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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
AMKOR TECHNOLOGY, INC.
- - - - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
AMKOR TECHNOLOGY, INC.
1345 ENTERPRISE DRIVE
WEST CHESTER, PA 19380
(610) 431-9600
TO THE STOCKHOLDERS
OF AMKOR TECHNOLOGY, INC.
Ladies and Gentlemen:
After careful consideration, the Board of Directors of Amkor Technology,
Inc., a Delaware corporation (the "Company" or "Amkor") has approved a series of
transactions (the "Acquisition Transactions") wherein (i) the Company would
consummate the transactions contemplated by an Asset Purchase Agreement by and
between Anam Semiconductor, Inc., a Korean corporation ("ASI") and the Company's
wholly-owned subsidiary Amkor Technology Korea, Inc. ("Amkor Korea") dated as of
January 14, 2000 and as amended on February 25, 2000, whereby Amkor will
purchase three test and packaging facilities located in Korea, known as K1, K2
and K3, and (ii) the Company would make an investment in ASI. In connection with
the Acquisition Transactions, the Company will undertake related equity
financing activities (the "Equity Financing Transactions"). The board has
determined that it is in the best interests of Amkor and its stockholders to
submit the Equity Financing Transactions to Amkor's stockholders for their
approval by written consent.
On behalf of the Board, I hereby request that you carefully review the
enclosed consent materials and provide your written consent to the Equity
Financing Transactions. Approval of this proposal includes approval of (i) the
issuance of up to approximately 4,512,560 shares of common stock upon conversion
of $258.75 million of our 5% convertible subordinated notes due 2007 sold by us
on March 22, 2000 in a private transaction, (ii) the sale of an aggregate of
20,500,000 shares of common stock, and warrants for 3,895,000 shares of common
stock, in a private transaction which we expect to complete in connection with
the Acquisition Transactions, and (iii) other equity financings, pursuant to
which the Company would issue common stock or securities convertible into common
stock which, when combined with the common stock to be issued in (i) and (ii)
above, would in an aggregate exceed 20% of the outstanding common stock of the
Company as of the record date for this written consent.
THE BOARD HAS APPROVED THE EQUITY FINANCING TRANSACTIONS. AFTER CAREFUL
CONSIDERATION, THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS CONSENT TO AND
APPROVE THE EQUITY FINANCING TRANSACTIONS. In addition, the holders of an
aggregate of approximately 30,053,921 shares of Amkor Common Stock, representing
approximately 22.9% of the outstanding Amkor Common Stock have entered into an
agreement pursuant to which such stockholders have agreed to vote in favor of
the Equity Financing Transactions. See "Certain Transactions -- Stock Ownership
of Certain Beneficial Owners and Management."
If you approve of the Equity Financing Transactions, please sign the
enclosed Action by Written Consent of Stockholders and return it to Kevin Heron
at Amkor either hand delivery, fax (610) 431-7189 or overnight courier to Amkor
Technology, Inc., 1345 Enterprise Drive, West Chester, Pennsylvania 19380, Attn:
Kevin Heron, Esq. as soon as possible, but in any event TO BE RECEIVED NO LATER
THAN 10:00 A.M. ON [DAY OF WEEK], , 2000. Only stockholders of
record at the close of business on the record date set by the board of
directors, , 2000, are entitled to vote on the proposal.
If you have any questions on the Equity Financing Transactions or the
enclosed materials, please do not hesitate to call Mr. Heron at (610) 431-9600,
or Bruce McNamara, Esq. of Wilson Sonsini Goodrich & Rosati at (650) 493-9300.
Sincerely,
--------------------------------------
Kenneth T. Joyce
Chief Financial Officer
<PAGE> 3
AMKOR TECHNOLOGY, INC.
NOTICE OF CONSENT SOLICITATION
This Notice of Consent Solicitation ("Consent Solicitation") is being
furnished to the stockholders ("Stockholders" or "you") of Amkor Technology,
Inc., a Delaware corporation ("Amkor" or the "Company") in connection with a
series of proposed equity financing transactions (the "Equity Financing
Transactions") related to (i) the Company's proposed acquisition (the
"Acquisition") by the Company of certain assets of Anam Semiconductor, Inc.
("ASI"), a Korean corporation headquartered at 280-8, 2-ga Sungsoo-dong,
Sungdong-gu, Seoul, the Republic of Korea, in accordance with the terms of the
Asset Purchase Agreement dated as of January 14, 2000 and as amended February
25, 2000 (the "Asset Purchase Agreement") by and between ASI and the Company's
wholly-owned subsidiary Amkor Technology Korea, Inc. ("Amkor Korea"), and (ii)
an investment in ASI.
You are requested to consent to the Equity Financing Transactions. Approval
of this proposal includes approval of (i) the issuance of up to approximately
4,512,560 shares of common stock upon conversion of $258.75 million of our 5%
convertible subordinated notes due 2007 sold by us on March 22, 2000 in a
private transaction, (ii) the sale of an aggregate of 20,500,000 shares of
common stock, and warrants for 3,895,000 shares of common stock, in a private
transaction which we expect to complete in connection with the Acquisition
Transactions, and (iii) other equity financings, pursuant to which the Company
would issue common stock or securities convertible into common stock which, when
combined with the common stock to be issued in (i) and (ii) above, would in an
aggregate exceed of 20% of the outstanding common stock of the Company as of the
record date for this written consent.
Pursuant to Section 228 of the Delaware General Corporation Law (the
"DGCL"), this Consent Solicitation is being distributed to Stockholders on or
about , 2000 for their information in connection with the enclosed
Action by Written Consent of the Stockholders (the "Consent"), pursuant to which
the Stockholders are requested to consider and consent to the Equity Financing
Transactions. Stockholders of record at the close of business on ,
2000 are entitled, for each share held, to one vote on the proposal. At the
record date, shares of our common stock were issued and outstanding.
The affirmative consent of a majority of these shares are required to approve
the Equity Financing Transactions.
You may revoke the enclosed Consent at any time before its use by
delivering to the Company a written notice of revocation or a duly executed
Consent bearing a later date. The Company shall bear the cost of this
solicitation. The Company may reimburse expenses incurred by brokerage firms and
other persons representing beneficial owners of shares in forwarding
solicitation material to beneficial owners. Certain of the Company's directors,
officers and regular employees, without additional compensation, may solicit
Consents personally or by telephone, telegram, letter or facsimile.
All information herein with respect to ASI has been furnished by ASI and
all information herein with respect to Amkor has been furnished by Amkor. No
person has been authorized to give any information or to give any representation
not contained in this Consent Solicitation in connection with the Acquisition
and, if given or made, such information or representation must not be relied
upon as having been authorized by ASI or Amkor. Summaries of documents contained
in this Consent Solicitation are qualified in their entirety by reference to
forms of such documents attached hereto as exhibits.
THE EQUITY FINANCING TRANSACTIONS INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS YOU SHOULD
CONSIDER CAREFULLY IN EVALUATING THE EQUITY FINANCING TRANSACTIONS.
THE AMKOR BOARD OF DIRECTORS (THE "BOARD") HAS APPROVED THE EQUITY
FINANCING TRANSACTIONS AND HAS UNANIMOUSLY DETERMINED THAT THEY ARE IN THE BEST
INTERESTS OF AMKOR AND THE STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS CONSENT TO AND APPROVE THE EQUITY
FINANCING TRANSACTIONS. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
The date of this Consent Solicitation is , 2000.
<PAGE> 4
AVAILABLE INFORMATION
Amkor is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, it files reports, Consent Solicitations and other
information with the Commission. Such reports, Consent Solicitations and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and at Seven World Trade Center (13th Floor), New York, New York
10048. Copies of such material may be obtained by mail from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also makes
electronic filings publicly available on the Internet within 24 hours of
acceptance. The Commission's Internet address is http://www.sec.gov. The
Commission web site also contains reports, proxy and Consent Solicitations, and
other information regarding registrants that file electronically with the
Commission. Amkor Common Stock is quoted on The Nasdaq National Market, and the
reports, Consent Solicitations and other information referred to above can also
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006. The exhibits required to be filed with the Commission as
part of the public reports referred to herein are available to the Stockholders
upon written request to Amkor Technology, Inc., Attn: Investor Relations, 1345
Enterprise Drive, West Chester, Pennsylvania 19380, telephone number (610)
431-9600.
THE DELIVERY OF THIS CONSENT SOLICITATION SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF ASI OR AMKOR SINCE SUCH DATE.
DISSENTERS' RIGHTS
Dissenting stockholders have no rights of appraisal or other dissenting
rights with respect to the proposed Equity Financing Transactions.
OPPORTUNITY TO ASK QUESTIONS
You have the opportunity to ask questions and receive answers concerning
the terms and conditions of the Equity Financing Transactions and to obtain any
additional information which Amkor possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy of information
furnished herein. In this regard, please contact Kevin Heron, Amkor Technology,
Inc., 1345 Enterprise Drive, West Chester, Pennsylvania 19380, telephone number
(610) 431-9600. For further information on the Equity Financing Transactions or
any of the attached related documents, please do not hesitate to contact Mr.
Heron.
ATTACHMENTS
The Written consent of Stockholders to approve the Equity Financing
Transactions is attached to this Consent Solicitation as Exhibit A.
FORWARD-LOOKING STATEMENTS
This Consent Solicitation contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
(the "Forward-Looking Statements"). Actual results could differ materially from
those projected in the Forward-Looking Statements as a result of the factors set
forth under "Risk Factors" and "Our Acquisition of ASI's Packaging and Test
Business and Investment in ASI" herein. In connection with the Forward-Looking
Statements, the Stockholders of Amkor should carefully review the factors set
forth in this Consent Solicitation under "Risk Factors," and "Our Acquisition of
ASI's Packaging and Test Business and Investment in ASI."
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RISK FACTORS
You should carefully consider the risks described below and other
information contained in this consent solicitation. Additional risks and
uncertainties not presently known to us, or that we currently deem immaterial,
may also impair our business operations. We cannot assure you that any of the
events discussed in the risk factors below will not occur. If they do, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our securities could
decline.
This consent solicitation contains forward-looking statements made as of
the date of this consent solicitation regarding our expected performance that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below and elsewhere in this
consent solicitation.
RELATIONSHIP WITH ASI
We will report ASI's financial results in our financial statements, and if ASI
encounters financial difficulties, our financial performance could suffer.
If we complete our investment in ASI and ASI's creditor banks convert their
debt of ASI to equity, we will own approximately 43% of ASI's outstanding voting
stock. Accordingly, we will report ASI's financial results in our financial
statements through the equity method of accounting. If ASI's results of
operations are adversely affected for any reason (including as a result of
losses at its consolidated subsidiaries and equity investees), our results of
operations will suffer as well. Financial or other problems affecting ASI could
also lead to a complete loss of our investment in ASI. In addition, under
proposed changes to U.S. GAAP, we could be required to consolidate ASI's
financial results with ours. In such an event, adverse changes in any line item
of ASI's financial statements would adversely affect the corresponding line
items in our consolidated financial statements.
Our wafer fabrication business may suffer if ASI reduces its operations or if
our relationship with ASI is disrupted.
Our wafer fabrication business depends on ASI providing wafer fabrication
services on a cost effective and timely basis. If ASI were to significantly
reduce or curtail its operations for any reason, or if our relationship with ASI
were to be disrupted for any reason, our wafer fabrication business would be
harmed. We may not be able to identify and qualify alternate suppliers of wafer
fabrication services quickly, if at all. In addition, we currently have no other
qualified third party suppliers of wafer fabrication services and do not have
any plans to qualify additional third party suppliers.
UNCERTAINTY REGARDING OUR PROPOSED TRANSACTIONS WITH ASI -- WE MAY NOT BE ABLE
TO COMPLETE OUR PROPOSED ACQUISITION OF K1, K2 AND K3 AND OUR OTHER PROPOSED
TRANSACTIONS WITH ASI ON THE TERMS DESCRIBED IN THIS CONSENT SOLICITATION, OR AT
ALL, WHICH MAY HARM OUR BUSINESS.
In 1999, we derived 45.0% of our net revenues and 29.5% of our gross profit
from sales of packaging and test services provided by ASI. If we complete our
proposed acquisition of K1, K2 and K3 from ASI, we will no longer be dependent
on ASI for packaging and test services. Our ability to consummate the proposed
acquisition of K1, K2 and K3 and other transactions related to that acquisition
is subject to a number of uncertainties, some of which are outside our control.
For example, the acquisition and our proposed investment in ASI are subject to
the approval of our stockholders and the shareholders of ASI (including the
Korean creditor banks of ASI), the completion of our proposed equity and secured
debt financings with third parties and Korean regulatory approvals. As a result,
we cannot assure you that we will be able to consummate these transactions on
the terms described in this Consent Solicitation, or at all.
If we fail to complete our proposed acquisition of K1, K2 and K3, we will
remain dependent on ASI for packaging and test services and will be unable to
achieve any improvements in our results of operations that direct ownership of
these facilities may bring. In connection with ASI's workout arrangement with
its
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creditor banks, we may still be required to make an additional $108.4 million
investment in ASI through 2002. If our proposed acquisition and investment are
not consummated, ASI will continue to have a substantial amount of debt, as well
as significant contingent liabilities under guarantees of affiliate debt, and
will remain subject to the workout arrangement with its creditor banks. This in
turn may adversely affect ASI's ability to continue to provide us with the
packaging and test services, as well as wafer fabrication services, that we
require for our business.
In addition, if our proposed acquisition of K1, K2 and K3 is not
consummated in all material respects by August 31, 2000, or should the asset
purchase agreement relating to that acquisition be terminated at any time prior
to such date, holders of Convertible Notes will have the right to require us to
redeem their Convertible Notes at a premium to their principal amount, plus
accrued interest and liquidated damages. See "Description of Convertible
Notes -- Repurchase at the Option of Holders if the Proposed Acquisition of K1,
K2 and K3 Does Not Close." If holders of a substantial amount of Convertible
Notes elect to have us redeem their Convertible Notes, our financial condition
could suffer.
POTENTIAL CONFLICTS OF INTEREST WITH ASI -- MEMBERS OF THE KIM FAMILY OWN
SUBSTANTIAL PORTIONS OF, AND HAVE ACTIVE MANAGEMENT ROLES IN, BOTH OUR COMPANY
AND ASI. THIS COULD LEAD TO CONFLICTS OF INTEREST IN OUR BUSINESS DEALINGS WITH
ASI.
Mr. James Kim, the founder of our company and currently our Chairman, Chief
Executive Officer and largest shareholder, is the eldest son of Mr. H.S. Kim,
the founder of ASI. Mr. H.S. Kim is currently the honorary Chairman and a
Director of ASI. Since January 1992, in addition to his other responsibilities,
Mr. James Kim has served as Chairman and a Director of ASI. The Kim family,
which collectively owned approximately 11% of the outstanding voting stock of
ASI as of February 29, 2000, significantly influences the management of ASI. Mr.
James Kim and members of his family beneficially own approximately 59% of our
outstanding common stock.
In October 1999, we purchased 10 million shares of ASI's voting stock at a
price of W5,000 per share for approximately $41.6 million. As a result of this
investment and the conversion of W98 billion (approximately $82 million) of ASI
debt to equity by ASI's creditor banks, we now own approximately 18% of ASI's
voting stock. If we complete our proposed private placement of common stock and
our proposed equity investment in ASI and ASI's creditor banks convert up to an
additional W150 billion (approximately $132 million) of their ASI debt into
common stock, our company will own approximately 43% of ASI's outstanding voting
stock, and the Kim family's direct ownership of ASI's and our voting stock will
be reduced to approximately 6% and 51%, respectively. Even though the Kim
family's ownership of our company and ASI will be reduced, we believe that the
Kim family will continue to exercise significant influence over our company and
ASI and its affiliates. This could lead to conflicts of interest between our
company and ASI or its affiliates. You should read "Our Acquisition of ASI's
Packaging and Test Business and Investment in ASI" for more information on our
relationship with ASI.
ABSENCE OF BACKLOG -- OUR NET REVENUES IN ANY QUARTER DEPEND ON OUR CUSTOMERS'
DEMAND FOR PACKAGING AND TEST SERVICES IN THAT QUARTER, AND WE MAY NOT BE ABLE
TO ADJUST COSTS QUICKLY IF OUR CUSTOMERS' DEMAND FALLS SUDDENLY.
Our packaging and test business does not typically operate with any
material backlog. We expect that in the future our packaging and test net
revenues in any quarter will continue to be substantially dependent upon our
customers' demand in that quarter. None of our customers have committed to
purchase any amount of packaging or test services or to provide us with binding
forecasts of demand for packaging and test services for any period. In addition,
our customers could reduce, cancel or delay their purchases of packaging and
test services. Because a large portion of our costs is fixed and our expense
levels are based in part on our expectations of future revenues, we may be
unable to adjust costs in a timely manner to compensate for any revenue
shortfall.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- WE DEPEND ON OUR FACTORIES IN
KOREA AND THE PHILIPPINES. MANY OF OUR CUSTOMERS' OPERATIONS ARE ALSO LOCATED
OUTSIDE OF THE U.S.
We provide packaging and test services through our three factories located
in the Philippines and our one factory in Korea. We source additional packaging
and test services from the K1, K2 and K3 factories located in Korea which are
owned by ASI and which we intend to acquire. We also source wafer fabrication
services from a wafer fabrication facility located in Korea and owned by ASI. In
addition, many of our customers' operations are located outside the U.S. The
following are risks inherent in doing business internationally:
- regulatory limitations imposed by foreign governments;
- fluctuations in currency exchange rates;
- political risks;
- disruptions or delays in shipments caused by customs brokers or
government agencies;
- unexpected changes in regulatory requirements, tariffs, customs, duties
and other trade barriers;
- difficulties in staffing and managing foreign operations; and
- potentially adverse tax consequences resulting from changes in tax laws.
In addition to the risks listed above, our operations in Korea and the
Philippines are subject to certain country-specific risks described below.
Risks Associated with Our Operations in Korea
Our operations in Korea, as well as ASI's operations, are subject to risks
inherent to operating in Korea. While our revenues in Korea will be denominated
in U.S. dollars, our labor costs and some of our operating costs will be
denominated in won. Substantially all of ASI's revenues and a significant
portion of its debt and capital lease obligations are denominated in U.S.
dollars, while its labor and some operating costs are denominated in won.
Fluctuations in the won-dollar exchange rate will affect both our company's and
ASI's financial results. When we make our investment in ASI and report ASI's
results in our financial statements using the equity method of accounting, our
financial results will be further affected by exchange rate fluctuations.
Beginning in late 1997 and continuing into 1998, Korea experienced a severe
foreign currency liquidity crisis that resulted in a significantly adverse
economic environment and a material depreciation in the value of the Korean won
relative to the U.S. dollar. The exchange rate as of December 31, 1996 was W844
to $1.00 as compared to W1,695 to $1.00 as of December 31, 1997, W1,195 to $1.00
as of December 31, 1998, W1,135 to $1.00 as of December 31, 1999 and W1,132 to
$1.00 as of February 29, 2000. The depreciation of the won relative to the U.S.
dollar increased the cost of importing goods and services into Korea. In
addition, the value in won of Korea's public and private sector debt denominated
in U.S. dollars and other foreign currencies also increased significantly. These
developments in turn led to sharply higher domestic interest rates and reduced
opportunities for refinancing or refunding maturing debts. As a result of these
difficulties, financial institutions in Korea have limited their lending,
particularly to highly leveraged companies. Future economic instability in Korea
could have a material adverse effect on our company's and ASI's business and
financial condition.
Relations between Korea and the Democratic People's Republic of Korea
("North Korea") have been tense over most of Korea's history. Incidents
affecting relations between the two Koreas continually occur. If the level of
tensions with North Korea increases or changes abruptly, both our company's and
ASI's businesses could be harmed.
Risks Associated with Our Operations in the Philippines
Although the political situation and the general state of the economy in
the Philippines have stabilized in recent years, each has historically been
subject to significant instability. Most recently, the devaluation of the
Philippine peso relative to the U.S. dollar beginning in July 1997 led to
economic
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instability in the Philippines. Any future economic or political disruptions or
instability in the Philippines could have a material adverse effect on our
business.
Because the functional currency of our operations in the Philippines is the
U.S. dollar, we have recently benefited from cost reductions relating to
peso-denominated expenditures, primarily payroll costs. We believe that any
future devaluations of the Philippine peso will eventually lead to inflation in
the Philippines, which could offset any savings achieved to date.
RISKS ASSOCIATED WITH OUR PROPOSED ACQUISITION OF ASI'S PACKAGING AND TEST
BUSINESS -- THE ACQUISITION OF THIS BUSINESS REPRESENTS A MAJOR COMMITMENT OF
OUR CAPITAL AND MANAGEMENT RESOURCES.
We intend to conduct due diligence and obtain representations from ASI in
connection with our proposed acquisition of K1, K2 and K3. However, there may be
additional hidden or contingent liabilities of K1, K2 and K3, relating to
matters such as environmental problems, taxation, employee obligations,
fraudulent conveyance and others, that will not have come to our attention prior
to our acquisition. If such liabilities exist, our business and financial
performance may suffer after the acquisition.
Our acquisition of ASI's packaging and test factories will require our
management to devote a significant portion of its resources to the maintenance
and operation of factories in Korea. We have limited experience in owning and
operating a business in Korea. It may take time for us to learn how to comply
with relevant Korean regulations, including tax, environmental and labor laws.
During the transition period in which we will integrate ASI's packaging and test
business into our company, our management may not have adequate time and
attention to devote to other aspects of our business, and those parts of our
business could suffer.
If the acquisition is completed, we plan to retain the approximately 6,600
Korean employees currently working in ASI's packaging and test business into our
workforce, and we may face cultural difficulties until we learn how to interact
with these new employees. If these employees become dissatisfied working for a
U.S. company, they may leave us. If we cannot find new employees to replace
departing ones, our new operations could suffer.
MANAGEMENT OF GROWTH -- WE FACE CHALLENGES AS WE INTEGRATE NEW AND DIVERSE
OPERATIONS AND TRY TO ATTRACT QUALIFIED EMPLOYEES TO SUPPORT OUR EXPANSION
PLANS.
We have experienced, and may continue to experience, growth in the scope
and complexity of our operations and in the number of our employees. This growth
has strained our managerial, financial, manufacturing and other resources.
Future acquisitions may result in inefficiencies as we integrate new operations
and manage geographically diverse operations.
In order to manage our growth, we must continue to implement additional
operating and financial controls and hire and train additional personnel. We
cannot assure you that we will continue to be successful in hiring and properly
training sufficient numbers of qualified personnel and in effectively managing
our growth. If we fail to: (1) properly manage growth, (2) improve our
operational, financial and management systems as we grow or (3) integrate new
factories and employees into our operations, our financial performance could be
materially adversely affected.
Our success depends to a significant extent upon the continued service of
our key senior management and technical personnel, any of whom would be
difficult to replace. In addition, in connection with our expansion plans, our
company and ASI will be required to increase the number of qualified engineers
and other employees at our respective factories in the Philippines and Korea.
Competition for qualified employees is intense, and our business could be
adversely affected by the loss of the services of any of our existing key
personnel. Our inability to attract, retain and motivate qualified new personnel
could have a material adverse effect on our business.
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RISKS ASSOCIATED WITH OUR WAFER FABRICATION BUSINESS -- OUR WAFER FABRICATION
BUSINESS IS SUBSTANTIALLY DEPENDENT ON TEXAS INSTRUMENTS.
Our wafer fabrication business, which commenced operations in January 1998,
depends significantly upon Texas Instruments. An agreement with ASI and Texas
Instruments (the "Texas Instruments Manufacturing and Purchasing Agreement")
requires Texas Instruments to purchase from us at least 40% of the capacity of
ASI's wafer fabrication facility, and under certain circumstances, Texas
Instruments has the right to purchase from us up to 70% of this capacity. We
cannot assure you that Texas Instruments will meet its purchase obligations in
the future. If Texas Instruments fails to meet its purchase obligations, our
company's and ASI's businesses could be harmed. For example, Texas Instruments'
orders in the first half of 1998 were below required minimum purchase
commitments due to market conditions and issues encountered by Texas Instruments
in the transition of its products to new technology.
Texas Instruments has transferred certain of its complementary metal oxide
silicon ("CMOS") process technology to ASI, and ASI is dependent upon Texas
Instruments' assistance for developing other state-of-the-art wafer
manufacturing processes. In addition, ASI's technology agreements with Texas
Instruments (the "Texas Instruments Technology Agreements") only cover .25
micron and .18 micron CMOS process technology. Texas Instruments has not granted
ASI a license under Texas Instruments' patents to manufacture semiconductor
wafers for third parties. Moreover, Texas Instruments has no obligation to
transfer any next-generation technology to ASI. Our company's and ASI's
businesses could be harmed if ASI cannot obtain new technology on commercially
reasonable terms or ASI's relationship with Texas Instruments is disrupted for
any reason.
PROTECTION OF INTELLECTUAL PROPERTY -- WE MAY BECOME INVOLVED IN INTELLECTUAL
PROPERTY LITIGATION.
We currently hold 68 U.S. patents, and we also have 102 pending patents and
are preparing an additional 57 patent applications for filing. In connection
with our proposed acquisition of K1, K2 and K3 from ASI, we plan to acquire all
of ASI's patents, patent applications and other intellectual property rights
related to its packaging and test business. We expect to continue to file patent
applications when appropriate to protect our proprietary technologies, but we
cannot assure you that we will receive patents from pending or future
applications. In addition, any patents we obtain may be challenged, invalidated
or circumvented and may not provide meaningful protection or other commercial
advantage to us.
We may need to enforce our patents or other intellectual property rights or
to defend our company against claimed infringement of the rights of others
through litigation, which could result in substantial cost and diversion of our
resources. If we fail to obtain necessary licenses or if we face litigation
relating to patent infringement or other intellectual property matters, our
business could suffer.
Although we are not currently a party to any material litigation, the
semiconductor industry is characterized by frequent claims regarding patent and
other intellectual property rights. If any third party makes a valid claim
against our company or ASI, our company or ASI could be required to: (1)
discontinue the use of certain processes, (2) cease the manufacture, use, import
and sale of infringing products, (3) pay substantial damages, (4) develop
non-infringing technologies or (5) acquire licenses to the technology we had
allegedly infringed. Our business, financial condition and results of operations
could be materially and adversely affected by any of these negative
developments.
In addition, Texas Instruments has granted ASI very limited licenses under
the Texas Instruments Technology Agreements, including a license under Texas
Instruments' trade secret rights to use Texas Instruments' technology in
connection with ASI's provision of wafer fabrication services. However, Texas
Instruments has not granted ASI a license under Texas Instruments' patents to
manufacture semiconductor wafers for third parties. Furthermore, Texas
Instruments has reserved the right to bring infringement claims against
customers of our company or customers of ASI with respect to semiconductor
wafers purchased from our company or ASI. Such customers and others could in
turn subject our company or ASI to litigation in connection with the sale of
semiconductor wafers produced by ASI.
7
<PAGE> 10
CONTINUED CONTROL BY EXISTING STOCKHOLDERS -- MR. JAMES KIM AND MEMBERS OF HIS
FAMILY CAN DETERMINE THE OUTCOME OF ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
As of February 29, 2000, Mr. James Kim and members of his family
beneficially owned approximately 59% of our outstanding common stock. Mr. James
Kim's family, acting together, will effectively control all matters submitted
for approval by our stockholders. These matters include the approval of the
acquisition of K1, K2 and K3 and could include:
- the election of all of the members of our Board of Directors;
- proxy contests;
- approvals of transactions between our company and ASI or other entities
in which Mr. James Kim and members of his family have an interest,
including transactions which may involve a conflict of interest;
- mergers involving our company;
- tender offers; and
- open market purchase programs or other purchases of our common stock.
See "Principal Stockholders" for additional information concerning
ownership of our common stock.
8
<PAGE> 11
OUR ACQUISITION OF ASI'S PACKAGING AND TEST BUSINESS
AND INVESTMENT IN ASI
PROPOSED ACQUISITION
We have agreed with ASI, subject to certain conditions, to purchase ASI's
packaging and test business, which consists primarily of its K1, K2 and K3
factories. The purchase price for these assets will be approximately $950.0
million. The table below provides selected information about these factories:
<TABLE>
<CAPTION>
APPROXIMATE
FACTORY SIZE
FACTORY LOCATION EMPLOYEES (SQUARE FEET) SERVICES
------- -------------- --------- ------------- ---------------------------------
<S> <C> <C> <C> <C>
K1................. Seoul, Korea 3,300 646,000 lead frame packaging and package
and process development
K2................. Pucheon, Korea 1,800 264,000 lead frame and laminates
packaging services
K3................. Pupyong, Korea 1,500 404,000 advanced lead frame packaging and
test services
</TABLE>
In connection with our acquisition of K1, K2 and K3, we will acquire all of
ASI's patents, patent applications and other intellectual property rights
related to its packaging and test business. We also plan to retain the
approximately 6,600 Korean employees currently working at K1, K2 and K3. We
intend to complete the acquisition during the second quarter of 2000.
PROPOSED INVESTMENT
In October 1999, we purchased 10 million shares of ASI's common stock at a
price of W5,000 per share for approximately $41.6 million. As a result of this
investment and the conversion of ASI's debt to equity by ASI's creditor banks,
we now own approximately 18% of ASI's voting stock. We have also agreed to make
a $459.0 million additional investment in ASI, subject to certain conditions. We
have agreed to invest $309.0 million of this additional investment at the time
we acquire K1, K2 and K3, with the remaining $150.0 million to be invested in
three installments: $30.0 million by June 30, 2000, $60.0 million by August 31,
2000 and $60.0 million by October 31, 2000. However, we have the right to
accelerate this investment. Of this $459.0 million investment, $109.0 million
will be invested at a purchase price of W8,000 per share and the remaining
$350.0 million will be invested at W18,000 per share. As of February 28, 2000,
the closing price of ASI's common stock on the Korea Stock Exchange was W10,100
per share. As of March 16, 2000, the closing price of ASI's common stock on the
Korea Stock Exchange was W15,650. Our investment will fulfill our prior
obligation to invest $150.0 million in ASI. Based upon an exchange rate of
W1,135 per $1.00 at December 31, 1999, we would purchase a total of
approximately 37.5 million shares for this $459.0 million investment in ASI. If
we acquire this number of shares of ASI's common stock, assuming ASI's creditor
banks convert an additional W150 billion (approximately $132 million) of their
ASI debt to equity in connection with our acquisition and investment, we will
own approximately 43% of ASI's outstanding voting stock.
PROPOSED FINANCING
We intend to finance the purchase of K1, K2 and K3 and the investment in
ASI with the proceeds of our offering of $258.75 million of convertible debt
(convertible into approximately 4,512,560 shares of common stock) which closed
on March 22, 2000, our proposed private placement of common stock, approximately
$750.0 million of new secured bank debt and cash on hand. For more information
on our convertible notes financing, please read "Description of Convertible
Notes."
In November 1999, we secured a commitment from a group of institutional
investors to provide $410.0 million in equity financing for use in connection
with our proposed acquisition of K1, K2 and K3. If we consummate our acquisition
of K1, K2 and K3, we would issue to these investors a total of 20,500,000 shares
of common stock. In addition, we would issue warrants for an aggregate of
3,895,000 shares of our common stock with a strike price of $27.50 per share to
these investors. These warrants
9
<PAGE> 12
would expire four years after the date we issue them. For a more complete
description of our sale of common stock, including a description of ancillary
agreements that we would enter into with the common stock investors, see
"Proposed Private Placement of Common Stock."
We expect to borrow $750.0 million in term loans under a new $850.0 million
secured credit facility, consisting of $650 million of term loans and $100.0
million drawn under the $200.0 million revolving credit line included as part of
this facility. We are currently in the process of negotiating the terms of the
facility to be provided by a syndicate of institutional lenders. The initial
borrowing under the facility will be subject to the consummation of our proposed
acquisition of K1, K2 and K3 and other related transactions. The facility will
provide for amortization of the drawn amount over a five to five and one-half
year period and quarterly principal and interest payments. We will be required
to make mandatory prepayments under the facility out of a portion of any excess
cash flow, the net proceeds of any asset sales and the net proceeds of any
issuance of debt or equity securities, subject to certain exceptions. We expect
that the agreement governing the facility will include certain financial
covenants, as well as covenants restricting our ability to incur debt, pay
dividends, make certain investments and payments, and encumber or dispose of
assets. We expect that our obligations under the facility will be guaranteed by
certain of our subsidiaries and will be secured by a pledge of the domestic
assets of our company and our subsidiaries, a pledge of the shares of certain of
our subsidiaries and a pledge of certain intercompany indebtedness.
The closing of our proposed private placement of common stock and our
proposed new secured bank financing is expected to take place concurrently with,
and is conditioned upon, the closing of our acquisition of K1, K2 and K3 and our
investment in ASI. We cannot assure you that any of these transactions will
occur. For information on the risks we face if these transactions do not occur,
see "Risk Factors -- Uncertainty Regarding Our Proposed Transactions with ASI."
If our proposed acquisition is not consummated in all material respects by
August 31, 2000, holders of our 5% Convertible Notes due 2007 will have the
right to require us to repurchase their Convertible Notes. See "Description of
Convertible Notes -- Repurchase at the Option of Holders if the Proposed
Acquisition of K1, K2 and K3 Does Not Close".
WHO IS ANAM SEMICONDUCTOR, INC.?
ASI is a Korean company engaged primarily in providing semiconductor
packaging and test services and wafer fabrication services. ASI currently
operates three semiconductor packaging and test factories in Korea, K1, K2 and
K3, which we plan to acquire. ASI also operates a semiconductor wafer
fabrication facility in Korea. In addition, ASI has a number of direct and
indirect subsidiaries, including Anam Engineering and Construction Co., Ltd.,
which is currently subject to corporate reorganization proceedings in Korea. If
we complete our acquisition of K1, K2 and K3 from ASI, ASI's business will
consist primarily of, and ASI will derive substantially all of its revenues
from, the sale of wafer fabrication services to us. We, in turn, will continue
to derive all of our wafer fabrication revenues from wafer fabrication services
performed for us by ASI.
We have a long-standing relationship with ASI. ASI was founded in 1956 by
Mr. H. S. Kim, the father of Mr. James Kim, our Chairman and Chief Executive
Officer. Since January 1992, in addition to his other responsibilities, Mr.
James Kim has served as Chairman and a Director of ASI. For the years ended
December 31, 1997, 1998 and 1999, we derived 68%, 69%, and 60% of our net
revenues and 42%, 49% and 38% of our gross profit from sales of services
performed for us by ASI. On a pro forma basis, after giving effect to our
acquisition of K4 and our proposed acquisition of K1, K2 and K3 as if they had
occurred on January 1, 1999, we would have derived 15% of our net revenues and
6% of our gross profit in 1999 from sales of services performed for us by ASI.
Under our current supply agreements with ASI, we have a first right to
substantially all of its packaging and test services and the exclusive right to
all of the output of its semiconductor wafer fabrication facility. In May 1999,
we purchased the K4 packaging and test factory from ASI for $575.0 million plus
the assumption of approximately $7.0 million of employee benefit liabilities.
Following our acquisition of K1, K2 and K3 from
10
<PAGE> 13
ASI, our supply agreement with ASI relating to packaging and test services will
terminate, and we expect to continue to purchase all of ASI's semiconductor
wafer output.
ASI DEBT RESTRUCTURING
ASI has been severely affected by the economic crisis in Korea beginning in
late 1997. ASI historically operated with a significant amount of debt relative
to its equity. The economic crisis in Korea led to sharply higher interest rates
and significantly reduced opportunities for refinancing maturing debts. Because
ASI maintained a substantial amount of short-term debt, its inability to
refinance this debt created a liquidity crisis for ASI. In addition to its own
leveraged financial position, ASI guarantees certain debt obligations of its
affiliates, many of which have encountered financial difficulties as a result of
the Korean economic crisis.
In October 1998, ASI announced that it had commenced negotiations with its
Korean creditor banks to enter into a debt restructuring arrangement known as a
"workout." ASI's workout was arranged under an accord among Korean creditor
banks to assist in the restructuring of Korean businesses and did not involve
the judicial system. The workout became effective in April 1999 and includes the
following arrangements:
- ASI was permitted to defer repayment on principal of ordinary loans until
December 31, 2003.
- ASI was permitted to defer repayment of principal under capital leases
until December 31, 1999, with payments of principal to resume under a
seven-year installment plan thereafter.
- ASI was permitted to defer the maturity of its won-denominated debentures
for an additional three-year term after scheduled maturity dates.
- ASI was permitted to make no interest payments on ordinary loans until
December 31, 1999.
- The creditor banks reduced interest rates on ASI's remaining outstanding
won-denominated ordinary loans to 10% or the prime rate of each creditor
bank, whichever was greater.
- ASI was given a grace period until December 31, 2003 against enforcement
of guarantees made by ASI for liabilities of ASI's affiliates. In
addition, interest was not to accrue on guaranteed obligations during
this period.
- For the duration of the workout, the creditor banks were to be entitled
to vote the ASI shares owned by Mr. James Kim and his family.
- The creditor banks agreed to convert W250 billion (approximately $208
million) of their ASI debt into (1) equity in the amount of W122.3
billion (approximately $102 million), (2) five-year non-interest bearing
convertible debt in the amount of W108.1 billion (approximately $90
million) and (3) non-interest bearing loans in the amount of W19.6
billion (approximately $16 million), provided that we made a $150.0
million equity investment in ASI.
In October 1999, the creditor banks converted W98 billion (approximately
$82 million) of ASI debt held by them into ASI stock. As a result, ASI's
creditor banks now own approximately 36% of ASI's voting stock. Also in October
1999, we made a W50 billion (approximately $41.6 million) equity investment in
ASI, fulfilling the first installment of our commitment to invest $150.0 million
in ASI in connection with ASI's workout.
ASI is currently in negotiations with its Korean creditor banks to arrange
the termination of its workout in connection with our proposed acquisition of
the K1, K2 and K3 factories and our proposed investment in ASI. Specifically,
ASI plans to repay W1,088 billion (approximately $959 million) of its
outstanding debt using the proceeds from its sale of K1, K2 and K3 and our
investment. ASI currently anticipates that its creditor banks will convert up to
an additional W150 billion (approximately $132 million) of ASI's debt into
equity concurrent with our proposed acquisition. ASI is negotiating with its
creditor banks to obtain further concessions relating to its debt. Following the
conversion of ASI's debt
11
<PAGE> 14
to equity by ASI's creditor banks and our investment in ASI, ASI's creditor
banks will own approximately 34% of ASI's outstanding voting stock.
RELATIONSHIP WITH ASI FOLLOWING OUR ACQUISITION OF ASI'S PACKAGING AND TEST
BUSINESS AND OUR INVESTMENT IN ASI
If we complete our proposed acquisition of K1, K2 and K3 and our proposed
investment in ASI, we expect to continue to have certain contractual and other
business relationships with ASI, including under our wafer fabrication services
supply agreement with ASI. Under this supply agreement, we will continue to have
the exclusive right to all of the wafer output of ASI's wafer fabrication
facility. The supply agreement has a five-year term, expiring November 1, 2002,
and may be terminated by either party upon five years' written notice after
completion of the initial five year term. The supply agreement may also be
terminated upon breach or insolvency of either party. The supply agreement
generally provides for continued cooperation between our company and ASI in
research and development.
Concurrent with the completion of our proposed acquisition of K1, K2 and
K3, we will enter into a transition services agreement with ASI. Pursuant to
this agreement, we will provide many of the same services to ASI's wafer
fabrication business that had been provided by ASI's packaging and test business
prior to its acquisition by us, including human resources, accounting and
general administrative services and customer services.
Following our proposed investment in ASI and the anticipated conversion of
additional ASI debt to equity by ASI's creditor banks, we will own approximately
43% of ASI's outstanding voting stock. Accordingly, we will report ASI's
financial results in our financial statements through the equity method of
accounting. If ASI's results of operations are adversely affected for any
reason, our results of operations will suffer as well. Financial or other
problems affecting ASI could also lead to a complete loss of our investment in
ASI. In addition, under proposed changes in U.S. GAAP, we could be required to
consolidate ASI's financial results with ours. In such an event, adverse changes
in any line item of ASI's financial statements would adversely affect the
corresponding line items in our consolidated financial statements.
Our company and ASI will also continue to have close ties due to our
overlapping ownership and management. We expect that Mr. James Kim will continue
to serve as Chairman and as a Director of ASI and as our Chairman and Chief
Executive Officer. The Kim family currently beneficially owns approximately 59%
of our outstanding common stock and approximately 11% of ASI's voting stock. If
we complete our proposed private placement of common stock, our proposed
investment in ASI and if ASI's creditor banks convert additional ASI debt into
equity, the Kim family will beneficially own approximately 51% of our
outstanding voting stock and approximately 6% of ASI's voting stock. Even though
the Kim family's direct ownership of ASI and our company will be reduced, we
believe that the Kim family will continue to exercise significant influence over
our company, ASI and its affiliates.
We have also entered into agreements with ASI and Texas Instruments
relating to our wafer fabrication business.
We may engage in other transactions with ASI from time to time that are
material to us. The indentures governing our senior subordinated notes, our
subordinated notes and our convertible subordinated notes, as well as the
agreements relating to our new secured bank debt, restrict our ability to enter
into transactions with ASI and other affiliates.
12
<PAGE> 15
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF AMKOR
The unaudited pro forma consolidated balance sheet as of December 31, 1999
appearing below gives effect to the following proposed transactions as if they
had occurred on December 31, 1999:
- our proposed $410.0 million private placement of our common stock;
- our proposed incurrence of $750.0 million of new secured bank debt;
- our proposed acquisition of K1, K2 and K3 for $950.0 million;
- our proposed $459.0 million equity investment in ASI;
- ASI's use of the net proceeds from its proposed sale of K1, K2 and K3 and
our proposed investment, principally to repay outstanding debt; and
- the proposed conversion of W150 billion (approximately $132 million) of
ASI's debt to equity by ASI's creditor banks.
The unaudited pro forma consolidated income statement gives effect to the
above proposed and the following historical transactions for the year ended
December 31, 1999 appearing below as if they occurred on January 1, 1999:
- our sale of $258.75 million of 5% Convertible Subordinated Notes due 2007
and
- our acquisition of K4 in May 1999 for $582.0 million and our incurrence
of $625.0 million of long-term debt in connection with that acquisition;
- our W50 billion (approximately $41.6 million) equity investment in ASI in
October 1999;
- the conversion of W98 billion (approximately $82 million) of ASI's debt
into equity by ASI's creditor banks in October 1999; and
- ASI's use of the net proceeds from its sale of K4, principally to repay
outstanding debt.
The unaudited pro forma consolidated financial information appearing below
is not necessarily indicative of the results of operations and financial
condition that we would have achieved if the completed and proposed transactions
described above had actually been consummated on such dates, nor are they
necessarily indicative of the future results and financial condition we will
achieve if the proposed transactions are consummated. In addition, while we
expect that the proposed transactions described above will be consummated on the
terms described in this Consent Solicitation, these transactions may not be
consummated on those terms, or at all. Accordingly, our future results and
financial condition could vary significantly from the unaudited pro forma
consolidated financial information appearing below.
We have used the purchase method of accounting in accordance with APB
Opinion No. 16 "Business Combinations" to prepare the accompanying unaudited pro
forma consolidated financial information. Under this method of accounting, we
allocated (1) the $575.0 million aggregate purchase price of K4, plus $7.0
million of assumed employee benefit liabilities, and (2) the $950.0 million
aggregate purchase price of K1, K2 and K3, to specific assets acquired based on
their estimated fair values. The purchase price does not include $20.3 million
of transaction expenses incurred in connection with the acquisition of K4 or the
$30.9 million of estimated transaction fees and expenses expected to be incurred
in connection with our proposed acquisition of K1, K2 and K3 and related
financing. The balance of the purchase price of both K4 and K1, K2 and K3
represents the excess of cost over net assets acquired. We have estimated the
preliminary fair value of K1, K2 and K3 assets based primarily on our knowledge
of this business and on information furnished by ASI. We will determine the
final allocation of the purchase price after the consummation of the acquisition
of K1, K2 and K3 based upon the receipt of an appraisal. We will not complete
all of the work required to fully evaluate the assets acquired by the time of
the closing of the acquisitions. Accordingly, we may not finalize purchase
accounting adjustments for up to one year after the closing of our acquisition
of K1, K2 and K3.
13
<PAGE> 16
We have used the equity method of accounting in accordance with APB Opinion
No. 18 to prepare the accompanying unaudited pro forma financial information to
give effect to our investment in ASI. Under this method of accounting, our
investment in ASI is carried at cost plus or minus our equity in all increases
or decreases in the investee's net assets after the date of investment. Under
the equity method, net income and stockholders' equity of the investor should be
the same as if the investor fully consolidated the investee. Accordingly, we
have included in the unaudited pro forma consolidated income statement for the
year ended December 31, 1999 the equity in the loss of ASI, including
amortization of the excess of the cost of our investment over the underlying
equity in the net assets at the date of our investment.
We have prepared the unaudited pro forma consolidated financial information
in accordance with U.S. GAAP. These principles require us to make extensive use
of estimates and assumptions that affect: (1) the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and (2) the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
You should read the unaudited pro forma consolidated financial information
in conjunction with "Risk Factors -- Uncertainty Regarding Our Proposed
Transactions with ASI," "Our Acquisition of ASI's Packaging and Test Business
and Investment in ASI," our consolidated financial statements and the related
notes, the financial statements of K1, K2 and K3 and the related notes and the
financial statements of ASI and the related notes, included elsewhere in this
Consent Solicitation.
14
<PAGE> 17
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
ACQUISITION
OF K1, K2
AND K3 AND PRO FORMA
K1, K2 OUR ADJUSTMENTS FOR
AMKOR AND K3 INVESTMENT RELATED PRO FORMA
HISTORICAL HISTORICAL IN ASI FINANCINGS AS ADJUSTED
---------- ---------- ----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 98,045 $ -- $ -- $ -- $ 98,045
Short-term investments.................. 136,595 -- -- (108,164)(a) 28,431
Accounts receivable:
Trade................................. 157,281 3,416 (3,416)(b) 71,500(e) 228,781
Due from affiliates................... 6,278 304,762 (304,762)(b) -- 6,278
Other................................. 6,469 3,653 (3,653)(b) -- 6,469
Inventories............................. 91,465 7,984 -- -- 99,449
Other current assets.................... 11,117 2,666 (2,666)(b) -- 11,117
---------- --------- --------- ---------- ----------
Total current assets........... 507,250 322,481 (314,497) (36,664) 478,570
---------- --------- --------- ---------- ----------
Property, plant and equipment, net...... 859,768 404,384 20,616(c) -- 1,284,768
---------- --------- --------- ---------- ----------
Investments............................. 63,672 -- 459,000(j) -- 522,672
---------- --------- --------- ---------- ----------
Other assets:
Due from affiliates................... 27,858 277 (277)(b) -- 27,858
Excess of cost over net assets
acquired............................ 233,532 -- 517,016(d) -- 750,548
Deferred income taxes................. -- 41,656 (41,656)(b) -- --
Other................................. 63,009 4,953 (4,953)(b) 30,928(f) 93,937
---------- --------- --------- ---------- ----------
Total other assets............. 324,399 46,886 470,130 30,928 872,343
---------- --------- --------- ---------- ----------
Total assets................... $1,755,089 $ 773,751 $ 635,249 $ (5,736) $3,158,353
========== ========= ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdraft.......................... $ 16,209 $ -- $ -- $ -- $ 16,209
Short-term borrowings and current
portion of long-term debt............. 6,465 -- -- (6,465)(k) --
Trade accounts payable.................. 122,147 51,360 (51,360)(b) -- 122,147
Due to affiliates....................... 37,913 14,788 (14,788)(b) -- 37,913
Accrued expenses........................ 88,577 13,845 (13,845)(b) -- 88,577
Accrued income taxes.................... 41,587 -- -- -- 41,587
---------- --------- --------- ---------- ----------
Total current liabilities...... 312,898 79,993 (79,993) (6,465) 306,433
Long-term debt.......................... 9,021 -- -- 750,000(g) 750,000
(9,021)(k)
Due to affiliates....................... -- 124,294 (124,294)(b) -- --
Senior and senior subordinated notes.... 625,000 -- -- -- 625,000
Convertible subordinated notes.......... 53,435 -- -- 258,750(h) 312,185
Other noncurrent liabilities............ 16,994 45,122 (45,122)(b) -- 16,994
---------- --------- --------- ---------- ----------
Total liabilities.............. 1,017,348 249,409 (249,409) 993,264 2,010,612
---------- --------- --------- ---------- ----------
Stockholders' equity:
Common stock.......................... 131 -- -- 21(i) 152
Warrants to purchase common stock..... -- -- -- 35,000(i) 35,000
Additional paid-in capital............ 551,964 -- -- 374,979(i) 926,943
Receivable from stockholders.......... (3,276) -- -- -- (3,276)
Retained earnings..................... 189,733 -- -- -- 189,733
Unrealized losses..................... (811) -- -- -- (811)
Net assets (liabilities).............. -- 524,342 (524,342)(b) -- --
---------- --------- --------- ---------- ----------
Total stockholders' equity..... 737,741 524,342 (524,342) 410,000 1,147,741
---------- --------- --------- ---------- ----------
Total liabilities and
stockholders' equity......... $1,755,089 $ 773,751 $(773,751) $1,403,264 $3,158,353
========== ========= ========= ========== ==========
</TABLE>
- - - - - ---------------
(a) Represents net cash to be used to acquire K1, K2 and K3, to make the
additional investment in ASI and to pay transaction fees and expenses.
(b) Represents the elimination of those assets and liabilities of K1, K2 and K3
that we will not acquire or assume as part of our proposed acquisition of
K1, K2 and K3.
15
<PAGE> 18
(c) Represents the excess of the fair value over the book value of the
property, plant and equipment acquired.
(d) Represents the excess of the purchase price for K1, K2 and K3 over the
estimated fair values of the net assets acquired.
(e) Represents the repurchase of accounts receivable to retire our accounts
receivable sales agreement.
(f) Represents transaction fees and expenses, which have been recorded as
deferred financing costs and will be amortized over the debt's term.
(g) Represents the financing of the transactions with $750.0 million of new
secured bank debt.
(h) Represents the issuance of $258.75 million of Convertible Notes.
(i) Represents the issuance of 20,500,000 shares of common stock we intend to
issue in a private equity offering and the fair value of the related
warrants to purchase 3,895,000 shares of common stock at $27.50 per share.
(j) Represents our additional $459.0 million investment in ASI.
(k) Represents the paydown of existing debt.
16
<PAGE> 19
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
ACQUISITION
PRO FORMA OF K1, K2
ADJUSTMENT AND K3
FOR K1, K2 AND OUR PRO FORMA
AMKOR K4 ACQUISITION AND K3 INVESTMENT ADJUSTMENTS FOR PRO FORMA
HISTORICAL HISTORICAL OF K4 HISTORICAL IN ASI RELATED FINANCINGS AS ADJUSTED
---------- ---------- ------------ ---------- ----------- ------------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.............. $1,909,972 $ 42,582 $(39,353)(a) $435,659 $(407,751)(a) $ -- $1,941,109
Cost of
revenues -- including
purchases from ASI....... 1,577,226 30,725 (39,353)(a) 289,233 (407,751)(a) -- 1,472,235
10,751(b) 51,881(b) --
(4,792)(c) (35,685)(c) --
---------- -------- -------- -------- --------- -------- ----------
Gross profit........... 332,746 11,857 (5,959) 146,426 (16,196) -- 468,874
---------- -------- -------- -------- --------- -------- ----------
Operating expenses:
Selling, general and
administrative......... 145,233 2,344 -- 16,120 -- -- 163,697
Research and
development............ 11,436 536 -- 3,383 -- -- 15,355
---------- -------- -------- -------- --------- -------- ----------
Total operating
expenses........... 156,669 2,880 -- 19,503 -- -- 179,052
---------- -------- -------- -------- --------- -------- ----------
Operating income....... 176,077 8,977 (5,959) 126,923 (16,196) -- 289,822
---------- -------- -------- -------- --------- -------- ----------
Other (income) expense:
Interest expense, net.... 45,364 24,492 (1,319)(d) (19,091) 19,091(d) 85,810(g) 159,939
-- -- -- -- -- 1,733(h) --
5,408(h) --
(1,549)(h) --
Foreign currency (gain)
loss................... 308 (16,665) 16,665(d) (582) 582(d) -- 308
Other (income) expense,
net.................... 25,117 113 -- 1,449 -- (4,280)(i) 22,399
---------- -------- -------- -------- --------- -------- ----------
Total other (income)
expense............ 70,789 7,940 15,346 (18,224) 19,673 87,122 182,646
---------- -------- -------- -------- --------- -------- ----------
Income (loss) before
income taxes and
equity in loss of
investees............ 105,288 1,037 (21,305) 145,147 (35,869) (87,122) 107,176
Provision for (benefit
from) income taxes....... 26,600 -- (5,937)(e) 46,376 (46,376)(f) (1,125) 19,538
Equity in loss of
investees................ (1,969) -- -- -- (69,971)(j) -- (71,940)
---------- -------- -------- -------- --------- -------- ----------
Net income............. $ 76,719 $ 1,037 $(15,368) $ 98,771 $ (59,464) $(85,997) $ 15,698
========== ======== ======== ======== ========= ======== ==========
Basic net income per
common share............. $ .64 $ .11
========== ==========
Diluted net income per
common share............. $ .63 $ .11
========== ==========
Shares used in computing
basic net income per
common share(k).......... 119,341 139,841
Shares used in computing
diluted net income per
common share(k).......... 135,067 141,339
</TABLE>
- - - - - ---------------
(a) We have eliminated the processing charges that we have paid to ASI for
services performed for us at the K4 and the K1, K2 and K3 facilities under
our supply agreements. Because we currently sell substantially all of K4's
and K1, K2 and K3's services, the net revenue from the sale of these
services to our customers is already reflected in our historical net
revenues.
(b) Represents the amortization of goodwill related to our acquisition of K4 and
our proposed acquisition of K1, K2 and K3, assuming a ten-year life.
(c) Represents change in depreciation expense based on adjusted book values of
acquired property, plant and equipment of K4 and of K1, K2 and K3.
(d) Represents the elimination of interest expense and foreign currency losses
related to the debt of K4 and of K1, K2 and K3 which we have not assumed as
part of the acquisition of K4 and will not assume as part of our acquisition
of K1, K2 and K3. As it relates to the acquisition of K4, interest expense,
net includes (1) interest expense of $22.2 million on $625.0 million of
senior and senior subordinated notes at an assumed weighted average interest
rate of 9.65%, (2) $1.0 million of amortization of debt issuance costs,
which are amortized over the life of the respective debt, and (3) net of
$24.5 million of the K4 interest eliminated.
(e) Represents an income tax benefit due to the pro forma adjustments for
interest expense.
(f) Represents the elimination of income tax expenses at K1, K2 and K3 due to
the fact that profits of K1, K2 and K3 will be subject to a tax holiday in
Korea.
17
<PAGE> 20
(g) Represents (1) interest expense on $750.0 million of new secured bank debt
and on $258.75 million of Convertible Notes at an assumed weighted average
interest rate of 8.17% and (2) $6 million of amortization of debt issuance
costs, which are amortized over the life of the respective debt.
(h) Represents interest on funds used to finance our $41.6 million investment in
ASI made in October 1999 and cash used to repurchase accounts receivable of
$71.5 million and to fund transaction costs and expenses net of interest
savings as a result of the pay down of $15.5 million of our existing debt.
(i) Represents fees paid by us under our accounts receivable sale agreement.
(j) Represents our equity in the loss of ASI, including $51.5 million of
amortization of the difference between the cost of our investment over the
underlying equity in net assets of ASI, assuming that the investment
occurred on January 1, 1999.
(k) Shares used in computing basic pro forma as adjusted net income per common
share for the year ended December 31, 1999 give effect to the issuance of
20,500,000 shares of common stock we intend to issue in a private equity
offering. Shares used in computing the diluted pro forma as adjusted net
income per common share for the year ended December 31, 1999 give effect to
the issuance of 20,500,000 shares of common stock we intend to issue in a
private equity offering and the exercise of outstanding stock options. On a
pro forma as adjusted basis, the conversion of convertible subordinated
notes is not dilutive.
18
<PAGE> 21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF AMKOR
We have derived the selected historical consolidated financial data
presented below for, and as of the end of, each of the years in the five-year
period ended December 31, 1999 from our consolidated financial statements.
Arthur Andersen LLP, independent public accountants, has audited the
consolidated financial statements as of December 31, 1998 and 1999 and for each
of the years in the three-year period ended December 31, 1999. Their report on
these consolidated financial statements, together with such consolidated
financial statements and the notes thereto, are included elsewhere in this
Consent Solicitation. We have derived the selected consolidated financial data
presented below as of December 31, 1995, 1996 and 1997 and for the years ended
December 31, 1995 and 1996 from audited consolidated financial statements which
are not presented in this Consent Solicitation. You should read the selected
consolidated financial data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes, included elsewhere
in this Consent Solicitation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............................................. $932,382 $1,171,001 $1,455,761 $1,567,983 $ 1,909,972
Cost of revenues -- including purchases from ASI.......... 783,335 1,022,078 1,242,669 1,307,150 1,577,226
-------- ---------- ---------- ---------- -----------
Gross profit.............................................. 149,047 148,923 213,092 260,833 332,746
-------- ---------- ---------- ---------- -----------
Operating expenses:
Selling, general and administrative..................... 55,459 66,625 103,726 119,846 145,233
Research and development................................ 8,733 10,930 8,525 8,251 11,436
-------- ---------- ---------- ---------- -----------
Total operating expenses............................ 64,192 77,555 112,251 128,097 156,669
-------- ---------- ---------- ---------- -----------
Operating income.......................................... 84,855 71,368 100,841 132,736 176,077
-------- ---------- ---------- ---------- -----------
Other (income) expense:
Interest expense, net................................... 9,797 22,245 32,241 18,005 45,364
Foreign currency (gain) loss............................ 1,512 2,961 (835) 4,493 308
Other (income) expense, net(a).......................... 6,523 3,150 8,429 9,503 25,117
-------- ---------- ---------- ---------- -----------
Total other (income) expense........................ 17,832 28,356 39,835 32,001 70,789
-------- ---------- ---------- ---------- -----------
Income before income taxes, equity in income (loss) of
investees and minority interest......................... 67,023 43,012 61,006 100,735 105,288
Provision for income taxes(b)............................. 6,384 7,876 7,078 24,716 26,600
Equity in income (loss) of interests(c)................... 2,808 (1,266) (17,291) -- (1,969)
Minority interest(d)...................................... 1,515 948 (6,644) 559 --
-------- ---------- ---------- ---------- -----------
Net income(b)............................................. $ 61,932 $ 32,922 $ 43,281 $ 75,460 $ 76,719
======== ========== ========== ========== ===========
Basic net income per common share......................... $ .75 $ .40 $ .52 $ .71 .64
======== ========== ========== ========== ===========
Diluted net income per common share....................... $ .75 $ .40 $ .52 $ .70 .63
======== ========== ========== ========== ===========
Pro Forma Data (Unaudited)(b):
Historical income before income taxes, equity in income
(loss) of ASI and minority interest..................... $ 67,023 $ 43,012 $ 61,006 $ 100,735
Pro forma provision for income taxes...................... 16,784 10,776 10,691 29,216
-------- ---------- ---------- ----------
Pro forma income before equity in income (loss) of
investees and minority interest......................... 50,239 32,236 50,315 71,519
Historical equity in income (loss)of investees(c)......... 2,808 (1,266) (17,291) --
Historical minority interest.............................. 1,515 948 (6,644) 599
-------- ---------- ---------- ----------
Pro forma net income...................................... $ 51,532 $ 30,022 $ 39,668 $ 70,960
======== ========== ========== ==========
Basic pro forma net income per common share............... $ .62 $ .36 $ .48 $ .67
======== ========== ========== ==========
Diluted pro forma net income per common share............. $ .62 $ .36 $ .48 $ .66
======== ========== ========== ==========
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Shares used in computing basic pro forma net income per
common share............................................ 82,610 82,610 82,610 106,221 119,341
Shares used in computing pro forma diluted net income per
common share............................................ 82,610 82,610 82,610 116,596 135,067
OTHER FINANCIAL DATA:
Depreciation and amortization............................. $ 26,614 $ 57,825 $ 81,864 $ 119,239 $ 180,332
Capital expenditures...................................... 123,645 185,112 178,990 107,889 242,390
Ratio of earnings to fixed charges(e)..................... 4.6x 2.4x 2.5x 4.4x 2.6x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 91,151 $ 49,664 $ 90,917 $ 227,587 $ 98,045
Short term investments...................................... 0 881 2,521 1,000 136,595
Working capital (deficit)................................... 111,192 36,785 (38,219) 191,383 194,352
Total assets................................................ 626,379 804,864 855,592 1,003,597 1,755,089
Total long-term debt........................................ 326,422 402,338 346,710 221,846 687,456
Total debt, including short-term borrowings and current
portion of long-term debt................................. 411,542 594,151 514,027 260,503 693,921
Stockholders' equity........................................ 45,289 45,812 90,875 490,361 737,741
</TABLE>
- - - - - ---------------
(a) In 1999 we recognized a pre-tax loss of $17.4 million as a result of the
early conversion of $153.6 million principal amount of our 5 3/4%
convertible subordinate notes due 2003.
(b) Prior to our reorganization in April 1998, our predecessor, AEI, elected to
be taxed as an S Corporation under the Internal Revenue Code of 1986 and
comparable state tax laws. As a result AEI did not recognize any provision
for federal income tax expense during the periods presented. The pro forma
provision for income taxes reflects the U.S. federal income taxes that would
have been recorded if AEI had been a C Corporation during these periods.
(c) In 1997, we recognized a loss of $17.3 million resulting principally from
the impairment of value of our prior investment in ASI, which we sold in
February, 1998.
(d) Represents ASI's 40% interest in the earnings of Amkor/Anam Pilipinas, Inc.
("AAP"), one of our subsidiaries in the Philippines. We purchased ASI's
interest in AAP with a portion of the proceeds from our initial public
offering in May 1998.
(e) We have calculated the ratio of earnings to fixed charges by dividing (1)
the sum of (x) income (loss) before income taxes, equity in income (loss) of
investees and minority interest plus (y) fixed charges by (2) fixed charges.
Fixed charges consist of interest expense plus one-third of rental expense.
We believe that one-third of rental expense is representative of the
interest factor of rental payments under our operating leases.
20
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA OF K1, K2 AND K3
The following table sets forth selected historical income statement and
other financial data of K1, K2 and K3 determined in accordance with U.S. GAAP.
We have derived the selected financial data of K1, K2 and K3 presented below for
each of the years in the three-year period ended December 31, 1999 and as of the
end of each of the years in the three-year period ended December 31, 1999, from
the financial statements of K1, K2 and K3. Samil Accounting Corporation,
independent public accountants, has audited the financial statements as of
December 31, 1997, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 1999. Their report on the financial statements as of
December 31, 1998 and 1999 and for each of the years in the three year period
ended December 31, 1999, together with such audited financial statements and the
related notes, are included elsewhere in this Consent Solicitation under the
title "Seongsu, Pucheon and Pupyong Packaging Business of Anam Semiconductor,
Inc."
You should read the following table in conjunction with the financial
statements of K1, K2 and K3 and the related notes, included elsewhere in this
Consent Solicitation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues(a)........................................... $ 599,575 $409,929 $435,659
Cost of revenues.......................................... 408,435 283,995 289,233
--------- -------- --------
Gross profit.............................................. 191,140 125,934 146,426
--------- -------- --------
Operating expenses:
Selling, general and administrative..................... 45,850 34,567 16,120
Research and development................................ 1,894 1,267 3,383
--------- -------- --------
Total operating expenses........................ 47,744 35,834 19,503
--------- -------- --------
Operating income.......................................... 143,396 90,100 126,923
--------- -------- --------
Other (income) expense:
Interest expense (income), net(b)....................... 5,508 15,882 (19,091)
Foreign currency (gain) loss(c)......................... 70,470 (2,396) (582)
Other (income) expense, net............................. (4,987) (7,541) 1,449
--------- -------- --------
Total other (income) expense.................... 70,991 5,945 (18,224)
--------- -------- --------
Income before income taxes................................ 72,405 84,155 145,147
Provision for (benefit from) income taxes................. (50,452) 30,289 46,376
--------- -------- --------
Net income................................................ $ 122,857 $ 53,866 $ 98,771
========= ======== ========
OTHER FINANCIAL DATA:
Depreciation and amortization............................. $ 116,534 $137,181 $133,452
Capital expenditures...................................... 145,642 24,345 39,281
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1998 1999
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................. $(151,903) $ 6,485 $242,488
Total assets.............................................. 830,633 661,471 773,751
Long-term debt............................................ 181,214 160,032 124,294
Total debt, including short-term borrowings and current
maturities of long-term debt............................ 341,203 197,285 139,082
Net assets................................................ 317,698 365,325 524,342
</TABLE>
21
<PAGE> 24
- - - - - ---------------
(a) Substantially all of K1, K2 and K3's net revenues represent processing
charges that we have paid to K1, K2 and K3 for services performed under our
supply agreements. Because we currently sell substantially all of K1, K2
and K3's services, the net revenues from the sale of K1, K2 and K3 services
to our customers are already reflected in our historical net revenues.
(b) Represents interest expense (income), net on debt of ASI attributable to
K1, K2 and K3's business, based on assumptions deemed reasonable by ASI's
management.
(c) The foreign currency gain in 1997 and foreign currency loss in 1998 are
primarily attributable to the effects of fluctuations in the Korean won
relative to the U.S. dollar on Korean won denominated debt and on foreign
currency forward contracts.
22
<PAGE> 25
SELECTED HISTORICAL FINANCIAL DATA OF ASI
The following table sets forth the selected historical consolidated
financial data of ASI determined in accordance with U.S. GAAP. We have derived
the selected financial data of ASI presented below for each of the years in the
three-year period ended December 31, 1999 and as of the end of each of the years
in the three-year period ended December 31, 1999, from the consolidated
financial statements of ASI. Samil Accounting Corporation, independent public
accountants, has audited the consolidated financial statements of ASI as of
December 31, 1997, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 1999. Their report on the consolidated financial
statements as of December 31, 1998 and 1999 and for each of the years in the
three year period ended December 31, 1999, together with such audited
consolidated financial statements and the related notes, are included elsewhere
in this Consent Solicitation.
The selected income statement data of ASI appearing below, as well as ASI's
consolidated income statements included in this Consent Solicitation, present
the packaging and test business of ASI on a discontinued operations basis to
reflect the sale of K4 and the proposed sale of K1, K2 and K3 to our company.
You should read the following table in conjunction with the consolidated
financial statements of ASI and the related notes, included elsewhere in this
Consent Solicitation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues(a)...................................... $ 406,937 $ 221,098 $ 285,925
Cost of revenues(b).................................. 314,666 230,478 239,632
---------- ---------- ----------
Gross profit (loss).................................. 92,271 (9,380) 46,293
---------- ---------- ----------
Operating expenses:
Selling, general and administrative................ 84,564 27,328 25,168
Impairment of long-lived assets(c)................. 15,942 273,937 --
Research and development........................... -- 2,064 87
---------- ---------- ----------
Total operating expenses................... 100,506 303,329 25,255
---------- ---------- ----------
Operating income (loss).............................. (8,235) (312,709) 21,038
---------- ---------- ----------
Other (income) expense:
Interest expense, net.............................. 123,781 207,084 179,413
Foreign currency (gain) loss(d).................... (159,897) 142,605 33,198
Impairment loss on loans to affiliates(e).......... -- 122,188 22,646
Guarantee obligation loss(f)....................... -- 97,344 --
Loss on valuation of inventories................... 543 15,140 2,041
Loss (gain) from disposal of investments........... (4,972) (23,082) 601
Other (income) expense, net........................ 4,598 12,808 (24,889)
---------- ---------- ----------
Total other (income) expense............... (35,947) 574,087 213,010
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes, equity in loss of affiliates and
minority interest.................................. 27,712 (886,796) (191,972)
Equity in loss of unconsolidated affiliates.......... (18,137) (66,792) (31,787)
Minority Interest.................................... (1,720) (2,035) --
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes....................................... 7,855 (955,623) (223,759)
Provision (benefit) for income taxes................. 109,894 1,542 (54,000)
---------- ---------- ----------
Income (loss) from continuing operations............. (102,039) (957,165) (169,759)
Discontinued Operations:
Income from discontinued packaging and test
operations (net of income taxes of $0, $0,
$12,408)(g)..................................... 143,469 109,632 130,064
Gain on sale of K4 (net of income taxes of $0, $0,
$14,268)........................................ -- -- 149,560
---------- ---------- ----------
Net income (loss).................................... $ 41,430 $ (847,533) $ 109,865
========== ========== ==========
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ (984,190) $ (221,798) $ 10,081
Total assets......................................... 2,922,114 1,878,950 1,487,469
Long-term debt....................................... 1,096,398 1,892,428 1,304,765
Total debt, including short-term borrowings and
current maturities of long-term debt............... 2,336,674 2,134,494 1,447,975
Net assets (liabilities)............................. 248,795 (615,806) (297,750)
</TABLE>
- - - - - ---------------
(a) In 1997, ASI's revenues included approximately $232.6 million from
construction services related to Anam Engineering and Construction Co.,
Ltd. ("Anam Construction"). Anam Construction became insolvent in 1998 and
filed for corporate reorganization. Consequently, ASI deconsolidated Anam
Construction starting in 1998. Revenues related to CMOS wafers manufactured
by ASI were $97.1 million in 1998 and $264.2 million in 1999. Remaining
revenues in 1998 related principally to Anam Instruments Co., Ltd., which
was accounted for using the equity method in 1999 as a result of a decrease
in ASI's ownership percentage.
(b) In January 1998, ASI commenced commercial operations in its wafer
fabrication facility and ramped up operations during that year. As a result,
ASI was not able to fully absorb its fixed manufacturing costs and realized
a $38.9 million loss at the gross profit line.
(c) ASI recognized an impairment loss of $273.9 million related to the wafer
fabrication facility in 1998.
(d) The foreign currency gain in 1997 and loss in 1998 are primarily
attributable to the effects of fluctuations in the Korean won relative to
the U.S. dollar on Korean won denominated debt and on foreign currency
forward contracts.
(e) In 1998 ASI determined that several affiliated companies facing financial
difficulties would not be able to satisfy their obligations to ASI and an
impairment loss was recognized in the amount of $122.2 million and $22.6
million in 1998 and 1999, respectively.
(f) In 1998 ASI recognized a loss related to guarantees provided to affiliated
companies in the amount of $97.3 million.
(g) Represents income from discontinued packaging and test operations (K4 and
K1, K2 and K3).
24
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF ASI
The unaudited pro forma consolidated balance sheet of ASI as of December
31, 1999 appearing below gives effect to the following proposed transactions as
if they had occurred on December 31, 1999:
- ASI's proposed sale of K1, K2 and K3 for $950.0 million;
- our proposed $459.0 million equity investment in ASI;
- ASI's use of the net proceeds from its proposed sale of K1, K2 and K3 and
our proposed investment, principally to repay outstanding debt; and
- the proposed conversion of W150 billion (approximately $132 million at
the exchange rate in effect as of December 31, 1999) of ASI's debt to
equity by ASI's creditor banks.
The unaudited pro forma consolidated income statement of ASI for the year
ended December 31, 1999 appearing below gives effect to the above proposed and
the following historical transactions as if they had occurred on January 1, 1999
using the exchange rate as of that date:
- ASI's sale of K4 to our company in May 1999 for $582.0 million;
- our W50 billion (approximately $41.6 million) equity investment in ASI in
October 1999;
- the conversion of W98 billion (approximately $82 million) of ASI's debt
into equity by ASI's creditor banks in October 1999; and
- ASI's use of the net proceeds from its sale of K4, principally to repay
outstanding debt.
The unaudited pro forma consolidated financial information of ASI appearing
below is not necessarily indicative of the results of operations and financial
condition that ASI would have achieved if the completed and proposed
transactions described above had actually been consummated on such dates, nor
are they necessarily indicative of the future results and financial condition
ASI will achieve if the proposed transactions are consummated. In addition,
while ASI expects that the proposed transactions described above will be
consummated on the terms described in this Consent Solicitation, these
transactions may not be consummated on those terms, or at all. Accordingly,
ASI's future results and financial condition could vary significantly from the
unaudited pro forma consolidated financial information appearing below.
The unaudited pro forma consolidated financial information of ASI appearing
below is based on financial statements prepared in accordance with U.S. GAAP.
These principles require the extensive use of estimates and assumptions that
affect: (1) the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and (2) the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
You should read the unaudited pro forma consolidated financial information
of ASI in conjunction with "Risk Factors -- Uncertainty Regarding Our Proposed
Transactions with ASI," "Our Acquisition of ASI's Packaging and Test Business
and Investment in ASI," ASI's consolidated financial statements and the related
notes and the financial statements of K1, K2 and K3 and the related notes,
included elsewhere in this Consent Solicitation.
25
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT OF ASI
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASI PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ----------- ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Sales............................................ $ 285,925 $ $ 285,925
Cost of sales.................................... 239,632 239,632
----------- ----------- ------------
Gross profit..................................... 46,293 -- 46,293
----------- ----------- ------------
Operating expenses
Research and development....................... 87 87
Provision for doubtful accounts................ 901 901
Selling and administrative expenses............ 24,267 24,267
----------- ----------- ------------
Total operating expenses............... 25,255 -- 25,255
----------- ----------- ------------
Operating income................................. 21,038 -- 21,038
----------- ----------- ------------
Other (income) expense
Interest income................................ (5,902) (5,902)
Interest expense............................... 185,315 (150,657)(a) 34,658
Foreign currency (gains) loss.................. 33,198 (25,972)(b) 7,226
Loss (gain) from disposal of investments....... 601 601
Loss on valuation of inventories............... 2,041 2,041
Impairment loss on loans to affiliates......... 22,646 22,646
Other, net..................................... (24,889) (24,889)
----------- ----------- ------------
Total other (income) expense........... 213,010 (176,629) 36,381
----------- ----------- ------------
Income (loss) from continuing operations before
income taxes, equity in loss of affiliates..... (191,972) 176,629 (15,343)
Equity in loss of unconsolidated affiliates...... 31,787 -- 31,787
----------- ----------- ------------
Income (loss) from continuing operations before
income taxes................................... (223,759) 176,629 (47,130)
Provision (benefit) for income taxes............. (54,000) 54,402(c) 402
----------- ----------- ------------
Income (loss) from continuing operations......... $ (169,759) $ 122,227 $ (47,532)
=========== =========== ============
PER SHARE DATA:
Basic income (loss) from continuing operations
per common share............................ $ (5.82) $ (0.43)
=========== =========== ============
Diluted income (loss) from continuing operation
per common share............................ $ (5.82) $ (0.43)
=========== =========== ============
Shares used in computing basic net income
(loss) per common share..................... 29,208,739 81,007,520(d) 110,216,259
=========== =========== ============
Shares used in computing diluted net income
(loss) per common share..................... 32,444,636 81,007,520(d) 113,452,206
=========== =========== ============
</TABLE>
- - - - - ---------------
(a) Represents the elimination of interest expense related to debt which was
assumed to be paid off and the conversion of debt to equity as follows:
<TABLE>
<S> <C>
Conversion of debt to equity in October 1999.............. $ 82,200
Net cash proceeds from sale of K4 used for debt payment in
May 1999............................................... 520,100
Proposed conversion of debt to equity by ASI's creditor
banks.................................................. 125,400
Portion of proposed equity investment by Amkor to be used
to repay debt.......................................... 309,000
Net cash proceeds from the proposed sale of K1, K2 and K3
available for debt payment............................. 650,000
----------
Total debt assumed to be paid on January 1,
1999............................................. $1,686,700
==========
</TABLE>
(b) Represents the elimination of foreign currency (gain) loss related to won
currency debt which is assumed to be paid off.
26
<PAGE> 29
(c) Represents income tax expense due to the pro forma adjustments.
(d) Represents adjustments for the number of common shares as follows:
<TABLE>
<S> <C>
Proposed equity investment by Amkor......................... 37,708,974
Proposed debt to equity conversion by creditor banks........ 18,750,000
Increase in the number of shares related to Amkor's equity
investment in October 1999................................ 8,273,973
Increase in the number of shares related to debt to equity
conversion in October 1999................................ 16,274,573
----------
Total number of shares adjusted................... 81,007,520
==========
</TABLE>
27
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF ASI
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASI PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets:
Cash and cash equivalents......................... $ 56,469 $ 184,900(a) $ 241,369
Restricted cash................................... 41,086 (2,881)(b) 38,205
Bank deposits..................................... 105,414 105,414
Accounts and notes receivable
Trade, net of allowance for doubtful
accounts..................................... 3,416 3,416
Due from affiliates, net of allowance for
doubtful accounts............................ 29,377 29,377
Other.......................................... 22,797 22,797
Short-term loans to affiliates, net............... 4,464 4,464
Inventories....................................... 41,949 (7,984)(b) 33,965
Other current assets.............................. 6,894 6,894
---------- ----------- ----------
Total current assets...................... 311,866 174,035 485,901
Non-current bank deposits........................... 204 204
Restricted cash..................................... 73 73
Investments
Available for sale................................ 28,128 28,128
Affiliated companies.............................. 18,550 18,550
Long-term receivables
Due from affiliate................................ 250 250
Others............................................ 2,906 2,906
Property, plant and equipment, less accumulated
depreciation...................................... 1,037,935 (398,932)(b) 639,003
Deferred tax asset-noncurrent....................... 53,212 53,212
Other assets........................................ 34,345 (5,690)(b) 28,655
---------- ----------- ----------
Total assets.............................. $1,487,469 $ (230,587) $1,256,882
========== =========== ==========
Current liabilities:
Short-term borrowings............................. $ 69,328 $ $ 69,328
Current portion of long-term debt................. 73,882 (73,882)(d) --
Trade accounts and notes payable.................. 48,902 48,902
Other accounts payable............................ 77,141 77,141
Accrued expenses.................................. 3,850 3,850
Forward contract liability........................ 15,364 15,364
Other current liabilities......................... 13,318 13,318
---------- ----------- ----------
Total current liabilities................. 301,785 (73,882) 227,903
Long-term debt, net of current portion and discounts
on debentures..................................... 875,175 (606,911)(d) 268,264
Long-term obligations under capital leases, net of
current portion................................... 429,590 (410,207)(d) 19,383
Accrued severance benefits, net..................... 48,757 (45,100)(c) 3,657
Liability for loss contingency...................... 129,912 (117,000)(e) 12,912
Other long-term liabilities......................... -- --
---------- ----------- ----------
Total liabilities......................... 1,785,219 (1,253,100) 532,119
---------- ----------- ----------
Total stockholders' equity................ (297,750) 1,022,513(f) 724,763
---------- ----------- ----------
Total liabilities and stockholders'
equity.................................. $1,487,469 $ (230,587) $1,256,882
========== =========== ==========
</TABLE>
28
<PAGE> 31
- - - - - ---------------
(a) Represents the amount to be used for purposes other than the repayment of
debt (see note (d) below).
(b) Represents the assets of K1, K2 and K3 to be sold.
(c) Represents severance benefits to be paid upon sale of K1, K2 and K3.
(d) Represents payment of debt and the proposed conversion of debt to equity as
follows:
<TABLE>
<S> <C>
Proposed conversion of debt to equity by ASI's creditor
banks..................................................... $ 132,000
Portion of proposed equity investment by Amkor to be used to
repay debt................................................ 309,000
Net cash proceeds from the proposed sale of K1, K2 and K3
available for debt payment................................ 650,000(*)
----------
Total debt assumed to be paid on December 31,
1999............................................ $1,091,000
==========
</TABLE>
<TABLE>
<S> <C> <C>
(*) Proposed sale price..................................... $ 950,000
Less:
- Related taxes....................................... (103,000)
- Severance payment................................... (45,100)
- Payment for guarantee obligation (see (e) below).... (117,000)
- Other operational needs............................. (34,900)
---------
$ 650,000
=========
</TABLE>
(e) Represents the amount to be used for the payment to eliminate guarantee
obligations provided for Anam Construction and Anam Electronics Co., Ltd.
(f) Represents the proposed conversion of approximately $132 million of ASI's
debt to equity by ASI's creditor banks, our proposed $459.0 million equity
investment in ASI and a remainder, which is principally comprised of gain
on the proposed sale of K1, K2 and K3, net of related tax expense.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the federal securities laws, including statements regarding: (1) the
anticipated growth in the market for our products, (2) our anticipated capital
expenditures and financing needs, (3) our expected capacity utilization rates,
(4) our belief as to our future operating performance, (5) future won/dollar
exchange rates, (6) our proposed acquisition of K1, K2 and K3 and our proposed
investment in ASI, including the financing of these transactions, (7) the future
of our relationship with ASI and (8) other matters 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 "Risk Factors." The following discussion provides
information and analysis of our results of operations for the three years ended
December 31, 1999 and our liquidity and capital resources. You should read the
following discussion in conjunction with "Selected Historical Consolidated
Financial Data of Amkor" and our consolidated financial statements and the
related notes, included elsewhere in this Consent Solicitation.
OVERVIEW
From 1995 to 1999, our net revenues increased from $932.4 million to
$1,910.0 million. We generate revenues primarily from the sale of semiconductor
packaging and test services. Historically we performed these services at our
three factories in the Philippines and subcontracted for additional services
with ASI which operated four packaging and test facilities in Korea. In May
1999, we acquired K4, one of ASI's packaging and test facilities, and we intend
to acquire ASI's remaining packaging and test facilities, K1, K2, and K3 during
the second quarter of 2000. Since 1998, we have also generated revenue by
marketing the wafer fabrication services performed by the wafer fabrication
facility owned by ASI. If we complete our proposed acquisition of K1, K2 and K3,
we will no longer depend upon ASI for packaging or test services, but we will
continue to market ASI's wafer fabrication services.
Historically, prices for our packaging and test services and wafer
fabrication services have declined over time. Beginning in 1997, a worldwide
slowdown in demand for semiconductor devices led to excess capacity and
increased competition. As a result, price declines in 1998 accelerated. From
1996 through 1999, we were able to partially offset the effect of price declines
by successfully developing and marketing new packages with higher prices, such
as advanced leadframe and laminate packages. We cannot assure you that we will
be able to offset any such price declines in the future. In addition, beginning
in the third quarter of 1999, demand for packaging and test services increased
significantly, which reduced the decline in average selling prices.
We depend on a small group of customers for a substantial portion of our
revenues. In 1997, 1998 and 1999, we derived 40.1%, 35.3% and 30.6%,
respectively, of our net revenues from sales to five packaging and test
customers, with 23.4%, 20.6% and 14.1% of our net revenues, respectively,
derived from sales to Intel Corporation. In addition, during 1998 and 1999, we
derived 7.4% and 15.3%, respectively, of our net revenues from wafer fabrication
services, and we derived substantially all of these revenues from Texas
Instruments.
Historically, our cost of revenues has consisted principally of: (1)
service charges paid to ASI for packaging and test services performed for us,
(2) costs of materials and (3) labor and other costs at our factories in the
Philippines and at K4 after our acquisition of that factory in May 1999. Service
charges paid to ASI and our gross margins on sales of services performed by ASI
have been set in accordance with our supply agreements with ASI, which provide
for periodic pricing adjustments based on changes in forecasted demand, product
mix, capacity utilization and fluctuations in exchange rates, as well as our
mutual long-term strategic interests. Fluctuations in service charges we pay to
ASI have historically had a significant effect on our gross margins. In
addition, our gross margins on sales of services performed by ASI have generally
been lower than our gross margins on sales of services performed by our
factories in the Philippines, but we have not borne any of ASI's fixed costs. If
we complete our proposed acquisition of
30
<PAGE> 33
K1, K2 and K3 from ASI, we will bear all of the costs associated with these
factories, but we will no longer pay service charges to ASI for packaging and
test services. We will continue to incur costs of direct materials used in
packages that we produce for our customers. Because a portion of our costs at
our factories in the Philippines and Korea will remain fixed, increases or
decreases in capacity utilization rates may continue to have a significant
effect on our gross profit. The unit cost of packaging and test services
generally decreases as fixed charges, such as depreciation expense on our
equipment, are allocated over a larger number of units produced.
In order to meet customer demand for our laminate packages, we have made
significant investments to expand our capacity in the Philippines. In connection
with our newest factory in the Philippines, P3, in 1996 we expensed $15.5
million of pre-operating and start-up costs and in the first six months of 1997
we incurred $16.6 million of initial operating losses. This factory operated at
substantially less than full capacity during these periods while our customers
were completing qualification procedures for the production of laminate packages
at this factory. During the last six months of 1997 and in 1998 and in 1999, we
significantly increased utilization at P3 due to continued growth in demand for
laminate packages. As a result, P3 contributed positive gross margins throughout
1998 and 1999.
Relationship with ASI
Through our supply agreements with ASI, we historically have had 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 ASI's wafer fabrication
facility. During 1997, 1998 and 1999, we derived approximately 68%, 69% and 60%,
respectively, of our net revenues and approximately 42%, 49% and 38%,
respectively, of our gross profit from sales of services performed for us by
ASI. In addition, ASI has derived nearly all of its revenues from services sold
by us. Historically, ASI has directly sold packaging and test services in Japan
and Korea. In January 1998, we assumed the marketing rights for packaging and
test services in Japan from ASI, and we expect to assume marketing rights for
such services in Korea upon completion of our proposed acquisition of K1, K2 and
K3. In January 1998, we also began marketing wafer fabrication services provided
by ASI's new semiconductor wafer fabrication facility.
Upon completion of our proposed acquisition of K1, K2 and K3, we will no
longer receive any packaging and test services from ASI. However, we expect to
continue to have certain contractual and other business relationships with ASI,
primarily our wafer fabrication services supply agreement. Under this supply
agreement, we will continue to have the exclusive right to all of the wafer
output of ASI's wafer fabrication facility, and we expect to continue to
purchase all of ASI's wafer fabrication services. Furthermore, we will own
approximately 43% of ASI's outstanding voting stock after our investment in ASI
and the anticipated conversion of an additional W150 billion (approximately
$132.0 million) of ASI's debt to equity by ASI's creditor banks. Accordingly, we
will report ASI's results in our financial statements through the equity method
of accounting. Our company and ASI will also continue to have close ties due to
our overlapping ownership and management.
For more information concerning our relationship with ASI, you should read
"Risk Factors -- Relationship with ASI," "Risk Factors -- Potential Conflicts of
Interest with ASI," "Our Acquisition of ASI's Packaging and Test Business and
Investment in ASI" and "-- Liquidity and Capital Resources."
Financial Impact of Our Acquisition of K1, K2 and K3 and Investment in ASI on
Our Results of Operations
If we complete our proposed acquisition of K1, K2 and K3 and our proposed
investment in ASI, we expect there will be significant changes in our future
financial results. Because we already sell substantially all of the output of
K1, K2 and K3, there will not be a significant change in our revenues. We expect
our gross margin to increase significantly as the K1, K2 and K3 factories would
no longer be subject to our supply agreement with ASI. The factories that we
currently own operate with gross margins significantly higher than the margins
we achieve under our supply agreement with ASI. However, our operating expenses
will increase as we will absorb the research and development, general and
administrative expenses
31
<PAGE> 34
related to the operations of K1, K2 and K3. Our interest expense will also
increase due to the debt we will incur to finance our proposed acquisition and
investment. We expect our overall effective tax rate to decrease due to the fact
that the profits of K1, K2 and K3 will be subject to a tax holiday in Korea. The
tax holiday will apply to 100% of the profits of K1, K2 and K3 for seven years
and then to 50% of such profits for three additional years. Because of our
equity investment in ASI, we will be required to record our increased
proportionate share of ASI's net income, net of the amortization of goodwill
incurred in the acquisition of our equity interest in ASI.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Gross profit................................................ 14.6% 16.6% 17.4%
Operating income............................................ 6.9% 8.5% 9.2%
Income before income taxes, equity in income (loss) of
investees and minority interest........................... 4.2% 6.4% 5.5%
Net income.................................................. 3.0% 4.8% 4.0%
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Revenues. Net revenues increased $342.0 million, or 21.8%, to $1,910.0
million in 1999 from $1,568.0 million in 1998. Packaging and test net revenues
increased 11.4% to $1,617.2 million in 1999 from $1,452.3 million in 1998. For
the same one-year periods, wafer fabrication net revenues increased to $292.7
million from $115.7 million.
The increase in packaging and test net revenues was primarily attributable
to a significant increase in unit volumes, which more than offset significant
average selling price erosion across all product lines. The average selling
price erosion was most severe in the second half of 1998 and has slowed during
1999 due to increases in product demand and decreases in excess factory
capacity. Offsetting this erosion in average selling prices was an overall unit
volume increase of approximately 30%. Growth in demand for our services was
driven by our customers in the PC and telecommunications industries.
Particularly strong was the demand for packages used in cellular phones and
internet enabling equipment. In addition, changes in the mix of products we are
selling, to more advanced and laminate packages, also provided an offset to
overall price erosion. During 1999, advanced and laminate packages, which have
higher average selling prices than traditional leadframe products, accounted for
60.2% of packaging and test net revenues compared to 53.8% in 1998.
The significant increase in wafer fabrication net revenues represents the
production ramp-up of the wafer fabrication facility, which began operation in
January 1998 and did not commence producing at near full installed capacity
until the beginning of 1999. ASI plans to expand the capacity of the wafer
fabrication facility from 18,000 wafers to 22,000 wafers per month by the end of
the first quarter of 2000.
Gross Profit. Gross profit increased $71.9 million, or 27.6%, to $332.7
million, or 17.4% of net revenues, in 1999 from $260.8 million, or 16.6% of net
revenues, in 1998.
Gross margins were positively impacted by:
- Improved gross margin on the output of K4 following our acquisition of K4
in May 1999.
- Increasing unit volumes during the third and fourth quarter of 1999,
which permitted better absorption of our factories' substantial fixed
costs, resulting in a lower manufacturing cost per unit and improved
gross margins.
32
<PAGE> 35
The positive impact on gross margins was partially offset by:
- Increasing contribution to total revenues from our low margin wafer
fabrication services business. In 1999 wafer fabrication services net
revenues represented 15.3% of total net revenues compared to 7.4% of
total net revenues in 1998. In addition, beginning in 1999, our
contractual gross margin for this business under our supply agreement
with ASI was reduced to 10% from 15% in 1998; and
- Significant average selling price erosion across all product lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $25.4 million, or 21.2%, to $145.2 million, or
7.6% of net revenues, in 1999 from $119.8 million, or 7.6% of net revenues, in
1998. The increase in these costs was due to:
- Increased headcount and related personnel costs at our marketing, sales
and wafer fabrication departments;
- Increased headcount and related personnel costs at our P3 factory, which
continued to increase production capacity; and
- Increased costs related to the consolidation of K4 factory operations
during the second quarter of 1999 and general and administrative
expenses, including fees paid to ASI under the transition services
agreement.
Research and Development. Research and development expenses increased $3.2
million, or 38.6%, to $11.4 million, or 0.6% of net revenues, in 1999 from $8.3
million, or 0.5% of net revenues, in 1998. Increased research and development
expenses resulted from increased headcount and general development activities,
primarily the expansion of our Chandler, Arizona-based research facility.
Other (Income) Expense. Other expenses increased $38.8 million, or 121.2%,
to $70.8 million, or 3.7% of net revenues, in 1999 from $32.0 million, or 2.0%
of net revenues, in 1998. The net increase in other expenses was primarily a
result of:
- Increase in interest expense of $27.4 million. The increased interest
expense resulted from the May 1999 issuance of senior and senior
subordinated notes to fund the K4 acquisition, which more than offset the
decrease in interest expense resulting from the application of the
proceeds from our initial public offering in May 1998 against outstanding
debt;
- Decrease in foreign exchange losses of $4.2 million resulting from the
stabilization of the Philippine peso since the first quarter of 1998; and
- Increase in other expenses, which in 1999 included a $17.4 million
non-cash charge associated with the early conversion of $153.6 million of
our outstanding convertible subordinated notes in the fourth quarter.
Income Taxes. Our effective tax rate in 1999 and 1998 was 25.3% and 29.0%,
respectively (after giving effect to the pro forma adjustment for income taxes).
The decrease in the effective tax rate in 1999 was due to the higher operating
profits at our factories that operate with tax holidays.
We have structured our global operations to take advantage of lower tax
rates in certain countries and tax incentives extended to encourage investment.
The tax returns for open years are subject to changes upon final examination.
Changes in the mix of income from our foreign subsidiaries, expiration of tax
holidays and changes in tax laws and regulations could result in increased
effective tax rates for us.
Minority Interest. Minority interest represented ASI's ownership in the
consolidated net income of Amkor/Anam Pilipinas, Inc. ("AAP"). Accordingly,
until the second quarter of 1998, we recorded a minority interest expense in our
consolidated financial statements relating to the minority interest in the net
income of AAP. In the second quarter of 1998, we purchased ASI's 40% interest in
AAP and, as a result, we now own 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.
33
<PAGE> 36
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Revenues. Net revenues increased $112.2 million, or 7.7%, to $1,568.0
million in 1998 from $1,455.8 million in 1997. Packaging and test net revenues
were relatively unchanged in 1998 compared to 1997. However, net revenues from
wafer fabrication services have ramped up since operations began in January 1998
and accounted for substantially all of the increase in net revenues. In
addition, beginning in January 1998, we assumed marketing rights for packaging
and test services in Japan from ASI.
Total unit volumes increased during 1998 compared to 1997. This increase
was primarily due to increases in volumes of laminate packages, which more than
doubled compared to 1997. Our advanced leadframe packages also increased in
volume, but unit volumes for traditional leadframe packages declined. Although
traditional leadframe packages accounted for more than 65% of our total unit
volume for 1998, the shift to laminate packages significantly impacted revenues
because each laminate package had an average selling price significantly higher
than the average selling price of a traditional leadframe package. Laminate and
advanced leadframe packages accounted for 53.8% of packaging and test net
revenues in 1998 compared to 38.7% in 1997. This trend was consistent throughout
1998.
Gross Profit. Gross profit increased $47.7 million, or 22.4%, to $260.8
million in 1998 from $213.1 million in 1997. Gross margin improved to 16.6% in
1998 from 14.6% in 1997. The following factors contributed to higher gross
margins in 1998:
- Gross margins on packaging and test services provided by ASI improved as
a result of the supply agreements entered into in January 1998;
- Gross margins at P3, which incurred significant pre-operating and
start-up costs and initial operating losses in the first half of 1997,
improved primarily as a result of increased volumes and better absorption
of fixed costs; and
- Gross margins improved as a result of the positive impact from wafer
fabrication revenues during 1998 compared to no revenue from wafer
fabrication in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.1 million, or 15.5%, to $119.8 million in
1998 from $103.7 million in 1997. Selling, general and administrative expenses
as a percentage of net revenues increased to 7.6% in 1998 from 7.1% in 1997. The
increase was primarily due to: (1) higher administrative expenses at P3 as unit
volumes continued to increase and (2) costs related to wafer fabrication
services, which began in January 1998.
Research and Development Expenses. Research and development expenses
decreased $0.3 million, or 3.2%, to $8.3 million in 1998 from $8.5 million in
1997. Research and development expenses as a percentage of net revenues
decreased to 0.5% in 1998 from 0.6% in 1997.
Other (Income) Expense. Other (income) expense decreased $7.8 million to
$32.0 million in 1998 from $39.8 million in 1997. The decline was primarily due
to a reduction in net interest expense of $14.2 million to $18.0 million in 1998
from $32.2 million in 1997. We used a portion of the proceeds from our initial
public offering in May 1998 to repay much of our outstanding debt. Additionally,
we accumulated a significant cash balance. An increase in foreign exchange
losses, due to fluctuations in the Philippine peso, partly offset lower interest
expense.
Income Taxes. Our effective tax rate, after giving effect to the pro forma
adjustment for income taxes, was 29.0% in 1998 compared to an effective tax rate
of 17.5% in 1997. The lower effective tax rate in 1997 was due to the
recognition of deferred tax assets on currency losses for Philippine tax
reporting purposes, which are not recognized for financial reporting purposes.
This decrease was offset by increases in the effective rate resulting from
non-deductible losses at P3 where we have a tax holiday until the end of 2002.
To the extent P3 is profitable, our effective tax rate related to our operations
in the Philippines during this tax holiday will be less than the statutory rate
of 35% in the Philippines. In 1997 we recognized deferred tax benefits from
unrealized foreign exchange losses which are recognized in the Philippines for
tax reporting purposes and relate to unrecognized net foreign exchange losses on
U.S. dollar denominated monetary assets and liabilities. These losses are not
recognized for financial reporting purposes because the
34
<PAGE> 37
U.S. dollar is our functional currency. These losses will be realized for tax
reporting purposes in the Philippines upon settlement of the related asset or
liability. The benefit derived from unrealized foreign exchange losses was
partially offset by an increase in the valuation allowance. We concluded that it
was more likely than not that we could realize a portion of these tax benefits
in the Philippines within the three year loss carryforward period. We recorded a
valuation allowance for the remaining tax benefits where we could not reach such
a conclusion.
Equity in Income (Loss) of Investees. In 1997, we recognized a loss of
$17.3 million resulting principally from the impairment of value in our
investment in ASI. In February 1998, we disposed of our investment in ASI's
common stock.
Minority Interest. Minority interest represented ASI's ownership in the
consolidated net income of AAP, one of our subsidiaries in the Philippines.
During 1997, as a result of a settlement of an intercompany loan, which
otherwise had no effect on our combined pretax income, AAP reported a net loss
as a separate entity. Accordingly, we recorded a minority interest benefit in
our consolidated financial statements related to the minority interest in the
net loss.
In the second quarter of 1998, we purchased ASI's 40% interest in AAP, and,
as a result, we now own substantially all of the common stock of AAP. The
purchase of the minority interest resulted in the elimination of the minority
interest liability and goodwill amortization of approximately $2.5 million per
year.
QUARTERLY RESULTS
The table below sets forth unaudited consolidated financial data, including
as a percentage of net revenues, for the last eight fiscal quarters ended
December 31, 1999. Our results of operations have varied and may continue to
vary from quarter to quarter and are not necessarily indicative of the results
of any future period. In addition, in light of our recent growth, including as a
result of our acquisition of the K4 packaging and test factory from ASI in May
1999, we believe that you should not rely on period-to-period comparisons as an
indication of our future performance.
We believe that we have included in the amounts stated below all necessary
adjustments, consisting only of normal recurring adjustments, to present fairly
our selected quarterly data. You should read our selected quarterly data in
conjunction with our consolidated financial statements and the related notes,
included elsewhere in this Consent Solicitation.
Our net revenues, gross profit and operating income are generally lower in
the first quarter of the year as compared to the fourth quarter of the preceding
year primarily due to the combined effect of holidays in the U.S., the
Philippines and Korea. Semiconductor companies in the U.S. generally reduce
their production during the holidays at the end of December which results in a
significant decrease in orders for packaging and test services during the first
two weeks of January. In addition, we typically close our factories in the
Philippines for holidays in January, and we and ASI close our factories in Korea
for holidays in February.
The semiconductor industry experienced a general slowdown during 1998. As a
result, our packaging and test net revenues decreased by 3.5% from the first
quarter of 1998 to the fourth quarter of 1998. The decrease in packaging and
test net revenue was offset by significant growth in net revenues from wafer
fabrication services. Net revenues from wafer fabrication services, which
represented less than 1% of net revenues in the first quarter of 1998, increased
to 16.4% of net revenues in the fourth quarter of 1998.
35
<PAGE> 38
In May 1999 we purchased the K4 factory from ASI. The acquisition resulted
in improved gross margins due to the difference in margins between company-owned
factories and factory services provided by ASI under our supply agreement. To
purchase K4, we issued $625 million of senior and senior subordinated notes.
This has resulted in increased interest expense.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $371,733 $384,724 $386,718 $424,808 $ 419,957 $449,925 $501,816 $538,274
Cost of revenues -- including
purchases from ASI................ 310,056 317,106 321,758 358,230 357,382 383,162 404,327 432,355
-------- -------- -------- -------- --------- -------- -------- --------
Gross profit.................... 61,677 67,618 64,960 66,578 62,575 66,763 97,489 105,919
-------- -------- -------- -------- --------- -------- -------- --------
Operating expenses:
Selling, general and
administrative.................. 28,715 28,939 30,017 32,175 30,106 35,017 40,376 39,734
Research and development.......... 2,057 1,938 2,109 2,147 2,251 2,843 2,990 3,352
-------- -------- -------- -------- --------- -------- -------- --------
Total operating expenses.... 30,772 30,877 32,126 34,322 32,357 37,860 43,366 43,086
-------- -------- -------- -------- --------- -------- -------- --------
Operating income.................... 30,905 36,741 32,834 32,256 30,218 28,903 54,123 62,833
-------- -------- -------- -------- --------- -------- -------- --------
Net income.......................... $ 8,812 $ 26,119 $ 20,874 $ 19,655 $ 18,925 $ 11,520 $ 26,088 20,186
======== ======== ======== ======== ========= ======== ======== ========
Pro forma net income................ $ 9,640 $ 20,791
======== ========
Basic net income per common share... $ .11 $ .25 $ .18 $ .17 $ .16 $ .10 $ .22 $ .16
======== ======== ======== ======== ========= ======== ======== ========
Diluted net income per common
share............................. $ .11 $ .24 $ .17 $ .16 $ .16 $ .10 $ .21 $ .16
======== ======== ======== ======== ========= ======== ======== ========
Basic pro forma net income per
common share...................... $ .12 $ .20
======== ========
Diluted pro forma net income per
common share...................... $ .12 $ .19
======== ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues -- including
purchases from ASI................. 83.4 82.4 83.2 84.3 85.1 85.2 80.6 80.3
----- ----- ----- ----- ----- ----- ----- -----
Gross profit..................... 16.6 17.6 16.8 15.7 14.9 14.8 19.4 19.7
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and
administrative................... 7.7 7.5 7.8 7.6 7.2 7.8 8.0 7.4
Research and development........... 0.6 0.5 0.5 0.5 0.5 0.6 0.6 .6
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses..... 8.3 8.0 8.3 8.0 7.7 8.4 8.6 8.0
----- ----- ----- ----- ----- ----- ----- -----
Operating income..................... 8.3 9.6 8.5 7.6 7.2 6.4 10.8 11.7
----- ----- ----- ----- ----- ----- ----- -----
Net income........................... 2.4% 6.8% 5.4% 4.6% 4.5% 2.6% 5.2% 3.8%
===== ===== ===== ===== ===== ===== ===== =====
Pro forma net income................. 2.6% 5.4%
===== =====
</TABLE>
Prior to our reorganization in April 1998, our predecessor, AEI, elected to
be taxed as an S Corporation under the Code and comparable state tax laws. As a
result, AEI did not recognize any provision for federal income tax expense from
January 1, 1994 through April 28, 1998. In accordance with applicable SEC
regulations, we have provided in our consolidated financial statements the pro
forma adjustments for income taxes (unaudited) to reflect the additional U.S.
federal income taxes which we would have recorded if AEI had been a C
Corporation during these periods.
Our operating results have varied significantly from period to period and
may continue to vary in the future due to a variety of factors. For more
information on the risks affecting our operating results, see the risk factors
entitled "Relationship with ASI," "Absence of Backlog," "Risks Associated with
Our Wafer Fabrication Business," and "Protection of Intellectual Property."
36
<PAGE> 39
LIQUIDITY AND CAPITAL RESOURCES
Our ongoing primary cash needs are for equipment purchases, factory
expansions, interest and principal payments on our debt and working capital, in
addition to our acquisitions and investments.
In February 2000, we reached an agreement with ASI to acquire K1, K2 and K3
for a purchase price of approximately $950.0 million and to make a $459.0
additional investment in ASI. This agreement supersedes our remaining commitment
to invest $108.4 million in ASI, out of the total $150 million we committed to
invest. We intend to finance our proposed acquisition and investment with the
proceeds of our sale of $258.75 million of 5% Convertible Subordinated Notes due
2007, our proposed $410.0 million equity financing, $750.0 million of new
secured bank debt and cash on hand. The new secured bank debt will be drawn from
a new $850.0 million secured bank facility which will provide for amortization
of the drawn amount over a five to five and one-half year period and quarterly
principal and interest payments. See "Our Acquisition of ASI's Packaging and
Test Business and Investment in ASI -- Proposed Financing."
In May 1998, we consummated our initial public offering of 35,250,000
shares of common stock and $207 million principal amount of convertible
subordinated notes due May 1, 2003. We used the net proceeds of approximately
$558 million primarily to repay approximately $264 million of short-term and
long-term debt and approximately $86 million of amounts due to Anam USA, Inc., a
wholly-owned financing subsidiary of ASI, and to purchase for $34 million ASI's
40% interest in AAP. The remaining amount of net proceeds was available for
capital expenditures and working capital.
On May 17, 1999 we completed an asset purchase of ASI's newest and largest
packaging and test factory, K4, excluding cash and cash equivalents, notes and
accounts receivables, intercompany accounts and existing claims against third
parties. The purchase price for K4 was $575 million, plus the assumption of
approximately $7 million of employee benefit liabilities. In conjunction with
our purchase of K4, we completed a private placement in May 1999 to raise $425
million in senior notes and $200 million in senior subordinated notes. The
senior notes mature in May 2006 and have a coupon rate of 9.25%. The senior
subordinated notes mature in 2009, and have a coupon rate of 10.5%. We are
required to pay interest semi-annually in May and November for all of the notes.
Under the terms of our trade receivables securitization agreement, a
commercial financial institution is committed to purchase, with limited
recourse, all right, title and interest in up to $100 million in eligible
receivables, as defined in the agreement. In connection with our proposed
incurrence of new secured bank debt for the proposed acquisition of K1, K2 and
K3 and the proposed investment in ASI, we plan to terminate this agreement.
We have invested significant amounts of capital to increase our packaging
and test services capacity. During the last three years we have constructed our
P3 factory, added capacity in our other factories in the Philippines and
constructed a new research and development facility in the U.S. In 1997, 1998
and 1999, we made capital expenditures of $179.0 million, $107.9 million and
$242.4 million, respectively. We intend to spend up to $400 million in
additional capital expenditures in 2000, primarily for the expansion of our
factories. We believe the increase in capital expenditures is necessary to
expand our capacity to meet the growth in demand we expect in 2000. If we
acquire the K1, K2 and K3 factories, we could incur significant additional
capital expenditures.
During the second quarter of 1999, we executed a letter with ASI committing
to make a $150 million equity investment in ASI. Our commitment required that we
invest this amount in installments of approximately $41 million in each of 1999,
2000 and 2001 and $27 million in 2002. In October, 1999 we made our initial
investment in ASI. We purchased 10 million shares of common stock at price of
W5,000 per share, or approximately $41.6 million dollars. As a result of this
investment and the conversion of ASI's debt to equity by ASI's creditor banks,
we now own approximately 18% of ASI's voting stock. The remaining portion of
this commitment has been superseded by our new agreement to invest an additional
$459.0 million in ASI.
37
<PAGE> 40
At December 31, 1999, our debt consisted of $625 million of senior and
senior subordinated notes, $6.5 million of borrowings classified as current
liabilities, $9.0 million of long-term debt and capital lease obligations and
$53.4 million of 5.75% convertible subordinated notes due 2003. We had $85.6
million in borrowing facilities with a number of domestic and foreign banks, of
which $82.2 million remained unused. These facilities are typically revolving
lines of credit and working capital facilities that are renewable annually and
bear interest at rates ranging from 8.0% to 10.75%. Long-term debt and capital
lease obligations outstanding have various expiration dates through April 2004
and bear interest at rates ranging from 5.8% to 13.8%.
Covenants in the agreements governing our new $850 million secured bank
facility, our existing $425 million of senior notes and $200 million of senior
subordinated notes and any future indebtedness may materially restrict our
operations, including our ability to incur debt, pay dividends, make certain
investments and payments and encumber or dispose of assets. In addition,
financial covenants contained in agreements relating to our existing and future
debt could lead to a default in the event our results of operations do not meet
our plans. A default under one debt instrument may also trigger cross-defaults
under our other debt instruments. An event of default under any debt instrument,
if not cured or waived, could have a material adverse effect on us.
Net cash provided by operating activities in 1997, 1998 and 1999 was $250.1
million, $238.0 million and $293.3 million, respectively. Net cash provided by
(used in) financing activities in 1997, 1998 and 1999 was $(16.0) million, $62.0
million and $573.9 million, respectively.
In the fourth quarter of 1999, the holders of our convertible subordinated
notes converted $153.6 million of such notes into 12.1 million shares of common
stock. In the fourth quarter 1999, we incurred a non-cash after-tax charge of
approximately $13.9 million representing the fair market value of the shares of
common stock issued in the conversion in excess of the shares required to be
issued, which represents a premium for early retirement. In the first quarter of
2000 we expect to incur a similar charge in the amount of $0.3 million.
Following our proposed acquisition of K1, K2 and K3 and our proposed
investment in ASI, we believe that our existing cash balances, available credit
lines, cash flow from operations and available equipment lease financing will be
sufficient to meet our projected capital expenditures, debt service, working
capital and other cash requirements for at least the next twelve months. We may
require capital sooner than currently expected. We cannot assure you that
additional financing will be available when we need it or, if available, that it
will be available on satisfactory terms. In addition, the terms of the senior
and senior subordinated notes sold by us in May 1999 significantly reduce our
ability to incur additional debt. Failure to obtain any such required additional
financing could have a material adverse effect on our company.
In connection with our wafer fabrication facility agreement with Texas
Instruments, our company and Texas Instruments agreed to revise certain payment
and other terms contained in the Texas Instruments Manufacturing and Purchase
Agreement. As part of the revision, Texas Instruments agreed to advance our
company $20 million in June 1998 and another $20 million in December 1998. These
advances represented prepayments of wafer fabrication facility services to be
provided in the fourth quarter of 1998 and first quarter of 1999, respectively.
We recorded these amounts as accrued expenses. In turn, we advanced these funds
to ASI as prepayment for fabrication facility service charges. We completely
offset the first $20 million advance to ASI against billings for wafer
fabrication services performed for us by ASI in the fourth quarter of 1998 and
offset the second $20 million advance to ASI against billings for wafer
fabrication services performed for us by ASI in the first quarter of 1999. Under
the terms of the revision to the Texas Instruments Manufacturing and Purchase
Agreement, we remain ultimately responsible for reimbursing Texas Instruments if
ASI fails to comply with the terms of the agreement.
Subchapter S Taxes and Distributions
Prior to our reorganization in April 1998, our predecessor, AEI, elected to
be taxed as an S Corporation under the Code and comparable state laws. As a
result, ASI did not recognize any provision
38
<PAGE> 41
for federal income tax expense prior to April 28, 1998. Instead, up until the
date the S Corporation status of AEI terminated, Mr. and Mrs. James Kim and
certain trusts established for the benefit of other members of Mr. and Mrs.
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. Under certain tax indemnification agreements, we are 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 April 28, 1998. The agreements in turn provide that,
under certain circumstances, we will indemnify such stockholders if they are
required to pay additional taxes or other amounts attributable to taxable years
for which AEI filed 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 million and $33.1
million in 1997 and 1998, respectively. As a result of the finalization of the
AEI tax returns in 1999, approximately $3.3 million of the 1998 distributions
will be refunded to our company.
YEAR 2000 ISSUES
We have been actively engaged in addressing year 2000 issues. These issues
occur because many currently installed computer systems and software products
are coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
At the date of this Consent Solicitation, our systems have not experienced
any year 2000 problems. We presently believe that the year 2000 problem will not
pose significant operational problems for our business and operations on a going
forward basis. While we have contingency plans in place for operational problems
which may still arise as a result of year 2000 problems, we cannot assure you
that the year 2000 problem will not pose significant operational problems or
have a material adverse effect on our business, financial condition and results
of operations in the future. Through the date of this Consent Solicitation,
costs incurred for year 2000 compliance have not been material.
We are not aware of any material year 2000 problems encountered by our
suppliers to date but have not yet obtained confirmations from our suppliers
that they did not experience year 2000 problems. Accordingly, we cannot
determine whether our suppliers have experienced year 2000 problems that may
impact their ability to supply us with equipment and services. Further, we
cannot determine the state of their year 2000 readiness. We cannot assure you
that our suppliers will be successful in ensuring that their systems have been
and will continue to be or will be year 2000 compliant or that their failure to
do so will not harm our business.
MARKET RISK SENSITIVITY
Our company is exposed to market risks, primarily related to foreign
currency and interest rate fluctuations. In the normal course of business, we
employ established policies and procedures to manage the exposure to
fluctuations in foreign currency values and changes in interest rates.
Foreign Currency Risks
Our company's primary exposures to foreign currency fluctuations is
associated with Philippine peso-based transactions and related peso-based assets
and liabilities, as well as Korean-won based transactions and related won-based
assets and liabilities. The objective in managing this foreign currency exposure
is to minimize the risk through minimizing the level of activity and financial
instruments denominated in pesos and won. Although we have selectively hedged
some of our currency exposure through short-term (generally not more than 30 to
60 days) forward exchange contracts, the hedging activity to date has been
immaterial.
39
<PAGE> 42
At December 31, 1999, the peso-based financial instruments primarily
consisted of cash, non-trade receivables, deferred tax assets and liabilities,
non-trade payables, accrued payroll, taxes and other expenses. Based on the
portfolio of peso-based assets at December 31, 1999, a 20% increase in the
Philippine peso to U.S. dollar exchange rate would result in a decrease of
approximately $3 million, in peso-based net assets.
At December 31, 1999, the won based financial instruments primarily
consisted of cash, non-trade receivables, non-trade payables, accrued payroll,
taxes and other expenses. Based on the portfolio of won-based assets at December
31, 1999, a 20% increase in the Korean won to U.S. dollar exchange rate would
result in a decrease of less than $1 million, in won-based net assets.
Interest Rate Risks
Our company has interest rate risk with respect to our investment in cash
and cash equivalents, use of short-term borrowings and long-term debt, including
the $53.4 million of convertible subordinated notes, $425.0 million of senior
notes and $200.0 million of senior subordinated notes outstanding, and will have
such risk with respect to our 5% Convertible Notes due 2007. Overall, we
mitigate the interest rate risks by investing in short-term investments, which
are due on demand or carry a maturity date of less than three months. In
addition, both the short-term borrowings and long-term debt, excluding our
convertible subordinated notes, senior notes and senior subordinated notes, have
variable rates that reflect currently available terms and conditions for similar
borrowings. As the convertible subordinated notes, senior notes and senior
subordinated notes bear fixed rates of interest, the fair value of these
instruments fluctuate with market interest rates. The fair value of the
convertible subordinated notes is also impacted by the market price of our
common stock.
The table below presents the interest rates, maturity dates, principal cash
flows and fair value of our fixed rate debt as of December 31, 1999.
<TABLE>
<CAPTION>
FIXED INTEREST
DEBT RATE MATURITY DATE PRINCIPAL FAIR VALUE
---- -------------- ------------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Convertible Notes.......................... 5.75% May 2003 $ 53,435 $115,420
Senior Notes............................... 9.25% May 2006 $425,000 $416,500
Senior Subordinated Notes.................. 10.5% May 2009 $200,000 $199,000
</TABLE>
Based on our conservative policies with respect to investments in cash and
cash equivalents, use of variable rate debt, and the fact we currently intend to
repay upon maturity our senior notes, senior subordinated notes the convertible
subordinated notes (unless converted), we believe that the risk of potential
loss due to interest rate fluctuations is not material.
Equity Price Risks
Our outstanding convertible subordinated notes are convertible into common
stock at $13.50 per share, and our 5% Convertible Notes due 2007 are convertible
into common stock at $57.34 per share. As stated above, we intend to repay our
convertible subordinated notes upon maturity, unless converted. If investors
were to decide to convert their convertible subordinated notes to common stock,
there would be no impact on our future earnings, other than a reduction in
interest expense, unless such conversion were induced by us.
40
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of February 29, 2000 by:
- each person or entity who is known by us to beneficially own 5% or more
of our outstanding common stock;
- each of our directors; and
- all of our executive officers.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(A)
------------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OWNERSHIP
---------------- ---------- ----------
<S> <C> <C>
James J. and Agnes C. Kim(b)(c)............................. 30,053,921 22.9
1345 Enterprise Drive
West Chester, PA 19380
David D. Kim Trust of December 31, 1987(c)(d)............... 14,457,344 11.0
1500 E. Lancaster Avenue
Paoli, PA 19301
John T. Kim Trust of December 31, 1987(c)(d)................ 14,457,344 11.0
1500 E. Lancaster Avenue
Paoli, PA 19301
Susan Y. Kim Trust of December 31, 1987(c)(d)(e)............ 14,457,344 11.0
1500 E. Lancaster Avenue
Paoli, PA 19301
J. & W. Seligman & Co. Incorporated(f)...................... 10,848,800 8.3
100 Park Avenue
New York, New York 10017
Capital Group International, Inc.(g)........................ 7,370,400 5.6
11100 Santa Monica Blvd.
Los Angeles, CA 90025
Winston J. Churchill(h)..................................... 15,000 *
Thomas D. George(h)......................................... 15,000 *
Gregory K. Hinckley(h)...................................... 6,000 *
John B. Neff(h)............................................. 65,000 *
John N. Boruch(i)........................................... 203,985 *
Eric R. Larson(j)........................................... 49,609 *
Kenneth T. Joyce(k)......................................... 8,237 *
Michael D. O'Brien(l)....................................... 81,444 *
All directors and executive officers as a group (9
persons)(m)............................................... 30,498,196 23.2
</TABLE>
- - - - - ---------------
* Represents less than 1%.
(a) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. The information is not necessarily indicative of beneficial
ownership for any other purpose. Under this rule, beneficial ownership
includes any share over which the individual or entity has voting power or
investment power. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of our common
stock subject to options held by that person that will be exercisable on or
before April 29, 2000 are deemed outstanding. Unless otherwise indicated,
each person or entity has sole voting and investment power with respect to
shares shown as beneficially owned.
(b) James J. and Agnes C. Kim are husband and wife. Accordingly, each
beneficially owns shares of our common stock held in the name of the other.
41
<PAGE> 44
(c) David D. Kim, John T. Kim and Susan Y. Kim are children of James J. and
Agnes C. Kim. Each of the David D. Kim Trust of December 31, 1987, John T.
Kim Trust of December 31, 1987 and Susan Y. Kim Trust of December 31, 1987
has in common Susan Y. Kim and John F.A. Earley as co-trustees, in addition
to a third trustee (John T. Kim in the case of the Susan Y. Kim Trust and
the John T. Kim Trust, and David D. Kim in the case of the David D. Kim
Trust) (the trustees of each trust may be deemed to be the beneficial
owners of the shares held by such trust). In addition, the trust agreement
for each of these trusts encourages the trustees of the trusts to vote the
shares of common stock held by them, in their discretion, in concert with
James Kim's family. Accordingly, the trusts, together with their respective
trustees and James J. and Agnes C. Kim, may be considered a "group" under
Section 13(d) of the Exchange Act. This group may be deemed to have
beneficial ownership of 73,425,953 shares or 56.1% of the outstanding
shares of our common stock.
(d) These three trusts together with the trusts described in note (e) below
comprise the Kim Family Trusts.
(e) Includes 8,200,000 shares held by the Trust of Susan Y. Kim dated April 16,
1998 established for the benefit of Susan Y. Kim's two children.
(f) J. & W. Seligman & Co. Incorporated ("JWS") reported in a Schedule 13G
filed with the Commission on February 10, 2000 that it beneficially owned
these shares as of December 31, 1999. JWS also reported that William C.
Morris, as the owner of a majority of the outstanding voting securities of
JWS, may be deemed to beneficially own the shares beneficially owned by
JWS. JWS is the investment adviser for Seligman Communications and
Information Fund, Inc. (the "Fund"). Of the 10,848,800 shares that JWS
beneficially owns, the Fund beneficially owns 9,050,000 shares.
(g) Capital Group International, Inc. reported in a Schedule 13G filed with the
Commission on February 14, 2000 that it beneficially owned these shares as
of December 31, 1999.
(h) Includes 5,000 shares issuable upon the exercise of stock options that are
exercisable on or before April 29, 2000.
(i) Includes 189,914 shares issuable upon the exercise of stock options that
are exercisable on or before April 29, 2000.
(j) Includes 39,374 shares issuable upon the exercise of stock options that are
exercisable on or before April 29, 2000.
(k) Includes 6,562 shares issuable upon the exercise of stock options that are
exercisable on or before April 29, 2000.
(l) Includes 48,444 shares issuable upon the exercise of stock options that are
exercisable on or before April 29, 2000 and 33,000 shares held jointly with
Mr. O'Brien's wife.
(m) Includes 304,294 shares issuable upon the exercise of stock options that
are exercisable on or before April 29, 2000.
42
<PAGE> 45
DESCRIPTION OF CONVERTIBLE NOTES
SUMMARY
Securities................. $258.75 million aggregate principal amount of
Convertible Notes.
Maturity................... The Convertible Notes will mature on March 15, 2007
unless earlier redeemed or converted.
Payment of Interest........ Interest on the Convertible Notes at the rate of 5%
per annum is payable semi-annually on September 15
and March 15 of each year, commencing September 15,
2000.
Conversion Rights.......... The Convertible Notes are convertible into our
common stock at the option of the holder at any
time on or before the close of business on the last
trading day prior to maturity, unless previously
redeemed, at a conversion price of $57.34 per
share, subject to adjustment in certain events. See
"-- Conversion."
Provisional Redemption by
the Company................ After September 20, 2001 and prior to March 20,
2003, the Convertible Notes may be redeemed at our
option, in whole or in part, at any time or from
time to time, at a redemption price equal to
103.571% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages,
if any, to the date of redemption if the closing
price of our common stock shall have equaled or
exceeded 150% of the conversion price then in
effect for at least 20 out of 30 consecutive days
on which the Nasdaq National Market is open for the
transaction of business prior to the date of
mailing the notice of provisional redemption. Upon
any provisional redemption, we will be obligated to
make an additional payment in an amount equal to
the present value of the aggregate value of the
interest payments and liquidated damages, if any,
that would thereafter have been payable on the
Convertible Notes from the provisional redemption
date to, but excluding, March 20, 2003. The present
value will be calculated using the bond equivalent
yield on U.S. Treasury notes or bills having a term
nearest in length to that of the additional period
as of the day immediately preceding the date on
which a notice of provisional redemption is mailed.
See "-- Provisional Redemption by the Company."
Redemption at the Option of
the Company................ On or after March 20, 2003, we may, upon at least
15 days' notice, redeem the Convertible Notes at
the redemption prices set forth herein, together
with accrued and unpaid interest and liquidated
damages, if any, thereon. See "-- Optional
Redemption."
Repurchase at the Option of
Holders if the Proposed
Acquisition of K1, K2 and
K3 Does Not Close........ If the proposed acquisition of K1, K2 and K3 is not
consummated in all material respects by August 31,
2000, or should the asset purchase agreement
relating to that acquisition be terminated at any
time prior to such date, holders will have the
right to require us to redeem their Convertible
Notes, in whole, but not in part, at a purchase
price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the special
redemption date.
43
<PAGE> 46
See "-- Repurchase at the Option of Holders if the
Proposed Acquisition of K1, K2 and K3 Does Not
Close."
In the event that at any time after the special
redemption date, less than 10% of the aggregate
principal amount of the Convertible Notes remain
outstanding, we may, at our option, redeem the
remaining Convertible Notes, in whole, but not in
part, at a price equal to the special redemption
price, plus accrued and unpaid interest and
liquidated damages, if any, to the date fixed for
their redemption by us, such date to be a date no
later than 30 days following the special redemption
date.
Repurchase Upon Designated
Event.................... The Convertible Notes are required to be
repurchased at 101% of their principal amount
together with accrued and unpaid interest and
liquidated damages, if any, thereon, at the option
of the holder, upon the occurrence of a designated
event (i.e., a change of control or a termination
of trading (each as defined)). See "-- Repurchase
at Option of Holders Upon a Designated Event."
Subordination.............. The Convertible Notes will be unsecured obligations
of Amkor and will be subordinated in right of
payment to all of our existing and future senior
debt and effectively subordinated to all existing
and future liabilities and obligations of our
subsidiaries. As of December 31, 1999, we had
approximately $710.8 million of outstanding
indebtedness that would have constituted debt
senior to the Convertible Notes. As of such date,
the indebtedness and other liabilities of our
subsidiaries (excluding intercompany liabilities
and obligations of a type not required to be
reflected on the balance sheet of such subsidiary
in accordance with GAAP) that would effectively
have been senior to the Convertible Notes were
approximately $212.6 million. After giving effect
to our proposed incurrence of approximately $750.0
million of new secured bank debt in connection with
our proposed acquisition of K1, K2 and K3 and our
proposed investment in ASI, such amounts will be
approximately $1,375.0 million and $209.2 million,
respectively. See "-- Subordination."
Registration Rights........ We have agreed to file a shelf registration
statement under the Securities Act relating to
resales of the Convertible Notes and the common
stock issuable upon conversion thereof. If such
registration statement is not filed or has not
become effective within the time periods set forth
herein, we will be required to pay liquidated
damages to holders of the Convertible Notes and
holders of the common stock issued upon conversion
thereof. See "-- Registration Rights."
Transfer Restrictions...... Neither the Convertible Notes nor the common stock
offered hereby have been registered under the
Securities Act, and such Convertible Notes and the
common stock issuable upon conversion thereof are
subject to certain restrictions on transfer.
Trading.................... The Convertible Notes are expected to be designated
as eligible for trading in The Portal Market. Our
common stock is quoted on the Nasdaq National
Market under the symbol "AMKR."
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Our Convertible Subordinated notes due 2007 (the "Convertible Notes") are
issued under an indenture dated as of March 16, 2000 (the "Indenture") between
the Company and State Street Bank and Trust Company, as trustee (the "Trustee").
A copy of the Indenture and the Registration Agreement referred to below is
available as set forth under "-- Additional Information" below. The following is
a summary of certain provisions of the Indenture and the Registration Agreement
and does not purport to be complete. Reference should be made to all provisions
of the Indenture and the Registration Agreement, including the definitions
therein of certain terms. Certain definitions of terms used in the following
summary are set forth under "-- Certain Definitions" below. As used in this
section, the "Company" means Amkor Technology, Inc., but not any of its
Subsidiaries, unless the context requires otherwise.
GENERAL
The Convertible Notes are general unsecured subordinated obligations of the
Company, will mature on March 15, 2007 (the "Maturity Date"), and are in an
aggregate principal amount of $258.75 million. The Convertible Notes are issued
in denominations of $1,000 and integral multiples of $1,000 in fully registered
form. The Convertible Notes are exchangeable and transfers thereof are
registrable without charge therefor, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge in connection
therewith.
The Convertible Notes accrue interest at a rate of 5% per annum from March
17, 2000, or from the most recent interest payment date to which interest has
been paid or duly provided for, and accrued and unpaid interest are payable
semi-annually in arrears on September 15 and March 15 of each year beginning
September 15, 2000. Interest is paid to the person in whose name a Convertible
Note is registered at the close of business on the September 1 or March 1
immediately preceding the relevant interest payment date (other than with
respect to a Convertible Note or portion thereof called for redemption on a
redemption date, or repurchased in connection with a Designated Event or a
Related Transactions Event on a repurchase date, during the period from a record
date to (but excluding) the next succeeding interest payment date (in which case
accrued interest shall be payable (unless such Convertible Note of portion
thereof is converted) to the holder of the Convertible Note or portion thereof
redeemed or repurchased)). Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
If the Company does not comply with certain deadlines set forth in the
Registration Agreement with respect to the registration of the Convertible Notes
or the common stock issuable upon conversion thereof for resale under a shelf
registration statement, holders of the Convertible Notes and/or the common stock
issued upon conversion thereof will be entitled to Liquidated Damages. See
"-- Registration Rights" below.
CONVERSION
The holders of Convertible Notes are entitled at any time on or before the
close of business on the last trading day prior to the Maturity Date of the
Convertible Notes, subject to prior redemption or repurchase, to convert any
Convertible Notes or portions thereof (in denominations of $1,000 or multiples
thereof) into common stock of the Company, at the conversion price of $57.34 per
share of common stock, subject to adjustment as described below (the "Conversion
Price"). Except as described below, no adjustment will be made on conversion of
any Convertible Notes for interest or Liquidated Damages, if any, accrued
thereon or for dividends on any common stock issued. If Convertible Notes not
called for redemption are converted after a record date for the payment of
interest and prior to the next succeeding interest payment date, such
Convertible Notes must be accompanied by funds equal to the interest and
Liquidated Damages, if any, payable on such succeeding interest payment date on
the principal amount so converted. The Company is not required to issue
fractional shares of common stock upon conversion of Convertible Notes and, in
lieu thereof, will pay a cash adjustment based upon the market price of the
common stock on the last trading day prior to the date of conversion. In the
case of Convertible Notes called for redemption, conversion rights will expire
at the close of business on the trading day preceding the date fixed for
redemption, unless the Company defaults in payment of the redemption price, in
which
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<PAGE> 48
case the conversion right will terminate at the close of business on the date
such default is cured. In the event any holder exercises its right to require
the Company to repurchase Notes upon a Designated Event or a Related
Transactions Event, such holder's conversion right will terminate on the close
of business on the Designated Event Offer Termination Date (as defined) or the
Special Redemption Date, as applicable, unless the Company defaults in the
payment due upon repurchase or the holder elects to withdraw the submission of
election to repurchase. See "-- Repurchase at Option of Holders Upon a
Designated Event."
The right of conversion attaching to any Convertible Note may be exercised
by the holder by delivering the Convertible Note at the specified office of a
conversion agent, accompanied by a duly signed and completed notice of
conversion, together with any funds that may be required as described in the
preceding paragraph. Such notice of conversion can be obtained from the Trustee.
Beneficial owners of interests in a Global Note (as defined) may exercise their
right of conversion by delivering to The Depository Trust Company ("DTC") the
appropriate instruction form for conversion pursuant to DTC's conversion
program. The conversion date shall be the date on which the Convertible Note,
the duly signed and completed notice of conversion, and any funds that may be
required as described in the preceding paragraph shall have been so delivered. A
holder delivering a Convertible Note for conversion will not be required to pay
any taxes or duties payable in respect of the issue or delivery of common stock
on conversion, but will be required to pay any tax or duty which may be payable
in respect of any transfer involved in the issue or delivery of the common stock
in a name other than the holder of the Convertible Note. Certificates
representing shares of common stock will not be issued or delivered unless all
taxes and duties, if any, payable by the holder have been paid.
The Conversion Price is subject to adjustment (under formulae set forth in
the Indenture) in certain events, including: (i) the issuance of common stock as
a dividend or distribution on common stock; (ii) certain subdivisions and
combinations of the common stock; (iii) the issuance to all or substantially all
holders of common stock of certain rights or warrants to purchase common stock
at a price per share less than the Current Market Price (as defined); (iv) the
dividend or other distribution to all holders of common stock of shares of
capital stock of the Company (other than common stock) or evidences of
indebtedness of the Company or assets (including securities, but excluding those
rights, warrants, dividends and distributions referred to above or paid
exclusively in cash); (v) dividends or other distributions consisting
exclusively of cash (excluding any cash portion of distributions referred to in
clause (iv)) to all holders of common stock to the extent such distributions,
combined together with (A) all such all-cash distributions made within the
preceding 12 months in respect of which no adjustment has been made plus (B) any
cash and the fair market value of other consideration payable in respect of any
tender offers by the Company or any of its Subsidiaries for common stock
concluded within the preceding 12 months in respect of which no adjustment has
been made, exceeds 15% of the Company's market capitalization (being the product
of the then current market price of the common stock times the number of shares
of common stock then outstanding) on the record date for such distribution; and
(vi) the purchase of common stock pursuant to a tender offer made by the Company
or any of its subsidiaries to the extent that the aggregate consideration,
together with (X) any cash and the fair market value of any other consideration
payable in any other tender offer expiring within 12 months preceding such
tender offer in respect of which no adjustment has been made plus (Y) the
aggregate amount of any such all-cash distributions referred to in clause (v)
above to all holders of common stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 15% of the Company's market capitalization on the expiration of
such tender offer.
In the case of (i) any reclassification or change of the common stock or
(ii) a consolidation, merger or combination involving the Company or a sale or
conveyance to another corporation of the property and assets of the Company as
an entirety or substantially as an entirety, in each case as a result of which
holders of common stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such common stock, the holders of the Convertible Notes then outstanding will be
entitled thereafter to convert such Convertible Notes into the kind and amount
of shares of stock, other securities or other property or assets, which they
would have owned or
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<PAGE> 49
been entitled to receive upon such reclassification, change, consolidation,
merger, combination, sale or conveyance had such Convertible Notes been
converted into common stock immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance (assuming, in a case in
which the Company's stockholders may exercise rights of election, that a holder
of Convertible Notes would not have exercised any rights of election as to the
stock, other securities or other property or assets receivable in connection
therewith and received per share the kind and amount received per share by a
plurality of non-electing shares). Certain of the foregoing events may also
constitute or result in a Designated Event requiring the Company to offer to
repurchase the Convertible Notes. See "-- Repurchase at Option of Holders Upon a
Designated Event."
In the event of a taxable distribution to holders of common stock (or other
transaction) that results in any adjustment of the Conversion Price, the holders
of Convertible Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of common stock.
The Company from time to time may, to the extent permitted by law, reduce
the Conversion Price of the Convertible Notes by any amount for any period of at
least 20 days, in which case the Company shall give at least 15 days' notice of
such decrease, if the Board of Directors has made a determination that such
decrease would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in the
Conversion Price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
common stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes.
No adjustment in the Conversion Price will be required unless such
adjustment would require a change of at least 1% of the Conversion Price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the Conversion Price will not be adjusted for the
issuance of common stock or any securities convertible into or exchangeable for
common stock or carrying the right to purchase any of the foregoing.
SUBORDINATION
On or prior to Put Expiration Date
On or before the earlier of the following dates (the "Put Expiration
Date"):
- to the extent such date does not occur after August 31, 2000, the date
the Related Transactions are consummated in all material respects and
- 30 days following the Special Redemption Date,
the Convertible Notes shall be senior debt of the Company and rank equally in
right of payment to all of the Company's existing and future unsecured senior
debt (including its 9 1/4% senior notes due 2006) and senior in right of payment
to all of the Company's existing and future debt that provides that it is
subordinated to the Convertible Notes including our 5 3/4% convertible
subordinated notes due 2003 and our 10 1/2% senior subordinated notes due 2009.
After Put Expiration Date
After the Put Expiration Date, the payment of principal of, premium, if
any, interest and Liquidated Damages, if any on the Convertible Notes will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full in cash or other payment satisfactory to the holders of Senior
Debt of all Senior Debt, whether outstanding on the date of the Indenture or
thereafter incurred. After the Put Expiration Date, upon any distribution to
creditors of the Company in a liquidation or dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property, an assignment for the benefit of
creditors or any marshaling of the Company's
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<PAGE> 50
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or other payment satisfactory to the Senior Debt of all
Senior Debt of all obligations in respect of such Senior Debt before the holders
of Convertible Notes will be entitled to receive any payment with respect to the
Convertible Notes.
After the Put Expiration Date, in the event of any acceleration of the
Convertible Notes because of an Event of Default, the holders of any Senior Debt
then outstanding will be entitled to payment in full in cash or other payment
satisfactory to the holders of such Senior Debt of all obligations in respect of
such Senior Debt before the holders of the Convertible Notes are entitled to
receive any payment or distribution in respect thereof. If payment of the
Convertible Notes is accelerated because of an Event of Default, the Company or
the Trustee shall promptly notify the holders of Senior Debt or the trustee(s)
for such Senior Debt of the acceleration.
After the Put Expiration Date, the Company also may not make any payment
upon or in respect of the Convertible Notes if (i) a default in the payment of
the principal of, premium, if any, interest, rent or other obligations in
respect of Senior Debt occurs and is continuing beyond any applicable period of
grace or (ii) a default, other than a payment default, occurs and is continuing
with respect to Designated Senior Debt that permits holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
Company or other person permitted to give such notice under the Indenture.
Payments on the Convertible Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived or
ceases to exist and (b) in case of a nonpayment default, the earlier of the date
on which such nonpayment default is cured or waived or ceases to exist or 179
days after the date on which the applicable Payment Blockage Notice is received
if the maturity of the Senior Debt has not been accelerated. No new period of
payment blockage may be commenced unless and until 365 days have elapsed since
the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice. Notwithstanding anything herein to the
contrary, payments made by the Company to repurchase Convertible Notes following
a Related Transactions Event shall not be subject to the provisions herein and
will not be subordinated in right of payment to the prior payment of Senior
Debt.
By reason of the subordination provisions described above, after the Put
Expiration Date, in the event of the Company's liquidation or insolvency,
holders of Senior Debt may receive more, ratably, and holders of the Convertible
Notes may receive less, ratably, than the other creditors of the Company. Such
subordination will not prevent the occurrences of any Event of Default under the
Indenture.
The Convertible Notes are obligations exclusively of the Company. However,
since the operations of the Company are primarily conducted through
Subsidiaries, the cash flow and the consequent ability of the Company to service
its debt, including the Convertible Notes, are primarily dependent upon the
earnings of its Subsidiaries and the distribution of those earnings to, or upon
loans or other payments of funds by those Subsidiaries to, the Company. The
payment of dividends and the making of loans and advances to the Company by its
Subsidiaries may be subject to statutory or contractual restrictions, are
dependent upon the earnings of those Subsidiaries and are subject to various
business considerations.
Any right of the Company to receive assets of any of its Subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders of
the Convertible Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such Subsidiary, in which case the claims of the Company would still
be subordinate to any security interests in the assets of such Subsidiary and
any indebtedness of such Subsidiary senior to that held by the Company.
As of December 31, 1999, the Company had approximately $710.8 million of
outstanding indebtedness that would have constituted Senior Debt, and the
indebtedness and other liabilities of the Company's subsidiaries (excluding
intercompany liabilities and obligations of a type not required to be reflected
on the balance sheet of such subsidiary in accordance with GAAP) that would
effectively have
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<PAGE> 51
been senior to the Convertible Notes were approximately $212.6 million. After
giving effect to the proposed incurrence by the Company of $750.0 million of new
secured bank debt in connection with its proposed acquisition of K1, K2 and K3
and its proposed investment in ASI, such amounts will be approximately $1,225.0
million and $212.6 million, respectively. The Indenture will not limit the
amount of additional indebtedness, including Senior Debt, that the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness and other liabilities that any Subsidiary can create, incur, assume
or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of Convertible Notes receives any payment or distribution of assets of the
Company of any kind after the Put Expiration Date in contravention of any of the
terms of the Indenture, whether in cash, property or securities, including,
without limitation by way of set-off or otherwise, in respect of the Convertible
Notes before all Senior Debt is paid in full in cash or other payment
satisfactory to the holders of Senior Debt, then such payment or distribution
will be held by the recipient in trust for the benefit of holders of Senior
Debt, and will be immediately paid over or delivered to the holders of Senior
Debt or their representative or representatives to the extent necessary to make
payment in full in cash or other payment satisfactory to such holders of all
Senior Debt remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior Debt.
PROVISIONAL REDEMPTION BY THE COMPANY
After September 20, 2001 and prior to March 20, 2003, the Convertible Notes
may be redeemed at the option of the Company in whole or in part (in any
integral multiple of $1,000), at any time or from time to time, upon not less
than 30 nor more than 60 days' prior notice by mail, at a redemption price equal
to 103.571% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, to the Provisional Redemption Date (subject to
the right of holders of record on the relevant record date to receive any such
amounts due on the relevant payment date) if the closing price of the common
stock shall have equaled or exceeded 150% of the Conversion Price then in effect
for at least 20 out of 30 consecutive days on which the Nasdaq National Market
is open for the transaction of business prior to the Notice Date.
Upon any Provisional Redemption, the Company will be obligated to make an
additional payment in an amount equal to the present value of the aggregate
value of the interest payments and Liquidated Damages, if any, that would
thereafter have been payable on the Convertible Notes from the Provisional
Redemption Date to but excluding March 15, 2003. The present value will be
calculated using the bond equivalent yield on U.S. Treasury notes or bills
having a term nearest in length to that of the additional period as of the day
immediately preceding the date on which a notice of Provisional Redemption is
mailed.
OPTIONAL REDEMPTION
On or after March 20, 2003, the Convertible Notes may be redeemed at the
option of the Company, in whole or from time to time in part, on not less than
15 nor more than 60 days' prior written notice to the holders thereof by first
class mail, at the following redemption prices (expressed as percentages of
principal amount) if redeemed during the 12-month period beginning March 20 of
each year indicated (March 20 with respect to 2003), plus accrued and unpaid
interest and Liquidated Damages, if any, to the date fixed for redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003............................................ 102.857%
2004............................................ 102.143
2005............................................ 101.429
2006............................................ 100.714
</TABLE>
and 100% at March 15, 2007.
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<PAGE> 52
SELECTION AND NOTICE
If less than all the Convertible Notes are to be redeemed at any time,
selection of Convertible Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Convertible Notes are listed or, if the Convertible Notes
are not so listed, on a pro rata basis by lot or by any other method that the
Trustee considers fair and appropriate. The Trustee may select for redemption a
portion of the principal of any Convertible Note that has a denomination larger
than $1,000. Convertible Notes and portions thereof will be redeemed in the
amount of $1,000 or integral multiples of $1,000. The Trustee will make the
selection from Convertible Notes outstanding and not previously called for
redemption; provided that if a portion of a holder's Convertible Notes are
selected for partial redemption and such holder converts a portion of such
Convertible Notes, such converted portion shall be deemed to be taken from the
portion selected for redemption.
Provisions of the Indenture that apply to the Convertible Notes called for
redemption also apply to portions of the Convertible Notes called for
redemption. If any Convertible Note is to be redeemed in part, the notice of
redemption will state the portion of the principal amount to be redeemed. Upon
surrender of a Convertible Note that is redeemed in part only, the Company will
execute and the Trustee will authenticate and deliver to the holder a new
Convertible Note equal in principal amount to the unredeemed portion of the
Convertible Note surrendered.
On and after the redemption date, unless the Company shall default in the
payment of the redemption price, interest and Liquidated Damages, if any, will
cease to accrue on the principal amount of the Convertible Notes or portions
thereof called for redemption and for which funds have been set apart for
payment. In the case of Convertible Notes or portions thereof redeemed on a
redemption date which is also a regularly scheduled interest payment date, the
interest payment due on such date shall be paid to the person in whose name the
Note is registered at the close of business on the relevant record date.
The Convertible Notes are not entitled to any sinking fund.
REPURCHASE AT THE OPTION OF HOLDERS IF THE PROPOSED ACQUISITION OF K1, K2 AND K3
DOES NOT CLOSE
If the Related Transactions are not consummated in all material respects by
August 31, 2000, or should the Related Agreement be terminated at any time prior
to such date (a "Related Transactions Event"), each holder will have the right
to require the Company to repurchase the holder's Convertible Notes, in whole,
but not in part, at a purchase price equal to 101% of the principal amount
thereof (the "Special Redemption Price"), plus accrued interest and unpaid
interest and Liquidated Damages, if any, to the Special Redemption Date (the
"Special Redemption Payment"), subject to the right of holders of record on the
relevant record date to receive any such amount due on the relevant payment
date. Within 10 days following a Related Transactions Event, the Company will
mail a notice to each holder specifying the Special Redemption Date, which shall
be no earlier than 30 days nor later than 40 days from the date such notice is
mailed (the "Special Redemption Date"), and offering to repurchase Convertible
Notes pursuant to the procedures required by the Indenture and described in such
notice.
The Company will furnish to the Paying Agent not later than the last
business day prior to the Special Redemption Date the aggregate Special
Redemption Payment with respect to the Convertible Notes to be redeemed on the
Special Redemption Date.
In the event that, after the Special Redemption Date, less than 10% of the
original aggregate principal amount of the Convertible Notes remain outstanding,
the Company may, at its option, redeem the remaining Convertible Notes, in
whole, but not in part, at a price equal to the Special Redemption Price, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date fixed
for their redemption by the Company (such date to be a date no later than 30
days following the Special Redemption Date) subject to the right of holders of
record on the relevant record date to receive any such amount due on the
relevant payment date.
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The Company has agreed that, during the period from the Issue Date to and
including the Put Expiration Date, it will maintain cash and cash equivalents in
an aggregate amount equal to or greater than 103% of the aggregate principal
amount of the outstanding Convertible Notes.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Convertible Notes as a result of a Related Transactions Event.
Rule 13e-4 under the Exchange Act requires, among other things, the
dissemination of certain information to security holders in the event of an
issuer tender offer and may apply in the event that the repurchase option
becomes available to holders of the Convertible Notes. The Company will comply
with this rule to the extent applicable at that time.
"Related Transactions" means the acquisition by the Company or any of its
subsidiaries of K1, K2 and K3 from ASI.
"Related Agreement" means the asset purchase agreement between ASI and the
Company dated as of January 14, 2000 relating to the Related Transaction, as
such agreement may be amended or restated from time to time.
REPURCHASE AT OPTION OF HOLDERS UPON A DESIGNATED EVENT
Upon the occurrence of a Designated Event, each holder of Convertible Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such holder's Convertible Notes
pursuant to the offer described below (the "Designated Event Offer") at an offer
price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase (the "Designated Event Payment"). Within 20 days following any
Designated Event, the Company will mail a notice to each holder describing the
transaction or transactions that constitute the Designated Event and offering to
repurchase Convertible Notes pursuant to the procedures required by the
Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Convertible Notes as a result of a Designated Event. Rule
13e-4 under the Exchange Act requires, among other things, the dissemination of
certain information to security holders in the event of an issuer tender offer
and may apply in the event that the repurchase option becomes available to
holders of the Convertible Notes. The Company will comply with this rule to the
extent applicable at that time.
On the date specified for termination of the Designated Event Offer, the
Company will, to the extent lawful, (1) accept for payment all Convertible Notes
or portions thereof properly tendered pursuant to the Designated Event Offer,
(2) deposit with the paying agent an amount equal to the Designated Event
Payment in respect of all Convertible Notes or portions thereof so tendered and
(3) deliver or cause to be delivered to the Trustee the Convertible Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of Convertible Notes or portions thereof being purchased by the Company.
On the date specified for payment of the Designated Event Payment (the
"Designated Event Payment Date"), the paying agent will promptly mail to each
holder of Convertible Notes so accepted the Designated Event Payment for such
Convertible Notes, and the Trustee will promptly authenticate and mail (or cause
to be transferred by book entry) to each holder a new Convertible Note equal in
principal amount to any unpurchased portion of the Convertible Notes
surrendered, if any; provided that each such new Convertible Note will be in a
principal amount of $1,000 or an integral multiple thereof.
The foregoing provisions would not necessarily afford holders of the
Convertible Notes protection in the event of highly leveraged or other
transactions involving the Company that may adversely affect holders.
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<PAGE> 54
The right to require the Company to repurchase Convertible Notes as a
result of a Designated Event could have the effect of delaying, deferring or
preventing a Change of Control or other attempts to acquire control of the
Company unless arrangements have been made to enable the Company to repurchase
all the Convertible Notes at the Designated Event Payment Date. Consequently,
this right may render more difficult or discourage a merger, consolidation or
tender offer (even if such transaction is supported by the Company's Board of
Directors or is favorable to the stockholders), the assumption of control by a
holder of a large block of the Company's shares and the removal of incumbent
management.
Except as described above with respect to a Designated Event, the Indenture
does not contain provisions that permit the holders of the Convertible Notes to
require that the Company repurchase or redeem the Convertible Notes in the event
of a takeover, recapitalization or similar restructuring. Subject to the
limitation on mergers and consolidations described below, the Company, its
management or its Subsidiaries could in the future enter into certain
transactions, including refinancings, certain recapitalizations, acquisitions,
the sale of all or substantially all of its assets, the liquidation of the
Company or similar transactions, that would not constitute a Designated Event
under the Indenture, but that would increase the amount of Senior Debt (or any
other indebtedness) outstanding at such time or substantially reduce or
eliminate the Company's assets.
The terms of the Company's existing or future credit or other agreements
relating to indebtedness (including Senior Debt) may prohibit the Company from
purchasing any Convertible Notes and may also provide that a Designated Event,
as well as certain other change-of-control events with respect to the Company,
would constitute an event of default thereunder. In the event a Designated Event
or a Related Transactions Event occurs at a time when the Company is prohibited
from purchasing Convertible Notes, the Company could seek the consent of its
then-existing lenders to the purchase of Convertible Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company would remain
prohibited from purchasing Convertible Notes. In such case, the Company's
failure to purchase tendered Convertible Notes would constitute an Event of
Default under the Indenture, which may, in turn, constitute a further default
under the terms of other indebtedness that the Company has entered into or may
enter into from time to time. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the holders of
Convertible Notes.
A "Designated Event" will be deemed to have occurred upon a Change of
Control or a Termination of Trading.
A "Change of Control" will be deemed to have occurred when: (i) any person
has become an Acquiring Person, (ii) the Company consolidates with or merges
into any other corporation, or conveys, transfers, or leases all or
substantially all of its assets to any person, or any other corporation merges
into the Company, and, in the case of any such transaction, the outstanding
common stock of the Company is changed or exchanged as a result, unless the
stockholders of the Company immediately before such transaction own, directly or
indirectly immediately following such transaction, at least a majority of the
combined voting power of the outstanding voting securities of the corporation
resulting from such transaction in substantially the same proportion as their
ownership of the Voting Stock immediately before such transaction, or (iii) any
time the Continuing Directors do not constitute a majority of the Board of
Directors of the Company (or, if applicable, a successor corporation to the
Company); provided that a Change of Control shall not be deemed to have occurred
if either (x) the last sale price of the common stock for any five trading days
during the ten trading days immediately preceding the Change of Control is at
least equal to 105% of the Conversion Price in effect on the date of such Change
of Control or (y) at least 90% of the consideration (excluding cash payments for
fractional shares) in the transaction or transactions constituting the Change of
Control consists of shares of common stock that are, or upon issuance will be,
traded on a United States national securities exchange or approved for trading
on an established automated over-the-counter trading market in the United
States.
The definition of Change of Control includes a phrase relating to the
lease, transfer or conveyance of "all or substantially all" of the assets of the
Company. Although there is a developing body of case law
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interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Convertible Notes to require the Company to repurchase such
Convertible Notes as a result of a lease, transfer or conveyance of less than
all of the assets of the Company to another person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
A "Termination of Trading" will be deemed to have occurred if the common
stock (or other common stock into which the Convertible Notes are then
convertible) is neither listed for trading on a United States national
securities exchange nor approved for trading on an established automated
over-the-counter trading market in the United States.
MERGER AND CONSOLIDATION
The Indenture provides that the Company may not, in a single transaction or
a series of related transactions, consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, another corporation, person or
entity as an entirety or substantially as an entirety unless either (a)(i) the
Company shall be the surviving or continuing corporation or (ii) the entity or
person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets of
the Company substantially as an entirety (x) is a corporation organized and
validly existing under the laws of the United States, any State thereof or the
District of Columbia and (y) assumes the due and punctual payment of the
principal of, and premium, if any, and interest on all the Convertible Notes and
the performance of every covenant of the Company under the Convertible Notes and
the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (b) immediately after such transaction no Default
or Event of Default exists; and (c) the Company or such person shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such transaction and the supplemental indenture comply with
the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of the
Company, the capital stock of which constitutes all or substantially all of the
properties and assets of the Company, shall be deemed to be the transfer of all
or substantially all of the properties and assets of the Company.
Upon any such consolidation, merger, sale, assignment, conveyance, lease,
transfer or other disposition in accordance with the foregoing, the successor
person formed by such consolidation or into which the Company is merged or to
which such sale, assignment, conveyance, lease, transfer or other disposition is
made will succeed to, and be substituted for, and may exercise every right and
power of, the Company under the Indenture with the same effect as if such
successor had been named as the Company therein, and thereafter (except in the
case of a sale, assignment, transfer, lease, conveyance or other disposition)
the predecessor corporation will be relieved of all further obligations and
covenants under the Indenture and the Convertible Notes.
REGISTRATION RIGHTS
Pursuant to a registration agreement (the "Registration Agreement"), the
Company has agreed for the benefit of the holders of the Convertible Notes and
common stock issued upon conversion thereof that (i) it will, at its cost,
within 90 days after the Issue Date, file a shelf registration statement (the
"Shelf Registration Statement") with the Commission with respect to resales of
the Convertible Notes and the
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common stock issuable upon conversion thereof, (ii) the Company will use its
best efforts to cause such Shelf Registration Statement to be declared effective
under the Securities Act within 180 days after the Issue Date and (iii) the
Company will keep the Shelf Registration Statement continuously effective under
the Securities Act until the earliest of (a) the second anniversary of the Issue
Date, (b) the date on which the Convertible Notes or the common stock issuable
upon conversion thereof may be sold by non-affiliates of the Company pursuant to
paragraph (k) of Rule 144 (or any successor provision) promulgated by the
Commission under the Securities Act and (c) the date as of which all the
Convertible Notes or the common stock issuable upon conversion thereof have been
sold pursuant to the Shelf Registration Statement.
If the Shelf Registration Statement (i) is not filed with the Commission on
or prior to 90 days, or has not been declared effective by the Commission within
180 days, after the Issue Date, or (ii) is filed and declared effective but
shall thereafter cease to be effective (without being succeeded immediately by a
replacement shelf registration statement filed and declared effective) or usable
for the offer and sale of Transfer Restricted Securities for a period of time
(including any Suspension Period) which shall exceed 60 days in the aggregate in
any 12-month period during the period beginning on the Issue Date and ending on
or prior to the second anniversary of the Issue Date (each such event referred
to in clauses (i) and (ii) being referred to herein as a "Registration
Default"), the Company will pay liquidated damages ("Liquidated Damages") to
each Holder of Transfer Restricted Securities which has complied with its
obligations under the Registration Agreement. The amount of Liquidated Damages
payable during any period in which a Registration Default shall have occurred
and be continuing is that amount which is equal to one-quarter of one percent
(25 basis points) per annum per $1,000 principal amount of Convertible Notes or
$2.50 per annum per 17.4398 shares of common stock (subject to adjustment in the
event of a stock split, stock recombination, stock dividend and the like)
constituting Transfer Restricted Securities for the first 90 days during which a
Registration Default has occurred and is continuing and 50 basis points per
annum per $1,000 principal amount of Convertible Notes or $5.00 per annum per
17.4398 shares of common stock (subject to adjustment as set forth above)
constituting Transfer Restricted Securities for any additional days during which
such Registration Default has occurred and is continuing. The Company has agreed
to pay all accrued Liquidated Damages by wire transfer of immediately available
funds or by federal funds check on each Damages Payment Date (as defined in the
Registration Agreement). Following the cure of a Registration Default,
Liquidated Damages will cease to accrue with respect to such Registration
Default.
"Transfer Restricted Securities" means each Convertible Note and any share
of common stock issued on conversion thereof until the date on which such
Convertible Note or share, as the case may be (i) has been transferred pursuant
to the Shelf Registration Statement or another registration statement covering
such Convertible Note or share which has been filed with the Commission pursuant
to the Securities Act, in either case after such registration statement has
become effective under the Securities Act, (ii) has been transferred pursuant to
Rule 144 under the Securities Act (or any similar provision then in force), or
(iii) may be sold or transferred pursuant to paragraph (k) of Rule 144 under the
Securities Act (or any successor provision promulgated by the Commission).
The Company will provide or cause to be provided to each holder of the
Convertible Notes, or the common stock issuable upon conversion of the
Convertible Notes, copies of the prospectus, which will be a part of the Shelf
Registration Statement, notify or cause to be notified to each such holder when
the Shelf Registration Statement for the Convertible Notes or the common stock
issuable upon conversion of the Convertible Notes has become effective and take
certain other actions as are required to permit unrestricted resales of the
Convertible Notes or the common stock issuable upon conversion of the
Convertible Notes. A holder of Convertible Notes or the common stock issuable
upon conversion of the Convertible Notes that sells such securities pursuant to
a Shelf Registration Statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Agreement that are applicable to such holder
(including certain indemnification and contribution rights or obligations). The
Company presently intends
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to distribute a questionnaire to each beneficial owner of Convertible Notes as
of a specified date to obtain certain information regarding such selling
security holders for inclusion in the prospectus.
The Company will be permitted to suspend the use of the prospectus which is
a part of the Shelf Registration Statement for a period not to exceed 30 days in
any three-month period or for three periods not to exceed an aggregate of 90
days in any twelve-month period (any such period being referred to as a
"Suspension Period") under certain circumstances relating to pending corporate
developments, public filings with the Commission and similar events. The Company
will pay all expenses of the Shelf Registration Statement; provided, however,
that each holder shall bear the expense of any broker's commission, agency fee
or underwriter's discount or commission.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being (i) default in
payment of the principal of, or premium, if any, on the Convertible Notes,
whether or not such payment is prohibited by the subordination provisions of the
Indenture; (ii) default for 30 days in payment of any installment of interest on
or Liquidated Damages with respect to the Convertible Notes, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (iii)
default by the Company for 60 days after notice in the observance or performance
of any other covenants in the Indenture; (iv) default in the payment of the
Designated Event Payment or the Special Redemption Payment in respect of the
Convertible Notes on the date therefor, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (v) failure of the
Company to maintain cash and cash equivalents in accordance with the provisions
of the Indenture or to provide timely notice of a Designated Event or a Related
Transactions Event; (vi) failure of the Company or any Material Subsidiary to
make any payment at maturity, including any applicable grace period, in respect
of indebtedness for borrowed money of, or guaranteed or assumed by, the Company
or any Material Subsidiary, which payment is in an amount in excess of
$20,000,000, and continuance of such failure for 30 days after notice; (vii)
default by the Company or any Material Subsidiary with respect to any such
indebtedness, which default results in the acceleration of any such indebtedness
of an amount in excess of $20,000,000 without such indebtedness having been paid
or discharged or such acceleration having been cured, waived, rescinded or
annulled for 30 days after notice; or (viii) certain events involving
bankruptcy, insolvency or reorganization of the Company or any Material
Subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(viii) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee, by written notice to the Company, or the holders of
not less than 25% in aggregate principal amount of the then outstanding
Convertible Notes, by written notice to the Company and the Trustee, may declare
the unpaid principal of, premium, if any, and accrued and unpaid interest and
Liquidated Damages, if any, on all the Convertible Notes then outstanding to be
due and payable. Upon such declaration, such principal amount, premium, if any,
and accrued and unpaid interest and Liquidated Damages, if any, will become
immediately due and payable, notwithstanding anything contained in the Indenture
or the Convertible Notes to the contrary, but subject to the provisions limiting
payment described in "-- Subordination." If any Event of Default specified in
clause (viii) above occurs with respect to the Company, all unpaid principal of,
and premium, if any, and accrued and unpaid interest and Liquidated Damages, if
any, on the Convertible Notes then outstanding will automatically become due and
payable, subject to the provisions described in "-- Subordination," without any
declaration or other act on the part of the Trustee or any holder of Convertible
Notes.
Holders of the Convertible Notes may not enforce the Indenture or the
Convertible Notes except as provided in the Indenture. Subject to the provisions
of the Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the holders, unless such holders have
offered to the Trustee a security or an indemnity satisfactory to it against any
cost, expense or liability. Subject to all provisions of the Indenture and
applicable law, the holders of a majority in aggregate principal amount of the
then outstanding Convertible Notes have the right to direct the time, method and
place of conducting any
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proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. If a Default or Event of Default occurs and is
continuing and is known to the Trustee, the Indenture requires the Trustee to
mail a notice of Default or Event of Default to each holder within 60 days of
the occurrence of such Default or Event of Default, provided, however, that the
Trustee may withhold from the holders notice of any continuing Default or Event
of Default (except a Default or Event of Default in the payment of principal of,
premium, if any, interest or Liquidated Damages, if any, on the Convertible
Notes) if it determines in good faith that withholding notice is in their
interest. The holders of a majority in aggregate principal amount of the
Convertible Notes then outstanding by notice to the Trustee may rescind any
acceleration of the Convertible Notes and its consequences if all existing
Events of Default (other than the nonpayment of principal of, premium, if any,
interest and Liquidated Damages, if any, on the Convertible Notes that has
become due solely by virtue of such acceleration) have been cured or waived and
if the rescission would not conflict with any judgment or decree of any court of
competent jurisdiction. No such rescission shall affect any subsequent Default
or Event of Default or impair any right consequent thereto.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Convertible Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Convertible Notes. If an Event of Default
occurs prior to any date on which the Company is prohibited from redeeming the
Convertible Notes by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Convertible Notes prior to such date, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Convertible Notes.
The holders of a majority in aggregate principal amount of the Convertible
Notes then outstanding may, on behalf of the holders of all the Convertible
Notes, waive any past Default or Event of Default under the Indenture and its
consequences, except Default in the payment of principal of, premium, if any, or
interest on the Convertible Notes (other than the non-payment of principal of,
premium, if any, interest and Liquidated Damages, if any, and interest on the
Convertible Notes that has become due solely by virtue of an acceleration that
has been duly rescinded as provided above) or in respect of a covenant or
provision of the Indenture that cannot be modified or amended without the
consent of all holders of Convertible Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Convertible Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Convertible Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Convertible Notes), and any existing default or compliance
with any provision of the Indenture or the Convertible Notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding Convertible Notes (including consents obtained in connection with a
tender offer or exchange offer for Convertible Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Convertible Notes held by a non-consenting holder): (a)
reduce the principal amount of Convertible Notes whose holders must consent to
an amendment, supplement or waiver, (b) reduce the principal of or change the
fixed maturity of any Convertible Note or, other than as set forth in the next
paragraph, alter the provisions with respect to the redemption of the
Convertible Notes, (c) reduce the rate of or change
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the time for payment of interest on any Convertible Notes, (d) waive a Default
or Event of Default in the payment of principal of or premium, if any, interest
or Liquidated Damages, if any, on the Convertible Notes (except a rescission of
acceleration of the Convertible Notes by the holders of at least a majority in
aggregate principal amount of the Convertible Notes and a waiver of the payment
default that resulted from such acceleration), (e) make any Convertible Note
payable in money other than that stated in the Indenture and the Convertible
Notes, (f) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Convertible Notes to
receive payments of principal of, premium, if any, interest or Liquidated
Damages, if any, on the Convertible Notes, (g) waive a redemption payment with
respect to any Convertible Note, (h) except as permitted by the Indenture,
increase the Conversion Price or, other than as set forth in the next paragraph,
modify the provisions of the Indenture relating to conversion of the Convertible
Notes in a manner adverse to the holders thereof or (i) make any change to the
abilities of holders of Convertible Notes to enforce their rights under the
Indenture or the provisions of clause (a) through (i) hereof. In addition, any
amendment to the provisions of Article 11 of the Indenture (which relate to
subordination) will require the consent of the holders of at least 75% in
aggregate principal amount of the Convertible Notes then outstanding if such
amendment would adversely affect the rights of holders of Convertible Notes.
Notwithstanding the foregoing, without the consent of any holder of
Convertible Notes, the Company and the Trustee may amend or supplement the
Indenture or the Convertible Notes to (a) cure any ambiguity, defect or
inconsistency or make any other changes in the provisions of the Indenture which
the Company and the Trustee may deem necessary or desirable, provided such
amendment does not materially and adversely affect the Convertible Notes, (b)
provide for uncertificated Convertible Notes in addition to or in place of
certificated Convertible Notes, (c) provide for the assumption of the Company's
obligations to holders of Convertible Notes in the circumstances required under
the Indenture as described under "-- Merger and Consolidation," (d) provide for
conversion rights of holders of Convertible Notes in certain events such as a
consolidation, merger or sale of all or substantially all of the assets of the
Company, (e) reduce the Conversion Price, (f) make any change that would provide
any additional rights or benefits to the holders of Convertible Notes or that
does not adversely affect the legal rights under the Indenture of any such
holder, or (g) comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act of
1939, as amended.
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while
Convertible Notes remain outstanding if (i) all outstanding Convertible Notes
will become due and payable at their scheduled maturity within one year or (ii)
all outstanding Convertible Notes are scheduled for redemption within one year,
and, in either case, the Company has (a) deposited with the Trustee an amount
sufficient to pay and discharge all outstanding Convertible Notes on the date of
their scheduled maturity or the scheduled date of redemption and (b) paid all
other sums then payable by the Company under the Indenture.
GOVERNING LAW
The Indenture will provide that the Convertible Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Convertible Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Convertible Note selected for redemption or repurchase. Also, the Company is
not required to transfer or exchange any Convertible Note for a period of 15
days before a selection of Convertible Notes to be redeemed.
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The registered holder of a Convertible Note will be treated as the owner of
it for all purposes.
CERTAIN DEFINITIONS
"Acquiring Person" means any person (as defined in Section 13(d)(3) of the
Exchange Act) who or which, together with all affiliates and associates (each as
defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act and as further defined
below) of shares of common stock or other voting securities of the Company
having more than 50% of the total voting power of the Voting Stock of the
Company; provided, however, that an Acquiring Person shall not include (i) the
Company, (ii) any Subsidiary of the Company, (iii) any Permitted Holder, (iv) an
underwriter engaged in a firm commitment underwriting in connection with a
public offering of the Voting Stock of the Company or (v) any current or future
employee or director benefit plan of the Company or any Subsidiary of the
Company or any entity holding common stock of the Company for or pursuant to the
terms of any such plan. For purposes hereof, a person shall not be deemed to be
the beneficial owner of (A) any securities tendered pursuant to a tender or
exchange offer made by or on behalf of such person or any of such person's
affiliates until such tendered securities are accepted for purchase or exchange
thereunder, or (B) any securities if such beneficial ownership (1) arises solely
as a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to the applicable rules and regulations under the
Exchange Act, and (2) is not also then reportable on Schedule 13D (or any
successor schedule) under the Exchange Act.
"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such person, but excluding any debt
securities convertible into such equity.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means any particular Senior Debt if the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall be "Designated Senior Debt" for purposes
of the Indenture (provided that such instrument, agreement or other document may
place limitations and conditions on the right of such Senior Debt to exercise
the rights of Designated Senior Debt).
"Eligible Investments" means any of the following: (i) investments in U.S.
Government Obligations maturing within 365 days of the date of acquisition
thereof; (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 90 days of the date of acquisition thereof
issued by a bank or trust company organized under the laws of the United States
of America or any state thereof having capital, surplus and undivided profits
aggregating in excess of $500 million and whose long-term debt is rated "A-3" or
"A-" or higher according to Moody's or S&P (or such similar equivalent rating by
at least one "nationally recognized statistical rating organization" (as defined
in Rule 436 under the Securities Act)); (iii) repurchase obligations with a term
of not more than 30 days for underlying securities of the types describe din
clause (i) entered into with:
(a) a bank meeting the qualifications described in clause (ii) above, or
(b) any primary government securities dealer reporting to the Market
Reports Division of the Federal Reserve Bank of New York;
(iv) investments in commercial paper, maturing not more than 90 days after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America with a rating at the time as of which any Investment therein is made of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or
such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)); and (v) direct obligations (or certificates representing an ownership
interest in such obligations) of any state of the United States of America
(including any agency or
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instrumentality thereof) for the payment of which the full faith and credit of
such state is pledged and which are not callable or redeemable at the issuer's
option, provided that: (a) the long-term debt of such state is rated "A-3" or
"A-" or higher according to Moody's or S&P (or such similar equivalent rating by
at least one "nationally recognized statistical rating organization" (as defined
in Rule 436 under the Securities Act)), and (b) such obligations mature within
180 days of the date of acquisition thereof.
"Event of Default" has the meaning set forth under "-- Events of Default
and Remedies" herein.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect from time to time.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i) (a) for borrowed money (including, but not
limited to, any indebtedness secured by a security interest, mortgage or other
lien on the assets of the Company that is (1) given to secure all or part of the
purchase price of property subject thereto, whether given to the vendor of such
property or to another, or (2) existing on property at the time of acquisition
thereof), (b) evidenced by a note, debenture, bond or other written instrument,
(c) under a lease required to be capitalized on the balance sheet of the lessee
under GAAP or under any lease or related document (including a purchase
agreement) that provides that the Company is contractually obligated to purchase
or cause a third party to purchase and thereby guarantee a minimum residual
value of the lease property to the lessor and the obligations of the Company
under such lease or related document to purchase or to cause a third party to
purchase such leased property, (d) in respect of letters of credit, bank
guarantees or bankers' acceptances (including reimbursement obligations with
respect to any of the foregoing), (e) with respect to Indebtedness secured by a
mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or
resulting in an encumbrance to which the property or assets of such person are
subject, whether or not the obligation secured thereby shall have been assumed
by or shall otherwise be such person's legal liability, (f) in respect of the
balance of deferred and unpaid purchase price of any property or assets, (g)
under interest rate or currency swap agreements, cap, floor and collar
agreements, spot and forward contracts and similar agreements and arrangements;
(ii) with respect to any obligation of others of the type described in the
preceding clause (i) or under clause (iii) below assumed by or guaranteed in any
manner by such person or in effect guaranteed by such person through an
agreement to purchase (including, without limitation, "take or pay" and similar
arrangements), contingent or otherwise (and the obligations of such person under
any such assumptions, guarantees or other such arrangements); and (iii) any and
all deferrals, renewals, extensions, refinancings and refundings of, or
amendments, modifications or supplements to, any of the foregoing.
"Issue Date" means the date on which the Convertible Notes are first issued
and authenticated under the Indenture.
"Material Subsidiary" means any Subsidiary of the Company which at the date
of determination is a "significant subsidiary" as defined in Rule 1-02(w) of
Regulation S-X under the Securities Act and the Exchange Act.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Holders" means James Kim and his estates, spouses, ancestors and
lineal descendants (and spouses thereof), the legal representatives of any of
the foregoing, and the trustee of any bona fide trust of which one or more of
the foregoing are the sole beneficiaries or the grantors, or any person of which
any of the foregoing, individually or collectively, beneficially own (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act) voting securities representing
at least a majority of the total voting power of all classes of Capital Stock of
such person (exclusive of any matters as to which class voting rights exist).
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"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization, limited liability company or
government or any agency or political subdivision thereof.
"Senior Debt" means the principal of, premium, if any, and interest on,
rent under, and any other amounts payable on or in or in respect of any
Indebtedness of the Company (including, without limitation, any Obligations in
respect of such Indebtedness and, in the case of Designated Senior Debt, any
interest accruing after the filing of a petition by or against the Company under
any bankruptcy law, whether or not allowed as a claim after such filing in any
proceeding under such bankruptcy law), whether outstanding on the date of the
Indenture or thereafter created, incurred, assumed, guaranteed or in effect
guaranteed by the Company (including all deferrals, renewals, extensions or
refundings of, or amendments, modifications or supplements to the foregoing);
provided, however, that Senior Debt does not include (v) Indebtedness evidenced
by the Convertible Notes, (w) any liability for federal, state, local or other
taxes owed or owing by the Company, (x) Indebtedness of the Company to any
Subsidiary of the Company except to the extent such Indebtedness is of a type
described in clause (ii) of the definition of Indebtedness, (y) trade payables
of the Company for goods, services or materials purchased in the ordinary course
of business (other than, to the extent they may otherwise constitute such trade
payables, any obligations of the type described in clause (ii) of the definition
of Indebtedness), and (z) any particular Indebtedness in which the instrument
creating or evidencing the same expressly provides that such Indebtedness shall
not be senior in right of payment to, or is pari passu with, or is subordinated
or junior to, the Convertible Notes.
"Subsidiary" means, with respect to any person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of capital stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
person or one or more of the other Subsidiaries of that person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such person or a Subsidiary of such person or (b)
the only general partners of which are such person or of one or more
Subsidiaries of such person (or any combination thereof).
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
PROPOSED PRIVATE PLACEMENT OF COMMON STOCK
In November, 1999 we secured a commitment from a group of investors to
provide $410.0 million in equity financing for use in connection with our
proposed acquisition of K1, K2 and K3. The following discussion assumes that we
have consummated the acquisition and related transactions.
COMMON STOCK
We would issue to these investors 20,500,000 shares of common stock. For so
long as these investors hold shares of our common stock, they would be entitled
to the same dividend, voting and other rights as the holders of our common stock
generally enjoy.
WARRANTS
We would issue warrants for an aggregate of 3,895,000 shares of common
stock with a strike price of $27.50 per share to these common stock investors.
These warrants would expire four years after the date we issue them.
60
<PAGE> 63
STOCKHOLDER RIGHTS AGREEMENT
We would enter into an agreement with these common stock investors relating
to their rights and obligations as stockholders. The agreement would include the
following provisions:
- Registration Rights: Holders of the common stock and warrants issued with
respect thereto would be entitled to certain rights with respect to the
registration of the resale of shares of common stock issued on conversion
or exercise thereof (the "Registrable Securities") under the Securities
Act. We will have an obligation to register part or all of these shares
after the first anniversary of the date we first issue the common stock
on up to four occasions if the holders of at least 20% of the Registrable
Securities request that we do so, provided that we have not already
caused a registration statement to go effective within the last nine
months. In addition, we shall extend to the holders of Registrable
Securities the right to include their securities in registrations
initiated by us. These registration rights would expire six years after
we issue the common stock.
- Preemptive Rights: We would extend to the holders of at least 750,000
shares of Registrable Securities the right to purchase up to their
pro-rata amount of new securities that we issue, subject to various
exceptions, until five years after we issue the common stock.
- Board Observation Rights: We would extend to two investors observation
rights to Board of Directors meetings for so long as each investor holds
at least 1,250,000 Registrable Securities.
- Restrictions on Transfer: The holders of Registrable Securities would
agree to limitations on their ability to transfer our securities under
certain circumstances.
- Company Right of First Refusal: The holders of Registrable Securities
would agree to grant us a right of first refusal to acquire shares of our
capital stock held by them on the terms they would propose to transfer
such securities to third parties.
CO-SALE AGREEMENT
We would enter into an agreement with these common stock investors and
certain of our existing stockholders to provide these common stock investors
with co-sale rights with respect to prospective transfers of our securities by
the existing stockholders.
61
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue up to 500,000,000 shares of common stock, $.001
par value, and 10,000,000 shares of preferred stock, $.001 par value. As of
February 29, 2000, there were an aggregate of 130,982,427 shares of common stock
outstanding. In addition, as of February 29, 2000, 4,596,805 shares of common
stock were issuable upon exercise of outstanding options, 4,938,651 shares of
common stock were reserved for issuance under the Company's 1998 Stock Plan,
1998 Stock Option Plan for French Employees, 1998 Director Option Plan and 1998
Employee Stock Purchase Plan and shares of common stock were reserved for
issuance upon conversion of our convertible notes.
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our Certificate of
Incorporation and Bylaws, which are included as exhibits to our report on Form
10-K for the year ended December 31, 1999, which is incorporated herein by
reference, and by the provisions of applicable Delaware law.
Our Certificate of Incorporation and Bylaws contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and which may have the effect of delaying,
deferring, or preventing a future takeover or change in control of our company
unless such takeover or change in control is approved by our Board of Directors.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Holders of common stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors. See "Risk Factors -- Continued Control by Existing Stockholders."
Holders of the common stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between our company and its debtholders. Our company has never declared or paid
cash dividends on its capital stock. We expect to retain future earnings, if
any, for use in the operation and expansion of our business, and does not
anticipate paying any cash dividends in the foreseeable future. In the event of
the liquidation, dissolution or winding up of our company, the holders of common
stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of preferred stock then outstanding.
PREFERRED STOCK
Our Board of Directors is authorized to issue up to 10,000,000 shares of
preferred stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by our
stockholders. See "Proposed Equity Financing."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our Certificate of Incorporation and
Bylaws could make our acquisition more difficult by means of a tender offer, a
proxy contest or otherwise and could also make the removal of incumbent officers
and directors more difficult. These provisions, summarized below, are expected
to discourage certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of us to first
negotiate with us. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
62
<PAGE> 65
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
Anti-Takeover Provisions of Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Undesignated Preferred Stock
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or making more difficult a change in control
of the company and may adversely affect the market price of, and the voting and
other rights of, the holders of our common stock. The issuance of preferred
stock with voting and conversion rights may adversely affect the voting power of
the holders of our common stock, including the loss of voting control to others.
We have no current plans to issue shares of preferred stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is First Chicago
Trust Company of New York Shareholder Services, 525 Washington Boulevard, Jersey
City, NJ 07310; telephone (201) 324-0014.
63
<PAGE> 66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMKOR TECHNOLOGY, INC.:
Report of Independent Public Accountants (Arthur Andersen
LLP)...................................................... F-2
Consolidated Statements of Income -- Years ended December
31, 1997, 1998 and 1999................................... F-3
Consolidated Balance Sheets -- December 31, 1998 and 1999... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1997, 1998 and 1999.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Independent Auditors' Report (Samil Accounting Corporation)
with respect to the 1999 Financial Statements of Amkor
Technology Korea, Inc..................................... F-36
K1, K2 AND K3:
Report of Independent Accountants (Samil Accounting
Corporation).............................................. F-37
Statements of Net Assets (Liabilities) -- As of December 31,
1998 and 1999............................................. F-38
Statements of Operations for the years ended December 31,
1997, 1998 and 1999....................................... F-39
Statements of Changes in Net Assets (Liabilities) for the
years ended December 31, 1997, 1998 and 1999.............. F-40
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-41
Notes to Financial Statements............................... F-42
ANAM SEMICONDUCTOR, INC.:
Report of Independent Accountants (Samil Accounting
Corporation).............................................. F-55
Consolidated Balance Sheets -- As of December 31, 1998 and
1999...................................................... F-57
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-58
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-59
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-60
Notes to Consolidated Financial Statements.................. F-61
Independent Auditor's Report (Ahn Kwon & Co.) with respect
to the Financial Statements of Anam Engineering &
Construction Co., Ltd. as of and for the years ended
December 31, 1999, 1998 and 1997.......................... F-96
Independent Auditors' Report (Siana Carr & O'Connor, LLP)
with respect to the Financial Statements of Anam USA, Inc.
as of December 31, 1999 and 1998 and for the three years
ended December 31, 1999................................... F-97
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Amkor Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Amkor
Technology, Inc. and its subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Anam Semiconductor,
Inc. ("ASI") (See Note 3), the investment in which is reflected in the
accompanying 1997 and 1999 financial statements using the equity method of
accounting. The investment in ASI represents 2% of total assets at December 31,
1997 and 1999 and the equity in its net loss represents 29% and 2% of net income
before the equity in loss of investees in 1997 and 1999, respectively. In
addition, we did not audit the financial statements of Amkor Technology Korea,
Inc., ("ATK"), a wholly-owned subsidiary, which statements reflect total assets
and total operating income of 35% and 6%, respectively, of the related
consolidated totals in 1999. The statements of ASI and ATK were audited by other
auditors whose reports have been furnished to us and our opinion, insofar as it
relates to amounts included for ASI and ATK, is based solely on the reports of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Amkor Technology, Inc. and its
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 3, 2000
(except as discussed in Note 21 with respect to the Company's proposed
acquisition of ASI's packaging and test facilities and its investment in ASI, as
to which the date is February 28, 2000, and the related proposed financing, as
to which the date is March 16, 2000)
F-2
<PAGE> 68
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES............................................... $1,455,761 $1,567,983 $1,909,972
COST OF REVENUES -- including purchases from ASI (Note
3)....................................................... 1,242,669 1,307,150 1,577,226
---------- ---------- ----------
GROSS PROFIT............................................... 213,092 260,833 332,746
---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative...................... 103,726 119,846 145,233
Research and development................................. 8,525 8,251 11,436
---------- ---------- ----------
Total operating expenses......................... 112,251 128,097 156,669
---------- ---------- ----------
OPERATING INCOME........................................... 100,841 132,736 176,077
---------- ---------- ----------
OTHER (INCOME) EXPENSE:
Interest expense, net.................................... 32,241 18,005 45,364
Foreign currency (gain) loss............................. (835) 4,493 308
Other expense, net....................................... 8,429 9,503 25,117
---------- ---------- ----------
Total other expense.............................. 39,835 32,001 70,789
---------- ---------- ----------
INCOME BEFORE INCOME TAXES, EQUITY IN LOSS OF INVESTEES AND
MINORITY INTEREST........................................ 61,006 100,735 105,288
PROVISION FOR INCOME TAXES................................. 7,078 24,716 26,600
EQUITY IN LOSS OF INVESTEES................................ (17,291) -- (1,969)
MINORITY INTEREST.......................................... (6,644) 559 --
---------- ---------- ----------
NET INCOME................................................. $ 43,281 $ 75,460 $ 76,719
========== ========== ==========
PRO FORMA DATA (UNAUDITED):
Historical income before income taxes, equity in loss of
investees and minority interest....................... $ 61,006 $ 100,735
Pro forma provision for income taxes..................... 10,691 29,216
---------- ----------
Pro forma income before equity in loss of investees and
minority interest..................................... 50,315 71,519
Historical equity in loss of investees................... (17,291) --
Historical minority interest............................. (6,644) 559
---------- ----------
Pro forma net income..................................... $ 39,668 $ 70,960
========== ==========
PER SHARE DATA:
Basic net income per common share........................ $ .52 $ .71 $ .64
========== ========== ==========
Diluted net income per common share...................... $ .52 $ .70 $ .63
========== ========== ==========
Basic pro forma net income per common share
(unaudited)........................................... $ .48 $ .67
========== ==========
Diluted pro forma net income per common share
(unaudited)........................................... $ .48 $ .66
========== ==========
Shares used in computing basic (proforma for 1997 and
1998) net income per common share..................... 82,610 106,221 119,341
========== ========== ==========
Shares used in computing diluted (proforma for 1997 and
1998) net income per common share..................... 82,610 116,596 135,067
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 69
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 227,587 $ 98,045
Short-term investments.................................... 1,000 136,595
Accounts receivable --
Trade, net of allowance for doubtful accounts of $5,952
and $2,443............................................ 109,243 157,281
Due from affiliates.................................... 25,990 6,278
Other.................................................. 5,900 6,469
Inventories............................................... 85,628 91,465
Other current assets...................................... 16,687 11,117
---------- ----------
Total current assets.............................. 472,035 507,250
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 416,111 859,768
---------- ----------
INVESTMENTS................................................. 25,476 63,672
---------- ----------
OTHER ASSETS:
Due from affiliates....................................... 28,885 27,858
Intangible assets......................................... 26,158 233,532
Other..................................................... 34,932 63,009
---------- ----------
89,975 324,399
---------- ----------
Total assets...................................... $1,003,597 $1,755,089
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft............................................ $ 13,429 $ 16,209
Short-term borrowings and current portion of long-term
debt................................................... 38,657 6,465
Trade accounts payable.................................... 96,948 122,147
Due to affiliates......................................... 15,722 37,913
Accrued expenses.......................................... 77,004 88,577
Accrued income taxes...................................... 38,892 41,587
---------- ----------
Total current liabilities......................... 280,652 312,898
---------- ----------
LONG-TERM DEBT.............................................. 14,846 9,021
---------- ----------
SENIOR AND SENIOR SUBORDINATED NOTES........................ -- 625,000
---------- ----------
CONVERTIBLE SUBORDINATED NOTES.............................. 207,000 53,435
---------- ----------
OTHER NONCURRENT LIABILITIES................................ 10,738 16,994
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY:
Common stock.............................................. 118 131
---------- ----------
Additional paid-in capital................................ 381,061 551,964
---------- ----------
Retained earnings......................................... 109,738 189,733
---------- ----------
Receivable from stockholder (Note 12)..................... -- (3,276)
---------- ----------
Accumulated Other Comprehensive Income:
Unrealized losses on investments....................... (556) (811)
---------- ----------
Total stockholders' equity........................ 490,361 737,741
---------- ----------
Total liabilities and stockholders' equity........ $1,003,597 $1,755,089
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 70
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RECEIVABLE OTHER
COMMON PAID-IN RETAINED FROM COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCKHOLDER INCOME TOTAL INCOME
------ ---------- -------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997.............. $ 46 $ 16,770 $ 32,340 $ $(3,344) $ 45,812
Net income............................ -- -- 43,281 -- -- 43,281 $43,281
Unrealized gains on investments....... -- -- -- -- 1,586 1,586 1,586
Currency translation adjustments...... -- -- -- -- 1,095 1,095 1,095
-------
Comprehensive income (Note 12)........ 45,962
-------
Distributions......................... -- -- (5,000) -- -- (5,000)
Change in division equity account..... -- 4,101 -- -- -- 4,101
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997............ 46 20,871 70,621 -- (663) 90,875
Net income............................ -- -- 75,460 -- -- 75,460 75,460
Unrealized losses on investments...... -- -- -- -- (556) (556) (556)
Currency translation adjustments,
re-classification for loss included
in net income....................... -- -- -- -- 663 663 663
-------
Comprehensive income (Note 12)........ -- -- -- -- -- -- 75,567
-------
Distributions......................... -- -- (33,100) -- -- (33,100)
Issuance of 35,250,000 common shares
in public offering, net............. 35 360,228 -- -- -- 360,263
Acquisition of AKI.................... (1) -- (3,243) -- -- (3,244)
Change in par value of stock in
connection with Company
Reorganization...................... 38 (38) -- -- -- --
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998............ 118 381,061 109,738 -- (556) 490,361
Net income............................ -- -- 76,719 -- -- 76,719 76,719
Unrealized (losses) on investments,
net of tax.......................... -- -- -- -- (255) (255) (255)
-------
Comprehensive income (Note 12)........ $76,464
-------
Issuance of stock through employee
stock purchase plan and stock
options............................. -- 3,875 -- -- -- 3,875
Receivable from Stockholder (Note
12)................................. -- -- 3,276 (3,276) -- --
Debt conversion (Note 9).............. 13 167,028 -- -- -- 167,041
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1999............ $131 $551,964 $189,733 $(3,276) $ (811) $737,741
==== ======== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 71
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1998 1999
----------- ------------ ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 43,281 $ 75,460 $ 76,719
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................... 81,864 118,022 176,866
Amortization of deferred debt issuance costs............ -- 1,217 3,466
Debt conversion expense................................. -- -- 17,381
Provision for accounts receivable....................... 3,490 1,719 (3,500)
Provision for excess and obsolete inventory............. 12,659 7,200 6,573
Deferred income taxes................................... (11,715) 1,250 9,418
Equity in loss of investees............................. 16,779 -- 4,591
(Gain) loss on sale of fixed assets and investments..... (239) 2,500 1,805
Minority interest....................................... (6,644) 559 --
Changes in assets and liabilities excluding effects of
acquisitions --
Accounts receivable..................................... (19,802) 4,742 (44,526)
Proceeds from sale/(repurchase of) accounts
receivable............................................ 90,700 (16,500) (2,700)
Other receivables....................................... 1,547 (1,021) (555)
Inventories............................................. (26,609) 23,042 (12,063)
Due to/from affiliates, net............................. (19,138) (11,117) 35,403
Other current assets.................................... (7,239) 6,709 1,601
Other non-current assets................................ 3,322 (8,061) (15,088)
Accounts payable........................................ 60,939 (12,489) 27,474
Accrued expenses........................................ 13,817 33,489 13,117
Accrued income taxes.................................... 14,130 11,924 2,695
Other long-term liabilities............................. (1,089) (685) (5,380)
----------- --------- ---------
Net cash provided by operating activities............. 250,053 237,960 293,297
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (178,990) (107,889) (242,390)
Acquisition of K4......................................... -- -- (575,000)
Acquisition of minority interest in AAP................... -- (33,750) --
Acquisition of AKI........................................ -- (3,244) --
Acquisition of AAPMC...................................... -- -- (2,109)
Sale of property, plant and equipment..................... 1,413 121 --
Proceeds from the sale/(purchase) of investments.......... (15,187) (18,550) (135,595)
Investment in ASI......................................... -- -- (41,638)
----------- --------- ---------
Net cash used in investing activities................. (192,764) (163,312) (996,732)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank overdrafts and short-term borrowings... 52,393 (173,565) (24,264)
Net proceeds from issuance of 35,250,000 common shares in
public offering......................................... -- 360,263 --
Proceeds from issuance of stock through employee stock
purchase plan
and stock options....................................... -- -- 3,875
Proceeds from issuance of Anam USA, Inc. debt............. 1,408,086 522,116 --
Payments of Anam USA, Inc. debt........................... (1,443,464) (658,029) --
Net proceeds from issuance of long-term debt.............. 11,389 203,170 603,569
Payments of long-term debt................................ (43,541) (158,833) (9,287)
Distributions to stockholders............................. (5,000) (33,100) --
Change in division equity account......................... 4,101 -- --
----------- --------- ---------
Net cash provided by (used in) financing activities... (16,036) 62,022 573,893
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 41,253 136,670 (129,542)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 49,664 90,917 227,587
----------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 90,917 $ 227,587 $ 98,045
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 37,070 $ 27,730 $ 45,500
Income taxes............................................ $ 3,022 $ 12,908 $ 13,734
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 72
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER 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, as well as the Company's investment in Anam Semiconductor Inc.
("ASI") (see Note 7), 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 those 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 (a U.S. Corporation)
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 ASI (which changed its name in 1998 from Anam
Industrial Co., Ltd.) (-- see Note 3), 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 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
F-7
<PAGE> 73
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
"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 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 then
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
$3,000. 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.
Nature of Operations
The Company provides semiconductor packaging and test services as well as
wafer fabrication services to semiconductor manufacturing and semiconductor
design companies located in strategic markets throughout the world. Such
services are provided by the Company and by ASI under a long-standing
arrangement (see Note 3). Approximately 68%, 67%, and 53% of the Company's
packaging and test revenues in 1997, 1998 and 1999, respectively, relate to the
packaging and test services provided by ASI. In addition, 100% of the Company's
wafer fabrication revenues relate to the wafer fabrication services provided by
ASI under a long-term agreement (see Note 3).
Concentrations of Credit Risk
Financial instruments, for which the Company is subject to credit risk,
consist principally of accounts receivable, cash and cash equivalents and
short-term investments. With respect to accounts receivable, the Company has
mitigated its credit risk by selling primarily to well established companies,
performing ongoing credit evaluations and making frequent contact with
customers.
During 1999, the Company has invested in high grade municipal bonds,
commercial loans and preferred stocks. These investments are classified in the
consolidated balance sheets either as cash and cash equivalents for securities
that have an underlying maturity date of less than three months, or as short-
term investments for securities that have an underlying maturity date in excess
of three months and are being held for trading purposes ("Trading Securities").
As of December 31, 1999, the Company held approximately $137,000 in Trading
Securities. These investments are carried at fair market value based on market
quotes and recent offerings of similar securities.
F-8
<PAGE> 74
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
The Company has mitigated its credit risk with respect to cash and cash
equivalents, as well as Trading Securities, through diversification of its
portfolio of holdings into various money market accounts, U.S. treasury bonds,
federal mortgage backed securities, high grade municipal bonds, commercial loans
and preferred stocks. At December 31, 1998 and 1999, the Company maintained
approximately $35,000 and $183,000, respectively, in high grade municipal bonds,
commercial loans and preferred stocks, with the largest individual investment
balance of approximately $10,000 and $12,000, respectively.
In addition, at December 31, 1998 and 1999, the Company maintained
approximately $29,000 and $11,000, respectively, in deposits and certificates of
deposits at foreign owned banks and approximately $4,000 and $13,000
respectively, in deposits at U.S. banks which exceeded federally insured limits,
of which, approximately $5,000 was maintained in one bank at December 31, 1999.
Significant Customers
The Company has a number of major customers in North America, Asia and
Europe. The Company's largest customer, Texas Instruments, Inc. ("TI"),
accounted for 16.5% of net revenues in 1999. Revenues for services provided to
TI prior to 1999 were less than 10%. In addition, the Company's second largest
customer, Intel Corporation, accounted for approximately 23.4%, 20.6% and 14.1%
of net revenues in 1997, 1998 and 1999, respectively. The Company's five largest
customers collectively accounted for 40.1%, 41.6%, and 43.6% of net revenues in
1997, 1998, and 1999, respectively. The Company anticipates that significant
customer concentration will continue for the foreseeable future, although the
companies which constitute the Company's largest customers may change.
Risks and Uncertainties
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from historical results include, but
are not limited to, dependence on the highly cyclical nature of both the
semiconductor and the personal computer industries, competitive pricing and
declines in average selling prices, dependence on the Company's relationship
with ASI (see Note 3), 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 the results of ASI
on an equity method of accounting basis.
Foreign Currency Translation
Substantially all of the Company's foreign subsidiaries and investee
companies use the U.S. dollar as their functional currency. Accordingly,
monetary assets and liabilities which were originally denominated in a foreign
currency are translated into U.S. dollars at month-end exchange rates.
Non-monetary items which were originally denominated in foreign currencies are
translated at historical rates. Gains and losses from such remeasurement and
from transactions denominated in foreign currencies are included in other
(income) expense. The cumulative translation adjustment reflected in accumulated
other comprehensive income in stockholders' equity in the consolidated balance
sheets related primarily to investments in unconsolidated companies which used
the local currency as the functional currency (see Note 7).
F-9
<PAGE> 75
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Accounts Receivable
At December 31, 1998 and 1999, trade accounts receivable represent the
Company's interest in receivables in excess of amounts purchased by banks under
an accounts receivable sale agreement (see Note 4). Of the total net trade
accounts receivable amount at December 31, 1998 and 1999, $22,488 and $36,880,
respectively, relates to the trade accounts receivable of CIL which were not
sold under the accounts receivable sale agreement.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally by using a moving average method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated by the straight-line method over the estimated useful lives of
depreciable assets. Accelerated methods are used for tax purposes. Depreciable
lives follow:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10 to 30 years
Machinery and equipment..................................... 3 to 5 years
Furniture, fixtures and other equipment..................... 3 to 10 years
</TABLE>
Cost and accumulated depreciation for property retired or disposed of are
removed from the accounts and any resulting gain or loss is included in
earnings. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense was $81,159, $116,424 and $158,938 for 1997, 1998
and 1999, respectively.
Intangible Assets
Intangible assets consist principally of goodwill. The Company recorded
goodwill representing the excess of cost over the recorded minority interest in
Amkor/Anam Pilipinas, Inc., one of its Philippine subsidiaries ("AAP"). In
addition, the Company recorded goodwill representing the excess of the cost over
the fair market value of the net assets acquired of ASI's packaging and test
business located in Kwangju, Korea ("K4") (See Note 3) and the excess of the
cost over the fair market value of the net assets acquired of Anam/Amkor
Precision Machine Company, Inc. ("AAPMC"), an affiliate of ASI. (See Note 18)
Goodwill is amortized on a straight-line basis over a period of ten years
which is the estimated future period to be benefited by the acquisitions. The
unamortized balance of goodwill at December 31, 1998 and 1999 was $24,596 and
$232,350, respectively.
Other Noncurrent Assets
Other noncurrent assets consist principally of deferred debt issuance
costs, security deposits, the cash surrender value of life insurance policies,
deferred income taxes and tax credits.
F-10
<PAGE> 76
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
In connection with the $207,000 offering of Convertible Notes (see Note 2),
and the $625,000 offering of Senior and Senior Subordinated Notes (See Note 3)
the Company incurred approximately $30,500 of debt issuance costs which have
been deferred and are amortized and reflected as interest expense over the life
of the Notes.
Other Noncurrent Liabilities
Other noncurrent liabilities consist primarily of pension obligations and
noncurrent income taxes payable.
Stock Compensation Plans
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock based plans 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. Disclosures required by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation," are presented in
Note 14.
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 paid, the use of accelerated methods of
depreciation for income tax purposes and unrecognized foreign exchange gains and
losses.
AEI, which was merged into ATI just prior to the Initial Public Offering
(See Note 2), 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. 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 Initial Public Offering (see Note 2), 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.
Revenue Recognition and Risk of Loss
The Company does not take ownership of customer-supplied semiconductors.
Title and risk of loss remains with the customer for these materials at all
times. Accordingly, the cost of the customer-supplied materials is not included
in the consolidated financial statements. Risk of loss for the Company's
packaging costs passes upon completion of the packaging process. The Company
generally records revenues upon shipment of packaged semiconductors to its
customers. The Company records wafer fabrication services revenues upon shipment
of completed wafers to its customers.
F-11
<PAGE> 77
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
Research and Development Costs
Research and development costs are charged to expense as incurred.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
establishes 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, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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, or December 31, 1998, as
selected at the transition date.
The Company believes that the impact of adopting SFAS No. 133 on its
financial statements will not be material and has not determined the timing of
adoption.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
the current presentation.
2. INITIAL PUBLIC OFFERING
On May 6, 1998, the Company 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, the Company sold 5,250,000 additional
shares of its common stock and $27,000 additional principal amounts of
Convertible Notes in conjunction with the underwriters' over-allotment options.
The net proceeds were approximately $558,121, after deducting the underwriter
discounts and offering expenses. The convertible notes 1) are convertible into
the Company's 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) mature at the end 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 was used to purchase ASI's 40% interest in
AAP (see Note 18.) In connection with the Offerings, one existing stockholder
sold approximately 5,000,000 of his shares.
F-12
<PAGE> 78
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
3. RELATIONSHIP WITH ANAM SEMICONDUCTOR INC.
In December 1999 the Company announced that it was in discussions with ASI
to purchase it's three remaining packaging and test factories, known as K1, K2
and K3 combined with an additional equity investment in ASI. In February 2000,
the Company announced that it had reached an agreement with ASI to purchase K1,
K2 and K3 for $950,000 and committed to make an additional equity investment in
ASI of approximately $459,000. The commitment to make this equity investment
supersedes the existing commitment to ASI to purchase $150,000 in equity,
previously agreed to as part of the terms of ASI's Workout (as defined below)
excluding the $41,600 already invested in October 1999. The Company expects to
complete the purchase of K1, K2 and K3 and investment in ASI during the second
quarter of 2000. To complete the transaction with ASI, the Company intends to
use existing cash and raise approximately $750,000 in secured bank term debt,
$410,000 in private equity financing and $225,000 in convertible subordinated
notes. If we make the additional $459,000 investment in the common stock of ASI
and the Creditor banks convert W150 billion (approximately $132,000) of debt to
common stock of ASI, the Company's and the Creditor banks' ownership in ASI
voting stock will be approximately 43% and 34%, respectively.
If the transaction with ASI is completed as described above, ASI will emerge
from its Workout with its Korean Creditor Banks. ASI has indicated that they
expect the net proceeds from the sale of K1, K2 and K3 and our additional equity
investment to be used to repay a substantial amount of debt, provide funding to
expand the capacity of their wafer foundry and provide general working capital.
In October 1999, the Company acquired 10,000,000 shares of ASI common stock for
approximately $41,600 (W50,000,000,000) representing the Company's first
installment of its commitment to invest in ASI over a four year period in
connection with ASI's Workout. The remaining portion of the obligation will be
canceled under the terms of the agreement to purchase K1, K2 and K3. The Company
owns 18% of ASI's common stock and members of the Kim family own 11%. As a
result of this ownership, and the relationship with ASI, the Company follows the
equity method of accounting for its investment in ASI.
Because the Company and ASI have reached agreement on terms to purchase K1,
K2 and K3, ASI's consolidated financial statements have been prepared to reflect
the packaging and test operations of ASI as discontinued operations. If the
Company is successful in acquiring K1, K2 and K3 and making our planned
additional equity investment in ASI, ASI will exit from the Workout program.
The following summary of consolidated financial information pertaining to
ASI for 1997, 1998 and 1999, reflecting the packaging and test operations of ASI
as discontinued operations, was derived from the consolidated financial
statements of ASI.
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
SUMMARY INCOME STATEMENT INFORMATION:
Sales............................................. $ 406,937 $ 221,098 $ 285,925
Income (loss)from continuing operations........... $ (102,039) $ (957,165) $ (169,759)
Net income (loss)................................. $ 41,430 $ (847,533) $ 109,865
SUMMARY BALANCE SHEET INFORMATION:
Total assets...................................... $2,922,114 $1,878,950 $1,487,469
Total liabilities................................. $2,662,612 $2,477,323 $1,785,219
</TABLE>
On May 17, 1999, the Company purchased certain assets and liabilities of
ASI's packaging and test business located in Kwangju, Korea ("K4"). The purchase
price for K4 was $575,000 in cash plus the assumption of approximately $7,000 of
employee benefit liabilities. The acquisition was accounted for as a purchase.
Accordingly, the results of K4 have been included in the accompanying
consolidated financial
F-13
<PAGE> 79
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
statements since the date of acquisition. The purchase price of $582,000 was
allocated to the fair value of the assets acquired, principally property plant
and equipment, of approximately $358,000 and liabilities assumed of
approximately $7,000. Goodwill resulting from the transaction of approximately
$223,000 will be amortized on a straight line basis over a 10 year period, and
is included in intangible assets in the Company's consolidated balance sheets at
December 31, 1999.
This acquisition was financed through a private placement completed by the
Company in May 1999 which raised approximately $603,600, net of debt issuance
costs of $21,400, through the issuance of $425,000 of senior notes and $200,000
in senior subordinated notes. The senior notes mature in May 2006 and have a
coupon rate of 9.25%. The senior subordinated notes mature in May 2009 and have
a coupon rate of 10.50%. The Company is required to pay interest semi-annually
in May and November for all of the notes. Subsequent to the purchase of K4 and
payment of related offering costs, the Company had approximately $29,714 of
proceeds remaining for working capital. The debt issuance costs have been
deferred and are included, net of amortization, in other non-current assets in
the Company's consolidated balance sheet at December 31, 1999. These deferred
costs are amortized over the life of the related notes.
In connection with the acquisition of K4, the Company has entered into a
transition services agreement with ASI. Pursuant to this agreement, ASI will
continue to provide many of the same non-manufacturing related services to K4
that it provided prior to the acquisition, including transportation and
shipping, human resources, and accounting and general administrative services.
The Company has incurred approximately $5,800 of costs during the year ended
December 31, 1999 for the services provided under this agreement. In addition,
the Company has also entered into an intellectual property license agreement
with ASI that was effective upon the closing of the acquisition.
To encourage the investment in K4, the Korean government has granted a tax
holiday on K4's operations. The tax holiday expires ten years after the earlier
of the first year K4 has taxable income or five years.
The following table displays unaudited pro forma consolidated results of
operations as though the acquisition of K4 had occurred as of the beginning of
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Net revenues................................................ $1,577,594 $1,913,201
Net income.................................................. $ 18,119 $ 62,388
Pro forma net income........................................ $ 13,619
Basic net income per common share........................... $ .17 $ .52
Diluted net income per common share......................... $ .17 $ .52
Basic pro forma net income per common share................. $ .13
Diluted pro forma net income per common share............... $ .13
</TABLE>
The pro forma results include adjustments for goodwill amortization,
depreciation, interest expense on debt issued to finance the purchase of K4, and
income taxes. The pro forma results are not necessarily indicative of the
results the Company would actually have achieved if the acquisition had been
completed as of the beginning of each of the periods presented, nor are they
necessarily indicative of future consolidated results.
In 1997, 1998, and 1999, approximately 68%, 67% and 53%, respectively, of
the Company's packaging and test revenues as well as 100% of the Company's wafer
fabrication revenues in 1998 and 1999 (see Note 1) were derived from services
performed for the Company by ASI. By the terms of a long-standing agreement, the
Company has been responsible for marketing and selling ASI's semiconductor
packaging
F-14
<PAGE> 80
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
and test services, except to customers in Korea and Japan to whom ASI has
historically sold such services directly. During 1998, the Company became
responsible for marketing and selling ASI's semiconductor packaging and test
services to the majority of ASI's customers in Japan. The Company has worked
closely with ASI in developing new technologies and products. Effective January
1, 1998, the Company entered into five-year supply agreements with ASI giving
the Company the first right to market and sell substantially all of ASI's
packaging and test services and the exclusive right to market and sell all of
the wafer output of ASI's new wafer foundry, both of which have negotiable
pricing terms. These agreements are cancellable by either party upon five years
prior written notice at any time after the fifth anniversary of the effective
date. The Company's business, financial condition and operating results have
been and will continue to be significantly dependent on the ability of ASI to
effectively provide the contracted services on a cost-efficient and timely
basis. The termination of the Company's relationship with ASI for any reason, or
any material adverse change in ASI's business resulting from underutilization of
its capacity, the level of its debt and its guarantees of affiliate debt, labor
disruptions, fluctuations in foreign exchange rates, changes in governmental
policies, economic or political conditions in Korea or any other change could
have a material adverse effect on the Company's business, financial condition
and results of operations.
As of December 31, 1999, ASI was contingently liable under guarantees in
respect of debt of its non-consolidated subsidiaries and affiliates in the
aggregate amount of approximately $322 million.
Prior to the Initial Public Offering, (see Note 2), 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.
ASI's business has been severely affected by the economic crisis in Korea.
ASI has traditionally operated with a significant amount of debt relative to its
equity and has contractually guaranteed the debt obligations of certain
affiliates and subsidiaries. These significant uncertainties may affect ASI's
future operations and its ability to maintain or refinance certain debt
obligations as they mature. ASI's plans to address these matters, which are
disclosed in ASI's financial statements, include entering into the Korean
financial restructuring program known as "Workout" in October 1998.
The Workout program is the result of an accord among Korean financial
institutions to assist in the restructuring of Korean business enterprises. This
process involves negotiation between the related banks and ASI, and does not
involve the judicial system. The Workout process also does not impact debts
outstanding with trade creditors, including balances due to/or from the Company.
ASI's operations have continued uninterrupted during the process, and we expect
ASI's operations to continue uninterrupted for the duration of the process.
The Workout as approved by the creditor banks in February 1999 contains the
following relief provisions for ASI:
- The creditor banks will allow ASI to defer repayment on principal of
ordinary loans until December 31, 2003. After December 31, 2003, bank
loans with repayment terms will be payable through readjustment of
repayment schedules on the basis of the repayment period as of October
24, 1998. For loans without repayment terms the schedule to repay
principal amounts will be determined by ASI and the creditor banks at the
end of such period.
- The creditor banks will allow ASI to defer repayment of principal under
capital leases until December 31, 1999, with payments of principal to
resume under a 7 year installment plan thereafter.
- The creditor banks will allow ASI to roll over the maturity of its
Won-denominated debentures held by the creditor banks for an additional
three year term after currently scheduled maturity dates.
F-15
<PAGE> 81
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
- The creditor banks will allow ASI to make no interest payments on
ordinary loans until December 31, 1999. The creditor banks will add
accrued interest to the principal amounts of these loans every three
months.
- The creditor banks will reduce interest rates on ASI's remaining
outstanding Won-denominated ordinary bank loans to 10% or the prime rate
of each creditor bank, whichever is greater. This would reduce ASI's
weighted average interest rate from 12.9% before the Workout to 10.5%
after the Workout.
- The creditor banks will give ASI a five year grace period until December
31, 2003 against enforcement of guarantees made by ASI for liabilities of
ASI's affiliates. In addition, interest will not accrue on guaranteed
obligations during the five year period.
- The creditor banks will provide to ASI a short-term loan of W50 billion
at the prime rate plus 1%, to be repaid with proceeds from the sale of
K4.
- The creditor banks will convert W250 billion ($208,000, using the
December 31, 1998 exchange rate of W1,207 to $1.00) of ASI debt held by
the creditor banks into: (1) W122.3 billion ($102,000 using the December
31, 1998 exchange rate) in equity shares of ASI, (2) W108.1 billion
($90,000 using the December 31, 1998 exchange rate) in five-year
non-interest bearing convertible debt and (3) W19.6 billion ($16,000) in
non-interest bearing loans. The conversion would take place in
installments over four years and at a conversion rate equal to W5,000 per
share, the par value of ASI's common stock. In order for the initial
conversion of debt to take place in accordance with the terms of the
Workout, ASI will have to undergo a series of corporate actions,
including a reverse stock split to bring the fair market value of its
equity shares to a price at least equal to the par value of such shares.
The creditor banks would time their conversions of ASI debt to coincide
with equity investments made in ASI by a third-party foreign investor
company, in the aggregate amount of $150,000 over a four year period.
The conversion of debt by the creditor banks was contingent on the
Company's commitment to invest $150,000 in ASI equity over a four-year period.
The Company has agreed to make an investment of $41,000 in 1999 and, assuming
certain additional conditions are met, invest an additional $109,000 between
years 2000 and 2002. As a result of the commitment to invest, ASI agreed to
reduce the K4 purchase price from $607,000 to $582,000. The Company's commitment
to ASI's creditor banks committing to an investment in ASI is contingent upon
the continuation of the Workout plan as approved, the continued effectiveness of
the Supply Agreements with ASI and coordination of proposed equity investments
with the conversion by the creditor banks of their ASI debt to equity. The
commitment letter provides that upon meeting these conditions, the Company would
invest $41,000 in 1999, 2000, and 2001 with a final investment of $27,000 in
2002. The Company would purchase the ASI shares at W5,000 per share. Since the
commitment is in U.S. dollars, the number of shares the Company would purchase
will vary based on the exchange rate of Korean won to U.S. dollars.
Assuming the creditor banks and ASI finalize and implement the Workout
under its original terms, the relative equity of ownership of ASI among the
creditor banks, the Kim family and the Company would be approximately 45%, 6%
and 32%, respectively (assuming an exchange rate of W1,135 to $1.00 and without
any future sales of ASI stock by these parties).
The creditor banks have the right to terminate the Workout if ASI fails to
meet the conditions of the Workout, which includes conditions related to ASI's
financial performance. The Company believes that if the Workout is not finalized
by the creditor banks and ASI or if the creditor banks subsequently terminate
the Workout, the debt relief afforded to ASI pursuant to the Workout would be
terminated, and the
F-16
<PAGE> 82
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
creditor banks could reinstate and enforce the original terms of ASI's debt,
including accelerating ASI's obligations. If this were to occur, ASI's and the
Company's businesses could be harmed.
There can be no assurance that ASI will be able to satisfy the terms of the
proposed Workout agreement. Any inability of ASI to comply with the terms of the
proposed Workout agreement, generate cash flow from operations sufficient to
fund its capital expenditures and other working capital and liquidity
requirements could have a material adverse effect on ASI's ability to continue
to provide services and otherwise fulfill its obligations to the Company. The
ultimate outcome of these uncertainties cannot be determined presently and ASI's
financial statements do not include any adjustments that might result from these
uncertainties.
4. ACCOUNTS RECEIVABLE SALE AGREEMENT
Effective July 7, 1997, the Company entered into an agreement to sell
receivables (the "Agreement") with certain banks (the "Purchasers"). The
transaction qualifies as a sale under the provisions of SFAS No. 125 "Accounting
For Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Under the Agreement, the Purchasers have committed to purchase,
with limited recourse, all right, title and interest in selected accounts
receivable of the Company, up to a maximum of $100,000. In connection with the
Agreement, the Company established a wholly owned, bankruptcy remote subsidiary,
Amkor Receivables Corp., to purchase accounts receivable at a discount from the
Company on a continuous basis, subject to certain limitations as described in
the Agreement. Amkor Receivables Corp. simultaneously sells the accounts
receivable at the same discount to the Purchasers. The Agreement is structured
as a three year facility subject to annual renewals based upon the mutual
consent of the Company and purchasers.
The Agreement was renewed effective December 30, 1998 and December 29, 1999
with the next renewal date scheduled March 29, 2000. ASI had guaranteed the
Company's obligations under the agreement (See Note 3), however, ASI was
released from its obligations as guarantor effective December 30, 1998.
Proceeds, net of reduction in selected accounts receivable from the sale of
receivables were $84,400 in 1997 which has decreased by $12,900 and $2,200
during 1998 and 1999, respectively, due to a further reduction in selected
accounts receivable. Losses on receivables sold under the Agreement were
approximately $2,414, $4,693 and $4,280 in 1997, 1998 and 1999, respectively,
and are included in other expense, net. As of December 31, 1998 and 1999,
approximately $2,700 and $2,200, respectively, are included in current
liabilities for amounts to be refunded to the Purchasers as a result of a
reduction in selected accounts receivable.
5. 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 and Korea, or at ASI on a
consignment basis. Components of inventories follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Raw materials and purchased components...................... $77,351 $81,379
Work-in-process............................................. 8,277 10,086
------- -------
$85,628 $91,465
======= =======
</TABLE>
F-17
<PAGE> 83
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Land........................................................ $ 2,346 $ 38,349
Buildings and improvements.................................. 142,252 303,077
Machinery and equipment..................................... 534,314 883,057
Furniture, fixtures and other equipment..................... 40,502 52,866
Construction in progress.................................... 8,282 47,393
-------- ----------
727,696 1,324,742
Less -- Accumulated depreciation and amortization........... 311,585 464,974
-------- ----------
$416,111 $ 859,768
======== ==========
</TABLE>
7. INVESTMENTS
The Company's investments include investments in affiliated companies which
provide services to the Company (see Note 3) and certain other technology based
companies. Investments are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Equity Investment in ASI (18% at December 31, 1999)......... $ -- $39,927
------- -------
Other Equity Investments (20% - 50% owned)
Taiwan Semiconductor Technology Corporation............... 20,052 18,456
Other..................................................... 738 860
------- -------
Total other equity investments.................... 20,790 19,316
------- -------
Available for Sale.......................................... 4,686 4,429
------- -------
$25,476 $63,672
======= =======
</TABLE>
In October, 1999, the Company acquired 10,000,000 shares of ASI common
stock for approximately $41,600 (W50,000,000,000) representing the Company's
first installment of its planned investments in ASI over a four year period in
connection with ASI's Workout (see Note 3).
In 1997, the Company recognized a loss of $17,291, resulting principally
from the impairment of value of its investment in ASI as well as the Company's
equity in loss of ASI for the year ended December 31, 1997. The amount of the
impairment loss was determined based upon the market value of the ASI shares on
the Korean Stock Exchange on February 16, 1998, the date that the Company sold
its investment in ASI common stock to AK Investments, Inc., an entity owned by
James J. Kim. In exchange for the shares, AK Investments, Inc. assumed $13,863
of the Company's long-term borrowings from AUSA.
F-18
<PAGE> 84
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
The following summary of consolidated financial information pertaining to
ASI for 1997 was derived from the consolidated financial statements (see Note
3). No amounts are presented for 1998 as the investment was sold in February
1998.
<TABLE>
<CAPTION>
1997
----------
<S> <C>
SUMMARY INCOME STATEMENT INFORMATION:
Sales....................................................... $ 406,937
Net income.................................................. $ 41,430
SUMMARY BALANCE SHEET INFORMATION:
Total assets................................................ $2,922,114
Total liabilities........................................... $2,662,612
</TABLE>
On October 21, 1998, the Company announced that it entered into a joint
venture, Taiwan Semiconductor Technology Corporation ("TSTC"), with Taiwan
Semiconductor Manufacturing Corporation, Acer Inc., United Test Center and
Chinfon Semiconductor & Technology Company. TSTC, which commenced operations in
1999, provides independent advanced integrated circuit ("IC") packaging services
primarily for the Taiwan market and Taiwan foundry output. The Company has
committed to invest an estimated total of $40,000 in TSTC. In October 1998, the
Company invested $10,000 as part of the second round of joint venture financing.
In December 1998, the Company purchased additional TSTC shares from ASI for
$10,000 which represented ASI's investment as part of the joint venture's
initial round of financing in which ATI did not participate. ASI did not
participate in the joint venture's second round of financing. No capital
contributions were required during 1999. As of December 31, 1999 the Company
owns approximately a 25% interest in TSTC and accordingly, the Company's
investment in TSTC is accounted for using the equity method of accounting.
8. SHORT-TERM CREDIT FACILITIES
At December 31, 1998 and 1999, short-term borrowings consisted of various
operating lines of credit and working capital facilities maintained by the
Company. These borrowings are secured by receivables, inventories or property.
These facilities, which are typically for one-year renewable terms, generally
bear interest at current market rates appropriate for the country in which the
borrowing is made (ranging from 10% to 11% at December 31, 1999). For 1998 and
1999, the weighted average interest rate on these borrowings was 11.9% and
11.7%, respectively. The unused portion of lines of credit was approximately
$82,000 at December 31, 1999.
F-19
<PAGE> 85
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
9. DEBT
Following is a summary of the Company's short-term borrowings and long-term
debt:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Short-term borrowings (see Note 8).......................... $ 30,430 $ 3,386
Senior notes, 9.25%, due May 2006 (See Note 3).............. -- 425,000
Senior subordinated notes, 10.5%, due May 2009 (See Note
3)........................................................ -- 200,000
Convertible subordinated notes, 5.75%, due May 2003 (See
Note 2)................................................... 207,000 53,435
Note payable, interest at bank's prime (8.8% at December 31,
1999), due in installments with balance due April 2004.... 12,747 11,472
Note payable, interest at LIBOR plus annual spread (10.25%
at December 31, 1998), due in installments with balance
due November 1999......................................... 7,000 --
Other, primarily capital lease obligations and other debt... 3,326 628
-------- --------
260,503 693,921
Less -- Short-term borrowings and current portion of
long-term debt............................................ (38,657) (6,465)
-------- --------
$221,846 $687,456
======== ========
</TABLE>
In the fourth quarter of 1999, the Company completed an early conversion of
convertible subordinated notes. As a result, the Company exchanged 12.1 million
shares of the Company's common stock for $153,565 of the Company's convertible
notes. The fair value of the shares of common stock issued in the exchanges in
excess of the shares required for conversion was $17,381, and was expensed
during the fourth quarter of 1999. This amount is included in other expense in
the accompanying consolidated statements of income.
Interest expense related to short-term borrowings and long-term debt is
presented net of interest income of $5,752, $9,072, and $19,905 in 1997, 1998
and 1999, respectively, in the accompanying consolidated statements of income.
The $53,435 of convertible notes mature in May 2003, the $425,000 of senior
notes mature in May 2006 and the $200,000 of senior subordinated notes mature in
May 2009. The senior notes and senior subordinated notes contain certain
covenants that could restrict the Company's ability and the ability of the
Company's subsidiaries to: incur additional indebtedness; pay dividends,
repurchase stock, prepay subordinate debt and make investments and other
restricted payments; create restrictions on the ability of the Company's
subsidiaries to pay dividends or make other payments; engage in sale and
leaseback transactions; create liens; enter into transactions with affiliates;
and sell assets or merge with or into other companies. These covenants are
subject to certain exceptions. The Company was in compliance with these
F-20
<PAGE> 86
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
covenants as of December 31, 1999. The principal payments required under other
long-term debt borrowings at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
2000........................................................ $ 3,079
2001........................................................ 2,647
2002........................................................ 2,549
2003........................................................ 2,549
2004........................................................ 1,276
Thereafter.................................................. --
-------
Total............................................. $12,100
=======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
U.S. Defined Contribution Plan
ATI has a defined contribution benefit plan covering substantially all U.S.
employees. Employees can contribute up to 13% of salary to the plan and ATI
matches 75% of the employee's contributions up to a defined maximum on an annual
basis. The expense for this plan was $959, $1,394 and $1,828 in 1997, 1998 and
1999, respectively.
Philippine Pension Plan
The Company's Philippine subsidiaries sponsor a defined benefit plan that
covers substantially all employees who are not covered by statutory plans.
Charges to expense are based upon costs computed by independent actuaries.
During 1998, the Company adopted SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132
revise employers' disclosures about pensions and other postretirement benefit
plans. It does not change the measurement or recognition of this plan.
The components of net periodic pension cost for the Company's Philippine
defined benefit plan are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Service cost of current period.............................. $1,274 $1,618 $ 2,153
Interest cost on projected benefit obligation............... 957 1,209 1,563
Expected return on plan assets.............................. (534) (879) (1,083)
Amortization of transition obligation and actuarial
gains/losses.............................................. 81 79 137
------ ------ -------
Total pension expense............................. $1,778 $2,027 $ 2,770
====== ====== =======
</TABLE>
It is the Company's policy to make contributions sufficient to meet the
minimum contributions required by law and regulation.
F-21
<PAGE> 87
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
The following table sets forth the funded status of the Company's
Philippine defined benefit pension plan and the related changes in the projected
benefit obligation and plan assets:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year......... $10,428 $13,567
Service cost.............................................. 1,618 2,153
Interest cost............................................. 1,209 1,563
Actuarial loss/(gain)..................................... 194 (356)
Foreign exchange(gain)/loss............................... 348 (388)
Benefits paid............................................. (230) (1,155)
------- -------
Projected benefit obligation at end of year............... 13,567 15,384
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year............ 6,614 8,204
Actual return on plan assets.............................. (461) 2,107
Employer contribution..................................... 2,137 1,748
Foreign exchange (gain)/loss.............................. 144 (235)
Benefits paid............................................. (230) (1,155)
------- -------
Fair value of plan assets at end of year.................. 8,204 10,669
------- -------
Funded status:
Projected benefit obligation in excess of plan assets..... 5,363 4,715
Unrecognized actuarial loss............................... (2,546) (1,011)
Unrecognized transition obligation........................ (906) (826)
------- -------
Accrued pension costs..................................... $ 1,911 $ 2,878
======= =======
</TABLE>
The discount rate used in determining the projected benefit obligation was
12% as of December 31, 1998 and 1999. The rates of increase in future
compensation levels was 11% as of December 31, 1998 and 1999. The expected
long-term rate of return on plan assets was 12% as of December 31, 1998 and
1999. These rates reflect economic and market conditions in the Philippines.
The fair value of plan assets include an investment in our Company's common
stock of approximately $2,800 at December 31, 1999.
F-22
<PAGE> 88
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
11. INCOME TAXES
The provision for income taxes includes federal, state and foreign taxes
currently payable and those deferred because of temporary differences between
the financial statement and the tax bases of assets and liabilities. The
components of the provision for income taxes follow:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $ 16,126 $18,316 $ 9,928
State.................................................. 2,639 4,426 1,746
Foreign................................................ 28 724 5,508
-------- ------- -------
18,793 23,466 17,182
-------- ------- -------
Deferred:
Federal................................................ (4,991) 282 532
Foreign................................................ (6,724) 968 8,886
-------- ------- -------
(11,715) 1,250 9,418
-------- ------- -------
Total provision................................ $ 7,078 $24,716 $26,600
======== ======= =======
</TABLE>
The reconciliation between the taxes payable based upon the U.S. federal
statutory income tax rate and the recorded provision follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Federal statutory rate.................................. $ 21,352 $35,257 $ 36,162
State taxes, net of federal benefit..................... 1,285 2,877 2,028
S Corp. status of AEI through April 28, 1998............ (3,613) (4,500) --
Deferred taxes established at termination of S Corp.
status of AEI......................................... -- (1,954) --
Income of foreign subsidiaries subject to tax holiday... (5,106) (9,129) (14,860)
Foreign exchange (losses)/gains recognized for income
taxes................................................. (21,147) 12,602 8,023
Change in valuation allowance........................... 22,000 (8,079) (11,084)
Difference in rates on foreign subsidiaries............. (7,693) (3,377) (630)
Goodwill and other permanent differences................ -- 1,019 6,961
-------- ------- --------
Total......................................... $ 7,078 $24,716 $ 26,600
======== ======= ========
</TABLE>
The Company has structured its global operations to take advantage of lower
tax rates in certain countries and tax incentives extended to encourage
investment. AAAP has a tax holiday in the Philippines which expires at the end
of 2002. Foreign exchange (losses)/gains recognized for income taxes relate to
unrecognized net foreign exchange (losses)/gains on U.S. dollar denominated
monetary assets and liabilities. These (losses)/gains, which are not recognized
for financial reporting purposes as the U.S. dollar is the functional currency
(see Note 1), result in deferred tax assets that will be realized, for
Philippine tax reporting purposes, upon settlement of the related asset or
liability. The net deferred tax asset related to these losses increased in 1997
as a result of the dramatic devaluation of the Philippine peso relative to the
U.S. dollar. These assets decreased in 1998 and 1999 as they were realized for
Philippine tax reporting purposes. The Company's ability to utilize these assets
depends on the timing of the
F-23
<PAGE> 89
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
settlement of the related assets or liabilities and the amount of taxable income
recognized within the Philippine statutory carryforward limit of three years.
During 1999, AAP reversed a valuation allowance established in prior years for a
portion of the related deferred tax assets. During 1999, AAP realized all
foreign net operating loss carryforwards established in 1998. In addition,
minimum corporate income tax credits of $1,182 reversed to offset current
foreign tax obligations.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Retirement benefits................................... $ 816 $ 1,038 $ 463
Other accrued liabilities............................. 100 4,571 2,579
Receivables........................................... 227 1,717 523
Inventories........................................... 6,509 2,583 3,892
Property, plant and equipment......................... -- (2,139) (2,539)
Unrealized foreign exchange losses.................... 37,447 15,805 480
Unrealized foreign exchange gains..................... (9,084) (3,530) (2,175)
Loss on sale of investment in ASI..................... -- 1,620 1,620
Net foreign operating loss carryforward............... -- 3,646 --
Minimum corporate income tax.......................... -- 1,182 --
Equity in earnings of investees....................... -- -- 1,148
Other................................................. (2) 191 191
-------- -------- -------
Net deferred tax asset................................ 36,013 26,684 6,182
Valuation allowance................................... (22,000) (13,921) (2,837)
-------- -------- -------
Net deferred tax asset................................ $ 14,013 $ 12,763 $ 3,345
======== ======== =======
</TABLE>
Non-U.S. income before taxes and minority interest of the Company was
approximately $33,000, $54,000 and $74,000 in 1997, 1998 and 1999, respectively.
The company does not pay or record U.S. income taxes on the undistributed
earnings of its foreign subsidiaries as long as those earnings are permanently
reinvested in the companies that produced them. These cumulative undistributed
earnings are included in consolidated retained earnings on the balance sheet and
amounted to approximately $112,000 as of December 31, 1999. An estimated $27,000
in U.S. income and foreign withholding taxes would be due if these earnings were
remitted as dividends.
At December 31, 1998 and 1999 current deferred tax assets of $9,838 and
$5,793, respectively, are included in other current assets and noncurrent
deferred tax assets of $2,925 and $2,324, respectively, are included in other
assets in the consolidated balance sheet. The Company's net deferred tax assets
include amounts which, in the opinion of management, are more likely than not to
be realizable through future taxable income. In addition, at December 31, 1999,
noncurrent deferred tax liabilities of $4,772 are included in other noncurrent
liabilities in the consolidated balance sheet.
The Company's tax returns have been examined through 1995 in the
Philippines and through 1994 in the U.S. The tax returns for open years are
subject to changes upon final examination. Changes in the mix of income from the
Company's foreign subsidiaries, expiration of tax holidays and changes in tax
laws or regulations could result in increased effective tax rates for the
Company.
F-24
<PAGE> 90
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
12. STOCKHOLDERS' EQUITY
The common stock and additional paid-in capital of the Company are
reflected at the original cost of the Amkor Companies. In connection with the
Reorganization (see Note 1), the Company has authorized 500,000,000 shares of
$.001 par value common stock, of which 117,860,000 and 130,659,772 were issued
and outstanding at December 31, 1998 and 1999, respectively. In addition, the
Company has authorized 10,000,000 shares of $.001 par value preferred stock,
designated as Series A.
At the date of the Reorganization 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 the Company.
The receivable from stockholder included in stockholders equity represents
the balance due from Mr. & Mrs. Kim and the Kim Family Trusts related to the
finalization of AEI's tax returns (See Note 11).
Changes in the division equity account reflected in the consolidated
statement of stockholders' equity represent the net cash flows resulting from
the operations of the Chamterry semiconductor packaging and test business for
1997. Such cash flows have been presented as distributions or capital
contributions since these amounts were retained in Chamterry Enterprises, Ltd.
for the benefit of the owners.
The line items included in other comprehensive income, prior to 1999, as
presented in the consolidated statements of stockholders' equity, relate to S
Corporation activity prior to 1998. Accordingly, the related amounts reflected
in other comprehensive income and accumulated other comprehensive income in the
consolidated statements of stockholders' equity and the consolidated balance
sheets are net of taxes at an effective tax rate of 0%. Unrealized losses on
investments during 1998 and 1999 have been tax effected at the applicable
statutory rates.
13. EARNINGS PER SHARE
Net income per common share was calculated by dividing net income and 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)
and the Initial Public Offering (see Note 2).
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires dual presentation of basic and diluted earnings per share ("EPS") on
the face of the income statement. Basic EPS is computed using only the weighted
average number of common shares outstanding for the period while diluted EPS is
computed assuming conversion of all dilutive securities, such as options. Both
the Company's basic and diluted as well as the Company's basic pro forma and
diluted pro forma per share amounts are the same for the year ended December 31,
1997. The Company's basic and diluted per share
F-25
<PAGE> 91
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
amounts for the years ended December 31, 1998 and 1999 as well as the Company's
basic proforma and diluted proforma per share amounts for the year ended
December 31, 1998 are calculated as follows:
<TABLE>
<CAPTION>
WEIGHTED
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Earnings per Share -- Year Ended December 31, 1998
Basic earnings per share......................... $75,460 106,221,000 $0.71
Impact of Convertible Notes...................... 5,672 10,334,000
Dilutive effect of options....................... -- 41,000
------- ----------- -----
Diluted earnings per share....................... $81,132 116,596,000 $0.70
======= =========== =====
Pro forma Earnings per Share -- Year Ended December
31, 1998 (unaudited)
Basic pro forma earnings per share............... $70,960 106,221,000 $0.67
Impact of Convertible Notes...................... 5,672 10,334,000
Dilutive effect of options....................... -- 41,000
------- ----------- -----
Diluted pro forma earnings per share............. $76,632 116,596,000 $0.66
======= =========== =====
Earnings per Share -- Year Ended December 31, 1999
Basic earnings per share......................... $76,719 119,341,000 $0.64
Impact of Convertible Notes...................... 8,249 14,228,000
Dilutive effect of options....................... -- 1,498,000
------- ----------- -----
Diluted earnings per share....................... $84,968 135,067,000 $0.63
======= =========== =====
</TABLE>
14. STOCK COMPENSATION PLANS
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 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 December 31, 1999, there were 90,000
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
F-26
<PAGE> 92
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
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 December 31,
1999, there were 4,775,098 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 5 years. The French Plan provides for the granting of options to employees
of 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 December 31, 1999, there were
200,450 options outstanding under the French Plan.
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 January 1, 1998................................ -- $ --
Granted................................................... 3,974,200 $10.01
Exercised................................................. -- $ --
Cancelled................................................. 150,300 $11.00
--------- ------
Balance at December 31, 1998.............................. 3,823,900 $ 9.97
--------- ------
Exercisable at December 31, 1998.......................... -- $ --
========= ======
Balance at January 1, 1999................................ 3,823,900 $ 9.97
Granted................................................... 1,468,450 $10.62
Exercised................................................. 75,534 $10.49
Cancelled................................................. 151,268 $ 9.91
--------- ------
Balance at December 31, 1999.............................. 5,065,548 $10.15
--------- ------
Exercisable at December 31, 1999.......................... 1,363,644 $ 9.82
========= ======
</TABLE>
F-27
<PAGE> 93
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
Significant option groups outstanding at December 31, 1999 and the related
weighted average exercise price and remaining contractual life information are
as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------- -------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE REMAINING
SHARES PRICE SHARES PRICE LIFE (YEARS)
--------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Options with Exercise Price of:
$16.56 - $28.25..................... 223,950 $18.73 -- -- 9.79
$10.00 - $11.00..................... 3,035,405 $10.98 1,148,538 $11.00 8.37
$ 8.06 - $ 9.63..................... 1,083,050 $ 9.06 10,000 $9.14 9.33
$ 5.66 - $ 7.97..................... 723,143 $ 5.67 205,106 $5.66 8.85
--------- ------ --------- ----- ----
Options outstanding at December 31,
1999................................ 5,065,548 1,363,644
========= =========
</TABLE>
A summary of the weighted average fair value of options at grant date
granted during the year ended December 31, 1998 and 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE GRANT DATE
SHARES PER SHARE FAIR VALUES
--------- ---------------- ----------------
<S> <C> <C> <C>
Options granted during 1998:
Options whose exercise price is greater
than the market price on grant date... 42,600 $11.00 $2.22
--------- ------ -----
Options whose exercise price equals
market price on grant date............ 3,901,600 $ 9.99 $4.31
--------- ------ -----
Options whose exercise price is less than
the market price on grant date........ 30,000 $10.34 $4.97
========= ====== =====
Options granted during 1999:
Options whose exercise price equals
market price on grant date............ 1,468,450 $10.62 $6.33
========= ====== =====
</TABLE>
In order to calculate the fair 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 75% for 1998 and 1999 respectively, dividend yield -- 0%, and risk free
interest rate -- 5.38% and 5.52% for 1998 and 1999, respectively.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
January 1998 and was approved by the stockholders in April 1998. A total of
1,000,000 shares of common stock have been made available for sale under the
Purchase Plan and an annual increase is to be added on each anniversary date of
the adoption of the Purchase Plan. Employees (including officers and employee
directors of the Company but excluding 5% or greater stockholders) are eligible
to participate if they are customarily employed for at least 20 hours per week
and for more than five months in any calendar year. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
may not exceed 15% of the compensation an employee receives on each payday. The
initial offering period began on October 1, 1998 with a seven-month offering
period. All subsequent offering periods will be consecutive six-month periods
beginning on May 1, 1999, subject to change by the Board of Directors. Each
participant will be granted
F-28
<PAGE> 94
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
an option on the first day of an offering period, and shares of Common Stock
will be automatically purchased on the last date of each offering period. The
purchase price of the Common Stock under the Purchase Plan will be equal to 85%
of the lesser of the fair market value per share of Common Stock on the start
date of the offering period or on the purchase date. Employees may end their
participation in an offering period at any time, and participation ends
automatically on termination of employment with the Company. The Purchase Plan
will terminate in January 2008, unless sooner terminated by the Board of
Directors.
Under the Purchase Plan, for the offering periods ending April 30, 1999 and
October 31, 1999, the Company sold 399,310 and 187,445 shares, respectively. In
addition, the Company has withheld $540 through payroll deductions as of
December 31, 1999. The fair market value per share of the Company's common stock
was $4.56 on October 1, 1998, the start date of the first offering period, $9.53
on May 1, 1999 and $21.31 on November 1, 1999. The fair values of the purchase
rights granted for the offering periods beginning October 1, 1998, May 1, 1999
and November 1, 1999 were $1.29, $3.21, and $6.99 respectively, which was
estimated using the Black Scholes option pricing model with the following
assumptions: expected option term -- 7 months for the offering period beginning
October 1, 1998 and 6 months for the other offering periods; stock price
volatility factor -- 47% and 75% for the offering period beginning October 1,
1998 and
the other offering periods, respectively; dividend yield for all offering
periods -0%; risk-free interest rate -5.38% and 5.52% for the offering period
beginning October 1, 1998 and the other offering periods, respectively.
The Company accounts for its stock compensation plans as prescribed by
Accounting Principles Board Opinion No. 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 its stock compensation plans, as provided by
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's reported
net income and basic and diluted earnings per share, which reflects pro forma
adjustments for income taxes for 1997 and 1998 (see Note 20), would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net Income:
As reported............................................ $39,668 $70,960 $76,719
Pro forma.............................................. $39,668 $69,313 $72,033
Earnings per share:
Basic:
As reported............................................ $ 0.48 $ 0.67 $ 0.64
Pro forma.............................................. $ 0.48 $ 0.65 $ 0.60
Diluted:
As reported............................................ $ 0.48 $ 0.66 $ 0.63
Pro forma.............................................. $ 0.48 $ 0.64 $ 0.59
</TABLE>
15. RELATED-PARTY TRANSACTIONS
At December 31, 1997, the Company owned 8.1% of the outstanding stock of
ASI (see Note 7), 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.
based on the market value of ASI shares on the Korean Stock
F-29
<PAGE> 95
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
Exchange. On June 1, 1998 the Company purchased ASI's interest in AAP for
approximately $34,000 (see Note 18).
The Company previously 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
test service charges and wafer fabrication service charges from 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 $527,858, $573,791 and $714,475 for 1997, 1998 and 1999,
respectively. Charges from AUSA for interest and bank charges were $6,002,
$2,215 and $1,416 for 1997, 1998 and 1999, respectively. Excluding the $20,000
balance due from ASI at December 31, 1998 for prepaid wafer foundry service
charges (see discussion below), the net amounts payable to ASI and AUSA were
$8,357 and $28,301 at December 31, 1998 and 1999, respectively.
To facilitate capacity expansion for new product lines, certain customers
advanced the Company funds to purchase certain equipment to fulfill such
customers 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 the Company through a reduction of
the monthly processing charges related to the customer product being assembled.
The Company will reduce its obligation to the customer through a reduction in
the accounts receivable, due from the customer, at the time services are billed.
As of December 31, 1998 and 1999 this amount was approximately $2,600 and
$1,141, respectively.
On August 1, 1997, the Company sold its equity investment in Anam
Semiconductor & Technology Co., Ltd. ("AST"), an affiliate of ASI, and certain
investments and notes receivable from companies unrelated to the semiconductor
packaging and test business to AK Investments, Inc., at cost ($49,740) and AK
Investments, Inc. assumed $49,740 of the Company's long-term borrowings from
Anam USA, Inc. Management estimates that the fair value of these investments and
notes receivable approximated the carrying value at August 1, 1997. Subsequent
to the sale on August 1, 1997 the Company loaned AK Investments, Inc. $12,800
for the purchase of additional investments. The amount outstanding on this loan
at December 31, 1998 and 1999 was $59 and $0, respectively.
The Company utilizes AST 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 which is
reflected in the current portion of Due from Affiliate. As of December 31, 1998
and 1999, the balance paid in advance to AST was approximately $3,500 and
$1,500, respectively. Payments to AST were approximately $26,000, $32,500 and
$33,000 during 1997, 1998 and 1999, respectively.
Anam Engineering and Construction, an affiliate of ASI, built the packaging
facility for AAAP in the Philippines. Payments to Anam Engineering and
Construction were $3,844, $869 and $3,881 in 1997, 1998 and 1999, respectively.
Anam Precision Equipment and Anam Instruments manufacture certain equipment used
by the Philippine operations. Payments to Anam Precision Equipment and Anam
Instruments were $4,211, $10,272 and $14,610 in 1997, 1998 and 1999,
respectively.
F-30
<PAGE> 96
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
A principal stockholder of the Company has extended guarantees on behalf of
the Company in the amount of $91,000 and $16,000 at December 31, 1998 and 1999,
respectively. Also in 1997, a company controlled by this stockholder purchased
investments in the amount of $49,740 (see Note 7).
The Company leases office space in West Chester, Pennsylvania from certain
stockholders of the Company. The lease expires in 2006. The Company has the
option to extend the lease for an additional 10 years through 2016. On September
11, 1997, the office previously being leased in Chandler, Arizona was purchased
from certain stockholders of the Company. The total purchase price of the
building ($5,710) represented the carrying value to the stockholders. Amounts
paid for these leases in 1997, 1998 and 1999 were $1,458, $1,118 and $1,140,
respectively.
At December 31, 1998 and 1999, the Company had net balances due from
affiliates other than ASI and AUSA of $27,510 and $24,524, respectively.
Realization of these balances is dependent upon the ability of the affiliates to
repay the amounts due. In management's opinion, these receivables are recorded
at the net realizable value.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate methodologies;
however, considerable judgment is required in interpreting market data to
develop the estimates for fair value. Accordingly, these estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. Certain of these financial instruments are with major
financial institutions and expose the Company to market and credit risks and may
at times be concentrated with certain counterparties or groups of
counterparties. The creditworthiness of counterparties is continually reviewed,
and full performance is anticipated.
The carrying amounts reported in the balance sheet for short-term
investments, due from affiliates, other accounts receivable, due to affiliates,
accrued expenses and accrued income taxes approximate fair value due to the
short-term nature of these instruments. The methods and assumptions used to
estimate the fair value of other significant classes of financial instruments is
set forth below:
Cash and Cash Equivalents. Cash and cash equivalents are due on demand or
carry a maturity date of less than three months when purchased. The carrying
amount of these financial instruments is a reasonable estimate of fair value.
Available for sale investments. The fair value of these financial
instruments was estimated based on market quotes, recent offerings of similar
securities, current and projected financial performance of the company and net
asset positions.
Short-term borrowings. Short-term borrowings have variable rates that
reflect currently available terms and conditions for similar borrowings. The
carrying amount of this debt is a reasonable estimate of fair value.
Long-term debt. Long-term debt balances have variable rates that reflect
currently available terms and conditions for similar debt. The carrying amount
of this debt is a reasonable estimate of fair value.
Senior Notes. The fair value of these financial instruments at December 31,
1999 is estimated to be $416,500 based on available market quotes.
Senior Subordinated Notes. The fair value of these financial instruments
at December 31, 1999 is estimated to be $199,000 based on available market
quotes.
F-31
<PAGE> 97
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
Convertible Subordinated Notes. The fair value of these financial
instruments at December 31, 1999 is estimated to be $115,420 based on available
market quotes.
17. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims incidental to the conduct of its
business. Based on consultation with legal counsel, management does not believe
that any claims, either individually or in the aggregate, to which the Company
is a party will have a material adverse effect on the Company's financial
condition or results of operations.
The Company is currently engaged in negotiations regarding amounts due
under a technology license agreement with a third party. To date, this dispute
has not involved the judicial systems. The Company has accrued its estimate of
amounts due under this agreement. However, depending on the results of the
negotiations, the ultimate amount payable could be less than the amount accrued
or exceed the amount accrued by up to $7,700.
Net future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year at December 31,
1999, are:
<TABLE>
<S> <C>
2000........................................................ $ 9,736
2001........................................................ 8,633
2002........................................................ 5,966
2003........................................................ 5,139
2004........................................................ 3,940
Thereafter.................................................. 77,312
--------
Total (net of minimum sublease income of
$3,862)........................................ $110,726
========
</TABLE>
Rent expense, net of sublease income of $366, $575 and $578 for 1997, 1998
and 1999, respectively, amounted to $6,709, $7,751 and $10,443 for 1997, 1998
and 1999, respectively.
The Company has various purchase commitments for materials, supplies and
capital equipment incidental to the ordinary conduct of business. As of December
31, 1999 the Company had commitments for capital equipment of approximately
$48,524. In the aggregate, such commitments are not at prices in excess of
current market.
18. ACQUISITIONS
On July 1, 1999, the Company acquired the stock of AAPMC for $3,800, which
was paid to ASI during June 1999. AAPMC supplies machine tooling used by the
Company at its Philippine operations. As an interim step to this acquisition,
during April 1999, the Company assumed and repaid $5,700 of AAPMC's debt. The
acquisition was financed through available working capital and was accounted for
as a purchase. Accordingly, the results of AAPMC have been included in the
accompanying consolidated financial statements since the date of acquisition and
goodwill of approximately $2,000 was recorded as of the date of acquisition and
will be amortized on a straight line basis over a ten year period. Goodwill, net
of amortization, is included in intangible assets in the Company's consolidated
balance sheets at December 31, 1999. The historical operating results of AAPMC
are not material in relation to the Company's operating results.
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
F-32
<PAGE> 98
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
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.
19. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," during the fourth quarter of 1998. The
Company has identified two reportable segments (packaging and test services and
wafer fabrication services) that are managed separately because the services
provided by each segment require different technology and marketing strategies.
Packaging and test services: Through its three factories located in the
Philippines, its Korean Factory, K4, as well as the three ASI factories in
Korea, under contract, the Company offers a complete and integrated set of
packaging and test services including IC packaging design, leadframe and
substrate design, IC package assembly, final testing, burn-in, reliability
testing and thermal and electrical characterization.
Wafer fabrication services: Through its wafer fabrication services
division, the Company provides marketing, engineering, and support services for
ASI's deep submicron CMOS foundry, under a long-term supply agreement.
Sales to Intel Corporation for packaging and test accounted for
approximately $340,000, $324,000 and $269,000 for the years ended December 31,
1997, 1998 and 1999, respectively. In addition, TI accounted for approximately
$25,000 of packaging and test revenues and $291,000 of wafer fabrication service
revenues during the year ended December 31, 1999. Revenues for services provided
to TI prior to 1999 were less than 10% of total revenue.
The accounting policies for segment reporting are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. The Company
evaluates its operating segments based on operating income.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes the
elimination of inter-segment balances and corporate assets which include cash
and cash equivalents, non-operating balances due from affiliates, investment in
ASI and TSTC (see Note 6) and other investments.
<TABLE>
<CAPTION>
PACKAGING WAFER
AND TEST FABRICATION OTHER TOTAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Net Revenues.......................... $1,617,235 $292,737 $ -- $1,909,972
Gross Profit.......................... $ 303,467 $ 29,279 $ -- $ 332,746
Operating Income...................... $ 158,283 $ 17,794 $ -- $ 176,077
Depreciation and Amortization......... $ 178,771 $ 1,561 $ -- $ 180,332
Capital Expenditures.................. $ 603,173 $ 2,536 $ -- $ 605,709
Total Assets.................. $1,391,105 $ 37,011 $326,973 $1,755,089
Year ended December 31, 1998:
Net Revenues.......................... $1,452,285 $115,698 $ -- $1,567,983
Gross Profit.......................... $ 243,479 $ 17,354 $ -- $ 260,833
Operating Income...................... $ 124,462 $ 8,274 $ -- $ 132,736
Depreciation and Amortization......... $ 118,676 $ 563 $ -- $ 119,239
Capital Expenditures.................. $ 102,142 $ 5,747 $ -- $ 107,889
Total Assets.................. $ 655,695 $ 65,941 $281,961 $1,003,597
</TABLE>
F-33
<PAGE> 99
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
<TABLE>
<CAPTION>
PACKAGING WAFER
AND TEST FABRICATION OTHER TOTAL
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Net Revenues.......................... $1,455,761 $ -- $ -- $1,455,761
Gross Profit.......................... $ 213,092 $ -- $ -- $ 213,092
Operating Income...................... $ 104,903 $ (4,062) $ -- $ 100,841
Depreciation and Amortization......... $ 81,770 $ 94 $ -- $ 81,864
Capital Expenditures.................. $ 176,858 $ 2,132 $ -- $ 178,990
Total Assets.................. $ 703,662 $ 2,068 $149,862 $ 855,592
</TABLE>
The following table presents net revenues by country based on the location
of the customer:
<TABLE>
<CAPTION>
NET REVENUES
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
United States..................................... $1,050,048 $1,124,764 $1,316,147
Foreign countries................................. 405,713 443,219 593,826
---------- ---------- ----------
Consolidated...................................... $1,455,761 $1,567,983 $1,909,972
========== ========== ==========
</TABLE>
The following table presents property, plant and equipment based on the
location of the asset:
<TABLE>
<CAPTION>
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
United States............................................. 37,845 48,851 48,438
Philippines............................................... 388,653 366,717 448,644
Korea..................................................... -- -- 362,144
Other foreign countries................................... 563 543 542
------- ------- -------
Consolidated.............................................. 427,061 416,111 859,768
======= ======= =======
</TABLE>
The following supplementary information presents net revenues allocated by
product family for the packaging and test segment:
<TABLE>
<CAPTION>
NET REVENUES
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Traditional Leadframe............................. $ 833,527 $ 603,222 $ 559,563
Advanced Leadframe................................ 311,988 342,866 412,395
Laminates......................................... 251,257 438,034 561,181
Test and Other.................................... 58,989 68,163 84,096
---------- ---------- ----------
Consolidated...................................... $1,455,761 $1,452,285 $1,617,235
========== ========== ==========
</TABLE>
20. PRO FORMA ADJUSTMENTS (UNAUDITED)
Statement of Income
Pro forma adjustments are presented for 1997 and 1998 to reflect a
provision for income taxes as if AEI had not been an S Corporation for all of
the periods presented. Pro forma net income per common share is based on the
weighted average number of shares outstanding as if the Reorganization had
occurred at the beginning of the period presented.
F-34
<PAGE> 100
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND DOLLAR PER SHARE DATA)
21. SUBSEQUENT EVENT
On February 28, 2000 the company announced a definitive agreement with ASI
to acquire ASI's three remaining packaging and test facilities and to make
additional equity investments in ASI. On March 16, 2000, the Company agreed to
privately place $225,000 aggregate principal amount (excluding any
over-allotments) of 5% convertible subordinated notes due 2007. The notes will
be convertible into the Company's common stock at a conversion price of $57.34
per share. The Company intends to finance the remainder of the purchase price
and investment with $750,000 of secured bank debt under an $850,000 bank credit
facility, $410,000 of Series A Preferred Stock and existing cash and short-term
investments. See Note 3.
F-35
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Amkor Technology Korea, Inc.
We have audited the accompanying balance sheet of Amkor Technology Korea,
Inc. (the "Company") as of December 31, 1999, and the related statements of
operations, stockholder's equity, and cash flows for the period from February 19
(date of incorporation) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amkor Technology Korea, Inc.
as of December 31, 1999, and the results of its operations and its cash flows
for the period from February 19 (date of incorporation) to December 31, 1999 in
conformity with generally accepted accounting principles in the United States of
America.
/s/ SAMIL ACCOUNTING CORPORATION
--------------------------------------
Seoul, Korea
January 15, 2000
F-36
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Anam Semiconductor, Inc.
We have audited the accompanying statements of net assets of the Seongsu,
Pucheon and Pupyong Packaging Businesses of Anam Semiconductor, Inc. (the
"Seongsu, Pucheon and Pupyong Packaging Businesses" and "Anam") as of December
31, 1999 and 1998 and the related statements of operations, changes in net
assets and cash flows for the years ended December 31, 1999, 1998 and 1997.
These financial statements are the responsibility of the Seongsu, Pucheon and
Pupyong Packaging Businesses' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Seongsu, Pucheon and
Pupyong Packaging Businesses as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for the years ended December 31, 1999,
1998 and 1997, in conformity with generally accepted accounting principles in
the United States of America.
As discussed in Note 1 to the accompanying financial statements, the
Seongsu, Pucheon and Pupyong Packaging Businesses' revenues are generated
primarily from semiconductor packaging and test services provided to Amkor
Technology Inc. ("Amkor") pursuant to supply agreements. The Seongsu, Pucheon
and Pupyong Packaging Businesses are dependent upon this support from Amkor.
As discussed in Note 3 to the accompanying financial statements, the
operations of the Seongsu, Pucheon and Pupyong Packaging Business, and those of
similar companies in the Republic of Korea, have been significantly affected,
and may continue to be affected for the foreseeable future, by the general
adverse economic condition in the Republic of Korea and in the Asia Pacific
region.
As more fully described in Note 4 to the accompanying financial statements,
on October 23, 1998, Anam entered into the Korean financial restructuring
program known as the "Workout Program". The Workout Program is the result of an
accord among financial institutions to assist in the restructuring of Korean
business enterprises and does not involve the judicial system. On February 23,
1999, Anam was granted certain economic concessions through the Workout Program
which was approved by its creditors committee.
/s/ SAMIL ACCOUNTING CORPORATION
--------------------------------------
Seoul, Korea
January 25, 2000, except as to Note 14,
which is as of February 28, 2000
F-37
<PAGE> 103
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESSES
OF ANAM SEMICONDUCTOR, INC.
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
THOUSANDS OF U.S.
DOLLARS
--------------------
AS OF DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ --
Due from corporate, current............................... 277,918 70,151
Accounts and notes receivable
Trade, net of allowance for doubtful accounts.......... 3,416 4,907
Due from affiliates, net of allowance for doubtful
accounts.............................................. 26,844 5,826
Other.................................................. 3,653 3,480
Inventories............................................... 7,984 6,190
Advances.................................................. 1,281 1,113
Prepaid expenses and other current assets................. 1,154 601
Deferred taxes, current................................... 231 1,482
-------- --------
Total current assets.............................. 322,481 93,750
Property, plant and equipment, net.......................... 404,384 498,555
Due from corporate, non-current............................. 277 1,622
Deferred taxes, non-current................................. 41,656 60,531
Other....................................................... 4,953 7,013
-------- --------
Total assets...................................... 773,751 661,471
-------- --------
LIABILITIES
CURRENT LIABILITIES:
Corporate borrowings, current............................. 14,788 37,253
Trade accounts payable.................................... 28,298 9,557
Other accounts payable.................................... 23,062 3,467
Accrued expenses.......................................... 11,098 33,112
Other current liabilities................................. 2,747 3,876
-------- --------
Total current liabilities......................... 79,993 87,265
Corporate borrowings, non-current........................... 124,294 160,032
Accrued severance benefits, net............................. 45,122 48,849
-------- --------
Total liabilities................................. 249,409 296,146
-------- --------
Commitments and contingencies
NET ASSETS.................................................. $524,342 $365,325
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 104
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESSES
OF ANAM SEMICONDUCTOR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THOUSANDS OF U.S. DOLLARS
--------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Sales...................................................... $435,659 $409,929 $599,575
Cost of sales.............................................. 289,233 283,995 408,435
-------- -------- --------
Gross profit............................................... 146,426 125,934 191,140
Operating expenses:
Selling and administrative............................... 16,120 34,567 45,850
Research and development................................. 3,383 1,267 1,894
-------- -------- --------
Operating income........................................... 126,923 90,100 143,396
-------- -------- --------
Non-operating income (expense):
Interest income (expense), net........................ 19,091 (15,882) (5,508)
Foreign exchange gains (losses), net.................. (3,235) (26,860) 26,249
Gains (losses) from forward contracts................. 3,817 29,256 (96,719)
Other, net............................................ (1,449) 7,541 4,987
-------- -------- --------
18,224 (5,945) (70,991)
-------- -------- --------
Income before income tax provision......................... 145,147 84,155 72,405
Income tax (provision) benefit............................. (46,376) (30,289) 50,452
-------- -------- --------
Net income................................................. $ 98,771 $ 53,866 $122,857
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 105
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESSES
OF ANAM SEMICONDUCTOR, INC.
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS U.S. DOLLARS)
<TABLE>
<S> <C>
BALANCE AT JANUARY 1, 1997.................................. $189,595
Net income................................................ 122,857
Net capital contribution.................................. 5,246
--------
BALANCE AT DECEMBER 31, 1997................................ 317,698
Net income................................................ 53,866
Net capital distribution.................................. (6,239)
--------
BALANCE AT DECEMBER 31, 1998................................ 365,325
Net income................................................ 98,771
Net capital contribution.................................. 60,246
--------
BALANCE AT DECEMBER 31, 1999................................ $524,342
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 106
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESSES
OF ANAM SEMICONDUCTOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THOUSANDS OF U.S. DOLLARS
---------------------------------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 98,771 $ 53,866 $ 122,857
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 133,452 137,181 116,534
Provision for severance benefits, net.................. (3,727) 17,107 (8,705)
Foreign exchange losses (gains), net................... 3,235 26,860 (26,249)
Losses (Gains) from forward contracts.................. (3,817) (29,256) 96,719
Deferred income taxes.................................. 20,126 30,289 (50,452)
Changes in operating assets and liabilities:
Decrease (Increase) in trade accounts receivable....... (19,527) 7,768 (483)
Decrease (Increase) in other accounts receivable....... (173) 24,260 (18,266)
Decrease (Increase) in inventories..................... (1,794) 9,051 7,109
Decrease (Increase) in advances........................ (168) 2,831 2,628
Decrease (Increase) in prepaid expenses................ (595) 83 1,785
Decrease in due from corporate......................... 32 1,131 5,705
Decrease (Increase) in other current assets............ 42 (42) --
Increase (Decrease) in trade accounts payable.......... 18,741 (6,719) (23,640)
Increase (Decrease) in other accounts payable.......... 19,595 (1,122) (2,517)
Decrease in accrued expenses........................... (18,197) (49,109) (8,653)
Decrease in other current liabilities.................. (1,129) (3,826) (14,174)
--------- --------- ---------
Net cash provided by operating activities............ 244,867 220,353 200,198
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance from (to) corporate............................... (193,111) (208) 20,940
Acquisition of property, plant and equipment.............. (39,281) (24,345) (145,642)
Decrease in other assets.................................. 2,060 19 2,322
--------- --------- ---------
(230,332) (24,534) (122,380)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Corporate borrowings, net................................. (58,203) (174,194) (66,137)
Net capital contribution (distribution)................... 60,246 (6,239) 5,246
--------- --------- ---------
Net cash provided by (used in) financing
activities........................................ 2,043 (180,433) (60,891)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (16,578) (17,705) (15,042)
--------- --------- ---------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS............. -- (2,319) 1,885
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. -- 2,319 434
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ -- $ -- $ 2,319
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 13,568 $ 12,842 $ 26,508
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 107
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
1. BUSINESS AND BASIS OF PRESENTATION
Business and Organization
Seongsu ("K1"), Pucheon ("K2") and Pupyong ("K3") Packaging Businesses,
established in 1976, 1984 and 1982, respectively, are providers of semiconductor
packaging and test services. K1, K2 and K3 are located in the Republic of Korea
and are owned and operated by Anam Semiconductor, Inc. ("Anam"). K1, K2 and K3
operate primarily for Amkor Technology, Inc. ("Amkor"), a United States
affiliate. K1, K2 and K3 package and test integrated circuits from wafers
provided by Amkor (the "Packaging Service") pursuant to supply agreements (the
"Supply Agreements") with Amkor. Consequently, substantially all of K1, K2 and
K3's revenues are derived from Packaging Services provided to Amkor pursuant to
the Supply Agreements (see Note 2).
The businesses of Anam and Amkor have been inter-related for many years and
are under the common ownership by Mr. H.S. Kim and his family. Mr. H.S. Kim
currently serves as Anam's honorary chairman and director of Anam and his eldest
son, Mr. James Kim, serves as Amkor's chairman and chief executive officer. Mr.
James Kim also serves as a director of Anam and as the chairman of the Anam
Group, consisting principally of companies in the Republic of Korea in the
electronics industries. As of December 31, 1999, Mr. H.S. Kim and his family
owned approximately 6.9% of the outstanding common stock of Anam and 58.8% of
the outstanding common stock of Amkor (see Note 4).
Basis of Presentation
The Securities and Exchange Commission in Staff Accounting Bulletin No. 55,
requires that historical financial statements of a subsidiary, division, or
lesser business component of another entity include certain expenses incurred by
the parent on its behalf. These expenses generally include, but are not limited
to, officer and employee salaries, rent, or depreciation, advertising,
accounting and legal services, other selling, general and administrative
expenses and other such expenses. These financial statements include such
expenses and services.
These financial statements present the assets, liabilities and results of
operations of K1, K2 and K3. Because K1, K2 and K3 did not previously prepare
separate financial statements, these financial statements were derived by
extracting the assets, liabilities and results of operations of K1, K2 and K3
from the corresponding Anam accounts. As a result, the carved out financial
statements contain allocations of certain Anam assets, liabilities, revenues and
expenses attributable to K1, K2 and K3 deemed reasonable by management to
present K1, K2 and K3 on a stand-alone basis. Although management is unable to
estimate the actual benefits which would have been realized and costs which
would have been incurred had the respective transactions been executed with
independent third parties, the allocation methodologies described below and
within the respective notes to financial statements, where appropriate, are
considered reasonable by management.
The financial position and results of operations of K1, K2 and K3 may,
however, differ from the results which may have been achieved had K1, K2 and K3
operated as an independent legal entity. Additionally, future expenses incurred
as an independent entity may not be comparable to the historical levels.
The statement of changes in net assets presents the net income (loss) of
the business and the net capital contribution or distribution made by Anam.
F-42
<PAGE> 108
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
The carved out financial statements are presented in accordance with
generally accepted accounting principles of the United States of America. All
amounts in these financial statements have been presented in thousands of U.S.
dollars, unless otherwise stated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by K1, K2 and K3 in the
preparation of these financial statements are summarized below.
Allocations
The financial statements reflect the assets, liabilities, revenue and
expenses that were directly related to K1, K2 and K3 as it operated within Anam.
In cases involving assets and liabilities not specifically identifiable to any
particular facility, a portion of such items were allocated to K1, K2 and K3
based on assumptions that management considered reasonable in the circumstances.
Anam uses a centralized approach to cash management and the financing of
its operations. Cash and cash equivalents, marketable securities, bank and other
loan guarantee deposits and debt not specifically identifiable to the operations
of any particular facility were allocated to K1, K2 and K3 based on asset and
debt ratio of Anam as of the beginning of 1995. The balances of these accounts
at the end of each subsequent period reflect the beginning allocated balance
plus the net cash inflow and outflow during the years as they related to K1, K2
and K3 resulting in the balance of cash requirement at year end. Those balances
of cash requirements of K1, K2 and K3 at the end of each year are used as the
basis for allocation of Anam's total cash and cash equivalents, marketable
securities, bank and other loan guarantee deposits and debt not specified,
identifiable to any division. Due to the fact that financing of operations and
utilization of the cash resources and investments is performed centrally, the
net interest expense on outstanding debt obligations plus income earned on
utilization of cash resources and investments of ASI are allocated to K1, K2 and
K3 on the same basis.
The statements of operations include management's estimates of all of the
costs of doing business, including specific corporate costs of K1, K2 and K3 and
certain allocated costs incurred by Anam on K1, K2 and K3's behalf including
finance, human resources, strategic planning, legal, accounting and tax. These
allocations were based on a variety of factors including, for example, the
number of employees, estimates of usage and revenues. Research and development
expenses were allocated based on the ratio of K1, K2 and K3's property, plant
and equipment to that of Anam's.
K1, K2 and K3 participated in certain centralized foreign currency and
interest rate risk management functions of Anam. As part of these activities,
derivative financial instruments were utilized to manage risks generally
associated with foreign currency and interest rate volatility. Although K1, K2
and K3 are not contractually obligated under these arrangements, the statements
of operations reflect the allocated benefits and costs from these functions.
Such allocations were based on net sales of each individual operating facility.
Related Party Arrangements
The businesses of Anam and Amkor have been inter-related for many years by
virtue of the Supply Agreements (see Note 1), family ties between their
respective shareholders and management, financial relationships, coordination of
product and operating plans, joint research and development activities and
shared intellectual property rights. The Supply Agreements between Anam
(including K1, K2 and K3)
F-43
<PAGE> 109
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
and Amkor govern the responsibility and the performance of Packaging Services by
Anam on behalf of Amkor and Amkor on behalf of Anam.
Under the Supply Agreements, Anam has granted to Amkor a first right to
substantially all of the Packaging Services capacity of Anam. Amkor, in return,
is responsible for sales of Anam's Packaging Services and is obligated to
actively and diligently market the Anam Packaging Services to potential and
existing customers. Pursuant to long-standing arrangements between Anam and
Amkor, all sales from Anam to Amkor are made through Anam USA ("A-USA"), a
wholly owned financing subsidiary of Anam. Pursuant to the Supply Agreements,
Amkor reimburses A-USA for the financing costs incurred in connection with trade
financing provided to Amkor. The Supply Agreements also provide that Amkor-
Anam, Inc., a subsidiary of Amkor, provide raw material procurement and related
services to Anam on a fee basis. Sales of K1, K2 and K3's packaging and testing
services to Amkor, made through A-USA, amounted to $407,751 in 1999 ($387,528 in
1998, $479,380 in 1997).
Under the Supply Agreements, pricing arrangements relating to the Packaging
Services provided by Anam to Amkor are subject to quarterly review and
adjustment 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 interest of Amkor and
Anam. The Supply Agreements dated January 1, 1998 have a five-year term and may
be terminated by the parties thereto upon five years' written notice at any time
after expiration of such initial five-year term.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. The most significant estimates and assumptions relate to the allocation
of carved out financial information, the allowance for uncollectable accounts
receivable, depreciation and product warranty liability. Actual results could
differ from these estimates.
Financial Instruments
The amounts reported for trade and other accounts receivable, other assets,
trade and other accounts payable, accrued expenses and other liabilities and
corporate borrowings and long-term borrowings and accounts payable approximate
fair value due to their short maturities or interest rates which approximate
market rates. Obligations due to or receivables from related parties have no
ascertainable fair value as no market exists for such instruments.
Allowance for Doubtful Accounts
K1, K2 and K3 provide an allowance for doubtful accounts receivable based
on the aggregate estimated collectibility of accounts receivable.
Inventories
Inventories, which primarily consist of raw materials and supplies are
stated at the lower of cost or market, cost being determined by the weighted
average method, except for materials in-transit, for which cost is determined
using the specific identification method.
F-44
<PAGE> 110
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as set forth below :
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Buildings................................................... 25 years
Machinery and equipment..................................... 2 - 6 years
Tools....................................................... 3 - 5 years
Furniture and fixtures...................................... 3 - 10 years
Vehicles.................................................... 2 - 5 years
</TABLE>
Upon retirement or other disposal of fixed assets, the costs and related
accumulated depreciation or amortization are eliminated from the accounts, and
any resulting gain or loss is reflected in operations for the period.
Routine maintenance and repairs are charged to expense as incurred.
Expenditures which enhance the value or materially extend the useful lives of
the related assets are capitalized.
Interest expense incurred during the construction period of assets on funds
borrowed to finance construction is capitalized.
Revenue recognition
Revenues from the sale of packaging services are recognized upon shipment
of goods to customers. K1, K2 and K3 do not take ownership of customer-supplied
semiconductors. Title remains with the customer for these materials at all
times. Accordingly, the cost of the customer-supplied materials is not included
in the financial statements. Risk of loss for K1, K2 and K3's packaging costs
passes upon completion of the packaging process and shipment to the customer.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
K1, K2 and K3 are not a separate taxable entity for Korean or international
tax purposes. Accordingly, income tax expense in the carved out financial
statements has been calculated on a separate tax return basis.
K1, K2 and K3 account for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS 109 requires an asset and liability approach for financial accounting and
reporting for income tax purposes. Under the asset and liability method,
deferred income taxes are recognized for temporary differences, net operating
loss carryforwards ("NOL") and tax credits by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Investment and R&D tax credits are accounted for by the flow-through method
whereby they reduce income taxes in the period the assets giving rise to such
credits are placed in service. To the extent such
F-45
<PAGE> 111
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
credits are not currently utilized, deferred tax assets, subject to
considerations about the need for a valuation allowance, are recognized for the
carryforward account.
Accrued Severance Benefits
Employees and directors with one year or more of service are entitled to
receive a lump-sum severance payment upon termination of their employment. The
amount of the payment is based on their length of service and salary at the date
of termination. The accrual for severance benefits approximates the amount
required to be paid by K1, K2 and K3 if all employees were terminated at the
date shown on the statement of net assets.
Foreign Currency
The U.S. dollar is K1, K2 and K3's functional currency. The accompanying
financial statements are remeasured into U.S. dollars from books and records
that were kept in Korean Won using the monetary/non-monetary method. Monetary
assets and liabilities, such as cash, receivables, borrowings and other
payables, are translated using the current exchange rate. Non-monetary assets
and liabilities, such as inventory and fixed assets, are translated using
historical exchange rates. Revenues and expenses are translated using average
exchange rates for the period, except for items related to non-monetary assets
and liabilities, which are translated using historical exchange rates. All
translation gains and losses are included in determining income for the period
in which exchange rates change. The exchange rates used to remeasure the
financial statements as of December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
KOREAN WON TO U.S. DOLLAR
-----------------------------------
END OF PERIOD AVERAGE
EXCHANGE RATES EXCHANGE RATES
---------------- ----------------
<S> <C> <C>
1999.................................. W1,134.50 = US$1 W1,189.30 = US$1
1998.................................. W1,195.80 = US$1 W1,398.88 = US$1
1997.................................. W1,695.80 = US$1 W 951.11 = US$ 1
</TABLE>
Impairment of Long-Lived Assets
Effective January 1, 1996, K1, K2 and K3 adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of." In accordance with this standard, management periodically evaluates the
carrying value of long-lived assets to be held and used, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flows are separately
identifiable and less than the asset's carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived assets. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
The adoption of this accounting standard did not have a material effect on K1,
K2 and K3's operating results or financial position.
Concentration of Credit Risk
Financial instruments which potentially expose K1, K2 and K3 to a
concentration of credit risk consist primarily of trade receivables.
F-46
<PAGE> 112
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
K1, K2 and K3 perform and sell their Packaging Services exclusively for
Amkor pursuant to the Supply Agreements. Any reduction in purchases by Amkor
could have an adverse impact on K1, K2 and K3's financial position, results of
operations and cash flows.
Risks and Uncertainties
K1, K2 and K3's business involves certain risks and uncertainties. Factors
that could affect K1, K2 and K3's future operating results and cause actual
results to vary materially from expectations include, but are not limited to,
dependence on a cyclical semiconductor and personal computer industry that is
characterized by rapid technological changes, fluctuations in end-user demands,
evolving industry standards, competitive pricing and declines in average selling
prices, risks associated with foreign currencies, and enforcement of
intellectual property rights. Additionally, the market in which K1, K2 and K3
operates is very competitive. Key elements of competition in the independent
semiconductor packaging market include breadth of packaging offerings,
time-to-market, technical competence, design services, quality, production
yields, reliability of customer service and price. Additionally, substantially
all of K1, K2 and K3's revenues are derived from Packaging Services provided to
Amkor pursuant to the Supply Agreements. Other risks exist as of December 31,
1999 as they are described in Workout Program in Note 4.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" which establishes a comprehensive standard on accounting for
derivatives and hedging. It is effective for all fiscal years beginning after
June 2000. K1, K2 and K3 have reviewed the provisions of the SFAS No. 133 and
has not yet quantified the impact of adopting SFAS No. 133; however, SFAS No.
133 could increase volatility in earnings.
3. UNSTABLE ECONOMIC ENVIRONMENT
In connection with the Asian financial crisis which began in 1997, the
Korean economy as well as other economies in the Asia Pacific region experienced
economic contractions, a reduction in the availability of credit, increased
interest rates, increased inflation, negative fluctuations in currency exchange
rates, increased numbers of bankruptcies, increased unemployment and labor
unrest. Such conditions had a significant adverse effect on the operations of
the Company and other companies in Korea and in the Asia Pacific region.
Recently, economic conditions in the Republic of Korea have improved as
evidenced by increased trade surplus, increases in foreign exchange reserves,
record levels of foreign investment and economic growth, lower inflation and
interest rates and stabilized foreign exchange rates. Notwithstanding the
current recovery, significant uncertainties still exist related to the economy
in Korea and in the Asia Pacific region.
4. WORKOUT PROGRAM
Anam has guaranteed certain debt obligations of equity investees and
affiliated companies, including Anam Engineering & Construction Co., Ltd. ("Anam
Construction"), Anam Environmental Industry Co., Ltd. ("Anam environment") and
Anam Electronics Co., Ltd., ("Anam Electronics"), which face serious financial
difficulties.
In response to this situation, Anam management has undertaken certain
measures it considers appropriate, including: (1) disposing of Kwangju Packaging
factory ("K4"); (2) placing Anam
F-47
<PAGE> 113
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
Construction into corporate reorganization under the Korean Corporate
Reorganization Act; and (3) enlisting jointly, on October 23, 1998 Anam, Anam
Electronics and Anam Environment into the "Workout Program", a financial
restructuring program supervised by the Korean Financial Supervisory Committee
("FSC"). The Workout Program is the result of an accord among Korean financial
institutions to assist in the restructuring of Korean business enterprises. This
process involves negotiations between the companies and the creditors committee
represented by banks and other financial institutions providing financing to
Anam, Anam Electronics and Anam Environment and does not involve the judicial
system. The Workout Program also allows the companies to resume their operations
uninterrupted and does not impact debt outstanding with trade creditors.
On February 23, 1999, the following basic conditions and terms of Anam's
Workout Program were agreed to and approved by its creditors committee: (1)
five-year extension of the loan and capital leases repayment schedules; (2)
reduction of bank loan interest rates to Korean prime rate; (3) conversion of
certain outstanding bank loans of Anam approximating 122 billion Won and 108
billion Won to equity shares and convertible bonds, respectively; (4) five-year
suspension of the creditor's right to demand performance on loan guarantees made
by Anam on behalf of its affiliates. In order for the initial conversion of debt
to take place in accordance with the terms of the Workout, Anam will have to
undergo a series of corporate actions, including a reverse stock split, to bring
the fair market value of its equity shares to a price at least equal to the par
value of such shares. The conversion of Anam debt by the creditor financial
institutions would coincide with each installment of Amkor's equity investment
in Anam as described below. The Workout contained provision for the entitlement
of the creditor financial institutions to vote the ASI shares owned by Mr. James
Kim and his family. Anam did not recognize any gain or loss as a result of the
Workout Program.
In addition to the basic restructuring terms as stated above, the approved
Workout Program also requires Mr. James Kim, the chairman of the Anam Group or
Amkor, to make capital contributions to Anam totaling $150,000 over the next
four years in exchange for equity shares of Anam at par value.
On May 13, 1999, Anam's Workout Program became effective upon signing of a
Memorandum of Understanding, which document detailed conditions and terms of
Anam's Workout Program, between Anam and the creditors committee.
The creditor financial institutions have the right to terminate or modify
the Workout if Anam does not fulfill the terms of the Workout, including meeting
certain financial targets. In addition, the creditor financial institutions can
modify the terms of the Workout upon agreement of creditor financial
institutions holding at least 75% of the debt restructured under the Workout. If
the creditor financial institutions subsequently terminate the Workout, the
creditor financial institutions could reinstate and enforce the original terms
of Anam's debt, including accelerating Anam's obligations and pursuing Anam's
guarantees of its affiliates' debt. If this were to occur, Anam's businesses
would be harmed.
There can be no assurance that Anam will be able to satisfy the terms of
the Workout Agreement. Any inability of Anam to comply with the terms of the
Workout Agreement, generate cash flow from operations sufficient to fund its
capital expenditures and other working capital and liquidity requirements could
have a material adverse effect on Anam's ability to continue to provide
services.
Anam Electronics' application for Workout Program was not accepted by the
creditors committee. As a result, on March 18, 1999, Anam Electronics filed an
application for corporate reorganization under the Korean Corporate
Reorganization Act and the district court approved Anam Electronics'
reorganization plan on February 7, 2000. On the other hand, Anam Environment's
application for Workout was accepted by its creditors committee on February 23,
1999. The probable outcome of these events was taken into
F-48
<PAGE> 114
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
consideration by Anam in estimating its liability under guarantees on the debts
of its equity investees and affiliates. No such liabilities are reflected in the
accompanying financial statements.
5. DUE FROM CORPORATE
As discussed in Note 1 to these financial statements, K1, K2 and K3 do not
undertake their own cash management functions and instead rely on Anam for such
activities. As such, any cash requirements are met by Anam or cash surplus is
maintained by Anam. The amounts due to K1, K2 and K3 at December 31, 1999 and
1998 consist of: (1) allocated cash and cash equivalents, marketable securities,
bank deposits and related receivables which are legally entered into and
maintained by Anam and (2) the amount by which obligations under capital lease
of K1, K2 and K3 exceed K1, K2 and K3's allocated portion of corporate
borrowings as of December 31, 1999 and 1998. The bank deposits and long-term
guarantee deposits which are maintained by Anam are denominated in Korean Won,
U.S. Dollars and Japanese Yen. Anam has purchased marketable securities for
purposes other than trading. Such securities consist primarily of debt
securities issued by the Korean government. K1, K2 and K3 do not have any
formalized cash management arrangements with Anam. Consequently, the amounts due
from Anam have been classified as current and long-term based on the maturity
dates, management's intent or restrictions of the underlying instruments.
6. INVENTORIES
Inventories at December 31, 1999 and 1998 comprise the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Finished products........................................... $13,643 $12,370
Semi-finished products and work in process.................. 2,446 1,573
Raw materials and supplies.................................. 1,895 2,247
------ ------
$7,984 $6,190
====== ======
</TABLE>
F-49
<PAGE> 115
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 comprise the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Buildings................................................... $ 214,190 $ 215,188
Machinery and equipment..................................... 861,200 838,673
Tools....................................................... 4,548 4,974
Furniture and fixtures...................................... 43,710 41,765
Vehicles.................................................... 1,696 2,113
---------- ----------
1,125,344 1,102,713
Accumulated depreciation.................................... (736,459) (636,056)
Governmental grants......................................... (1,247) (749)
---------- ----------
387,638 465,908
Land........................................................ 16,605 31,710
Construction in progress.................................... -- 820
Machinery in transit........................................ 141 117
---------- ----------
$ 404,384 $ 498,555
========== ==========
</TABLE>
At December 31, 1999, property, plant and equipment, other than land, were
insured against fire and other casualty losses up to approximately $638,392.
Capitalized interest costs for the year ended December 31, 1999 approximate
$432.
Buildings of K1, K2 and K3 at December 31, 1999 are pledged as collateral
for various loans obtained by Anam from banks, including Korea Development Bank,
up to a maximum amount of $634,471 (see Note 8).
Property, plant and equipment under capital leases which include machinery,
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cost of machinery and equipment under capital lease......... $ 250,651 $ 249,538
Accumulated depreciation.................................... (159,353) (111,126)
--------- ---------
$ 91,298 $ 138,412
========= =========
</TABLE>
F-50
<PAGE> 116
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
Future minimum lease payments under noncancelable capital leases as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
FOR YEARS ENDED DECEMBER 31,
2000........................................................ $ 27,628
2001........................................................ 27,775
2002........................................................ 27,664
2003........................................................ 27,544
2004........................................................ 27,417
Thereafter.................................................. 54,412
--------
Total minimum lease payments................................ 192,440
Less amount representing interest........................... (53,358)
--------
Present value of minimum lease payments..................... 139,082
Less: portion due within one year........................... (14,788)
--------
$124,294
========
</TABLE>
8. CORPORATE BORROWINGS
K1, K2 and K3 do not undertake their own financing but have been able to
benefit from the financing obtained by Anam. As of December 31, 1999 and 1998,
the balances of current and non-current include allocated corporate borrowings
limited to the obligations of K1, K2 and K3 for capital lease (see Note 7). Cash
requirement of K1, K2 and K3 as of December 31, 1999 and 1998 is less than
obligations under capital lease of K1, K2 and K3. The difference between the
cash requirement and the obligations under capital lease is recorded as due from
corporate, current.
Anam has entered into various types of financing arrangements including
short-term working capital borrowings, six-month trade letters of credit
financings, general term loans, guaranteed and non-guaranteed debentures,
convertible bonds, capital lease obligations and other long-term financing. K1,
K2 and K3 do not have their own six-month trade letters of credit but benefits
from such letters of credit when needed. Certain of these lines of credit and
borrowings have been guaranteed by affiliates and subsidiaries of Anam.
K1, K2 and K3 do not have any debt sharing or other arrangements with Anam.
Consequently, the amounts due to Anam have been classified as current and
long-term based on the expected maturities of Anam's contractual obligations.
9. FINANCIAL INSTRUMENTS
In the normal course of business, Anam has purchased various financial
instruments, including derivative instruments for purposes other than trading.
Derivative financial instruments are not entered into for speculative purposes.
Anam enters into foreign currency exchange contracts, including forward and swap
contracts, to manage the exposure to changes in currency exchange rates,
principally U.S. Dollars. The use of foreign currency forward contracts and
swaps allows Anam to reduce its exposure to the risk that the eventual Korean
Won cash outflows resulting from facility operating expenses, capital
expenditures, local supplier purchases and debt service will be adversely
affected by changes in exchange rates. Gains and losses on these foreign
exchange contracts entered into by Anam and that hedge
F-51
<PAGE> 117
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
forecasted transactions are recognized in income as the exchange rates change.
At December 31, 1999, the forward contracts and swap contracts under which Anam
is contractually obligated expire as follows:
Currency and interest swap
<TABLE>
<CAPTION>
CONTRACT CONTRACTED RECEIVING PAYING CONTRACT
BANK AMOUNT EXCHANGE RATE RATE(%) RATE(%) DUE DATE
---- -------- ------------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Korea Development Bank................ $50,000 W938 : US$1 9.95 6.25 Oct. 10, 2000
Shinhan Bank.......................... $10,000 W882 : US$1 10.20 6.90 Apr. 24, 2000
Korea Merchant Bank................... $20,000 W882 : US$1 10.20 6.90 Apr. 24, 2000
</TABLE>
Interest swap
<TABLE>
<CAPTION>
CONTRACT SELLING BUYING CONTRACT
BANK AMOUNT RATE(%) RATE(%) TERMS
---- -------- ------------- ------- --------------
<S> <C> <C> <C> <C>
Chase Manhattan Bank....................... $100,000 6 month LIBOR 5.80 Sept. 16, 2000
</TABLE>
10. ACCRUED SEVERANCE BENEFITS
Changes in accrued severance benefits for the year ended December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Beginning balance........................................... $54,620 $34,435
Provision, net of payments and translation gain/loss........ (4,143) 20,185
------- -------
Ending balance.............................................. 50,477 54,620
Balance of payments remaining with National Pension Fund.... (5,355) (5,771)
------- -------
$45,122 $48,849
======= =======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1999 Anam was contingently liable for guarantees of
indebtedness of subsidiaries and affiliated companies of Anam approximating
$411,896.
At December 31, 1999, Anam provided notes and checks, including 40 blank
notes and 28 blank checks, to several banks and financial institutions as
collateral in relation to various borrowings and guarantees of indebtedness.
Anam has made agreements with various banks to discount notes up to an
aggregate maximum amount of $281,401 at December 31, 1999.
F-52
<PAGE> 118
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
12. INCOME TAXES
The tax provision (benefit) consists of the following :
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Current.............................................. $26,250 $ -- $ --
Deferred............................................. 20,126 30,289 (50,452)
------- ------- --------
$46,376 $30,289 $(50,452)
======= ======= ========
</TABLE>
K1, K2 and K3 incurs income tax liabilities in Korean Won and based upon
taxable income determined in accordance with Korean generally accepted
accounting principles and tax laws. The tax provision included in these
financial statements reflects current tax expense and the impact of accounting
for deferred taxes under SFAS 109 on a separate tax return basis. K1, K2 and K3
do not have any formalized tax sharing agreement with Anam.
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including K1, K2 and K3's ability to generate taxable
income within the period during which the temporary differences reverse, the
outlook for the Korean economy environment and the overall future industry
outlook. Management has considered these factors in reaching its conclusion as
to the valuation allowance for financial reporting purposes. Such valuation
allowance is reviewed periodically.
The major components of the deferred tax assets and deferred tax
liabilities as of December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets
Corporate borrowings...................................... $ -- $ 237
Forward contracts......................................... 231 475
Provision for severance benefits, net..................... 11,823 11,459
Property, plant and equipment, net........................ 29,833 34,181
Tax credit................................................ -- 14,517
Other..................................................... -- 1,144
------- -------
Total deferred tax assets......................... $41,887 $62,013
======= =======
</TABLE>
F-53
<PAGE> 119
SEONGSU, PUCHEON AND PUPYONG PACKAGING BUSINESS
OF ANAM SEMICONDUCTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
-------------------------
The statutory income tax rates, including tax surcharges, applicable to K1,
K2 and K3 for 1999, 1998 and 1997 are approximately 30.8%. The reconciliation
from income taxes calculated at the statutory tax rate to the effective income
tax amount for each of the periods is as follows :
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Taxes at Korean statutory tax rate.......................... $44,705 $25,919 $ 22,301
Remeasurement effect........................................ 3,279 14,516 (56,317)
Tax credit incurred......................................... -- (2,224) (22,435)
Other, net.................................................. (1,608) (7,922) 5,999
------- ------- --------
Effective income tax provision (benefit).................. $46,376 $30,289 $(50,452)
======= ======= ========
</TABLE>
13. GEOGRAPHICAL INFORMATION
K1, K2 and K3 operate in one industry segment, semiconductor packaging and
test services. All of their assets are located in the Republic of Korea.
Sales amounts from external customers by country is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S.A. ............................................ $407,751 $387,528 $479,380
Japan.............................................. -- 3,243 93,586
Republic of Korea.................................. 27,908 19,158 26,609
-------- -------- --------
$435,659 $409,929 $599,575
======== ======== ========
</TABLE>
14. SUBSEQUENT EVENT
On February 28, 2000, Anam made a decision to sell to Amkor all operating
assets related to Packaging Business excluding K2 land in accordance with the
approval of Anam's board of directors' meeting and Anam's creditors committee.
The sale price of Packaging Business is Korean Won equivalent to $950 million.
F-54
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Anam Semiconductor, Inc.
We have audited the accompanying consolidated balance sheets of Anam
Semiconductor, Inc. and its subsidiaries (the "Company") as of December 31, 1999
and 1998 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended December
31, 1999 as prepared under generally accepted accounting principles in the
United States of America. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit 1) the financial
statements of Anam Engineering and Construction Co., Ltd. ("Anam Construction"),
the investment in which is reflected in the consolidated financial statements
referred to above using the equity method of accounting in 1999 and 1998 and
consolidated in 1997, and 2) the financial statements of Anam USA, Inc, ("Anam
USA") a wholly owned subsidiary. The financial statements of Anam Construction
reflect total revenues of $ 387,946 thousand for the year ended December 31,
1997. The Company's net investment in Anam Construction was $0 at December 31,
1999 and 1998 and the equity in its net loss were $29,937 and $56,884 in 1999
and 1998. The financial statements of Anam USA reflect total assets of $124,442
thousand and $235,343 thousand at December 31, 1999 and 1998, respectively, and
total revenues of $715,756 thousand, $576,130 thousand and $544,148 thousand for
the years ended December 31, 1999, 1998 and 1997, respectively. Those statements
referred to above were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Anam Construction and Anam USA, is based solely on the
report of the other auditors. The report of the auditor of Anam Construction
contained an informative disclosure paragraph relating to uncertainties about
Anam Construction's ability to continue as a going concern.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Anam Semiconductor, Inc. and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations, stockholders' deficit and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles in the United States of America.
As discussed in Note 3 to the accompanying financial statements, Anam
Semiconductor, Inc.'s revenues are generated primarily from semiconductor
packaging and test services provided to Amkor Technology Inc. ("Amkor") pursuant
to supply agreements. As described in Note 30 to the accompanying financial
statements, on May 17, 1999, Anam Semiconductor, Inc. has sold to Amkor all the
assets of one of the four its packaging and test facilities located in Kwangju
city, the Republic of Korea ("K4"). As described in Note 31 to the accompanying
financial statements, on February 28, 2000, Anam Semiconductor, Inc. made a
decision to sell to Amkor all of the remaining operating assets related to the
remaining three packaging and testing facilities excluding K2 land in accordance
with the approval of a board of directors' meeting.
As discussed in Note 4 to the accompanying financial statements, the
operations of the Anam Semiconductor, Inc. and its affiliates in the Republic of
Korea, have been significantly affected, and may continue to be affected for the
foreseeable future, by the general adverse economic condition in the Republic of
Korea and in the Asia Pacific region.
F-55
<PAGE> 121
As more fully described in Note 5 to the accompanying financial statements,
on October 23, 1998, Anam Semiconductor, Inc. entered into the Korean financial
restructuring program known as the "Workout Program". The Workout Program is the
result of an accord among financial institutions to assist in the restructuring
of Korean business enterprises and does not involve the judicial system. On
February 23, 1999, Anam Semiconductor, Inc. was granted certain economic
concessions through the Workout Program which was approved by its creditors
committee.
/s/ SAMIL ACCOUNTING CORPORATION
Seoul, Korea
February 28, 2000
F-56
<PAGE> 122
ANAM SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
THOUSANDS OF US DOLLARS
---------------------------
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 56,469 $ 15,452
Restricted cash........................................... 41,086 --
Bank deposits............................................. 105,414 10,936
Accounts and notes receivable
Trade, net of allowance for doubtful accounts........... 3,416 50,180
Due from affiliates, net of allowance for doubtful
accounts............................................... 29,377 14,737
Other................................................... 22,797 10,153
Short-term loans to affiliates, net....................... 4,464 14,108
Inventories............................................... 41,949 59,807
Other current assets...................................... 6,894 22,597
---------- ----------
Total current assets................................ 311,866 197,970
Non-current bank deposits................................... 204 879
Restricted cash............................................. 73 2,351
Investments
Available for sale........................................ 28,128 34,009
Affiliated companies...................................... 18,550 19,146
Long-term receivables
Due from affiliate........................................ 250 --
Others.................................................... 2,906 5,729
Property, plant and equipment, less accumulated
depreciation.............................................. 1,037,935 1,581,614
Deferred tax asset -- noncurrent............................ 53,212 --
Other assets................................................ 34,345 37,252
---------- ----------
Total assets........................................ $1,487,469 $1,878,950
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 69,328 $ 228,112
Current portion of long-term debt......................... 73,882 13,954
Trade accounts and notes payable.......................... 48,902 42,759
Other accounts payable.................................... 77,141 75,211
Accrued expenses.......................................... 3,850 16,504
Forward contract liability................................ 15,364 36,968
Other current liabilities................................. 13,318 6,260
---------- ----------
Total current liabilities........................... 301,785 419,768
Long-term debt, net of current portion and discounts on
debentures................................................ 875,175 1,309,492
Long-term obligations under capital leases, net of current
portion................................................... 429,590 582,936
Accrued severance benefits, net............................. 48,757 65,727
Liability for loss contingency.............................. 129,912 97,344
Other long-term liabilities................................. -- 2,056
---------- ----------
Total liabilities................................... $1,785,219 $2,477,323
---------- ----------
Commitments and contingencies
Minority interests in consolidated subsidiaries............. $ -- $ 17,433
---------- ----------
Stockholders' equity:
Capital stock, W5,000 par value; authorized 300 million
shares of common stock and 10 million shares of
preferred stock.........................................
Common stock: issued and outstanding 55,031,183 shares in
1999 and 30,477,018 shares in 1998...................... 284,329 192,849
Series A preferred stock: issued and outstanding 2,240,240
shares in 1999 and 1998................................. 15,167 15,167
Series B preferred stock: issued and outstanding 336,036
shares in 1999 and 1998................................. 2,220 2,220
---------- ----------
301,716 210,236
Capital surplus........................................... 190,409 182,347
Receivable from stockholders.............................. (62,118) (116,417)
Accumulated deficit....................................... (712,000) (864,905)
Accumulated comprehensive income (loss):
Unrealized gains (losses) in investments................ (911) 1,728
Cumulative translation adjustment....................... (14,846) (28,795)
---------- ----------
Total stockholders' equity.......................... (297,750) (615,806)
---------- ----------
Total liabilities and stockholders' equity.......... $1,487,469 $1,878,950
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 123
ANAM SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THOUSANDS OF US DOLLARS
--------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales....................................................... $ 285,925 $ 221,098 $ 406,937
Cost of sales............................................... 239,632 230,478 314,666
----------- ----------- -----------
Gross profit................................................ 46,293 (9,380) 92,271
----------- ----------- -----------
Operating expenses
Research and development.................................. 87 2,064 --
Amortization of goodwill.................................. -- 768 5,334
Provision for doubtful accounts........................... 901 1,496 3,787
Impairment of long-lived assets........................... -- 273,937 15,942
Selling and administrative expenses....................... 24,267 25,064 75,443
----------- ----------- -----------
Total operating expenses................................ 25,255 303,329 100,506
----------- ----------- -----------
Operating income (loss)..................................... 21,038 (312,709) (8,235)
----------- ----------- -----------
Other (income) expense
Interest income........................................... (5,902) (20,715) (45,151)
Interest expense.......................................... 185,315 227,799 168,932
Foreign currency (gains) loss............................. 33,198 142,605 (159,897)
Loss (gain) from disposal of investments.................. 601 (23,082) (4,972)
Loss on valuation of inventories.......................... 2,041 15,140 543
Impairment loss on loans to affiliates.................... 22,646 122,188 --
Guarantee obligation loss................................. -- 97,344 --
Other, net................................................ (24,889) 12,808 4,598
----------- ----------- -----------
Total other (income) expense............................ 213,010 574,087 (35,947)
----------- ----------- -----------
Income (loss) from continuing operations before income
taxes, equity in loss of affiliates and minority
interest.................................................. (191,972) (886,796) 27,712
Equity in loss of unconsolidated affiliates................. (31,787) (66,792) (18,137)
Minority interest........................................... -- (2,035) (1,720)
----------- ----------- -----------
Income (loss) from continuing operations before income
taxes..................................................... (223,759) (955,623) 7,855
Provision (benefit) for income taxes........................ (54,000) 1,542 109,894
----------- ----------- -----------
Income (loss) from continuing operations.................... (169,759) (957,165) (102,039)
Discontinued operations:
Income from discontinued packaging and testing operation
(net of income taxes of $12,408; $0; $0)................ 130,064 109,632 143,469
Gain on sale of K4 (net of income taxes of $14,268; $0;
$0)..................................................... 149,560 -- --
----------- ----------- -----------
Net income (loss)........................................... $ 109,865 $ (847,533) $ 41,430
=========== =========== ===========
Unrealized gains (losses) in investments.................. (2,639) 7,892 (5,000)
Translation adjustment (loss)............................. 13,949 (38,352) 8,450
----------- ----------- -----------
Comprehensive income........................................ $ 121,175 $ (877,993) $ 44,880
=========== =========== ===========
PER SHARE DATA:
Basic income (loss) from continuing operations per common
share..................................................... $ (5.82) $ (40.43) $ (4.87)
=========== =========== ===========
Basic net income (loss) per common share.................... $ 3.76 $ (35.80) $ 1.97
=========== =========== ===========
Diluted income (loss) from continuing operation a per common
share..................................................... $ (5.82) $ (40.43) $ (4.87)
=========== =========== ===========
Diluted net income (loss) per common share.................. $ 3.42 $ (35.80) $ 1.84
=========== =========== ===========
Shares used in computing basic net income (loss) per common
share..................................................... 29,208,739 23,675,158 20,968,843
=========== =========== ===========
Shares used in computing diluted net income (loss) per
common share.............................................. 32,444,686 23,675,158 23,193,850
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 124
ANAM SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
( IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
---------------------- -------------------- CAPITAL RECEIVABLE FROM
SHARES AMOUNT SHARES AMOUNT SURPLUS STOCKHOLDERS
---------- -------- --------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997.................... 21,134,068 $137,372 2,240,240 $15,167 $143,321 $ (36,186)
Comprehensive income:
Net income..................................
Unrealized gains (loss) on investments......
Currency translation adjustments............
Comprehensive income..........................
Net cash advances to stockholders............. (93,623)
Stock dividends............................... 3,170,110 20,941 336,036 2,220 (23,161)
Issuance of common stock...................... 6,172,840 34,536 62,187
---------- -------- --------- ------- -------- ---------
Balance at December 31, 1997.................. 30,477,018 192,849 2,576,276 17,387 182,347 (129,809)
---------- -------- --------- ------- -------- ---------
Comprehensive loss:
Net loss....................................
Unrealized gains on investments.............
Currency translation adjustments............
Comprehensive loss............................
Collection of receivable from stockholders.... 13,392
---------- -------- --------- ------- -------- ---------
Balance at December 31, 1998.................. 30,477,018 192,849 2,576,276 17,387 182,347 (116,417)
---------- -------- --------- ------- -------- ---------
Comprehensive loss:
Net income..................................
Unrealized gains on investments.............
Currency translation adjustments............
Comprehensive income (loss):..................
Reverse stock split........................... (6,801,860) (43,040)
Issuance of common stock for cash............. 10,000,000 41,695
Debt to equity conversion..................... 19,669,600 82,011
Convertible bonds to equity conversion........ 1,686,425 10,814 8,906
Others........................................ (844)
Collection of receivable from stockholders.... 54,299
---------- -------- --------- ------- -------- ---------
Balance at December 31, 1999.................. 55,031,183 $284,329 2,576,276 $17,387 $190,409 $ (62,118)
========== ======== ========= ======= ======== =========
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME TOTAL
----------- ------------- ---------
<S> <C> <C> <C>
Balance at January 1, 1997.................... $ (58,802) $ (57) $ 200,815
Comprehensive income:
Net income.................................. 41,430 41,430
Unrealized gains (loss) on investments...... (5,000) (5,000)
Currency translation adjustments............ 8,450 8,450
---------
Comprehensive income.......................... 44,880
Net cash advances to stockholders............. (93,623)
Stock dividends...............................
Issuance of common stock...................... 96,723
--------- -------- ---------
Balance at December 31, 1997.................. (17,372) 3,393 248,795
--------- -------- ---------
Comprehensive loss:
Net loss.................................... (847,533) (847,533)
Unrealized gains on investments............. 7,892 7,892
Currency translation adjustments............ (38,352) (38,352)
---------
Comprehensive loss............................ (877,993)
Collection of receivable from stockholders.... 13,392
--------- -------- ---------
Balance at December 31, 1998.................. (864,905) (27,067) (615,806)
--------- -------- ---------
Comprehensive loss:
Net income.................................. 109,865 109,865
Unrealized gains on investments............. (2,639) (2,639)
Currency translation adjustments............ 13,949 13,949
---------
Comprehensive income (loss):.................. 121,175
Reverse stock split........................... 43,040 --
Issuance of common stock for cash............. 41,695
Debt to equity conversion..................... 82,011
Convertible bonds to equity conversion........ 19,720
Others........................................ (844)
Collection of receivable from stockholders.... 54,299
--------- -------- ---------
Balance at December 31, 1999.................. $(712,000) $(15,757) $(297,750)
========= ======== =========
Unrealized
losses in
investments $ (911)
Cumulative
translation
adjustment (14,846)
--------
$(15,757)
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
<PAGE> 125
ANAM SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THOUSANDS OF U.S. DOLLARS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 109,865 $(847,533) $ 41,430
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 271,513 291,915 138,627
Provision for severance benefits.......................... 10,472 35,228 23,263
Losses (gains) on foreign currency translation, net....... 33,198 142,605 (159,897)
Losses (gains) on sale of investments, net................ 601 (23,082) (4,972)
Impairment of long-lived assets........................... -- 273,937 15,942
Impairment loss on loan to affiliates..................... 22,646 122,188 --
Guarantee obligation loss................................. -- 97,344 --
Loss on investment in equity method investees, net........ 31,787 66,792 18,137
Gains on disposal of K4 and other......................... (180,453)
Other, net................................................ 10,830 32,841 28,492
Change in operating assets and liabilities, net of
deconsolidation effects...................................
Decrease (increase) in trade accounts and notes
receivable.............................................. 24,825 13,564 9,750
Decrease (increase) in other accounts receivable.......... (25,844) 32,763 1,437
Decrease in contracts receivable.......................... -- -- 15,461
Decrease (increase) in due from affiliates................ (43,339) (7,764) (51,939)
Decrease (increase) in inventories........................ (1,009) (31,951) 72,412
Decrease (increase) in other current assets............... 14,471 39,412 (35,167)
Increase (decrease) in trade accounts and notes payable... 16,202 (9,597) 7,592
Increase (decrease) in other accounts payable............. (1,123) 43,869 80
Increase (decrease) in forward contract credit............ (20,943) (79,329) 104,968
Increase (decrease) in other current liabilities.......... (13,922) (2,495) (7,974)
Increase in deferred tax asset............................ (53,212) -- --
Payments of severance benefits............................ (6,492) (6,099) (6,755)
--------- --------- ---------
Net cash provided by operating activities............... $ 200,073 $ 184,608 $ 210,887
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in bank deposits...................... $ (99,418) $ 9,403 $ 235,711
Decrease (increase) in short term loans................... 7,788 (227,641) (15,228)
Acquisition of property, plant and equipment.............. (183,650) (140,290) (511,620)
Proceeds from sale of property, plant and equipment
(including K4).......................................... 624,791 1,712 18,740
Acquisition of investments................................ (1,247) (8,937) (26,959)
Disposal of investment including AAPI..................... 41,425 39,698 6,353
Decrease (increase) in non-current bank deposits.......... (204) 18,034 2,179
Decrease (increase) in restricted cash.................... (41,132) 85,647 (66,955)
Decrease (increase) in long-term receivables.............. 1,485 171,979 (97,522)
Decrease (increase) in other assets....................... 128 (11,173) 20,919
Deconsolidation of subsidiaries........................... (6,279) (1,005) --
--------- --------- ---------
Net cash (used in) provided by investing activities..... 343,687 (62,573) (434,382)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings.............. (47,286) (91,884) 286,938
Repayment of current maturities of long-term debt......... (10,545) (48,206) (91,391)
Borrowing of long-term debt............................... 48,054 10,572 312,243
Repayment of long-term debt............................... (484,448) (50,175) (1,054)
Repayment of long-term obligations under capital leases... (61,597) (39,848) (2,556)
Increase (decrease) in other long-term liabilities........ 117 1,883 15,507
Dividends paid............................................ -- -- --
Decrease (increase) in receivable from stockholders....... 54,299 13,392 (93,623)
Increase in capital....................................... 41,695 -- 96,723
--------- --------- ---------
Net cash (used in) provided by financing activities..... (459,711) (204,266) 522,787
--------- --------- ---------
Effect of exchange rate changes on cash..................... (43,032) 59,935 (316,111)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 41,017 (22,296) (16,819)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 15,452 37,748 54,567
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 56,469 $ 15,452 $ 37,748
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 197,716 $ 221,900 $ 133,157
========= ========= =========
Income taxes............................................ $ 15,658 $ 2,812 $ 5,322
========= ========= =========
Property, plant and equipments acquired through capital
leases.................................................. $ 1,116 $ 54,748 $ 505,897
========= ========= =========
Capital increase through debt conversion.................. $ 101,731 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE> 126
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
1. ORGANIZATION AND NATURE OF BUSINESS:
The Controlling Company
Anam Semiconductor, Inc. (hereinafter referred to as "Anam" or "ASI"),
incorporated in the Republic of Korea in August 1956, is a provider of
semiconductor packaging and test services. In 1998, Anam commenced operations to
fabricate and sell non-memory semiconductor chips ("wafer fabrication").
Anam changed its name from Anam Industrial Co., Ltd. to Anam Semiconductor,
Inc. on March 20, 1998.
Anam's semiconductor packaging and test facilities operate primarily for
Amkor Technology, Inc. ("Amkor"), a United States affiliate. Anam packages and
tests integrated circuits from wafers provided by Amkor (the "Packaging
Service") pursuant to supply agreements (the "Supply Agreements") with Amkor. In
addition, pursuant to the manufacturing and purchasing agreements with Texas
Instruments Incorporated ("TI"), a United States corporation, further discussed
in Note 3, Anam fabricates wafers, which are also sold to Amkor.
The businesses of Anam and Amkor have been inter-related for many years and
are under the common ownership by Mr. H.S. Kim and his family (the "Kim
Family"). Mr. H.S. Kim currently serves as Anam's honorary chairman and his
eldest son, Mr. James Kim, serves as Amkor's chairman and chief executive
officer. Mr. James Kim also serves as a director of Anam and as the chairman of
the Anam Group, consisting principally of companies in the Republic of Korea in
the electronics and construction industries. As of December 31, 1999, Mr. H.S.
Kim and his family owned approximately 6.9% of the outstanding common stock of
Anam and 58.8% of the outstanding common stock of Amkor (See Note 5).
Consolidated Subsidiaries and Significant Equity Investees:
(A) Major subsidiaries and significant equity investees included in the
accompanying financial statements by either consolidation or equity method of
accounting at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
SUBSIDIARIES CAPITAL STOCK
------------ ------------------------- DIRECT AND
MILLIONS OF THOUSAND OF INDIRECT METHOD OF
WON US DOLLARS OWNERSHIP(%) ACCOUNTING
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Anam Instruments*............................. W12,746 $16,823 21.57 Equity
Anam Construction**........................... 25,898 32,563 49.00 Equity
Anam Environment**............................ 1,200 1,729 50.83 Equity
Anam USA...................................... 0.08 0.1 100.00 Consolidation
Acqutek (formerly, Anam S&T).................. 24,062 27,248 17.55 Equity
Anam Finance.................................. 39,000 45,899 44.60 Equity
Anam Telecom.................................. 47,958 57,135 29.51 Equity
</TABLE>
- - - - - -------------------------
* This entity was consolidated in 1998 and 1997 but deconsolidated in 1999.
** These entities were consolidated in 1997 but deconsolidated in 1999 and 1998.
(B) A summary of the subsidiaries referred to above is as follows:
Anam Instruments Co., Ltd. (Anam Instruments)
Anam Instruments was established under the name of Handeung Co., Ltd. in
February, 1989 to manufacture and sell electronic parts and equipment. In
December 1990, it merged with Anam Horologe Co., Ltd., an affiliate engaged in
manufacturing and selling watches. Concurrently, the company changed
F-61
<PAGE> 127
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
its name to Anam Instruments Co., Ltd. In October 1994, Anam Instruments
obtained the optical products and semiconductor machinery business of Anam.
As of December 31, 1999, its capital stock is W12,746 million ($16,823), of
which Anam Semiconductor owned 21.57%.
Anam Engineering and Construction Co., Ltd. (Anam Construction)
Anam Construction was incorporated in March 1983. Anam Construction is a
construction contractor for industrial and commercial buildings and is engaged
in the construction of condominiums primarily in the Republic of Korea. Its
major customers are affiliated companies in the Anam Group. As of December 31,
1999, Anam Construction has outstanding capital stock of W25,898 million
($32,563), of which Anam owned 49.00%. Anam Construction became insolvent and
filed an application for corporate reorganization under the Korean Corporate
Reorganization Act on October 24, 1998. It is currently under the control of a
receiver appointed by the Court. The court issued an order for preservation of
assets on October 30, 1998 and the commencement of the reorganization proceeding
was made by the court on April 23, 1999. A draft reorganization plan is
scheduled for submission at the statutory meeting of interested parties.
Approval of the draft reorganization plan by the creditors is expected to be
made in March 2000. As a result of this filing, Anam lost control over Anam
Construction. Anam deconsolidated this entity and accounted for it as an
investment under the equity method as of and for the years ended December 31
1999 and 1998.
Anam Construction holds investments in Anam Environmental Industry Co.,
Ltd. and Anam Thai Engineering & Construction Co., Ltd.
Anam Environmental Industry Co., Ltd. (Anam Environment)
Anam Environment was incorporated under the name of Yu-Bong Industry Co.,
Ltd. in February 1986 and is engaged in treatment of industrial scrap in the
Republic of Korea. Anam holds interest in Anam Environment through Anam
Construction. As of December 31, 1999, Anam Environment's capital stock is
W1,200 million ($1,729), of which Anam Construction owned 50.83%. As a
subsidiary of Anam Construction, this entity was also deconsolidated by Anam and
accounted for by the equity method as of and for the years ended December 31,
1999 and 1998.
Anam USA, Inc. (Anam USA)
Anam USA was incorporated in Philadelphia, United States in September 1994,
to sell semiconductor products of Anam. As of December 31, 1999, its capital
stock is US$0.1 of which Anam owned 100%.
Acqutek Semiconductor & Technology Co., Ltd. (Acqutek)
Acqutek was incorporated in January 1979. It is engaged in designing
semiconductors, manufacturing and selling semiconductor equipment and the Value
Added Network business. In September 1991, Acqutek was registered as a foreign
invested company under the Foreign Capital Inducement Law of the Republic of
Korea. The company changed its name from Anam S&T Co., Ltd. to Acqutek Semi-
conductor & Technology Co., Ltd. in November 1999.
As of December 31, 1999 its capital stock amounted to W24,062 million
($27,248), of which Anam owned 17.55%.
F-62
<PAGE> 128
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Hanmi-Anam Financial Service Co., Ltd. (Anam Finance)
Anam Finance was established in May 1994 and is engaged in installment
financing and factoring. As of December 31, 1999 its capital stock amounted to
W39,000 million ($45,899), of which Anam and its subsidiaries owned 39.00% and
5.60%, respectively.
Anam Telecommunications Co., Ltd. (Anam Telecom)
Anam Telecom was established in August 1997, and is engaged in the
telecommunication business. As of December 31, 1999, its capital stock amounted
to W47,958 million ($57,135), of which Anam owned 29.51%.
(C) Change in Entities included in Consolidation :
As of December 31, 1999, Anam owned 21.57% of Anam Instrument. Anam's
ownership percentage decreased from 67.24% as of December 31, 1998 due to sales
of Anam Instrument shares. Accordingly Anam accounted for it under the equity
method of accounting during 1999, effective January 1, 1999.
During 1999 Anam has sold its whole interest in Anam/Amkor Precision
Machine Company (Philippines) Inc. (AAPMCI) to Amkor Technology Inc.
Both Anam Instrument and AAPMCI were consolidated in the accompanying
financial statements for 1998 and 1997.
As of December 31, 1999 and 1998, Anam owned 49.00% of Anam Construction.
Anam's ownership percentage decreased from 56.15% as of December 31, 1997 due to
Anam Instrument's sale of its 10.64% interest in Anam Construction to Anam
Electronics Co., Ltd., an affiliated company through common ownership by the Kim
family, on September 29, 1998. Furthermore, Anam Construction filed for
corporate reorganization under the Korean Corporate Reorganization Act on
October 24, 1998. As part of the reorganization, Anam Construction was placed
under the control of a receiver. Because management of Anam no longer exercises
control over Anam Construction, Anam deconsolidated its investment in Anam
Construction, including its consolidated subsidiary, Anam Environment, and
accounted for it under the equity method of accounting during 1999 and 1998,
effective January 1, 1998.
Prior to January 1, 1998, due to continuous net loss incurred by Anam
Construction, the accumulated net losses from Anam Construction included in the
consolidated financial statements had exceeded Anam's original investment. Anam
continued to record such excess net loss due to the existence of a parent-
subsidiary relationship. At January 1, 1998, when Anam deconsolidated Anam
Construction, accumulated losses in excess of original investment were
reclassified as part of the allowance for Anam's loan to Anam Construction.
After the deconsolidation, Anam continued recognition of its share of Anam
Construction's losses and such losses were recorded as part of the allowance for
Anam's loan to Anam Construction. In addition, due to the significant financial
difficulty experienced by Anam Construction in 1999 and 1998, Anam recorded
additional allowance for its loan to Anam Construction to reduce the net loan
balance to zero.
Both Anam Construction and Anam Environment were consolidated in the
accompanying financial statements for 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES:
The consolidated financial statements are presented in accordance with
generally accepted accounting principles of the United States of America ("U.S.
GAAP"). Significant accounting policies followed by
F-63
<PAGE> 129
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Anam and its consolidated subsidiaries (hereinafter collectively referred to as
the "Company") in the preparation of the accompanying consolidated financial
statements are summarized below.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Anam and its greater than 50% owned subsidiaries. The interest of other
stockholders in these subsidiaries is reflected as minority interests. The
equity method of accounting is used when Anam has both a 20% to 50% equity
interest and the ability to exercise significant influence over the investee.
Investments in companies owned less than 20% are carried at cost. All
significant intercompany transactions and balances with consolidated
subsidiaries have been eliminated in consolidation.
Unrealized profit arising from sales by the controlling company to the
consolidated subsidiaries or equity-method investees is fully eliminated and
charged to the interest of the controlling company. Unrealized profit, arising
from sales by the consolidated subsidiaries or equity-method investees to the
controlling company or sales between consolidated subsidiaries or equity-method
investees, is eliminated to the extent of the investor ownership interest.
Use of Estimates --
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The
most significant estimates and assumptions relate to the allowance for
uncollectable accounts receivables, guaranty obligations, depreciation and
impairment of long-lived assets. Actual results could differ from those
estimates and may affect amounts reported in future periods. Management believes
that the estimates are reasonable.
Cash and Cash Equivalents --
Cash and cash equivalents include cash on hand and all highly liquid
investments with original maturities of three months or less at purchase.
Restricted Cash --
Restricted cash consists of current and non-current bank deposits, which
are pledged in connection with various short-term borrowings (Note 14) and
long-term debt (Note 16). Restricted cash at December 31, 1999 and 1998 was
$41,159 and $2,351, respectively.
At December 31, 1998, $2,286 of restricted cash represent deposits made
under group severance insurance plans, the withdrawal of which is restricted to
the actual payment of severance benefits. The Company classified those
restricted bank deposits with remaining maturities between three months to one
year at the balance sheet date as current and all other restricted bank deposits
as non-current.
Bank Deposits --
Bank deposits consist of time deposits with banks and other financial
institutions which have remaining maturities of more than three months at
purchase. The Company classified these bank deposits with remaining maturities
of one year or less at the balance sheet date as current and those with
remaining maturities of more than one year as non-current.
F-64
<PAGE> 130
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Available For Sale Securities --
The Company accounts for those investments included in "Available for sale
securities" under the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115). This statement requires investment securities to be divided into one
of three categories: held-to maturity, available for sale and trading.
The Company currently classifies all investments in debt and equity
securities as available for sale securities. Individual securities with
remaining contractual maturity of less than one year at the balance sheet date
are included in current assets, and others are included as non-current assets.
All available for sale securities are recorded at fair value. Unrealized holding
gains and losses on securities available for sale are reported as a separate
component of stockholders' equity, net of related deferred taxes. Realized gains
and losses on the sale of securities available for sale are determined using the
specific identification method and are charged to current operations.
Allowance for Doubtful Accounts --
The Company provides an allowance for doubtful accounts receivable based on
the aggregate estimated collectibility of accounts receivable.
Inventories --
Inventories are stated at the lower of cost or market, with cost being
determined by the weighted average method, except for materials in-transit, for
which cost is determined using the specific identification method.
Property, Plant and Equipment --
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as set forth below:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Buildings............................................... 25 years
Structures.............................................. 2 - 25 years
Machinery, equipment and vehicles....................... 2 - 6 years
Tools................................................... 3 - 5 years
Furniture and fixtures.................................. 3 - 10 years
</TABLE>
Routine maintenance and repairs are charged to expense as incurred.
Expenditures which enhance the value or materially extend the useful lives of
the related assets are capitalized.
Interest expense incurred during the construction period of assets on funds
borrowed to finance such construction is capitalized. Capitalized interest costs
at December 31, 1999 and 1998 approximate $4,502 and $14,554, respectively.
The Korean government provides subsidies to the Company for purchases of
certain buildings and machinery. The Company recorded such purchases at full
acquisition costs and the related subsidies as a contra-asset account. The
contra-asset account is reduced using the straight-line method over the
estimated useful lives of the related assets.
F-65
<PAGE> 131
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Lease Transactions --
The Company accounts for lease transactions as capital leases, depending on
the terms of the underlying lease agreements. Assets leased under capital leases
are recorded at cost as property, plant and equipment and depreciated using the
straight-line method over their estimated useful lives. In addition, aggregate
lease payments are recorded as obligations under capital leases, net of accrued
interest as determined by total lease payments in excess of the cost of the
leased machinery and equipment. Accrued interest is amortized over the lease
period using the effective interest rate method.
Discounts on Debentures --
Discounts on debentures are amortized using the effective interest rate
method over the repayment period of the debentures. The resulting amortization
cost is included in interest expense.
Accrued Severance Benefits --
Employees and directors with one year or more of service are entitled to
receive a lump-sum payment upon termination of their employment with the
Company, based on their length of service and rate of pay at the time of
termination. Accrued severance benefits are estimated assuming all eligible
employees were to terminate their employment at the balance sheet date. The
annual severance benefits expense charged to operations is calculated based on
the net change in the accrued severance benefits payable at the balance sheet
date, plus the actual payments made during the year.
The contributions to national pension fund made under the National Pension
Plan are deducted from accrued severance benefit liabilities. Contributed
amounts are refunded from the National Pension Plan to employees on their
retirement.
Revenue Recognition (non-construction business) --
Substantially all revenues are recognized upon shipment of goods to
customers. The Company does not take ownership of customer-supplied
semiconductors. Title remain with the customer for these materials at all times.
Accordingly, the cost of the customer-supplied materials is not included in the
consolidated financial statements. Risk of loss for the Company's packaging
costs passes upon completion of the packaging process and shipment to the
customer. In regards to wafer fabrication services, the Company recognizes
revenue upon shipment of completed wafers to its customers.
Revenue Recognition (construction business) --
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage-of-completion method, measured by the
percentage of costs incurred to date to estimated total costs for each contract.
This method is used because management considers expended costs to be the best
available measure of progress on these contracts. A contract is considered
complete when all costs except insignificant items have been incurred and the
installation is operating according to specifications or has been accepted by
the customer. Revenues from sale of constructed condominiums and some
construction contracts are recognized on the completion method. This method is
used because of unreliable estimates that cause forecasts to be doubtful.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and
F-66
<PAGE> 132
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
are recognized in the period in which the revisions are determined. An amount
equal to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
Discontinued Operations --
The operating results of the packaging and testing business, including K4
which was sold in May 1999 (see Note 30), are shown separately as discontinued
operations in the accompanying income statement due to approved sale of the
remaining packaging and testing business in February 2000 (see Note 31). The
results of the discontinued business do not reflect any interest expense or
indirect expenses allocated by the Company. The income statements for 1998 and
1997 have been restated and operating results of the packaging business are also
shown separately.
Research and Development Costs --
Research and development costs are expensed as incurred.
Advertising Costs --
Advertising costs are charged to current period operations when incurred.
Advertising expenses for 1999, 1998 and 1997 were $236, $946 and $5,510,
respectively.
Income Taxes --
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". SFAS 109 requires the recognition of deferred tax assets and liabilities
created by temporary differences between the financial statement and tax bases
of assets and liabilities. Deferred tax assets and liabilities are computed on
such temporary differences, including available net operating loss carryforwards
("NOL") and tax credits, by applying enacted statutory tax rates applicable to
the years when such differences are expected to be reversed. A valuation
allowance is provided on deferred tax assets to the extent that it is more
likely than not that such deferred tax assets will not be realized. Total income
tax provision includes current tax expenses under applicable tax regulations and
the change in the balance of deferred tax assets and liabilities.
Investment tax credits are accounted for by the flow-through method whereby
they reduce income taxes in the period the assets giving rise to such credits
are placed in service. To the extent such credits are not currently utilized,
deferred tax assets, subject to considerations about the need for a valuation
allowance, are recognized for the carryforward amount.
Earnings Per Share --
In February 1997, the Financial Accounting Standard Board (the "FASB")
issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128). This statement specifies the computation, presentation and
disclosure requirements for earnings per share. The Company has calculated
earnings per share based on the basic and diluted per share calculation (see
Note 24). Basic EPS is computed using the weighted average number of common
shares outstanding for the period while diluted EPS is computed assuming
conversion of all dilutive securities, such as convertible bonds. Both
computations reflect all stock dividends and the June 17, 1999 reverse stock
split in the number of shares.
F-67
<PAGE> 133
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Remeasurement into US Dollar --
The U.S. dollar is the functional currency for ASI because the dollar is
the currency of reference for market pricing in the worldwide semiconductor
industry and revenue from external sales in U.S. dollars exceeds revenues in any
other currency. The functional currency used by ASI's subsidiaries and equity
investees, with the exception of Anam USA, is the Korean Won. The functional
currency used by Anam USA is the U.S. dollar.
For financial statement purposes, assets and liabilities of ASI are
remeasured into U.S. dollars from books and records kept in Korean Won using the
monetary/non-monetary method. Monetary assets and liabilities, such as cash,
receivables, borrowings and other payables, are translated to U.S. dollars at
end-of-period exchange rates. Non-monetary assets and liabilities, such as
inventory, investments and fixed assets, are translated using historical
exchange rates. Revenues and expenses are translated using average exchange
rates for the period, except for items related to non-monetary assets and
liabilities, which are translated using historical exchange rates. All
translation gains and losses are included in the determination of income for the
period in which exchange rates change.
The financial position and results of operations of the Company's
subsidiaries and equity-method investees except Anam USA are measured using
local currency as functional currency. The financial statements of these
subsidiaries and equity-method investees are translated to U.S. dollars using
the current exchange rate method. All the assets and liabilities are translated
to U.S. dollars at end-of-period exchange rates. Capital accounts are translated
using historical exchange rates. Revenues and expenses are translated using
average exchange rates. Translation adjustments arising from differences in
exchange rates from period to period are included in the cumulative translation
adjustment account in stockholders' equity.
The end of period exchange rates and average exchange rates for the period
used to remeasure the assets, liabilities, revenues and expenses in accordance
with the translation method stated above in 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
KOREAN WON TO U.S. DOLLAR
------------------------------------------------------
END OF PERIOD EXCHANGE RATES AVERAGE EXCHANGE RATES
---------------------------- ----------------------
<S> <C> <C>
1999............................ W1,134.50 = US$1 W1,189.30 = US$1
1998............................ W1,195.80 = US$1 W1,398.88 = US$1
1997............................ W1,695.80 = US$1 W 951.11 = US$1
</TABLE>
Dividends --
In the event that cash dividends are declared in the future, such dividends
will be paid in Korean Won. The Company does not intend to pay cash dividends in
the foreseeable future.
Derivative Financial Instruments --
The Company enters into foreign currency exchange contracts, including
forward and swap contracts, to manage the exposure to changes in currency
exchange rates, principally the exchange rate between Korean Won and U.S.
Dollar. The use of foreign currency forward contracts allows Anam to reduce its
exposure to the risk that the eventual Korean Won cash outflows resulting from
facility operating expenses, capital expenditures, local supplier purchases and
debt service will be adversely affected by changes in exchange rates. These
transactions do not meet the requirements for hedge accounting for financial
statement purpose. Therefore the resulting realized and unrealized gains or
losses, measured by quoted market prices, are recognized in income as the
exchange rates change. These gains and losses are included
F-68
<PAGE> 134
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
in the foreign currency gains (losses) account. The net unrealized gains
(losses) on these contracts are accrued in the balance sheet account, forward
contract debit (credit).
The Company enters into interest rate swap transactions to manage its
exposure to the fluctuation of interest rates. These transactions are accounted
for on an accrual basis, in which cash settlement receivable or payable is
recorded as an adjustment to interest income or expense.
In regards to the impact of derivative financial instruments on liquidity
and cash flow, no significant extra cash requirement is expected. Furthermore,
the Company enters into these derivative contracts with major financial
institutions and continues to monitor the credit worthiness of these
institutions. Management expects full performance from its counterparties under
these contracts.
Allowance for credit losses on loans receivable --
The Company accounted for allowance for credit losses in accordance with
SFAS 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). Under
SFAS 114, a loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired loans is
generally based on the present value of expected future cash flows discounted at
the historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the fair value of the collateral.
When a loan is classified as impaired, no interest income is recognized.
Any subsequent cash payment is applied to reduce the principal.
Impairment of Long-Lived Assets --
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." In accordance with
this standard, management periodically evaluates the carrying value of
long-lived assets, including intangibles, when events and circumstances warrant
such a review. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flows are less than the asset's carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived assets. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
Concentration of Credit Risk --
Financial instruments, which potentially expose the Company to a
concentration of credit risk, consist primarily of cash and cash equivalents,
bank deposits, restricted cash, trade receivables, loans to affiliates and
financial instruments with off-balance sheet risks.
It is the Company's practice to place its cash and cash equivalents, bank
deposits and restricted cash in various financial institutions located in Korea
and the United States (U.S.) so as to limit the amount of credit exposure to any
one financial institution. Deposits in U.S. banks may exceed the amount of
insurance provided on such deposits by the Federal Deposit Insurance Corporation
(the "FDIC"). The Company controls the credit risks associated with cash and
cash equivalents, bank deposits and restricted cash by monitoring the financial
standing of the related banks and financial institutions.
Anam performs and sells its Packaging Services exclusively to Amkor
pursuant to the Supply Agreements. In 1999, 1998 and 1997, sales to Amkor
accounted for substantially all of Anam's revenues
F-69
<PAGE> 135
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
and accounts receivables. Any reduction in purchases by Amkor could have an
adverse impact on Anam's financial position, results of operations and cash
flows.
The loans to affiliates are uncollateralized and collection is subject to
the operations of those affiliates. Management believes they have provided
adequate allowance against these loans to reduce them to their net realizeable
value.
The Company controls the credit risks associated with financial instruments
through credit approvals, investment limits and centralized monitoring
procedures but does not normally require collateral or other security from the
counterparties. If the counterparty fails to honor certain forward or swap
contracts, management believes any loss would be limited to the exchange rate or
interest rate differential from the time the contract was made and the
settlement date. The Company conducts its derivative transactions with major
financial institutions and does not anticipate non-performance by counterparties
which could have a significant impact on its financial position or results of
operations.
Risks and Uncertainties --
The Company's business involves certain risks and uncertainties. Factors
that could affect the Company's future operating results and the carrying value
of assets such as property, plant and equipment include, but are not limited to,
dependence on a cyclical semiconductor industry that is characterized by rapid
technological changes, fluctuations in end-user demands, evolving industry
standards, competitive pricing and declines in average selling prices, risks
associated with assets, liabilities and transactions denominated in foreign
currencies, and enforcement of intellectual property rights. Additionally, the
market in which the Company operates is very competitive. Key elements of
competition in the independent semiconductor packaging market include breadth of
packaging offerings, time-to-market, technical competence, design services,
quality, production yields, reliability of customer service and price. A
substantial portion of the Company's revenues is derived from Packaging
Services(See Note 28) provided to Amkor pursuant to the Supply Agreements. Other
risks exist as of December 31, 1999 as described in the Workout Program in Note
5.
Presentation of Unit Currency --
All amounts in the financial statements have been presented in thousands of
U.S. dollars, unless otherwise stated.
Recent Accounting Pronouncements --
In June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes a comprehensive standard
on accounting for derivatives and hedging. It is effective for all fiscal years
beginning after June 15, 1999. The Company has reviewed the provisions of the
SFAS No. 133 and has not yet quantified the impact of adopting SFAS 133.
However, SFAS 133 could increase volatility in earnings.
3. RELATIONSHIP WITH AMKOR:
The businesses of Anam and Amkor have been inter-related for many years by
virtue of the Supply Agreements (See Note 1), common ownership and management,
financial relationships, coordination of product and operating plans, joint
research and development activities and shared intellectual property rights.
At December 31, 1997, Amkor owned 8.1% of the outstanding stock of ASI. On
February 16, 1998, Amkor sold its investment in ASI common stock for $13,863 to
AK Investments, Inc., an affiliate through
F-70
<PAGE> 136
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
common ownership of Kim Family, based on the market value of ASI shares on the
Korean Stock Exchange. In accordance with the terms and condition of Workout
Program discussed in Note 5, on October 29, 1999, Amkor made $41,695 of capital
contribution to ASI in exchange for equity shares of ASI at par value. As a
result, ASI issued 10,000,000 shares of common stock to Amkor.
At December 31, 1998, ASI owned 100% of the outstanding stock of Anam/Amkor
Precision Machine Company (Philippines), Inc. ("AAPMCI"). On June 16, 1999, ASI
sold its whole investment in AAPMCI common stock for $3,800 to Amkor and $3,217
of realized gain from the sale was recognized.
At December 31, 1997, ASI owned 40% of the outstanding stock of Amkor/Anam
Philipinas, Inc. ("AAPI"). On May 22, 1998, ASI sold its investment in AAPI
common stock for $33,750 to Amkor and $22,329 of realized gain from the sale was
recognized.
In 1999, 1998 and 1997, approximately 93.3%, 91.5% and 77.1%, respectively,
of Anam's revenues was derived from sales to Amkor. By the terms of a
long-standing agreement, Amkor has been responsible for marketing and selling
ASI's semiconductor packaging and test services, except to customers in Korea
and Japan to whom ASI has historically sold such services directly. Since 1998,
Amkor became responsible for marketing and selling ASI's semiconductor packaging
and test services to the majority of ASI's customers in Japan. ASI has worked
closely with Amkor in developing new technologies and products.
Effective January 1, 1998, ASI entered into the five-year Supply Agreements
with Amkor giving Amkor the first right to market and sell substantially all of
ASI's packaging and test services and the exclusive right to market and sell all
of the wafer output of ASI's new wafer foundry, both of which have negotiable
pricing terms, taking into consideration 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
interest of Anam and Amkor. Amkor, in return, is responsible for sales of
Packaging Services and is obligated to actively and diligently market the
Packaging Services to potential and existing customers.
Pursuant to arrangements between Anam and Amkor, all sales from Anam to
Amkor are made through Anam USA ("AUSA"). Prior to Amkor's initial public
offering in 1998, Amkor obtained a significant portion of its financing from
AUSA. AUSA obtained for the benefit of Amkor a continuous series of short-term
financing arrangements based on guarantees provided by ASI. Pursuant to the
Supply Agreements, Amkor reimburses AUSA for the financing costs incurred by it
in connection with trade financing provided to Amkor. Amkor no longer depends on
such financing arrangement as of December 31, 1998.
These agreements are cancelable by either party upon five years prior
written notice at any time after the fifth anniversary of the effective date.
The Company's business, financial condition and operating results have been and
will continue to be significantly dependent on the ability of Amkor to
effectively market ASI's services. The termination of ASI's relationship with
Amkor for any reason, or any material adverse change in Amkor's business could
have a material adverse effect on ASI's business, financial condition and
results of operations.
In January 1998, the Company and Amkor entered into a manufacturing and
purchasing agreement with Texas Instruments Incorporated ("TI") pursuant to
which the Company will manufacture and Amkor will market wafer fabrication
services to TI. Under the terms of the agreement, TI has agreed to purchase at
least 40% of the foundry's capacity, and under certain circumstances has the
right to purchase up to 70% of the foundry's capacity. In addition, the Company
has a license to use TI technology only to provide wafer fabrication services to
TI.
F-71
<PAGE> 137
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
The agreement ends on December 31, 2007, but may be terminated earlier
upon, among other things, the consent of the Company, TI and Amkor, a material
breach by the Company, TI or Amkor, the failure of the Company to protect TI's
intellectual property and a change of control, bankruptcy, liquidation or
dissolution of the Company. The agreement may also be terminated by the Company
or TI on two years' notice if they cannot successfully negotiate an agreement to
govern the Company's use of TI's next-generation foundry technology prior to
June 30, 2000. During any such two-year notice period, TI will only be obligated
to purchase a minimum of 20% of the foundry's capacity.
4. UNSTABLE ECONOMIC ENVIRONMENT:
In connection with the Asian financial crisis which began in 1997, the
Korean economy as well as other economies in the Asia Pacific region experienced
economic contractions, a reduction in the availability of credit, increased
interest rates, increased inflation, negative fluctuations in currency exchange
rates, increased numbers of bankruptcies, increased unemployment and labor
unrest. Such conditions had a significant adverse effect on the operations of
the Company and other companies in Korea and in the Asia Pacific region.
Recently, economic conditions in the Republic of Korea have improved as
evidenced by increased trade surplus, increases in foreign exchange reserves,
record levels of foreign investment and economic growth, lower inflation and
interest rates and stabilized foreign exchange rates. Notwithstanding the
current recovery, significant uncertainties still exist related to the economy
in Korea and in the Asia Pacific region.
5. WORKOUT PROGRAM:
The Company has traditionally operated with a significant amount of debt
relative to its equity and had a significant working capital deficit at December
31, 1997. In addition, the Company has guaranteed certain debt obligations of
equity investees and affiliated companies, including Anam Construction, Anam
Environment and Anam Electronics Co., Ltd., ("Anam Electronics"), which face
serious financial difficulties.
In response to this situation, management has undertaken certain measures
it considers appropriate, including: (1) disposing of the Kwangju factory (see
Note 30); (2) placing Anam Construction into corporate reorganization under the
Korean Corporate Reorganization Act (see Note 1); and (3) enlisting, on October
23, 1998 ASI into the "Workout Program", a financial restructuring program
supervised by the Korean Financial Supervisory Commission ("FSC"). The Workout
Program is the result of an accord among Korean financial institutions to assist
in the restructuring of Korean business enterprises. This process involves
negotiations between the companies and the creditors committee represented by
banks and other financial institutions providing financing to ASI and does not
involve the judicial system. The Workout Program also allows ASI to resume its
operations uninterrupted and does not impact debts outstanding with trade
creditors. Anam Electronics and Anam Environment also applied for the Workout
Program in October 1998.
On February 23, 1999, the following basic conditions and terms of ASI's
Workout Program were agreed to and approved by its creditors committee: (1)
five-year extension of the loan and capital leases repayment schedules; (2)
reduction of bank loan interest rates to Korean prime rate; (3) conversion of
certain outstanding bank loans of ASI to equity shares and convertible bonds
approximating $102,275 and $90,400, respectively; and (4) five-year suspension
of creditors' right to demand performance on loan guarantees made by Anam on
behalf of its affiliates. In order for the initial conversion of debt to take
place in accordance with the terms of the Workout, ASI will have to undergo a
series of corporate actions, including a reverse stock split, to bring the fair
market value of its equity shares to a price at least equal to the par value of
such shares. The conversion of ASI debt by the creditor financial institutions
would
F-72
<PAGE> 138
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
coincide with each installment of Amkor's equity investment in ASI as described
below. The workout contained provision for the entitlement of the creditor
financial institutions to vote the ASI shares owned by Mr. James Kim and his
family. The Company did not recognize any gain or loss as a result of the
Workout Program.
In addition to the basic restructuring terms as stated above, the approved
Workout Program also requires Mr. James Kim, the chairman of the Anam Group or
Amkor, to make capital contributions to the Company totaling $150,000 over the
next four years in exchange for equity shares of the Company at par value.
On May 13, 1999, ASI's Workout Program became effective upon signing of a
Memorandum of Understanding, which document detailed conditions and terms of
ASI's Workout Program, between ASI and the creditors committee.
The creditor financial institutions have the right to terminate or modify
the Workout if Anam does not fulfill the terms of the Workout, including meeting
certain financial targets. In addition, the creditor financial institutions can
modify the terms of the Workout upon agreement of creditor financial
institutions holding at least 75% of the debt restructured under the Workout. If
the creditor financial institutions subsequently terminate the Workout, the
creditor financial institutions could reinstate and enforce the original terms
of Anam's debt, including accelerating Anam's obligations and pursuing Anam's
guarantees of its affiliates' debt. If this were to occur, Anam's businesses
would be harmed.
There can be no assurance that Anam will be able to satisfy the terms of
the Workout Agreement. Any inability of Anam to comply with the terms of the
Workout Agreement, generate cash flow from operations sufficient to fund its
capital expenditures and other working capital and liquidity requirements could
have a material adverse effect on Anam's ability to continue to provide
services.
Anam Electronics' application for Workout Program was not accepted by the
creditors committee. As a result, on March 18, 1999, Anam Electronics filed an
application for corporate reorganization under the Korean Corporate
Reorganization Act. The reorganization plan was completed and approved by the
district court on February 7, 2000. On the other hand, Anam Environment's
application for Workout was accepted by its creditors committee on February 23,
1999. The probable outcome of these events was taken into consideration by the
Company in estimating its liability on guarantees on the debts of its equity
investees and affiliates.
F-73
<PAGE> 139
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
6. ACCOUNTS AND NOTES RECEIVABLE:
Accounts and notes receivable at December 31, 1999 and 1998 comprise the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Accounts receivable, trade.................................. $ 2,997 $37,211
Notes receivable, trade..................................... 551 16,072
------- -------
3,548 53,283
Allowance for doubtful accounts............................. (132) (3,103)
------- -------
Trade accounts and notes receivable, net.................... $ 3,416 $50,180
======= =======
Accounts receivable from affiliated companies............... $30,128 $14,502
Notes receivable from affiliated companies.................. 181 1,128
------- -------
30,309 15,630
Allowance for doubtful accounts............................. (932) (893)
------- -------
Due from affiliates, net.................................... $29,377 $14,737
======= =======
</TABLE>
7. INVENTORIES :
Inventories at December 31, 1999 and 1998 comprise of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Finished products and merchandise........................... $ 6,639 $21,799
Semi-finished products and work in process.................. 15,562 18,722
Raw materials and supplies.................................. 17,338 18,377
Materials in transit........................................ 2,410 909
------- -------
$41,949 $59,807
======= =======
</TABLE>
8. SHORT-TERM LOANS TO AFFILIATES:
Loans receivable at December 31, 1999 and 1998 comprise of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Loans to affiliated companies
Anam Construction......................................... $ 151,639 $ 144,156
Anam Environment.......................................... 13,486 12,795
Anam Electronics.......................................... 145,987 125,188
Acqutek................................................... 3,877 3,676
Dongan Engineering Co., Ltd............................... 587 892
--------- ---------
315,576 286,707
Loans to employees and directors............................ -- 36
--------- ---------
315,576 286,743
Allowance for credit loss on loans receivable (Note 9)...... (311,112) (272,635)
--------- ---------
$ 4,464 $ 14,108
========= =========
</TABLE>
F-74
<PAGE> 140
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
The loans to affiliated companies and other loans have maturity periods of
less than one year and are uncollateralized.
9. LOAN IMPAIRMENT:
The Company provided loans to several affiliated companies, which currently
face financial difficulties. Consequently, the Company assessed the
collectibility of these loans in accordance with SFAS 114 and determined that
the Company would not be able to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement on
certain loans.
The amount of impaired loans and related allowance for credit loss on loans
receivable are summarized below (see Note 8):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Impaired loans, gross....................................... $311,112 $272,635
Allowance for credit loss on loans receivable............... (311,112) (272,635)
-------- --------
Impaired loans, net......................................... $ -- $ --
======== ========
</TABLE>
For the year ended December 31, 1999 and 1998, the average recorded
investment in impaired loans was approximately $291,874 and $133,626,
respectively.
No interest income was recognized on impaired loans for the year ended
December 31, 1999 and 1998. Had these loans performed in accordance with their
original terms, interest income of $22,684 and $17,927 would have been recorded
in 1999 and 1998, respectively.
The changes in the allowance for credit loss on loans receivable are
summarized below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Beginning balance........................................... $272,635 $ --
Excess loss from investment in Anam Construction carried
over from prior years (Note 1)............................ -- 93,563
Equity in loss of Anam Construction for 1998 (Note 1)....... -- 56,884
Additions charged to operations............................. 22,646 122,188
Effect of changes in exchange rates......................... 15,831 --
-------- --------
Ending balance.............................................. $311,112 $272,635
======== ========
</TABLE>
10. INVESTMENT IN AVAILABLE FOR SALE SECURITIES:
The Company's investment in available for sale securities are summarized
below:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
--------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Bonds issued by government................. $ 3 $-- $ -- $ 3
Bonds issued by local government........... 3 -- -- 3
Equity Securities.......................... 30,557 54 2,489 28,122
------- --- ------ -------
Total............................ $30,563 $54 $2,489 $28,128
======= === ====== =======
</TABLE>
F-75
<PAGE> 141
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
--------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Bonds issued by government................. $ 276 $ -- $ -- $ 276
Bonds issued by local government........... 1 -- -- 1
Equity Securities.......................... 32,004 2,320 592 33,732
------- ------ ---- -------
Total............................ $32,281 $2,320 $592 $34,009
======= ====== ==== =======
</TABLE>
The maturity of the bonds issued by the government and the bonds issued by
local government as of December 31,1999 ranged from less than one year to ten
years.
The gross realized gains from the sale of available for sale securities
during the years ended December 31, 1998 and 1997 were $5,317 and $4,972,
respectively. The gross realized losses from the sale of available for sale
securities in 1999 and 1998 were $891 and $4,564, respectively.
At December 31, 1999 and 1998, equity securities with total carrying amount
of $9,578 and $8,535, respectively, were pledged as collateral for issuing
non-guaranteed debentures and capital lease obligation, respectively (see Notes
13 and 16).
At December 31, 1999, 1998 and 1997, respectively, the net book value of
certain equity investment is below acquisition cost and is not expected to be
recovered in the near future. Accordingly, an impairment loss of $1,523, $244
and $2,477, respectively is included in non-operating expenses for the
other-than-temporary impairment of such investment.
11. INVESTMENTS IN AFFILIATED COMPANIES:
<TABLE>
<CAPTION>
PERCENTAGE OF DECEMBER 31,
OWNERSHIP (%) AT ------------------
DECEMBER 31, 1999 1999 1998
----------------- ------- -------
<S> <C> <C> <C>
Investments in affiliated companies:
By the equity method:
Anam Construction....................................... 49.00 $ -- $ --
Acqutek................................................. 17.55 4,164 7,788
Anam Instruments (1999 only)............................ 21.75 8,954 --
Anam Finance............................................ 39.00 -- --
Anam Telecom............................................ 29.51 4,261 7,987
Anam Japan Inc. and others (*).......................... 29.82 - 100.00 1,171 3,371
------- -------
$18,550 $19,146
======= =======
</TABLE>
- - - - - -------------------------
(*) Certain majority-owned subsidiaries are not consolidated due to
immateriality.
The Company has received dividends of $158 and $26 from investments in
affiliates accounted for by the equity method for the years ended December 31,
1998 and 1997, respectively. These dividends were recorded as a reduction in the
carrying value of the related investments.
F-76
<PAGE> 142
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
12. SUMMARY FINANCIAL DATA ON SIGNIFICANT EQUITY INVESTEES:
Additional information regarding the Company's equity investees is as
below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT NET EQUITY
ASSETS ASSETS LIABILITIES LIABILITIES (DEFICIT)
-------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Anam Construction*............... $145,289 $85,895 $416,648 $65,199 $(250,663)
Anam Instruments................. 82,126 41,413 49,568 24,872 49,099
Acqutek.......................... 35,552 55,275 34,376 33,722 22,729
Anam Finance..................... 32,423 1,167 37,320 98 (3,828)
Anam Telecom..................... 6,502 22,862 2,416 5,996 20,952
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------
GROSS GROSS INCOME (LOSS) FROM NET INCOME
REVENUE PROFIT (LOSS) OPERATIONS (LOSS)
-------- ------------- ------------------ ----------
<S> <C> <C> <C> <C>
Anam Construction*..................... $ 63,621 $(14,766) $(66,991) $(66,991)
Anam Instruments....................... 169,051 26,601 11,135 7,487
Acqutek................................ 57,040 3,646 (7,978) (4,377)
Anam Finance........................... 9,980 (8,323) (8,343) (8,343)
Anam Telecom........................... 1,543 (3,278) (8,220) (8,220)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------------------------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT NET EQUITY
ASSETS ASSETS LIABILITIES LIABILITIES (DEFICIT)
-------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Anam Construction*............... $229,841 $92,041 $431,701 $61,368 $(171,187)
Acqutek.......................... 22,369 55,595 33,874 26,358 17,732
Anam Finance..................... 68,977 40,402 100,629 4,194 4,556
Anam Telecom..................... 14,592 23,863 5,866 7,427 25,162
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
GROSS GROSS INCOME (LOSS) FROM NET INCOME
REVENUE PROFIT (LOSS) OPERATIONS (LOSS)
------- ------------- ------------------ ----------
<S> <C> <C> <C> <C>
Anam Construction*...................... $65,097 $(13,171) $(99,236) $(99,236)
Acqutek................................. 41,108 8,472 10,560 10,560
Anam Finance............................ 10,583 (23,866) (23,923) (23,923)
Anam Telecom............................ 367 (2,954) (3,658) (3,658)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
INCOME (LOSS)
GROSS GROSS FROM CONTINUING NET INCOME
REVENUE PROFIT OPERATIONS (LOSS)
-------- ------- --------------------- ----------
<S> <C> <C> <C> <C>
AAPI........................................... $223,380 $54,297 $(16,594) $(16,594)
Acqutek........................................ 95,403 30,485 (17,963) (17,963)
Anam Finance................................... 18,022 510 391 391
Anam Telecom................................... -- -- (8,186) (8,186)
</TABLE>
- - - - - -------------------------
* Anam Environment's figures are included in Anam Construction.
F-77
<PAGE> 143
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
13. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1999 and 1998 comprise of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Costs
Land...................................................... $ 43,260 $ 113,162
Buildings and structures.................................. 309,315 588,251
Machinery, equipment and vehicles......................... 1,578,736 1,628,360
Tools, furniture and fixtures............................. 55,402 17,443
Construction in progress.................................. -- 38,195
Machinery in transit...................................... 22,558 40,430
---------- ----------
2,009,271 2,425,841
Accumulated depreciation.................................... (968,910) (843,478)
---------- ----------
1,040,361 1,582,363
Governmental subsidies...................................... (2,426) (749)
---------- ----------
Net Property, Plant and Equipment........................... $1,037,935 $1,581,614
========== ==========
</TABLE>
Capital Leases
The Company has various facilities and equipment held under capital lease
agreements.
Capital lease assets included in the above categories are further described
below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Machinery and equipment..................................... $ 870,837 $ 907,644
Accumulated depreciation.................................... (356,140) (218,713)
--------- ---------
Capitalized Leases, net..................................... $ 514,697 $ 688,931
========= =========
</TABLE>
Future minimum lease payments under noncancelable capital leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL
FOR YEARS ENDED DECEMBER 31, LEASES
---------------------------- ---------
<S> <C>
2000........................................................ $ 101,556
2001........................................................ 100,492
2002........................................................ 99,076
2003........................................................ 97,552
2004........................................................ 95,911
Thereafter.................................................. 186,390
---------
Total minimum lease payments................................ 680,977
Less amount representing interest........................... (197,871)
---------
Present value of minimum lease payments under capital
leases.................................................... 483,106
Less: portion due within one year........................... (53,516)
---------
$ 429,590
=========
</TABLE>
F-78
<PAGE> 144
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Pledged Property, Plant and Equipment
A substantial portion of the Company's property, plant and equipment is
pledged as collateral for various loans from banks, up to a maximum amount of
$636,608 and $683,917, at December 31, 1999 and 1998, respectively (see Notes 14
and 16).
Impairment of Property, Plant and Equipment
The Company recognized an impairment loss of $273,937 related to its assets
held in the wafer fabrication factory (the "FAB") in Bucheon City, Republic of
Korea in 1998 in accordance with SFAS 121. The amounts in property, plant and
equipment above reflect the write-off of assets based upon the present value of
expected future cash flows, as summarized below:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Building.................................................... $120,863
Machinery, equipment and vehicles........................... 153,074
--------
Total impairment write-off.................................. $273,937
========
</TABLE>
The FAB commenced operation in February 1998. Based on equipment installed
in FAB, as of December 31, 1998 production levels were below the levels
necessary for the factory to be profitable. Due to the lack of capital available
to the Company, investment in additional equipment for FAB was not planned in
the near future.
In 1999, the Company did not record the restoration of previously
recognized impairment loss in accordance with SFAS 121.
14. SHORT-TERM BORROWINGS:
Short-term borrowings at December 31, 1999 and 1998 comprise of the
following:
<TABLE>
<CAPTION>
ANNUAL INTEREST DECEMBER 31,
RATE (%) AT -------------------
DECEMBER 31, 1999 1999 1998
----------------- ------- --------
<S> <C> <C> <C>
Trade financing................................ N/A $ -- $165,301
General term loans............................. 11.96 69,328 62,214
Others......................................... N/A -- 597
------- --------
$69,328 $228,112
======= ========
</TABLE>
Trade financing of ASI have been converted to long-term debt following
conditions and terms of ASI's Workout Program on February 23, 1999.
The weighted average interest rate on short-term borrowings were 11.96% and
11.36% at December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company provided notes and checks, including 40
blank notes and 28 blank checks, to several banks and financial institutions as
collateral in relation to various borrowings and guarantees of indebtedness.
Certain bank deposits and property, plant, equipment are pledged as collateral
in relation to the above short-term borrowings (see Notes 2 and 13).
F-79
<PAGE> 145
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
15. ACCRUED SEVERANCE BENEFITS:
Accrued severance benefits at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Beginning balance........................................... $73,428 $46,089
Decrease resulting from sales of divisions.................. (9,392) --
Decrease resulting from deconsolidation of affiliates....... (5,223) (1,790)
Provisions.................................................. 10,472 35,228
Severance payments.......................................... (14,717) (6,099)
------- -------
54,568 73,428
Balance of payments remaining with National Pension Fund.... (5,811) (7,701)
------- -------
$48,757 $65,727
======= =======
</TABLE>
The Company has partially funded accrued severance benefits through group
severance insurance plans. At December 31, 1998, the Company maintained $2,286
of group severance insurance deposits, the withdrawal of which is restricted to
the actual payment of severance benefits. The amounts funded under these
insurance plans are included as non-current bank deposits (see Note 2).
F-80
<PAGE> 146
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
16. LONG-TERM BORROWINGS AND INSTALLMENT PAYABLE:
Long-term debt, excluding capital lease obligations, at December 31, 1999
and 1998 comprise the following :
<TABLE>
<CAPTION>
ANNUAL INTEREST CARRYING VALUE AT
RATE (%) AT DECEMBER 31,
DECEMBER 31, ---------------------
1999 1999 1998
--------------- -------- ----------
<S> <C> <C> <C>
Won Currency Loans:
Choheung Bank due 2003............................... 3.00 - 11.50 $305,497 $ 408,021
Korea Development Bank............................... -- -- 77,474
Shinhan Bank due 2003................................ 8.47 - 11.25 41,157 60,329
Korea Exchange Bank.................................. 11.00 - 11.75 88,296 53,353
Hanvit Bank.......................................... 10.00 - 11.00 76,184 75,305
Seoul Bank........................................... 10.00 - 11.00 55,307 34,094
Others............................................... 3.00 - 11.50 64,820 67,934
-------- ----------
631,261 776,510
Less : current portion................................. (819) (1,593)
-------- ----------
630,442 774,917
-------- ----------
U.S. Currency Loans:
Korea Development Bank............................... -- -- 85,850
Seoul Bank........................................... -- -- 24,168
Korea Exchange Bank due 2004......................... Prime rate + 3 10,079 67,249
Shinhan Bank......................................... LIBOR + 3.5 11,502 37,046
Choheung Bank........................................ -- -- 57,563
Others............................................... LIBOR + 6.65 2,875 28,900
-------- ----------
24,456 300,776
Less : current portion................................. -- (2,765)
-------- ----------
24,456 298,011
-------- ----------
Debentures in Won currency:
Guaranteed, payable through 2004..................... 10.00 - 11.00 67,766 104,533
Non-guaranteed, payable through 2004................. 10.00 - 13.38 140,971 85,298
-------- ----------
208,737 189,831
Less: current portion................................ (19,392) --
Discounts on debentures........................... (1,812) (4,361)
-------- ----------
187,533 185,470
-------- ----------
Convertible Bonds (see Note 17):
US Dollar, payable through 2010...................... 0.25 31,193 48,749
-------- ----------
Installment Payable:
Installment Payable in Won currency.................. 2,515 11,941
Less: current portion................................ (719) (9,596)
Discounts on Installment Payable.................. (245) --
-------- ----------
1,551 2,345
-------- ----------
Total long-term debt......................... $875,175 $1,309,492
======== ==========
</TABLE>
F-81
<PAGE> 147
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
See Notes 7, 12 and 14 for the related collateral arrangements for the
Company's long-term debt. In relation to guaranteed debentures and convertible
bonds, the Company pays guarantee fees at 0.25% to 0.5% per annum. In addition,
the repayment of a substantial portion of long-term debt is guaranteed by
certain affiliated companies.
Certain debentures are guaranteed by Korea Development Bank, Kwangju Bank,
etc. The carrying amount of the debentures is equivalent to the registered,
issued and outstanding amount of debentures.
The annual maturities of long-term debt, excluding discounts on debentures,
outstanding at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
WON CURRENCY U.S. CURRENCY CONVERTIBLE INSTALLMENT
YEAR LOANS LOANS DEBENTURES BONDS PAYABLE TOTAL
---- ------------ ------------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
2000................. $ 819 $ -- $ 19,392 $ -- $ 719 $ 20,930
2001................. 487 -- -- -- 719 1,206
2002................. 404 -- -- -- 719 1,123
2003................. 428 -- -- -- 358 786
2004................. 629,123 24,456 189,345 -- -- 842,924
thereafter........... -- -- -- 31,193 -- 31,193
-------- ------- -------- ------- ------ --------
$631,261 $24,456 $208,737 $31,193 $2,515 $898,162
======== ======= ======== ======= ====== ========
</TABLE>
17. CONVERTIBLE BONDS:
In 1996, the Company issued US Dollar-denominated convertible bonds
aggregating $40 million bearing interest at 0.25% per annum. The bonds are
convertible into common stock from April 22, 1996 through November 30, 2010, at
a specified conversion price, subject to adjustment based on the occurrence of
certain events as provided in the offering agreement. The adjusted conversion
price as of W10,568 per share as of December 31, 1998 changed to W6,406 per
share as of December 31, 1999 to reflect issues of common stock in 1999 (see
Note 22). The exchange rate applicable to the exercise of the conversion rights
is fixed at W779.72 per US$1.
The Company may redeem all or some of the bonds on or at any time after
March 20, 1997 at their principal amount, together, in each case, with accrued
interest. No such redemption may be made on or prior to March 20, 2001 unless
the average of the last selling prices or, if no sales take place on such day,
the closing bid or offered prices of the common shares as reported by the Korea
Stock Exchange, for each of 30 consecutive trading days, ending not more than 30
days prior to the date upon which notice of such redemption is given, has been
at least 130% of the conversion price of each such trading day.
Any bondholder may request the Company to redeem all or some of the bonds
held by him on March 20, 2001 at 142.75% of the principal amount of such bonds,
together with interest accrued to the date of redemption.
Unless previously redeemed, purchased and cancelled or converted, the bonds
will be redeemed on December 31, 2010 at their principal amount together with
accrued interest.
During 1999, $19,720 of convertible bonds with interest of $3,545 were
converted into the Company's common stock. As a result of the conversion,
1,686,425 additional shares were issued, which resulted in increase of capital
and capital surplus by $10,814 and $8,906, respectively. Remainder of
convertible bonds comprised principal of $23,825 and interest of $7,368 as of
December 31, 1999.
F-82
<PAGE> 148
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
18. INTEREST CAPITALIZATION:
The Company capitalized interest costs on borrowings associated with
property, plant and equipment during the construction period (see Note 2).
Details related to interest costs for the years ended December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Total interest costs incurred............................... $189,817 $242,353
Charged to expense.......................................... 185,315 227,799
-------- --------
Interest capitalized........................................ $ 4,502 $ 14,554
======== ========
</TABLE>
19. REVENUE:
Revenue from continuing operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue from construction services................. $ -- $ -- $232,631
Net sales of tangible products..................... 282,469 213,593 163,359
Other Revenue...................................... 3,456 7,505 10,947
-------- -------- --------
Total.................................... $285,925 $221,098 $406,937
======== ======== ========
</TABLE>
20. COST OF SALES OF CONTINUING OPERATIONS CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cost of construction services...................... $ -- $ -- $191,455
Cost of tangible product sold...................... 239,632 230,478 123,211
-------- -------- --------
Total.................................... $239,632 $230,478 $314,666
======== ======== ========
</TABLE>
21. INCOME TAXES:
The tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------ --------
<S> <C> <C> <C>
Current:............................................. $ 26,868 $1,172 $ 9,794
Deferred:............................................ (54,192) 370 100,100
-------- ------ --------
Total...................................... (27,324) 1,542 109,894
Allocated to discontinued packing and testing
operation.......................................... 12,408 -- --
Allocated to gain on sale of K4...................... 14,268 -- --
-------- ------ --------
Continuing operations................................ $(54,000) $1,542 $109,894
======== ====== ========
</TABLE>
Anam incurs income tax liabilities in Korean Won based on taxable income
determined in accordance with Korean generally accepted accounting principles
and tax laws. The tax provision included in these financial statements reflects
current tax expense and the impact of accounting for deferred taxes under SFAS
109.
F-83
<PAGE> 149
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including Anam's ability to generate taxable income
within the period during which the temporary differences reverse, the outlook
for the Korean economy environment and the overall future industry outlook.
Management has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes. Such valuation allowance
is reviewed periodically.
The major components of deferred tax assets and deferred tax liabilities as
of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets :
Borrowings................................................ $ 3,141 $ 1,750
Forward contracts......................................... 371 580
Provision for severance benefits, net..................... 14,320 13,423
Property, plant and equipment............................. 116,278 147,958
Short term and long term loans............................ 163,469 157,164
Provision for contingency losses.......................... 40,013 29,982
Inventories............................................... 678 5,463
Accounts and notes receivable............................. 41 42,465
Investment................................................ 11,800 11,994
Deferred charges.......................................... -- 17,476
Loss carry forwards....................................... -- 35,288
Tax credit................................................ 58,942 61,094
Other..................................................... 41 38,574
--------- ---------
Total deferred tax assets.............................. 409,094 563,211
--------- ---------
Deferred tax liabilities
Reserves by Korean tax law................................ -- 2,357
Accounts and notes payable................................ -- 37,860
Advances from customers................................... -- 44,162
Other..................................................... 62 7,384
--------- ---------
Total deferred tax liabilities......................... 62 91,763
Valuation allowance.................................... (355,820) (472,428)
--------- ---------
Net deferred tax assets (liabilities)....................... $ 53,212 $ (980)
========= =========
</TABLE>
The net deferred tax liabilities as of December 31, 1998 are included in
other current liabilities and other long-term liabilities.
At December 31, 1999, the Company has available unused investment tax
credits of $58,942, which may be applied against future income tax amounts
through 2006.
Management has reassessed the estimated future taxable income and has
concluded that it is "more likely than not" that Anam will not realize the full
benefit of deferred tax assets. Accordingly, a valuation allowance of $355,820
and $472,428 at December 31, 1999 and 1998, respectively, has been recorded.
F-84
<PAGE> 150
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
The statutory income tax rates, including tax surcharges, applicable to
Anam for 1999, 1998 and 1997 are approximately 30.8%, respectively. The
reconciliation from income taxes calculated at the statutory tax rate to the
effective income tax amount for each of the periods is as follows:
<TABLE>
<CAPTION>
THOUSANDS OF U.S. DOLLARS
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Taxes at Korean statutory tax rate...................... $ 35,213 $(239,367) $ 52,724
Remeasurement effect.................................... 75,257 75,813 (212,612)
Increase (decrease) in valuation allowance.............. (116,608) 193,615 268,279
Tax credit used......................................... (12,057) -- --
Other, net.............................................. (9,129) (28,519) 1,503
--------- --------- ---------
Total income tax provision (benefit).................. $ (27,324) $ 1,542 $ 109,894
========= ========= =========
</TABLE>
22. CAPITAL STOCK:
The authorized share capital of the Company consists of 300,000,000 and
100,000,000 shares of common stock, respectively, and 10,000,000 and 30,000,000
shares of preferred stock, respectively, both with par value of W5,000 as of
December 31, 1999 and 1998.
As of December 31, 1999 and 1998, outstanding capital stocks are as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES ISSUED
AND OUTSTANDING THOUSANDS OF WON
------------------------ PAR VALUE ------------------------------------
1999 1998 1999 AND 1998 1999 1998
---------- ---------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Common stock.......... 55,031,183 30,477,018 W5,000 W275,155,915 W152,385,090
Preferred stock....... 2,576,276 2,576,276 5,000 12,881,380 12,881,380
---------- ---------- ---------------- ----------------
57,607,459 33,053,294 W288,037,295 W165,266,470
========== ========== ================ ================
</TABLE>
As of December 31, 1999 and 1998, preferred stocks are as follows:
<TABLE>
<S> <C>
Series A preferred stock.................................... 2,240,240 shares
Series B preferred stock.................................... 336,036
----------
2,576,276 shares
----------
----------
</TABLE>
Series A preferred stock (First Preferred) --
Series A preferred stockholders have no voting rights and are entitled to
non-cumulative and non-participating preferred dividends at a rate of one
percentage point over those provided to common shareholders. This preferred
dividend rate is not applicable to stock dividends.
Series B Cumulative Convertible preferred stock (Second Preferred) --
Series B Cumulative Convertible preferred stockholders are entitled to
cumulative and participating preferred dividends at a rate of 9% of par value.
The shareholders have no voting rights, except for the period from the
shareholders' meeting in which dividends at a rate less than 9% of par value are
declared through the shareholders' meeting in which dividends at a rate more
than 9% of par value are declared. Preferred stocks shall be converted to common
shares on March 15, 2007. The basis of conversion is one share of preferred
stock for one share of common stock.
F-85
<PAGE> 151
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Common and preferred stock issued in 1999 and 1997 are as follows: (Per
share date is stated in U.S. dollars)
<TABLE>
<CAPTION>
PAID-IN CAPITAL IN
DATE OF ISSUANCE TYPE SHARES PAR VALUE EXCESS OF PAR VALUE
---------------- ---- ---------- --------- -------------------
<S> <C> <C> <C> <C>
COMMON STOCK
October 29, 1999.......................... (A) 19,669,600 $82,011 $ --
October 29, 1999.......................... (B) 10,000,000 41,695 --
August 13 - December 30, 1999............. (C) 1,686,425 10,814 8,906
March 15, 1997............................ (D) 3,170,110(*) 20,941 --
July 24, 1997............................. (E) 6,172,840(*) 34,536 62,187
PREFERRED STOCK
March 15, 1997............................ (D) 336,036(*) 2,220 --
</TABLE>
- - - - - -------------------------
(A) Transfer of long-term borrowings to capital stock
(B) Issuance of common stock at $4.17 to creditors and Amkor
(C) Transfer of convertible bonds to capital stock
(D) Transfer of capital surplus to capital stock in the form of stock dividend
(E) Issuance of depository receipts
The Company completed an underwritten public offering of 6,172,840 shares of
its common stock in Luxemburg capital market, at a public offering price of
$15.67 per share, net of direct issuance cost of $3,278
(*) The number of shares represents stock issued before reverse stock split.
Common stock reduced in 1999 is as follows: (Per share data is stated in
U.S. dollars)
<TABLE>
<CAPTION>
PAID-IN CAPITAL IN
DATE OF REDUCTION TYPE SHARES PAR VALUE EXCESS OF PAR VALUE
----------------- ---- ---------- --------- -------------------
<S> <C> <C> <C> <C>
COMMON STOCK
June 17, 1999.......................... (A) (6,801,860) $(43,040) $ --
</TABLE>
- - - - - -------------------------
(A) Reverse stock split from 1.2873 share to one
23. RECEIVABLE FROM STOCKHOLDERS:
Receivable from stockholders is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Beginning balance...................................... $116,417 $129,809
Collection of advance.................................. (54,299) (13,392)
-------- --------
Ending balance......................................... $ 62,118 $116,417
======== ========
</TABLE>
In July 1997, the Company loaned $100,000 to a shareholder through an
affiliated company which is payable on demand. This loan was used to purchase
the Company's depository receipts issued on July 24, 1997. The Company collected
$39,555 from the shareholder in 1999. Interest is payable at the rate from 4.1%
to 14.3% as of December 31, 1999. The Company has not recognized interest income
receivable related to this loan. This loan is recorded as a contra equity item.
In addition, the Company also made certain non-interest bearing loans to
employees and directors to finance their acquisition of the Company's stock.
Such loans are also recorded as a contra equity item.
F-86
<PAGE> 152
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
24. EARNINGS (LOSS) PER SHARE:
For the years ended December 31, 1999, 1998 and 1997, earnings (loss) per
share (EPS) was calculated as follows:
<TABLE>
<CAPTION>
WEIGHTED AVG. PER SHARE
EARNINGS (LOSS) SHARES AMOUNT
(NUMERATOR) (DENOMINATOR) (IN US DOLLARS)
--------------- ------------- ---------------
<S> <C> <C> <C>
Earnings per Share -- Year Ended December 31,
1999
Loss from continuing operations.................. $(169,759)
Less: Preferred stock dividend................... (133)
---------
Weighted average number of common shares for the
year before retroactive adjustment to reflect
the reverse stock split........................ 32,320,823
Effect of retroactive adjustment to reflect the
reverse stock split............................ (3,112,084)
----------
Basic earnings per share:
Loss from continuing operations attributable to
common stock................................... (169,892) 29,208,739 $ (5.82)
========== =======
Add: Income from discontinued operations......... 279,624
---------
Net income attributable to common stock.......... 109,732 29,208,739 $ 3.76
=======
Effect of dilutive securities:
Convertible debentures........................... 1,252 2,899,911
Convertible preferred stock...................... 133 336,036
--------- ----------
Diluted earnings per share:
Net income attributable to common stock.......... 111,117 32,444,686 $ 3.42
========= ========== =======
Loss from continuing operations attributable to
common stock................................... $(169,892) 29,208,739 $ (5.82)
========= ========== =======
Earnings per Share -- Year Ended December 31,
1998
Loss from continuing operations.................. $(957,165)
Less: Preferred stock dividend................... (108)
---------
Weighted average number of common shares for the
year before retroactive adjustment to reflect
the reverse stock split........................ 30,477,018
Effect of retroactive adjustment to reflect the
reverse stock split............................ (6,801,860)
----------
Basic earnings per share:
Loss from continuing operations attributable to
common stock................................... (957,273) 23,675,158 $(40.43)
========== =======
Add: Income from discontinued operations......... 109,632
---------
Net loss attributable to common stock............ (847,641) 23,675,158 $(35.80)
=======
Effect of dilutive securities:
Convertible debentures........................... -- --
Convertible preferred stock...................... -- --
--------- ----------
</TABLE>
F-87
<PAGE> 153
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WEIGHTED AVG. PER SHARE
EARNINGS (LOSS) SHARES AMOUNT
(NUMERATOR) (DENOMINATOR) (IN US DOLLARS)
--------------- ------------- ---------------
<S> <C> <C> <C>
Diluted earnings per share:
Net loss attributable to common stock............ (847,641) 23,675,158 $(35.80)
========= ========== =======
Loss from continuing operations attributable to
common stock................................... $(957,273) 23,675,158 $(40.43)
========= ========== =======
Earnings per Share -- Year Ended December 31,
1997
Income from continuing operations................ $(102,039)
Less: Preferred stock dividend................... (159)
---------
Weighted average number of common shares for the
year before retroactive adjustment to reflect
the reverse stock split........................ 26,993,191
Effect of retroactive adjustment to reflect the
reverse stock split............................ (6,024,348)
----------
Basic earnings per share:
Income from continuing operations attributable to
common stock................................... (102,198) 20,968,843 $ (4.87)
========== =======
Add: Income from discontinued operations......... 143,469
---------
Net income attributable to common stock.......... 41,271 20,968,843 $ 1.97
=======
Effect of dilutive securities:
Convertible debentures........................... 1,252 1,888,971
Convertible preferred stock...................... 159 336,036
Diluted earnings per share:
Net income attributable to common stock.......... 42,682 23,193,850 $ 1.84
========= ========== =======
Income from continuing operations attributable to
common stock................................... $(102,198) 20,968,843 $ (4.87)
========= ========== =======
</TABLE>
The basic earnings per share for discontinued operations was $9.58, $4.63
and $6.84 in 1999, 1998 and 1997, respectively. Diluted earnings per share for
discontinued operations was $9.24, $4.63 and $6.71 in 1999, 1998 and 1997,
respectively.
25. COMMITMENTS AND CONTINGENCIES:
At December 31, 1999, the Company was contingently liable for guarantees of
indebtedness of certain affiliated companies as follows :
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Anam Electronics(*).................................. $134,651 $147,014
Anam Construction.................................... 150,587 144,568
Anam Environment..................................... 9,626 11,070
Acqutek.............................................. 13,691 19,369
Anam Finance......................................... 4,966 11,666
Other Affiliates..................................... 8,391 26,543
-------- --------
Total...................................... $321,912 $360,230
======== ========
</TABLE>
(*) An affiliate through common ownership of the Kim Family.
F-88
<PAGE> 154
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
As discussed in Note 5, Anam Construction and Anam Electronics became
insolvent and filed an application for corporate reorganization under the Korean
Corporate Reorganization Act on October 24, 1998 and March 18, 1999,
respectively. The application of each company was accepted by the court. Under
the court appointed receivership management, both companies had been preparing
their reorganization plan including the restructuring of existing debt. Anam
Electronics reorganization plan was completed and approved by the court on
February 7, 2000 and Anam Construction's reorganization plan is expected to be
finalized in March 2000. According to Anam Electronics' reorganization plan, a
portion of ASI's loans to Anam Electronics approximating W32.4 billion shall be
converted to common stock of Anam Electronic in exchange for 2,072,300 shares at
W16,000 per share by June 1, 2000. After this conversion, ASI will own 32.4% of
Anam electronics' common shares.
Under the terms of Anam's Workout Program, the guaranteed creditors of Anam
Construction and Anam Electronics may exercise their right to request from the
Company the performance of guarantee obligations only at the time when the
guarantee obligation amount is fixed after the extinction of the primary
debtors' legal entity as a result of bankruptcy or liquidation. In addition, the
payment of the principal of the guarantee obligation was suspended until
December 31, 2003 and interest during such suspension period will be exempted.
Accordingly, it is expected that the Company may be contingently liable for
payment guarantees on the remaining indebtedness of Anam Construction and Anam
Electronics at December 31, 2003. The Company recorded a liability for loss
contingency of $101,460 and $66,707 at December 31, 1999 and 1998, respectively,
for the probable loss that may occur upon guaranteed creditors' demand for
performance of these loan guarantees.
In addition to loss provisions provided for those affiliate guarantees
discussed above, the Company accrued an additional provision of $18,452 and
$20,637 at December 31, 1999 and 1998, respectively, related to losses expected
on other guarantees.
At December 31, 1999 and 1998, the Company is contingently liable for
letters of commitment provided in relation to the issue of $38 million secured
floating rate notes due 2000 by Pacific Elephant Investment (L) limited ("PEIL")
and the issue of $20 million guaranteed floating rate notes due 2002 by Pacific
Rainbow Investment (L) Limited ("PRIL"). According to terms of the letters of
commitment, the Company is required, subject to any restrictions under Korean
Law, to make a capital injection to PEIL and PRIL if their gross asset value
become lower than 100% of the outstanding principal amount of all borrowings by
PEIL and PRIL, respectively. Because of the economic crisis in Asia Pacific
region, the gross asset value of both PEIL and PRIL significantly declined and,
as a result, the Company was asked to make capital injections to PEIL and PRIL.
The amount of capital injection requested on October 29, 1999 approximates
$18,000 for PEIL and $17,000 for PRIL. The Company has been negotiating this
matter with various parties including those responsible for the operations of
PEIL and PRIL to settle down these claims. By taking into consideration the
current status of negotiation, the Company recorded a liability for loss
contingency of $10,000 at December 31, 1999 and 1998 for the probable loss that
may occur upon settlement of these claims.
26. DERIVATIVE FINANCIAL INSTRUMENTS:
The total fair value of all derivative instruments at December 31, 1999 and
1998 was $164,636 and $273,962, respectively. Net unrealized losses in relation
to currency and interest swap contracts approximate $15,364 and $36,968 as of
December 31, 1999 and 1998, respectively (see Note 2).
F-89
<PAGE> 155
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Currency and interest swap
The Company had several outstanding currency and interest rate swap
contracts at December 31, 1999 and 1998, further described as follows:
1999
<TABLE>
<CAPTION>
CONTRACTED RECEIVING PAYING CONTRACT
BANK CONTRACT AMOUNT EXCHANGE RATE RATE(%) RATE(%) DUE DATE
---- --------------- ------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Korea Development Bank............ US$50,000 W938 : US$1 9.95 6.25 Oct 10, 2000
Sinhan Bank....................... US$10,000 W882 : US$1 10.20 6.90 Apr 24, 2000
Korea Merchant Bank............... US$20,000 W882 : US$1 10.20 6.90 Apr 24, 2000
</TABLE>
1998
<TABLE>
<CAPTION>
CONTRACTED RECEIVING PAYING CONTRACT
BANK CONTRACT AMOUNT EXCHANGE RATE RATE(%) RATE(%) DUE DATE
---- --------------- ------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Chase Manhattan Bank............. $30,000 W830 : US$1 8.25 7.00 Sept 16, 1999
Chase Manhattan Bank............. $20,000 W840 : US$1 7.99 6.29 Oct 17, 1999
Korea Development Bank........... $50,000 W938 : US$1 9.95 6.25 Oct 10, 2000
Shinhan Bank..................... $10,000 W882 : US$1 10.20 6.90 Apr 24, 2000
Korea Merchant Bank.............. $20,000 W882 : US$1 10.20 6.90 Apr 24, 2000
</TABLE>
Under the terms of the currency and interest swaps, the Company is
obligated to pay the contract amount multiplied by the current exchange rate
multiplied by the paying rate and is entitled to receive the contract amount
multiplied by the contracted exchange rate multiplied by the paying rate at
six-month intervals until the contract due date.
Interest swap
The Company had several outstanding interest-rate swap contracts in
relation to payment of interest on foreign currency long-term debt at December
31, 1999 and 1998, further described as follows:
1999
<TABLE>
<CAPTION>
BUYING
BANK CONTRACT AMOUNT SELLING RATE(%) RATE(%) CONTRACT TERMS
---- --------------- --------------- ------- --------------
<S> <C> <C> <C> <C>
Chase Manhattan Bank US$100,000 6 month LIBOR 5.800 Sept 16, 2000
</TABLE>
1998
<TABLE>
<CAPTION>
SELLING BUYING CONTRACT
BANK CONTRACT AMOUNT RATE(%) RATE(%) TERMS
- - - - - -------------------- --------------- ------------- ------- --------------
<S> <C> <C> <C> <C>
Shinhan Bank US$ 50,000 6 month LIBOR 5.705 Jul 1, 1999
Chase Manhattan Bank US$100,000 6 month LIBOR 5.800 Sept 16, 2000
</TABLE>
27. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate methodologies;
however, considerable judgement is required in interpreting market data to
develop estimates for fair value. Accordingly, these estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. Certain of these financial instruments are with major
financial institutions and expose the Company to
F-90
<PAGE> 156
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
market and credit risks and may at times be concentrated with certain
counterparties or group of counter-parties. The creditworthiness of
counterparties is continually reviewed, and full performance is anticipated.
The carrying amount reported in the balance sheet for accounts receivable
from affiliates, other accounts receivable, short-term loans receivable, and
accrued expenses approximate fair value due to the short-term nature of these
instruments. The methods and assumptions used to estimate the fair value of
other significant classes of financial instruments are set forth below:
Cash and Cash Equivalents
Cash and cash equivalents are due on demand or carry a maturity date of
less than three months when purchased. The carrying amount of these financial
instruments is a reasonable estimate of fair value.
Available for Sale Investments
The fair value of these financial instruments was estimated based on market
quotes, recent offerings of similar securities, current and projected financial
performance of the company and net asset positions.
Investment in affiliated companies
Management believes it is impractical to estimate the fair value of non
publicly traded companies.
Short-term borrowing
Short-term borrowings have variable rates that reflect currently available
terms and conditions for similar borrowings. The carrying amount of this debt is
a reasonable estimate of fair value.
Long-term debt
Long-term debt balances have variable rates that reflect currently
available terms and conditions for similar debt. The carrying value of this debt
is a reasonable estimate of fair value.
Convertible Bonds
Management believes it is impractical to estimate the fair value of such
bonds due to their unique feature and the lack of an active trading market for
such bonds.
Derivative Instruments
The fair value of derivative instruments is based on quoted market prices
if available or discounted cash flow if market quote is not available, and is
estimated to be $164,636 and $273,962 at December 31, 1999 and 1998,
respectively.
28. RELATED PARTY TRANSACTIONS:
Discontinued packaging and testing operations
On February 28, 2000, Anam's board of directors and the creditors committee
approved the formal plan to sell the remaining packaging and testing operations
to Amkor, the company related to Anam (see Notes 1 and 2). The anticipated
disposal date is approximately April 30, 2000. Net sales of the packaging and
testing operations, consisting of plants K1, K2 and K3, for the years ended
December 31, 1999, 1998 and 1997, including those of K4 sold to Amkor in May,
1999, were $477,862, $500,914 and $650,457,
F-91
<PAGE> 157
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
respectively. These amounts are not included in the net sales in the
accompanying income statements (see Notes 30 and 31).
Significant transactions with affiliated companies during 1999, 1998 and
1997 and the related account balances at December 31, 1999 and 1998 are
summarized as follows:
Transactions between the Company and its affiliated companies
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Sales
Amkor............................................ $712,300 $566,261 $530,262
Other affiliated companies....................... 2,428 4,051 19,013
-------- -------- --------
$714,728 $570,312 $549,275
======== ======== ========
Purchases
Other affiliated companies....................... $ 17,612 $ 16,277 $ 21,114
======== ======== ========
</TABLE>
Related accounts balances between the Company and its affiliated companies
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Receivables
Amkor..................................................... $26,586 $13,342
Other affiliated companies................................ 7,505 15,503
------- -------
$34,091 $28,845
======= =======
Payables
Amkor..................................................... $ 1,223 $22,578
Other affiliated companies................................ 10,633 2,012
------- -------
$11,856 $24,590
======= =======
</TABLE>
Employee and Directors Loans
The Company has short-term loans of $36 to its employees and directors at
December 31, 1998. Such loans are provided to assist employees and directors in
housing purchase. They generally bear market interest rate and are repaid
through regular payroll deduction based on a predetermined schedule.
29. SEGMENT INFORMATION:
The Company has identified three reportable segments, specifically
packaging and test services, wafer fabrication service and construction, that
are managed separately because the services provided by each segment require
different technology.
The Company offers a complete and integrated set of packaging and test
services including IC packaging design, leadframe and substrate design, IC
package assembly, final testing, burn-in reliability test and thermal and
electrical characterization. The Company also manufacture submicron CMOS wafers
through its foundry. Also, the Company, through its subsidiary, Anam
Construction, provide construction services, which was consolidated in 1997 but
deconsolidated since 1998.
F-92
<PAGE> 158
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
The accounting policies for segment reporting are the same as those
described in Note 2 to the consolidated financial statements. The Company
evaluates its operating segments based on profit and loss.
BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue from external customers:
Packaging............................................ $ 477,862 $ 500,914 $ 650,457
Construction......................................... -- -- 232,631
Wafer................................................ 264,177 97,068 --
Other................................................ 21,748 124,030 174,306
---------- ---------- ----------
Total........................................ $ 763,787 $ 722,012 $1,057,394
========== ========== ==========
Property, Plant and Equipment:
Packaging............................................ $ 401,568 $ 926,135
Construction......................................... -- --
Wafer................................................ 597,870 597,165
Other................................................ 38,497 58,314
---------- ----------
Total........................................ $1,037,935 $1,581,614
========== ==========
</TABLE>
The following is a summary of operations by country based on the location
of the customer. Property, plant and equipment is based on the location of the
equipment.
BY GEOGRAPHY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue from external customers:
United States........................................ $ 712,300 $ 566,261 $ 530,262
Republic of Korea and Others......................... 51,487 155,751 527,132
---------- ---------- ----------
Total........................................ $ 763,787 $ 722,012 $1,057,394
========== ========== ==========
Property, Plant, and Equipment
United States........................................ $ 76 $ 72
Republic of Korea.................................... 1,037,859 1,581,542
---------- ----------
Total........................................ $1,037,935 $1,581,614
========== ==========
</TABLE>
BY MAJOR CUSTOMER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
Revenue from external customers:
Amkor................................................... $712,300 $566,261 $ 530,262
Other................................................... 51,487 155,751 527,132
-------- -------- ----------
Total........................................... $763,787 $722,012 $1,057,394
======== ======== ==========
</TABLE>
F-93
<PAGE> 159
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The other column includes the
elimination of inter-segment balances and corporate assets.
<TABLE>
<CAPTION>
PACKAGING
AND TEST WAFER
(DISCONTINUED) FABRICATION CONSTRUCTION OTHER TOTAL
-------------- ----------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Net Revenue........................... $ 477,862 $264,177 $ -- $ 21,748 $ 763,787
Gross Profit.......................... 156,704 38,155 -- 8,138 202,997
Operating Income...................... 136,002 26,570 -- 938 163,510
Depreciation and Amortization......... 150,653 119,447 -- 1,531 271,631
Capital Expenditures.................. 595 3,907 -- -- 4,502
Total Assets.......................... 583,491 728,774 -- 175,204 1,487,469
Year ended December 31, 1998
Net Revenue........................... $ 500,914 $ 97,068 $ -- $124,030 $ 722,012
Gross Profit.......................... 139,129 (38,884) -- 29,504 129,749
Operating Income...................... 94,929 (315,911) -- 17,905 (203,077)
Depreciation and Amortization......... 179,955 115,428 -- 3,869 299,252
Capital Expenditures.................. 2,317 12,237 -- -- 14,554
Total Assets.......................... 1,075,286 740,135 -- 63,529 1,878,950
Year ended December 31, 1997
Net Revenue........................... $ 650,457 $ -- $387,946 $ 18,991 $1,057,394
Gross Profit.......................... 186,633 -- 94,469 (2,198) 278,904
Operating Income...................... 129,157 -- 55,287 (49,210) 135,234
Depreciation and Amortization......... 143,079 -- 11,243 (3,659) 150,663
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments............... $ 763,787 $ 722,012 $1,057,394
Elimination of revenues from discontinued operation
(Note 28)......................................... 477,862 500,914 650,457
---------- ---------- ----------
Total consolidated revenue........................... $ 285,925 $ 221,098 $ 406,937
========== ========== ==========
GROSS PROFIT
Total gross profit for reportable segments........... $ 202,997 $ 129,749 $ 278,904
Elimination of gross profit from discontinued
operation (Note 28)............................... 156,704 139,129 186,633
---------- ---------- ----------
Total consolidated gross profit...................... $ 46,293 $ (9,380) $ 92,271
========== ========== ==========
OPERATING INCOME
Total operating income (loss) for reportable
segments.......................................... $ 163,510 $ (203,077) $ 135,234
Elimination of operating income from discontinued
operation (Note 28)............................... 142,472 109,632 143,469
---------- ---------- ----------
Total consolidated operating income.................. $ 21,038 $ (312,709) $ (8,235)
========== ========== ==========
Total asset.................................. $1,487,469 $1,878,950 $2,922,114
========== ========== ==========
</TABLE>
F-94
<PAGE> 160
ANAM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
30. SALE OF K4 ASSETS AND OTHER:
On May 17, 1999, the Company sold to Amkor all the assets of the Company's
packaging and test facility located in Kwangju city, the Republic of Korea
("K4"), excluding cash and cash equivalents, notes and accounts receivables,
intercompany accounts and existing claims against third parties, in accordance
with an asset purchase agreement signed on December 30, 1998 and approved by its
shareholders on February 3, 1999. The sale price of K4 is $575,000 in cash, plus
the transfer of up to $7,000 of employee benefit liabilities. The sale of K4
resulted in a gain of approximately $163,828 on the sale. K4 provides packaging
and test services for advanced leadframe and laminate packages that are used in
high-performance electronic products such as cellular telephones, laptop
computers, digital cameras and microprocessors. K4 began operating in October
1996 and is Anam's newest semiconductor packaging and test facility. The
operating results of K4 are included in the income from the discontinued
operation because of the approved sale of the remaining packaging and testing
business in 2000 (see Note 31).
In connection with the sale of K4, Anam entered into a Transition Services
Agreement with Amkor. Pursuant to this agreement, Anam will continue to provide
many of the same non-manufacturing related services to K4 that it provided prior
to the sale, including, human resources, accounting and general administrative
services. The monthly fee for the service is $766. Anam also entered into an
Intellectual Property License Agreement with Amkor that became effective upon
the closing of the sale. Anam transferred certain patents to Amkor and licensed
certain intellectual property rights to Amkor under an exclusive, fully paid,
perpetual license.
In August 1999, the Company sold all assets and liabilities directly
related to the wiring business to a third party and recognized a gain of $16,671
on the sale. This sale did not qualify as discontinued operations and,
accordingly, the related gain was included in the results of continuing
operations.
31. SUBSEQUENT EVENTS :
On February 28, 2000, Anam made a decision to sell to Amkor all of the
remaining operating assets related to the packaging and testing business
excluding K2 land in accordance with the approval of the Anam's board of
directors' meeting and the Anam's creditors committee. The sale price of
Packaging Business is Korean Won equivalent to $950 million. The major assets of
the packaging and testing business are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Inventory.............................................. $ 7,984 $ 7,982
Fixed Assets........................................... 401,568 926,135
-------- --------
$409,552 $934,117
======== ========
</TABLE>
On February 28, 2000, the Company also made a decision to issue 56,457,039
shares of the new common stock on approval of a board of directors' meeting as
follows:
- Approximately 15,529,000 shares of common stock will be issued to Amkor
at W8,000 per share
- Additional 22,179,974 shares of common stock will be issued to Amkor at
W18,000 per share
- Additional 18,750,000 shares of common stock will be issued to creditor
banks at W8,000 per share through the conversion of W150 billion debt
into common stock
Management of the Company intends to use proceeds from the sales of the
packaging and testing operations to repay its borrowings due to remaining wafer
fabrication creditor institutions and invest in the remaining wafer fabrication
operations of the Company.
F-95
<PAGE> 161
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Anam Engineering & Construction Co., Ltd.
Seoul, Korea
We have audited the consolidated balance sheets of Anam Engineering &
Construction Co., Ltd. and its subsidiary as of December 31, 1999, 1998 and
1997, the related consolidated statements of operations, shareholders' deficit,
and cash flows for the years then ended, all expressed in Korean Won (not
separately included herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements (not separately
included herein) present fairly, in all material respects, the financial
position of Anam Engineering & Construction Co., Ltd. and its subsidiary as of
December 31, 1999, 1998 and 1997, the results of their operations, the changes
in their shareholders' deficit and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1, the Company has filed a voluntary petition for
reorganization under the Corporate Reorganization Act in the Republic of Korea.
The financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1, the Company's recurring
losses from operations, negative working capital, and shareholders' capital
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also discussed in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Ahn Kwon & Co.
February 9, 2000
F-96
<PAGE> 162
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Anam USA, Inc.
West Chester, Pennsylvania
We have audited the balance sheets of Anam USA Inc. (a Pennsylvania
Corporation and a wholly-owned subsidiary of Anam Semiconductor, Inc., Seoul,
ROK) (ASI) as of December 31, 1999 and 1998 and the related statements of
income, stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1999 (not separately included herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not separately
included herein) present fairly, in all material respects, the financial
position of Anam USA, Inc. as of December 31, 1999 and 1998 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
All of the Company's outstanding notes payable and letters of credit are
guaranteed by ASI. ASI has a significant amount of debt relative to its equity.
ASI's business has been significantly affected by the economic crisis in Korea.
In October 23, 1998, ASI entered into a Korean financial restructuring program
known as "Workout Program." On February 23, 1999, ASI was granted certain
economic concessions through the Workout Program which was approved by the
Korean Financial Supervisory Committee. The effects of the "Workout Program" and
its impact on the Company are disclosed in Note 5.
/s/ SIANA CARR & O'CONNOR, LLP
January 31, 2000
F-97
<PAGE> 163
AMKOR TECHNOLOGY, INC.
CONSENT SOLICITATION
LIST OF EXHIBITS
<TABLE>
<S> <C>
Written Consent of Stockholders to approve the Acquisition
Exhibit A Transactions
</TABLE>
<PAGE> 164
EXHIBIT A
WRITTEN CONSENT OF THE STOCKHOLDERS OF
AMKOR TECHNOLOGY, INC.
EFFECTIVE AS OF APRIL , 2000
Pursuant to Section 228 of the Delaware General Corporation Law and the
Bylaws of Amkor Technology, Inc., a Delaware corporation (the "Company"), the
undersigned, constituting the holders of the outstanding shares of the Company
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, hereby adopt the following resolutions by
written consent, effective for all purposes as of the date set forth above:
APPROVAL OF THE EQUITY FINANCING TRANSACTIONS
WHEREAS, the Board of Directors has approved transactions related to
the Company's proposed acquisition of the packaging and test business of
Anam Semiconductor, Inc. ("ASI") (the "Acquisition Transactions),
including:
(1) the acquisition of the facilities known as K1, K2 and K3 for $950
million, and
(2) an investment in ASI of approximately $500 million.
WHEREAS, the Board of Directors recommends that the Stockholders of the
Company approve equity financing transactions related to the Acquisition
Transactions (the "Equity Financing Transactions"), including:
(1) the issuance of up to approximately 4,512,560 shares of common stock
upon conversion of $258.75 million of the 5% convertible subordinated
notes due 2007 sold by us on March 22, 2000 in a private transaction,
(2) the sale of an aggregate of 20,500,000 shares of common stock and
warrants for 3,895,000 shares of common stock in a private transaction
we expect to complete in connection with the Acquisition Transactions,
and
(3) other equity financings, pursuant to which the Company would issue
common stock or securities convertible into common stock which, when
combined with the common stock to be issued pursuant to (1) and (2)
above, would in the aggregate exceed 20% of the outstanding common
stock of the Company as of April , 2000.
NOW, THEREFORE, BE IT RESOLVED: That the Equity Financing Transactions are
hereby approved and authorized in all respects, with such changes, additions,
deletions, supplements and amendments thereto as the officers of the Company may
deem necessary or advisable.
[ ] I consent to the resolution set forth above, approving the Equity
Financing Transactions.
[ ] I do not consent to the resolution set forth above, approving the
Equity Financing Transactions.
IN WITNESS WHEREOF, the undersigned Stockholders have executed this Written
Consent in counterpart as of the date set forth above, and direct that this
Written Consent be filed with the minutes of the proceedings of the stockholders
of the Company.
- - - - - ---------------------------------------------------------
Name of Stockholder:
