Corporate Communications:

ASM Pacific Technology Annual Report 2001
An example of corporate copywriting in a formal business style on a technical subject, taking into account the client's stylistic wishes and policy requirements.

a) Excerpt from Chairman's Statement

"REVIEW

In spite of the ongoing harsh business environment in the semiconductor industry, ASM, alone among the leading players in its space, remained profitable in 2001 although with a reduced turnover of US$XXXX million. Return on capital employed and on sales were XXX% and XXX% respectively. This was largely due to the solid foundation laid over the years by the diversification of our product and application markets, an efficient cost structure and successful introductions of new product lines. In 2001 sales attributable to our five largest customers combined were less than 30% of our total, evidence of our successful “diversified market” strategy.

Still, 2001 was a difficult year for the electronics industry. Every sector of its supply chain was deeply affected. Started by the correction of excessive inventories amassed in year 2000, accelerated by the slowing world economy and the events on 11th September, the slowdown has become the fastest and steepest downturn in the history of the semiconductor industry. Analysts estimate there was a 20% decline in IC unit volume and around 32% drop in revenue (SIA, IC Insights, VLSI Research and WSTS). Capital investment, especially for IC assembly equipment, came to a screeching halt in the first quarter. According to data published by our leading bonder competitors and SEAJ, their assembly equipment turnover dropped by more than 70% as compared with the previous year.

Naturally ASM was not immune to such a major industry fluctuation. In 2001 we outperformed the assembly equipment industry leader in revenue change and surpassed their sales during the first quarter, but our equipment revenue which ranks 2nd in the world was still down by XX% as compared with the previous year. On hand order backlog, which stood at US$120 million at the beginning of the year, was reduced to just over US$XX million as of 31st December 2001, due to weak inflows and some cancellations during the year.

However, an industry slowdown represents the best window of opportunity to broaden our customer base and expand sales to existing customers with our new products. As happened during the 1998 slowdown, the soft period is giving ASM the chance to cultivate new customers and gain market share. After many months of extensive field evaluations based on our AB339 Eagle demonstration machines, we received initial orders from four new customers during the 4th quarter, based in Taiwan, Singapore and Indonesia. The machines’ superior process capabilities, throughput and stability, as well as ASM’s technical support, enabled us to capture these customers who use the AB339 Eagle wire bonders for state-of-the-art 50-60 microns pad pitch bonding.

Indeed, reflecting customer satisfaction and market acceptance, our AB339 Eagle gold wire bonder received the Semiconductor International Editors’ Choice Best Products Award in 2001 for the second time in its successive generation. We also received plaudits from other sources in addition to recognition by our industry and customers: the Singapore Government acknowledged ASM’s past achievements and long term commitment to Singapore by awarding us the prestigious Manufacturing Headquarter (MHQ) status and its associated incentives.

During the last year new products and new generation machines were launched according to schedule. We have delivered a number of machines to customers for performance evaluations, including the high speed, innovative IC die bonders capable of handling 300 mm. and 200 mm. wafers and the high precision, eutectic solder process bonders for ‘flip chip in package’ applications. Our unique small footprint integrated ball placement, reflow and cleaning system and a multi-site test handler were also shipped for customer benchmarking. Furthermore, the new generation IDEALine, based on the twin Eagle and some advanced concepts, was sent for beta site testing. These exciting new products are expected to start generating revenue in 2002.

While we made every effort to cut our operating costs last year – including fixed costs like salary, fringes, rental and production headcount – we made no compromise on our technology and product developments or our efforts at market penetration. R&D expenses, net of a HK$3.5 million Singapore Government research grant subsidy, amounted to HK$166.5 million, representing 13.4% of our equipment sales. Capital investments, which cover R&D analytical tools and equipment, information systems and some prudent machinery purchases to enhance production capabilities, amounted to HK$153 million (20% below our previous plan). Capital investment planned for 2002 is HK$150million.

With the major change in our gold wire bonder production run rate from late year 2000 and for most of 2001, inventory turnover based on current year sales was less than desirable. Fortunately this abrupt schedule change coincided with our transition to the new Eagle wire bonder planned for the 4th quarter of 2000. With no obsolescence risk, these Eagle related raw materials and work-in-process are expected to clear during 2002. Even though we had to prepare materials for the pilot production of our new flip chip bonder, 300 mm IC die bonder and our integrated ball placement, reflow and cleaning system during the latter part of the year, our total inventory was reduced by 12% to HK$607 million at year-end. The enterprise resource planning (ERP) software, which has been widely implemented within ASM worldwide, has proved a valuable tool in streamlining our logistics and management information systems.

LIQUIDITY AND FINANCIAL RESOURCES
The Group’s shareholders’ funds decreased to HK$XXXXXXX as at 31st December 2001 (2000: HK$2,093,600,000). As there were no long term borrowing, gearing of the Group was zero, the same as the past year.

Although HK$459.5 million was paid as dividend and HK$153 million spent in capital investment during the twelve-month period, due to strong positive cash flow, cash on hand at 31st December 2001 was slightly reduced to HK$XXXXXXX (2000: HK$648,804,000). In fact, the majority of capital investments were funded by the current year depreciation of HK$151.8 million.

Except for a JPY479 million loan raised in July 2001 to hedge against our yen-based assets’ exposure to currency fluctuation, with no other bank borrowing, this resulted in an all bank debt to equity ratio of only 1.6%. Current ratio significantly improved to 4.39. Receivables were tightly monitored during the year, resulting in 65 days sales outstanding (2000: 65 days).

The Group has minimal currency exposure as the majority of all sales were denominated in US dollars. On the other hand, its disbursements were mainly in US dollar, Hong Kong dollar, Singapore dollar and Renminbi. The limited yen-based receivables were covered by some accounts payables in yen to Japanese vendors and the hedging loan as stated above.

HUMAN RESOURCES
The Group adopts a competitive remuneration package for its employees. Aside from salary payments, other benefits include contributions to provident fund schemes and medical subsidies. In addition, based on the Group’s financial results and individual performance, discretionary bonus and bonus shares may be granted to eligible staff. In general, salary review is conducted annually. The Group is committed to continue its rigorous staff development and training programs.

As at 31st December 2001, the total headcount of the Group worldwide was approximately 5,000 people.

PROSPECTS
As reflected by several companies’ recently reported figures, rising utilisation of wafer foundries and sales of consumables, semiconductor assembly factories passed through their trough during the 4th quarter. Although overshadowed by the weak world economy, SIA predicts the semiconductor industry will rebound slightly by 6% in 2002, followed by strong double-digit growth in the subsequent two years. Electronic Trend Publication (ETP) has projected integrated circuits (IC) output to rise by 10% in 2002, while packaging material revenue is expected to increase by 11% according to SEMI.

The assembly equipment market usually lags behind customers’ activities but leads the other semiconductor equipment sectors like wafer processing equipment by a few months. VLSI Research forecasts it will experience a marginal gain of 1% in 2002, followed by a strong year in 2003 with 50% growth. Most industry participants expect a slow first half and an increased uptake in business activities starting mid-2002.

Although we began the year with an eroded order backlog, ASM’s management believes industry will continue to make investments related to enhanced technology such as finer pad pitch wire bonders to meet ever increasing die shrink requirements. In addition to technology buys, customers also need to invest in equipment to cope with new package types like QFN and flip chip. While the first few months should prove challenging times, with our diversified products, improved market position and a strong balance sheet, we believe ASM will weather the long winter and come out of the slowdown better than our competitors.

In addition to having our customers testing our completely rejuvenated product portfolio, to maintain our leadership in fine pitch wire bonders we will introduce our enhanced version of the Eagle wire bonder – the Eagle 60 – by the end of the first quarter. Featuring 15-20% productivity gain over current generation machine, the Eagle 60 is expected to further ease looping control, off-line programming and portability demands. Further development to achieve even better output per given floor space is in our roadmap, to ensure ASM is well-positioned for the market upturn.

Having participated in the photonics industry during the last three years with our laser diode die and wire bonders, ASM has also made a commitment to develop an optical fibre alignment and welding machine capable of sub-micron accuracy. We anticipate the first prototype to be ready by end of this year, to further our penetration and support of this rising optical communication component industry.

Our strategy of providing packaging development support to customers has produced dividends in the chip scale package area. Apart from becoming the customers’ QFN leadframe supplier, this value-added service has enabled ASM to open some doors for our other assembly equipment. We intend to capitalize on this strategy and beef up our packaging development team, providing further solutions to customers in the flip chip arena.

Similarly, our factory automation solution helps to cement ASM’s working relationship with customers. Our closely integrated new product introductions also aid the forging of closer ties to strategic clients. To help customers make the best use of their capital investments, ASM has committed R&D resources to develop equipment management software – the IDEALnet – as a management tool for customers to track equipment performance, gain remote access to information and diagnostic, as well as providing them with a vehicle to improve their machine Overall Equipment Effectiveness (OEE).

With additional R&D projects like equipment management software, flip chip packaging development and the optical fibre alignment machine, our R&D spending is expected to rise moderately. Aside from leading edge products, ASM can truly differentiate itself from its competitors in its total solution approach to customers’ business needs, a strategy that rivals cannot imitate easily.

APPRECIATION
After the meteoric rise in semiconductor industry growth in 2000, a correction was to be expected in 2001. ASM’s strong performance in such adverse circumstances is a tribute not only to the prescience of our business strategies but also the resilience and dedication of our staff, to whom the Board expresses its profound appreciation.
Things will not be plain sailing in 2002, but we look forward with anticipation to seizing the opportunity to increase our market share as we did during the previous slowdown, and prepare ourselves to take advantage of the coming market recovery.

b) Excerpt from the Management Review

( Note how it expands and rephrases the more compressed information in the Chairman's Statment)

"Overview

Initially a result of inventory correction but exacerbated by soft demand due to the slowing world economy, production run rates of many semiconductor factories were slashed to fractions of their past levels last year. However, after a long period of month-to-month decline in output, the semiconductor industry passed its trough and began a gradual recovery starting in the fourth quarter. Analysts estimated there was a 20% decline in IC unit volume and around 32% drop in revenue in 2001 – the most severe slowdown in the entire history of the semiconductor industry. Capital expenditure of many companies was cut, resulting in push-outs or cancellations of outstanding orders. Purchases of IC assembly and packaging equipment for capacity expansion vanished.

Even in these serious circumstances, ASM remained profitable, largely due to the solid business foundation laid over the years by our superlative products in diversified territorial and application markets. Still, Group turnover dropped to US$200 million, a reduction of 60.9% as compared with the previous year. With eroded order backlog, turnover during the second half of the year was only 57.3% as compared with the first half. While every sector of the electronics food chain was badly hit, due to the strong domestic economy in the first half of the year our sales to the China market declined much less than in other countries. In addition, with our equipment strengths in servicing the optoelectronics market, we made record sales into Japan, better than all previous years. Riding our strong market momentum, ASM clearly has been gaining market share in both good (years 1999, 2000) and bad (2001) years.

The operating leverage effect of the reduced turnover inevitably affected gross and net margins. Even though net profit was trimmed to HK$231 million, once again we outperformed our competitors in the rate of revenue change and distinguished ourselves as the only profitable company during this slowdown. The combined effect of our rising equity base and smaller profit resulted in return on capital employed and on sales ratios of 13.5% and 14.6% respectively. Together with a 33% rise in our share price and hefty dividends during the year, ASM represents a good investment for our shareholders during this poor economic environment.

ASM is committed to long term growth and success. While our competitors were forced to make expedient decisions to produce short-term results, we did not cut back in marketing and R & D. Instead, we used this slow period to aggressively launch renewed market assaults. Many new products and new models equipped with the more powerful motion controllers and linear motors were introduced to the market. New die, wire and flip chip bonders were sent for various field evaluations, and obtained very favourable responses from the customers. Our technical support for customers’ packaging development efforts also yielded good returns. This strategy enables ASM to foster strategic partnerships with our customers and open some doors for our leadframes and other assembly equipment.

While the first few months of this year may prove challenging times, due to a low order backlog and lack of customer capacity expansion until their overall loading further improves, we have seen rising demands for fine pitch wire bonders to meet the die shrink requirements. This capability upgrade, as well as the need to invest in new package types like QFN, CSP and flip chip, will lead the assembly equipment industry’s gradual recovery. We believe ASM is well positioned with its products and integrated customer solutions to take full advantage of the market upturn.

Market and Product Development

Equipment Division

In spite of the extremely harsh business environment, ASM achieved a turnover of US$159.2 million in 2001, largely thanks to our diversified products addressing different application markets. With this turnover, ASM still ranks second among the world’s semiconductor assembly equipment manufacturers, although it represents a reduction of 63.5% compared to the previous year. Nevertheless, our sales were only 10% below that of our leading competitor, and we actually surpassed them during the first quarter. With our leading competitors reporting a revenue drop exceeding 70% in the calendar year 2001, once again ASM outperformed our peers and has clearly been gaining market share in the last few years.

Equipment sales represent 80% of the Group’s turnover. Due to the soft IC packaging market, especially the subcon segment, our weighting towards equipment addressing the optoelectronics, discretes and chip-on-board sectors was heavier than in the previous year.

During this slowdown, the AB339 Eagle wire bonder led our market offensive and successfully captured four new customers who did extensive field evaluations to verify our bonder’s superior fine pitch process capabilities, throughput and stability. Other demonstrations are currently on-going and several have already generated favourable responses from potential customers. We expect our wire bonder market share will be further enlarged when the market comes back for more technology and capacity buys.

Apart from supporting customers with process enhancements, we are continuing to push forward with our factory automation solution. We recently shipped our new generation IDEALine, featuring twin Eagles and some advanced concepts, to a customer for beta site testing. Concurrently, we are building a complete line for another customer, with ASM supplying all the critical process modules such as die attach, snap cure, wire bond, encapsulation, trim form, test handling, singulation, inspection, tape and reel. In addition to absolutely minimum work-in-progress (WIP), this line can go from wafer to fully tested and packaged IC in less than one hour manufacturing cycle time, a many-fold reduction as compared with the traditional approach.

Many exciting new products were launched during the year. Among them, our new AD900 flip chip bonder, which addresses the growing demands of flip chip in package (FCIP) with eutectic solder process, found its high placement accuracy and throughput well received by our customers. Our unique, small footprint solder ball placement line was shipped for customer benchmarking, complementing our factory automation solution for ball array packages. As an alternative to strip testing but achieving the same high productivity and standardized handler objectives, we delivered our first multi-site test handler capable of ambient and elevated temperatures. We expect these innovative new products will start generating revenue in 2002 and strengthen ASM’s product portfolio.

Leadframe Division

With the electronic industry adjusting its supply chain inventory, demand for semiconductors and consequently leadframes was low, especially during the 2nd and 3rd quarters. Our leadframe revenue dropped by 43.5% last year to US$40.8 million, representing 20% of the Group’s turnover.

As an integrated leadframe supplier having full functional capabilities, ASM is well-known for short delivery lead times and offers frame design, rapid prototyping and volume production of stamped frames with either spot silver or full palladium plating. Over the years, ASM has provided cost-effective solutions for surface-mounted IC and micro-packages with high density matrix leadframes.

Recognizing constraints in wire bonding, encapsulation and de-taping, we also offer QFN leadframes designed to optimize various assembly processes. Unique among all leadframe suppliers, this specialised knowledge permits ASM to provide strong packaging development support to our customers. Together with our superior half-etching capabilities, such value-added services have propelled ASM to leadership position in QFN leadframes. To meet upcoming volume demands, we have been installing reel to reel etching equipment and plating machines to capitalize on this market opportunity.

Capacity and Plant Development

Due to poor market demand, 2001 was not a year of capacity expansion or new facilities. This provided an excellent opportunity for our production management to focus on quality and efficiency improvement, training of staff and better utilization of the CNC machines already installed. More production capacity was allocated for our R&D prototypes and pilot production to expedite the time-to-market of our new products.

To sustain profitability at a much reduced business volume, many steps were taken to reduce our fixed and variable costs. Apart from minor layoffs and self-attrition to reduce headcount and remove marginal performers, we also introduced pay cuts, froze salary reviews and slashed overtime payments to trim fixed personnel expenses. In addition to savings on utilities and supplies due to plant shutdown, this soft period also helped to use up our employees’ accrued annual leave. These prudent cost control measures permitted us to sustain our track record of profitability since inception, i.e. full year operation starting 1976.

Reflecting the market situation, we trimmed our capital investment in 2001 to HK$153 million, some 20% below our original budget. In line with current business levels and typical of past years, we have budgeted HK$150 million for 2002, intended for analytical equipment, hardware and software to support R&D, logistics and management information, stamping dies for additional matrix leadframe products, machines for boosting QFN etched frame production, and to enhance our production capabilities.

Research and Development

In addition to our technological prowess, ASM’s success is built on our ability to innovate faster than our competitors and to exceed customer expectations with our products and services. In this regard, ASM aims not only to provide customers with world class hardware, but also with continuous process enhancement, packaging development support, factory automation solutions and software to help them manage their valuable assets. To fund these growing activities, it is our policy to spend 10% of our equipment sales on R&D. In 2001, our gross R&D expenses amounted to HK$170 million, second highest in our corporate history, representing 13.7% of our equipment sales.

As in previous years, we have a program to launch many new and exciting products in 2002. To maintain ASM’s leadership in fine pitch wire bonders and to offer customers better return on their investment dollar and factory space, the enhanced version of our Eagle wire bonder – the Eagle 60 – will be ready by the end of the first quarter. Featuring 15-20% higher productivity to lower customers’ cost of ownership, easier looping control, off-line programming and portability, this new model will further challenge our competitors’ market presence. Additional developments to achieve finer pad pitch bonding and better output per given floor area are in our roadmap.

During the past three years we have supported the photonics industry with our laser diode die and wire bonders. Now, as part of our long term diversification plan to serve the optical communication component industry, we have decided to broaden our product offerings with an optical fibre alignment and welding machine capable of sub-micron accuracy. We will be working closely with some selected customers and get our prototype machines ready within 2002.

To differentiate ASM as the leader of its industry and to help customers make the best use of their assets, we have been developing a cluster controller and IDEALnet software for monitoring ASM or foreign equipment. With 2D laser marking on the substrates and vision camera at each processing station, the cluster controller provides error prevention and traceability for the integrated circuits to be processed. The equipment management software, IDEALnet, permits the tracking of equipment performance, gaining remote access to information and diagnostic, as well as offering a vehicle to improve machine Overall Equipment Effectiveness (OEE).

We have already successfully developed a bonder to address one segment of the flip chip market. Now, as the pacesetter in the microelectronics assembly and packaging equipment industry, we intend to allocate additional R&D resources to expand our product range. We will provide a reflow station to be linked to our AD900 flip chip bonder to satisfy in-line processing requirements. An optional larger force bonding head module will address the higher complexity I/O dies. To cater for different bumping media, we will develop a machine for making gold stud bumps, and equip our flip chip bonder with thermocompression and thermosonic chip attach capabilities. Development efforts will be expanded to adapt transfer moulding and eliminate the underfill process for some selected applications. Our packaging development team will work closely with our customers to explore high performance but cost-effective flip chip packaging.

These and other groundbreaking, innovative development projects distinguish ASM from our competitors in the market, and safeguard our future business success.

Financial

ASM’s strong financial position is the result of our profitable and cash generating business performance in past years, as well as our conservative fiscal policy, prudent investment planning and strict liquidity control.

In spite of the most severe downturn in the history of semiconductor and its equipment industries, ASM remained profitable and generated strong positive cash flow last year. Although HK$459.5 million was paid as dividend and HK$153 million spent in capital investment during the twelve-month period, cash on hand at 31st December 2001 was only slightly reduced to HK$478.5 million (2000: HK$648.8 million). In fact, the majority of capital investments were funded by the current year depreciation of HK$151.8 million.

Except for a JPY479 million loan raised in July 2001 to hedge against our yen-based assets’ exposure to currency fluctuation, with no other bank borrowing, this resulted in an all bank debt to equity ratio of only 1.6%. With no long-term borrowing, as in the previous year, gearing ratio is again zero. Net interest income amounts to HK$ 22.1 million for the year.

Receivables were tightly monitored during 2001, resulting in 65 days sales outstanding, the same as the previous year. Management has closely scrutinized all receivable accounts and concluded that bad debt exposure, if any, is immaterial and well covered by provisions made in conformity with the Company’s policy. With the substantial reduction in working capital, our current ratio significantly improved to 4.39. Order backlog exceeded US$20 million as of December 31, 2001.

Having established a solid foundation in the microelectronics market, the Group intends to further its organic growth strategy in the near term. With no short term need for major cash outlay and in view of our strong liquidity and rising equity base, as evidenced by the recent dividend proposals, we aim to operate the Group with the optimum shareholder fund and return any excessive cash holdings to our shareholders. The strong financial position of the Company should allow ASM to weather the slowdown and emerge as a formidable leader in our industry.