PART I
ITEM 1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not applicable.
ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not
applicable.
The following table represents
selected historical consolidated financial data for ASAT for the five-year period ended April 30, 2007. The selected historical consolidated financial data below as of April 30, 2006 and 2007 and for the years ended April 30, 2005,
2006 and 2007 were derived from our audited consolidated financial statements as of such dates and for such periods included elsewhere in this Annual Report. The selected historical consolidated financial data below as of April 30, 2003, 2004
and 2005 and for the years ended April 30, 2003 and 2004 were derived from our audited consolidated financial statements as of such dates and for such periods not included in this Annual Report. The financial information included in this Annual
Report does not reflect our results of operations, financial position and cash flows in the future and our past operating results are no guarantee of our future operating performance. In this Annual Report, all references to fiscal years are to the
Companys fiscal years ended April 30th, thus fiscal year 2007 refers to the fiscal year ended on April 30, 2007.
1
SELECTED FINANCIAL DATA
The selected historical consolidated financial data is qualified by reference to, and
should be read in conjunction with, Item 5Operating and Financial Review and Prospects and our consolidated financial statements and the related notes, included elsewhere in this Annual Report.
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Fiscal Year Ended April 30,
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2003
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2004
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2005
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2006
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2007
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(In thousands of dollars, except for share and ADS data)
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Statement of Operations Data:
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Net sales
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$
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150,090
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$
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214,674
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$
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194,411
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$
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182,115
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$
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164,853
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Cost of sales
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140,366
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174,275
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182,319
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168,859
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149,927
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Gross profit
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9,724
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40,399
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12,092
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13,256
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14,926
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Operating expenses:
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Selling, general and administrative expenses
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24,215
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24,775
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27,455
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29,448
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22,065
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Research and development
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5,299
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4,562
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4,481
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4,059
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2,218
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Reorganization expenses
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713
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928
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4,690
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2,473
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Litigation settlement
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4,603
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Impairment of property, plant and equipment
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81,807
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2,387
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19,944
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3,890
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Facilities and relocation charges
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306
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1,054
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3,047
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Total operating expenses
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112,034
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32,030
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57,411
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43,141
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29,803
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(Loss) income from operations
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(102,310
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)
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8,369
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(45,319
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)
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(29,885
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)
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(14,877
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)
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Other income, net (1)
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1,709
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689
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688
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3,438
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643
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Charges on early redemption of 12.5% senior notes (2)
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(10,346
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)
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Interest expense
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(13,652
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(15,425
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)
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(15,046
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(16,633
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)
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(19,542
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Loss before income taxes
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(114,253
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)
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(16,713
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)
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(59,677
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(43,080
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(33,776
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)
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Income tax benefit (expense)
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15,174
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(4
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)
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(748
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649
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(1,264
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)
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Net loss
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$
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(99,079
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)
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$
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(16,717
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)
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$
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(60,425
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$
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(42,431
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)
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$
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(35,040
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)
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Net loss applicable to common stockholders:
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Net loss
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$
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(99,079
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)
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$
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(16,717
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)
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$
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(60,425
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)
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$
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(42,431
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)
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$
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(35,040
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)
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Preferred shares:
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Cumulative preferred share dividends
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(976
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)
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(1,990
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)
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Accretion of preferred shares
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(500
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(1,232
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)
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Net loss applicable to common stockholder
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$
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(99,079
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$
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(16,717
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$
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(60,425
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$
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(43,907
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$
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(38,262
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Net loss per share (basic and diluted) (3)
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$
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(0.15
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$
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(0.02
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$
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(0.09
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$
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(0.06
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)
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$
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(0.06
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Net loss per ADS (basic and diluted) (3)
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$
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(2.22
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$
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(0.36
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$
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(1.35
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$
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(0.97
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)
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$
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(0.83
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)
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Basic and diluted weighted average number of shares outstanding (3)
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668,947,000
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671,721,610
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677,953,380
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679,357,820
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691,798,216
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Basic and diluted weighted average number of ADSs outstanding (3)
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44,596,467
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44,781,441
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45,196,892
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45,290,521
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46,119,881
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2
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As of April 30,
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2003
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2004
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2005
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2006
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2007
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(In thousands of dollars)
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Balance Sheet Data (at end of year):
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Cash and cash equivalents
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$
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25,775
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$
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62,610
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$
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32,717
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$
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11,915
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|
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$
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7,325
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Total assets
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165,170
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227,019
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178,746
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181,461
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135,137
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Total debt (4)
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98,705
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150,000
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160,021
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160,972
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164,666
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Total shareholders equity (deficit)
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48,099
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33,782
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(26,456
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)
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(53,257
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)
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|
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(88,261
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)
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Fiscal Year Ended April 30,
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|
2003
|
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|
2004
|
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2005
|
|
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2006
|
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2007
|
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(In thousands of dollars)
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Other Data:
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|
|
|
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|
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|
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Net cash (used in) provided by operating activities
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$
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(2,342
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)
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$
|
15,932
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|
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$
|
1,886
|
|
|
$
|
(7,060
|
)
|
|
$
|
10,403
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Net cash used in investing activities
|
|
|
(6,359
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)
|
|
|
(24,095
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)
|
|
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(40,727
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)
|
|
|
(23,404
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)
|
|
|
(17,567
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)
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Net cash provided by financing activities
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|
|
|
|
|
|
45,033
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|
|
|
9,127
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|
|
|
9,651
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|
|
|
2,535
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Depreciation of property, plant and equipment
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|
|
30,220
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|
|
|
24,855
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|
|
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31,682
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|
|
|
26,886
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|
|
|
23,328
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Amortization of deferred charges and debt discount
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|
|
1,497
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|
|
|
1,479
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|
|
|
958
|
|
|
|
1,947
|
|
|
|
3,705
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Capital expenditures
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|
|
6,940
|
|
|
|
28,530
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|
|
|
40,740
|
|
|
|
23,520
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|
|
|
17,748
|
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(1)
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Other income, net mainly consists of interest income, rental income, gain (loss) on disposal of property, plant and equipment, unapplied payment from customers, write-back of long
outstanding payable balances and reversal of the previously accrued write-off of ASAT S.A. See note 16 of the notes to our consolidated financial statements included in this Annual Report.
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(2)
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Reflects charges incurred in connection with the early redemption of our 12.5% senior notes, which included $6.3 million for the early redemption premium and $4.0 million for the
non-cash write-off of deferred financing costs and debt discount in fiscal year 2004.
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(3)
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The computation of net loss per share (basic and diluted) is calculated as the net loss for the year divided by the weighted average number of shares outstanding during the year.
The computation of net loss per share (basic and diluted) for the years ended April 30, 2003, 2004, 2005, 2006 and 2007 is based on a weighted average number of ordinary shares during the year in the amount of 668,947,000, 671,721,610,
677,953,380, 679,357,820 and 691,798,216, respectively. Effective from December 22, 2006, we changed our ADS to ordinary share ratio from one ADS for every five ordinary shares to one ADS for every 15 ordinary shares. Therefore, the basic and
diluted earnings per ADS as well as the basic and diluted weighted average number of ADSs outstanding for the four fiscal years ended April 30, 2003, 2004, 2005 and 2006 have been retrospectively restated based on the new ratio applied
effective from December 22, 2006.
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(4)
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Debt consists of bank debt, senior notes, capital lease obligations and a purchase money loan facility. As of April 30, 2007, debt included our 9.25% senior notes, purchase
money loan, capital lease obligations and loans made under a revolving credit facility. As of April 30, 2006, debt included our 9.25% senior notes, purchase money loan and capital lease obligations. As of April 30, 2005, debt included our
9.25% senior notes, capital lease obligations and a short-term bank loan. As of April 30, 2004, debt included our 9.25% senior notes. As of April 30, 2003 debt included our 12.5% senior notes.
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Exchange Rate Information
The financial information
presented in this Annual Report is in U.S. dollars. Such information assumes certain currency exchange rate information, including that set forth below.
The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since 1983, the Hong Kong dollar has been linked to the U.S. dollar. Although the market exchange rate of the Hong Kong
dollar against the U.S. dollar was and continues to be determined by forces of supply and demand in the foreign exchange market, between 1983 and May 2005 Hong Kong maintained a fixed rate system which fixed the rate
3
of exchange to HK$7.80 per U.S. dollar, or the Linked Exchange Rate System. However, in May 2005, the Hong Kong Monetary Authority broadened the 22-year
trading band from the original rate of HK$7.80 per U.S. dollar to a new range varying between HK$7.75 per U.S. dollar and HK$7.85 per U.S. dollar. This move was aimed at discouraging the use of Hong Kong dollars as a vehicle for speculation that the
Renminbi would appreciate. The Hong Kong government has indicated its intention to maintain the Linked Exchange Rate System. The Hong Kong government has also stated that it has no intention of imposing exchange controls and that the Hong Kong
dollar will remain freely convertible into other currencies, including the U.S. dollar. However, we cannot assure you that the Hong Kong government will maintain the trading band at HK$7.75 to HK$7.85 per U.S. dollar or at all. As a result of the
Linked Exchange Rate System, exchange rates between the Hong Kong dollar and other currencies are influenced by the value of the U.S. dollar.
Additionally, our exposure to fluctuations in the value of the Renminbi has significantly increased due to the completion of the move of our manufacturing, assembly and test facilities to Dongguan, China. From 1994 to July 2005, the
conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, was based on rates set by the Peoples Bank of China, which were set daily based on the previous days interbank foreign market exchange rate and current
exchange rates on the world financial markets. As a result, the exchange rate of the Renminbi to the U.S. dollar was previously substantially pegged or fixed. On July 21, 2005 the government of China announced that the exchange rate of the
Renminbi was being appreciated against the U.S. dollar and that the Renminbi would henceforth have a more flexible exchange rate within a narrow band that would float against a basket of foreign currencies. However, the Chinese government may decide
to change or abandon this policy at its sole discretion at any time in the future. As of September 30, 2007, the exchange rate was RMB7.52 to US$1.00 as compared with RMB7.96 to US$1.00 as of September 30, 2006. This appreciation of the Renminbi
against the U.S. dollar and any future appreciation in the exchange rate of the Renminbi against the U.S. dollar may increase our costs relating to our Dongguan, China operations.
4
RISK FACTORS
Risk Factors
Risks relating to our business include the factors set forth below. Because of the following factors, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
We have been operating at a net loss for each of the past five fiscal years and have had negative operating cash flow in fiscal 2003 and 2006.
We have been operating at a net loss for each of the past five fiscal years. Our net loss for the fiscal years ended April 30, 2003, 2004, 2005, 2006 and 2007 was $99.1 million, $16.7 million, $60.4 million,
$42.4 million and $35.0 million, respectively. We also had negative operating cash flow in fiscal 2003 and 2006 of $2.3 million and $7.1 million, respectively. Although we had a positive operating cash flow for the fiscal year ended April 30,
2007 of $10.4 million, we cannot assure you that we will be able to generate positive cash flow in the future.
Due to insufficient cash
generated from operations, we have funded our operations through the sale of equity and debt securities, borrowings, equipment lease financings, shareholder financings and other financing arrangements. While we have been implementing cost reduction
programs since the end of the January 2002 quarter, including the move of our assembly and test facilities from Hong Kong to lower-cost facilities in Dongguan, China, we continue to have significant fixed expenses and are incurring other
manufacturing, sales and marketing, product development and administrative expenses. We are also obligated to make significant interest payments on our 9.25% senior notes due 2011 of approximately $7.0 million on August 1 and February 1 of
each year. In January 2006, we also obtained $10.0 million under our purchase money loan facility, which will be due on April 30, 2009. On May 1, 2006, we entered into an advance payment agreement with a customer to provide us with $6.0
million of financing in the form of advance payments for assembly and test services, subject to certain conditions. The advance was made to us on June 9, 2006. In September 2006, ASAT China obtained a revolving credit facility for $3.8 million
with a term of one year. On October 8, 2006, ASAT China drew down $2.5 million (which amount was rolled over in September 2007 for another one year term), and on April 30, 2007, ASAT China drew down the remaining balance of this revolving
credit facility, all of which remains outstanding as of the date of this Annual Report. In September 2007, ASAT China obtained a revolving credit facility of RMB150 million (approximately US$20 million) with a term of one year. This facility is
secured by certain trade receivables of ASAT China. This facility has not been drawn down as of the date of this Annual Report.
In the
event that we continue to generate negative cash flow, we may be required to seek new or alternative financing to fund our operations in the future. Our ability to raise any future additional or alternative financing will be limited by our financial
situation, including our high level of debt and negative net worth, and may be limited by market conditions, our controlling shareholders, who may oppose transactions that reduce their control or dilute their ownership positions, the covenants in
our 9.25% senior notes due 2011, our purchase money loan agreement, our advance payment agreement and our revolving credit facility, any default or non-compliance with the covenants that govern any of our borrowings, as well as requirements to
obtain approval of certain types of financings from our shareholders. For details of our borrowings, see Item 3Key InformationRisk FactorsWe may not be able to finance future needs because of restrictions placed on us by the
indenture governing our 9.25% senior notes due 2011 and the purchase money loan agreement. We are also uncertain as to whether we can raise additional financing from our shareholders in the future. For these and other reasons outside our
control, it may be difficult for us to raise additional capital if and when it is required or at all. If we are unable to raise future additional or alternate financing when needed, any of the following may occur:
|
|
|
our customer relationships and orders with our customers could deteriorate;
|
|
|
|
suppliers would be less willing to supply us or extend credit on acceptable terms, if at all;
|
5
|
|
|
employee attrition could increase; and
|
|
|
|
lenders could be unwilling to provide or refinance our debt.
|
If adequate capital is not available to us as required, or if it is not available on favorable terms, our business and financial condition would be adversely affected, which could negatively affect our ability to
develop new technologies and products and services, increase production and compete effectively in our market, and we may not be able to meet our obligations as they become due. In addition, if adequate capital is not available to us, we will need
to sell assets or seek to undertake a restructuring of our obligations with our creditors, and we cannot give assurances that we would be able to accomplish either of these measures on commercially reasonable terms, if at all. In any such case, we
may not be able to continue as a going concern.
We will require a significant amount of cash to fund operating and capital expenditures and to service
our debt.
Our ability to fund operating and capital expenditures and to service debt will depend significantly on our ability to
generate cash from operations. For the fiscal year ended April 30, 2005, the earnings to fixed charges deficiency was $59.7 million, for the fiscal year ended April 30, 2006, the earnings to fixed charges deficiency was $43.1 million, and
for the fiscal year ended April 30, 2007, the earnings to fixed charges deficiency was $33.8 million. For the purpose of this calculation, earnings consisted of loss before income taxes and fixed charges, and fixed
charges consisted of interest expense, including amortization of debt discount and debt issuance costs, and the interest portion within rental expenses which is estimated as one-third of the rental expenses relating to operating leases. We
will need to generate cash flow in excess of current levels to fund operating and capital expenditures and to service our debt, including our 9.25% senior notes due 2011, our purchase money loan facility and capital lease obligations. However, we
cannot assure you that we will be able to generate cash flow or obtain funds from other financing sources to fund our planned operations and capital expenditures or to service our debt. Our ability to generate cash from operations is subject to
general economic, financial, competitive, industry, legal and other factors and conditions, many of which are outside our control. In particular, our operations are subject to cyclical downturns and price and demand volatility in the semiconductor
industry. If we cannot generate sufficient cash to service our debt or obtain financing, we may have to, among other things, reduce capital expenditures, reduce research and development expenditures, sell assets, restructure our debt, or obtain
alternate financing, which may not be available on acceptable terms or at all. We might not be able to take these actions or they may not be successful. Our ability to take any of these steps may be subject to approval by creditors, including future
creditors, our shareholders and the holders of our 9.25% senior notes due 2011.
Our substantial indebtedness, related interest payments and required
dividends could adversely affect our operations.
We have a significant amount of indebtedness that will increase further if we make any
drawdowns on our new $20 million credit facility or if we are able to secure new financing. Our related interest payments and semiannual dividend payments on our Series A Redeemable Convertible Preferred Shares, or Series A Preferred Shares, also
impose significant financial burdens on us. If further new debt is added to our consolidated debt level, the related risks that we now face could intensify. Covenants in the agreements governing our existing debt, and debt we may incur in the
future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments, and encumber or dispose of assets. In addition, financial covenants contained in agreements relating to our
existing and future debt could lead to a default in the event our results of operations do not meet our plans and we are unable to amend such financial covenants prior to default. A default under one debt instrument may also trigger cross-defaults
under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on us, our financial condition and our capital structure.
6
Our substantial indebtedness has important consequences to our ability to operate our company. For
example, it could, and does:
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increase our vulnerability to general adverse economic and industry conditions;
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limit our ability to fund future working capital, capital expenditures, research and development and other general corporate requirements;
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require us to dedicate a substantial portion of our cash flow from operations to service interest and principal payments on our debt;
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limit our flexibility to react to changes in our business and the industry in which we operate;
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place us at a competitive disadvantage to any of our competitors that have less debt; and
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limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds.
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We may not be able to finance future needs because of restrictions placed on us by the indenture governing our 9.25% senior notes due
2011 and the purchase money loan agreement.
The indenture governing our 9.25% senior notes due 2011 contains, and agreements governing
our future debt may contain, various covenants that limit our ability to, among other things:
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pay dividends, redeem capital stock and make certain other restricted payments or investments, including loans, guarantees and advances;
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incur additional indebtedness, including guarantees, or issue certain equity interests;
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merge, consolidate or sell all or substantially all of our assets;
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issue or sell capital stock of some of our subsidiaries;
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sell or exchange assets or enter into new businesses;
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create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
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create liens on assets; and
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enter into particular types of transactions with affiliates or related persons.
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On August 23, 2007, we obtained consent from holders of our 9.25% senior notes due 2011 to amend certain provisions of the indenture governing our
9.25% senior notes due 2011. As a result, we entered into a supplemental indenture on August 27, 2007, which is filed as an exhibit to this annual report. The purchase money loan agreement entered into in connection with our shareholder
financing contains various restrictive covenants, including those described above, and additional restrictions on our ability to incur indebtedness. On August 23, 2007, we entered into a waiver and amendment agreement with the lenders under our
purchase money loan facility, and amended certain provisions of the purchase money loan agreement including, without limitation, extending the payment dates for certain principal and interest payments. Such waiver and amendment agreement is filed as
an exhibit to this annual report. For further details, see Item 7Major Shareholders and Related Party TransactionsRelated Party Transactions and Item 10Additional InformationMaterial Contracts. In
addition, our advance payment agreement with one of our customers contains affirmative and negative covenants that restrict our ability to take specified actions.
Our ability to comply with covenants contained in the indenture governing our 9.25% senior notes due 2011, our purchase money loan agreement and other agreements governing indebtedness to which we may become a party
may be affected by events beyond our control, including prevailing economic, financial and industry conditions. We operate in an industry that requires large capital expenditures for productivity
7
improvements, and the indenture governing our 9.25% senior notes due 2011, the purchase money loan agreement and agreements governing other debt we may
incur, may limit our ability to finance these capital expenditures. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in an acceleration of our indebtedness and cross-defaults
under the agreements governing other indebtedness to which we may become a party. Any such acceleration or cross-default could require us to repay or repurchase debt, together with accrued interest, prior to the date it otherwise is due, which could
adversely affect our financial condition. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business in our sole discretion could harm our business by, among other things, limiting our
ability to take advantage of financing, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us. Our ability to obtain needed future financing may require alternative financing arrangements with our
customers to fund capital expenditures.
We are controlled by two principal groups of shareholders, and their interests may conflict with your interest.
Several private equity funds separately managed by or affiliated with JPMP Master Fund Manager, L.P. (formerly Chase Capital Partners)
and Olympus Capital Holdings Asia, respectively, referred to as the investor group in this Annual Report, collectively owned approximately 39.4% of the outstanding ordinary shares of ASAT Holdings as of April 30, 2007. The investor
group has signed a co-investment agreement generally to vote in unison on certain matters. QPL International Holdings Limited (QPL), its subsidiaries and its controlling shareholder collectively owned approximately 42.5% of the ordinary
shares of ASAT Holdings as of April 30, 2007. The investor group and QPL together control ASAT Holdings board of directors, the election and nomination of new directors, management and policies. In addition, our current Acting Chief
Executive Officer is a member of our board of directors and is affiliated with QPL, and our current Chief Financial Officer is the brother of a member of our board of directors who is affiliated with the investor group. For further information, see
Item 7Major Shareholders and Related Party TransactionsRelated Party Transactions. QPL and the investor group are subject to a shareholders agreement and vote together on certain matters, including on the election of
directors of ASAT Holdings. The investor group and QPL are not obligated to provide any financing under their current shareholders agreement. The investor group and QPL are not obligated to exercise their rights as shareholders in the interests of
ASAT Holdings and may engage in activities that conflict with such interests. We have not established, and may be unable to establish, any procedures for resolving actual or perceived conflicts of interest between our principal shareholders and our
other investors. Furthermore, disagreements between the investor group and QPL which cannot be resolved could adversely affect the management of our company.
The market price of our ADSs may be volatile and you may not be able to resell your ADSs at or above the price you paid, or at all. In addition, the liquidity of the ADSs may also be adversely affected by delisting if we cannot meet
Nasdaq Capital Market listing requirements.
Our ADSs have experienced substantial price volatility during the past three years,
particularly as a result of variations between our anticipated and actual financial results, the published expectations of analysts, and announcements by our competitors and by us. From time-to-time, this volatility has been exacerbated by the
relatively low average daily trading volumes of our ADSs. In addition, the stock market itself has experienced extreme price and volume fluctuations that have negatively affected the market price of the stocks of many technology and manufacturing
companies. These factors, as well as general worldwide economic and political conditions, may materially adversely affect the market price of our ADSs in the future.
Our ADSs were transferred to the Nasdaq Capital Market from the Nasdaq Global Market (formerly the Nasdaq National Market) effective November 30, 2005. On May 25, 2005, we received a compliance notice from
The Nasdaq Stock Market, Inc., or Nasdaq, stating that, for a period of 30 consecutive trading days, our ADSs had closed below the minimum bid price of $1.00 per ADS as required under the Nasdaq Marketplace Rule 4450(a)(5) for continued listing on
the Nasdaq Global Market. In accordance with Nasdaqs Marketplace Rules,
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we had until November 21, 2005 to regain compliance with the Nasdaq Global Markets continued listing requirements and, as we failed to meet those
requirements, we transferred the listing of our ADSs to the Nasdaq Capital Market.
On July 17, 2006, we received a compliance notice
from Nasdaq stating that, for a period of 30 consecutive trading days, our ADSs had closed below the minimum bid price of $1.00 per ADS as required under Nasdaq Marketplace Rule 4320(e)(2)(E)(i) for continued listing on the Nasdaq Capital Market. In
accordance with Nasdaq Marketplace 4310(c)(8)(D), we were provided with 180 calendar days, until January 16, 2007, to regain compliance with the Nasdaq Capital Markets continued listing requirements or be subject to delisting. Effective
at the close of business on December 22, 2006, we adjusted our ADS ratio from a ratio of one ADS for every five ordinary shares to a ratio of one ADS for every 15 ordinary shares. On January 11, 2007, we received a Nasdaq letter advising
that we regained compliance with the minimum bid price requirement for continued listing found in Nasdaq Marketplace Rule 4320(e)(2)(E)(ii).
On July 30, 2007, we received another compliance notice from Nasdaq stating that, for a period of 30 consecutive trading days, our ADSs had closed below the minimum bid price of $1.00 per share as required under Nasdaq Marketplace Rule
4320(e)(2)(E)(i) for continued listing on the Nasdaq Capital Market. In accordance with Nasdaq Marketplace Rule 4310(c)(8)(D), we have been provided with 180 calendar days, until January 28, 2008, to regain compliance with the Nasdaq Capital
Markets continued listing requirements or be subject to delisting. If compliance cannot be demonstrated by January 28, 2008, Nasdaq will determine whether we meet the initial listing criteria for the Nasdaq Capital Market, other than the
bid price requirement. If we meet the initial listing criteria, we may be granted an additional 180 calendar days to regain compliance with the bid price requirement. If we are not eligible for this additional compliance period, Nasdaq will provide
written notification that our ADSs will be delisted.
On September 17, 2007, we received a Nasdaq Staff Determination (Staff
Determination) letter indicating that the Companys market value of listed securities has been below $35,000,000 as required for continued inclusion by Marketplace Rule 4320(e)(2)(B) and that its American Depositary Shares are, therefore,
subject to delisting. The Company was also notified by Nasdaq at that time that it does not comply with the minimum stockholders equity of $2,500,000 or net income from continuing operations of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years, which are also requirements for continued listing on the Nasdaq Capital Market.
We have appealed the Staff Determination and have received a hearing date of November 1, 2007 for such appeal. At the hearing, the Company will be required to address the foregoing non-compliance with the Nasdaq
listing rules. Nasdaqs delisting action has been stayed, pending a final written determination by the Nasdaq Listing Qualifications Panel following the hearing. Our ADSs are currently trading on the Nasdaq Capital Market under the trading
symbol ASTT. The price of our ADSs could be further negatively impacted by the adjustment to our ADS ratio, the conversion of Series A Preferred Shares, the exercise of warrants and the payment of future dividends on our Series A
Preferred Shares. We cannot assure you that we will be able to meet the listing requirements for the Nasdaq Capital Market in the future or that we will succeed with our appeal hearing with Nasdaq to avoid delisting.
The liquidity and price of our ADSs most probably will be negatively impacted by delisting. For example, the demand for our ADSs may be curtailed by
certain investment entities that have self-imposed restrictions and/or investment limitations regarding the trading in and holding of securities that are not listed. Any of these entities that hold our ADSs prior to delisting would likely seek to
sell their ADSs, which would tend to depress the price of our ADSs. In addition, the quotation of our ADSs on the Nasdaq Global Market preempted the operation of the laws of the various U.S. states relating to the qualification of securities.
Securities listed on the Nasdaq Capital Market or that have been delisted do not preempt the operation of these laws and, as a result, the liquidity of our ADSs may be negatively impacted. If we are unable to meet the listing requirements to remain
on the Nasdaq Capital Market, our ADSs may be traded on the Over The Counter Bulletin Board or our ADSs may not be traded on any market and the price and liquidity of your ADSs may decline.
9
Our business is and will continue to be substantially affected by the highly cyclical nature of the semiconductor
industry, which cyclicality is beyond our control.
Our business is substantially affected by market conditions in the semiconductor
industry, which is highly cyclical. The industry has been subject to significant downturns characterized by reduced product demand, increased competition and declines in average selling prices and margins. Semiconductor industry conditions are often
affected by manufacturing over-capacity and declining demand and reduced pricing in end-user markets.
The overall demand for
semiconductors increased significantly during the period from the second quarter of calendar year 2003 through the first quarter of calendar year 2004, but in the July 2004 quarter, the semiconductor industry experienced a downturn and our net sales
on a quarterly basis decreased sequentially from that quarter through the July 2005 quarter. Since the July 2005 quarter, the semiconductor industry has experienced a gradual recovery through the present, but we have failed to capture all the
benefits of such recovery that we otherwise might obtain due to disruptions in our operations during our move to Dongguan, China, which was completed in our October 2006 quarter. After moving our manufacturing operations to China, we are able to
improve our cost structure by taking advantage of skilled and low cost labor pool. However, if any future downturn in the semiconductor industry proves to be similar to the 2004 downturn, our business, financial condition and results of operations
would be adversely affected, our cash position would further erode and we may be required to seek new financing, which may not be obtainable on acceptable terms or at all. We may also be required to reduce our capital expenditures, which in turn
could hinder our ability to implement our business plan and to improve our productivity. In addition, we may need to expand our production capacity and throughput to maintain or increase revenues if average selling prices, or ASPs, decline, in
connection with an industry downturn. Because of the past downturns in the semiconductor industry and the uncertainty of the gradual recovery, we continue to re-evaluate our product mix and the direction of our business. This re-evaluation led to
significant write-downs of property, plant and equipment of $81.8 million for the year ended April 30, 2003 and $19.9 million for the year ended April 30, 2005
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We may need to make additional write-downs in the future.
Our principal market is in the communications sector, which is subject to fluctuating demand and continuous pressure on selling prices.
A significant percentage of our net sales is derived from customers who use assembly or test services for semiconductor devices used in the
communications sector. Sales to the communications sector comprised 54%, 52% and 61% of total net sales for the fiscal years ended April 30, 2005, 2006 and 2007, respectively. This sector has been subject to extreme fluctuations in demand, and
in the past we have experienced a prolonged industry-wide slowdown in demand in the communications sector. Historically, the average selling price of communications products has continuously declined, and the resulting pricing pressure on services
provided by us has led to reductions in our net sales and decreasing margins. For the past four years, we have embarked upon a strategy to diversify our customer base, increase margins and reduce dependency on the communications sector. Some of the
other market sectors which we seek to diversify our customer base include the consumer, personal computers/computing and automotive/industrial sectors. However, decreasing average selling prices could also affect products in these sectors. Moreover,
the execution of our strategy continues to take time and may ultimately not be successfully implemented. For example, we may lose customers, experience reductions in sales or experience lower margins for customers outside the communications sector.
If we are unable to successfully implement our diversification strategy, our financial condition and results of operations could be materially adversely affected.
Our ability to rapidly develop and successfully bring to market advanced technologies and services is important to maintaining our competitive position and profitability.
The semiconductor industry is characterized by rapid technological developments. Since we have been reducing our investments in research and development
in the last five fiscal years (and particularly between fiscal years ended April 30, 2006 and 2007 during which time we were implementing significant cost reduction
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measures), our research and development efforts may not yield commercially viable packages or test services to keep up with these technological changes. Any
inability to meet our customers schedules for new product introductions could affect our revenue, prospects for growth and future customer relationships. Our customers seek advanced and quick time-to-market assembly and test capabilities for
their increasingly complex end-user applications. Failure to maintain or increase investment in research and development or to advance our designs and process technologies successfully and in a timely manner could have a material adverse effect on
our competitiveness and our profitability. Technological advances could lead to significant decreases in prices for maturing product offerings. Extending reliance on mature product offerings could reduce our gross margins.
We could be required to incur significant capital expenditures for manufacturing technology and equipment to remain competitive.
Semiconductor manufacturing has historically required, and in the future is likely to continue to require, a constant upgrading of process technology to
remain competitive, as new and enhanced semiconductor processes are developed which permit the manufacture of smaller, more efficient and more powerful semiconductor devices. Our assembly and test facilities have required and will continue to
require significant investments in manufacturing technology and equipment in the future. We have made substantial capital expenditures and installed significant production capacity to support new technologies and increase production volume. For our
fiscal year ended April 30, 2007, we made capital expenditures of $17.7 million. As of April 30, 2007, we had commitments for future capital expenditures of approximately $1.2 million. We currently intend to fund these capital expenditures
with the existing cash resources and positive cash flow generated from the savings, if any, expected to be realized from reductions in cost structure associated with the completion of the move of our manufacturing operations to Dongguan, China, from
financing provided by our customers to purchase equipment to expand our capacity and from future new financings. However, our ability to generate positive cash flow from our customers is uncertain so we cannot assure you that we will have sufficient
capital resources to make further necessary investments in manufacturing technology and equipment. Our ability to sustain needed capital expenditures may require alternative financing, including financing arrangements with our customers to purchase
equipment that primarily services such customers and new external financing. In addition, due to the long lead time involved in the pre-deployment development and product qualification activities that must precede a new product release, we may be
called upon to make substantial investments in both package design efforts and in new manufacturing equipment well in advance of our being able to record appreciable revenues derived from those new products. Further, during each stage of the long
qualification process required by customers for our products, which can take up to six months to complete, there is a substantial risk that we will have to abandon a potential assembly or test service which is no longer marketable or technologically
feasible or competitive and in which we have invested significant resources. Even if we are able to qualify new packages, a significant amount of time will have elapsed between our investment in new packages and the receipt of any related revenues.
Because our industry is highly competitive and many of our competitors have greater operating and financial resources, we may not be able to secure new
customers or maintain our customer base.
The semiconductor packaging and test industry is highly competitive, with more than 50
independent providers of semiconductor assembly services worldwide. We believe our principal competitors include Advanced Semiconductor Engineering, Inc., Amkor Technology, Inc., or Amkor, Carsem (M) Sdn. Bhd., Siliconware Precision Industries
Co., Ltd. and STATS ChipPAC Ltd. Many of our competitors have greater operating capacity and financial resources than we do and have proven research and development and marketing capabilities. If demand for semiconductor assembly and test services
were to continue to increase, our competitors would be at an advantage to us to capture this increased demand by utilizing their greater financial resources to more rapidly increase capacity. Many of our competitors also have established
relationships with many large semiconductor companies that are current or potential customers of ours. Further, lengthy qualification periods and a familiarity between potential customers and their current assembly service providers may limit our
ability to secure new customers.
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We also compete indirectly with the in-house assembly and test service resources of many of our largest
customers, the integrated device manufacturers, or IDMs. These IDM customers may decide to shift some or all of their assembly and test services to internally sourced capacity.
Due to this highly competitive environment, we may experience difficulties in securing business from new customers, additional business from our existing
customers or even maintaining our current level of business with our existing customers. In addition, if the trend for semiconductor companies to outsource their packaging needs does not continue, we may not be able to maintain our customer base and
our business and results of operations would be materially adversely affected.
If any of our competitors grow through acquisitions or equity investment
financing and we are unable to similarly grow, we may have difficulties competing against those competitors in terms of volume production, price competitiveness and array of services.
Some of our competitors with greater financial resources have been able to grow through acquisitions or equity investment financing. There have been
instances where one of our competitors has acquired the entire back-end assembly operations of an IDM. For example, Amkor acquired a substantial portion of IBMs assembly and test operations in China and Singapore. Other examples of merger and
acquisition activity among our competitors are the acquisition of ChipPAC, Inc. by ST Assembly Test Services Ltd., the acquisitions of UltraTera Corp. and NS Electronics Bangkok Ltd. by United Test and Assembly Center. An example of equity
investment financing is Temasek Holdings voluntary takeover bid to increase its equity shareholdings in STATS ChipPAC. As a result of such growth through acquisitions or equity investment financing, these competitors will have increased
capacity or stronger financial resources, and may be better positioned to increase their market share by decreasing prices. Additionally, as a result of such acquisitions or equity investment financing, these competitors may be able to provide a
broader array of services. If we are unable to grow our business through acquisitions or equity investment financing, we may have difficulties competing successfully against these competitors. In addition, the indenture that governs our 9.25% senior
notes due 2011 and our purchase money loan agreement require us to comply with certain covenants that limit our ability to enter into mergers or consolidations.
We face risks associated with potential acquisitions, investments, strategic partnerships or other ventures, including whether we can identify opportunities, complete the transactions and integrate the other parties into our business.
We believe that the semiconductor packaging industry may undergo consolidation, both with regard to consolidation among independent
assembly services providers and with respect to the outsourcing of in-house assembly capacity of semiconductor IDMs. We believe it may become increasingly important to acquire or make investments in complementary business, facilities, technologies,
services or products, or enter into strategic partnerships with parties who can provide access to those assets, if appropriate opportunities arise. From time to time we have had discussions with companies regarding our acquiring, investing in or
partnering with their businesses, products, services or technologies, and we regularly engage in such discussions in the ordinary course of our business. We may not be able to identify suitable acquisition, investment, strategic or other partnership
candidates or have sufficient resources to undertake such a transaction, which may place us at a disadvantage if our competitors are able to grow their market share through acquisitions, investments or strategic partnerships. If we do identify
suitable candidates, we may not be able to complete those transactions on commercially acceptable terms or at all. If we acquire another company, we could have difficulty in integrating that companys personnel, products, operations and
technology. In addition, the key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and reduce the expected benefits of
the acquisition.
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Our assembly and test processes are complex and prone to error, which may create defects and adversely affect
production yields.
Assembly and test services are prone to human error and equipment malfunction. Defective packages and services may
also result from:
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improper programming of customer specified manufacturing instructions;
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contaminants in the manufacturing environment;
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equipment deviations from process specifications;
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the use of defective raw materials; or
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defective vendor-provided leadframes or component parts.
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These factors have periodically contributed to lower production yields and may continue to do so, particularly in connection with any expansion of capacity or change in processing steps. In addition, our production
yields on new packaging technologies could be lower during the period necessary for us to develop the requisite expertise and experience with these processes. Any failure by us to maintain high quality standards and acceptable production yields, if
significant and sustained, could result in delays in shipments, increased costs or cancellation of orders, which could have a material adverse effect on our business, financial condition and results of operations.
In order to meet customer demands for package design, assembly and test services, we may be required to add new test equipment, which can be very capital intensive
and may not result in expected revenues and/or margins.
We provide our customers with package design, assembly and test services. Many
of our customers seek to do business with independent assemblers who can provide a full range of assembly and test services, particularly testing of mixed-signal semiconductors which perform both analog and digital functions. In order to satisfy
such customers demands, we may be called upon to acquire additional test equipment capacity, which could require us to increase our capital expenditures on test equipment. We may not have sufficient cash resources or available financing to
increase our capital expenditures in response to our customers demands. Additionally, the use of mixed-signal test equipment involves complex software programming and the use of sophisticated and expensive equipment operated by a highly
skilled workforce. However, customers requesting these types of test services are typically not willing to commit to the utilization of such additional capacity beyond their short-term forecasts. If these customers do not place their expected orders
or we experience a general decrease in demand for our test services, we could have excess capacity and low utilization rates for our test equipment, which could increase our costs and negatively affect our expected revenues and/or margins. In
addition, any failure by us to provide package design, assembly and test services could result in the loss of customers or sales of our services, which could have a material adverse effect on our business, financial condition and results of
operations.
Our profitability has in past periods been affected by low capacity utilization rates, which are significantly influenced by factors
outside of our control.
As a result of the capital intensive nature of our business, our operations are characterized by high fixed
costs. Consequently, insufficient utilization of installed capacity can negatively affect our profitability. For example, in fiscal year 2003, our capacity utilization rates ranged from averages of approximately 42% to 67% per month for our
assembly operations as a result of the weak demand for our assembly and test services resulting from the prolonged downturn in the semiconductor industry. In addition, as a result of the most recent industry downturn, which occurred in late 2004,
our capacity utilization rates averaged approximately 68% in fiscal year 2005. While the industry has gradually recovered in fiscal year 2006, we were unable to capture all the benefits of such recovery that we might otherwise obtain due to
disruptions in our operations during our move to Dongguan, China, and our capacity utilization rates averaged approximately 64% for fiscal year 2007. If we experience low capacity utilization in future periods, our financial condition and results of
operations could be adversely affected.
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Our customers generally do not place purchase orders far in advance, which makes it difficult for us to predict our
future sales, adjust our production costs and efficiently allocate our capacity on a timely basis and could therefore have an adverse effect on our business and operating results.
Although our customers provide us with forecasts of their expected orders, our customers generally do not place purchase orders far in advance of the
required shipping dates. In addition, due to the cyclical nature of the semiconductor industry, our customers purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant
backlog, which makes it difficult for us to forecast our sales in future periods. Also, since our costs of sales and operating expenses have high fixed cost components, including depreciation and employee costs, we may be unable to adjust our cost
structure in a timely manner to compensate for shortfalls in sales. Our current and anticipated customers may not place orders with us in accordance with our expectations or at all. As a result, it may be difficult to plan our capacity, which
requires significant lead time to ramp up and cannot be altered easily. If our capacity does not match our customer demand, we will either be burdened with expensive and unutilized overcapacity or be unable to support our customers
requirements, both of which would have an adverse effect on our business and results of operations.
We generate a significant amount of revenue from a
limited number of customers. The loss of, or reduced purchases by, one or more of our larger customers may have an adverse effect on our results of operations.
For each year ended April 30, 2007, 2006 and 2005, our single largest customer accounted for approximately 53.7%, 32.6% and 21.1%, respectively, of net sales. For the fiscal year ended April 30, 2007, our five
largest customers by net sales accounted for approximately 69.0% of net sales and our ten largest customers by net sales accounted for approximately 79.3% of net sales. For the fiscal year ended April 30, 2006, our five largest customers by net
sales accounted for approximately 59.2% of net sales and our ten largest customers by net sales accounted for approximately 74.0% of net sales. If any key customer were to significantly reduce its purchases from us, our results of operations may
likely be adversely affected. In addition, there may be a trend toward increasing customer concentration.
In line with industry practice,
new customers usually require us to pass a lengthy and rigorous qualification process that can take up to six months and be a significant cost to us and the customer. As a result, customers are reluctant to qualify new assembly and test service
providers and it may be difficult for us to attract new major customers and/or break into new markets. In addition, if we fail to qualify packages with potential customers or customers with which we have recently become qualified do not use our
services, then our customer base could become more concentrated with an even more limited number of customers accounting for a significant portion of our net sales. Furthermore, we believe that once a semiconductor company has selected a particular
assembly and test companys services, the semiconductor company generally relies on that vendors packages for specific applications and, to the extent possible, subsequent generations of that vendors packages. Accordingly, it may be
difficult to achieve significant sales from a customer once it selects another vendors assembly and test services.
We are vulnerable to
weaknesses in the economies of Asian countries.
Most of our important suppliers of raw materials, leadframes and the semiconductor
chips delivered to us for assembly and test are located in Asia. Substantially all our customers are United States or European multinational companies and nearly 100% of our invoices are billed in U.S. dollars. We estimate that approximately 74.0%
of our net sales during the fiscal year ended April 30, 2007 and 65.3% of our net sales during the fiscal year ended April 30, 2006 represented packages shipped to distribution centers and destinations within Asia (including Hong Kong).
These factors raise a number of financial, operational and business risks, including:
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exposure to regional economic and political developments;
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changes in local intellectual property laws and commercial laws;
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the imposition of local currency controls;
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adverse changes in local tax law or adverse changes in customs duties and procedures;
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availability of supplies and materials in China;
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transportation difficulties; and
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unfavorable changes to import/export regulations and procedures.
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These factors could adversely affect both our operations and the operations of our suppliers and customers. Future economic downturns in Asia or elsewhere would likely be detrimental to our business, financial
condition and results of operations.
Our ability to operate our Chinese manufacturing operations is dependent upon our working relationship with our
development partner in China.
Our development partner in China, the Dongguan Changan County Changshi Development Company
(Changshi), is an entity established by the Dongguan government to develop and manage several newly designated industrial parks in Changshi prefecture Chang An town, Dongguan City, Guangdong Province. Changshis performance during
the construction of Phase I and Phase II of our Dongguan, China facilities and completion of the interior finish and fixtures of our Phase I facility in Dongguan, China, met or exceeded our expectations with respect to the quality and timeliness of
the construction. However, Changshi may not continue to perform at these levels or at all during its assistance to us in the operation of our Dongguan, China facilities. Moreover, we could experience difficulties in our relationship with Changshi,
and the decisions made by Changshi may not be consistent with our interests, which in either case could be disruptive to our operations. Changshi is the owner of the Phase I and Phase II facilities land-use rights and buildings, constructed
our Phase I facilitys interior finish and fixtures and holds the approvals from the Chinese government necessary for us to operate our assembly and test facilities in Dongguan. A dispute with Changshi could cause Changshi to be unwilling to
perform its contractual obligations as lessor for our Dongguan, China facilities. In such circumstances, Changshi could prevent us from operating the facilities, which, following transfer of all of our manufacturing operations to Dongguan, China
means that we would be unable to conduct our business. Although we have the contractual right under our respective leases with Changshi to purchase the Dongguan, China facilities from Changshi at stipulated times, there can be no assurance that we
will have sufficient funds or access to financing in order to purchase the facilities. Any disruption in our business due to a dispute with Changshi may have a material adverse effect on our results of operations. In addition, if Changshi were to
breach one or more of its agreements with us, our agreements with Changshi provide that we must pursue any claims against it through binding arbitration in Beijing before the China International Economic and Trade Arbitration Commission. The outcome
of any such arbitration would be controlled by Chinese law and could be time consuming and unfavorable to us.
Our direct labor, and certain indirect
labor, workforce are composed primarily of Peoples Republic of China nationals, and we expect these employees to unionize. If we encounter future labor problems, this could adversely affect our revenues and profitability.
None of our employees in Dongguan, China or our other employees are currently represented by a union. However, our workers in our Dongguan, China
facilities may unionize, although we are not sure what percentage of this workforce will be affected. It is possible that the union will be subject to collective bargaining and wage agreements. These agreements could increase our labor costs in
China and have an adverse impact on our operating results. In addition, once unionized, this workforce may undertake labor protests and work stoppages, which could also have an adverse impact on our operating results. We cannot assure you that any
potential issues with the expected labor union or other employees will be resolved favorably for us in the future, that we will be successful in negotiating any potential wage and collective bargaining agreements, that we will not experience
significant work stoppages in the future or that we will not record significant charges related to those work stoppages or our compliance with changing minimum wage labor laws.
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Operating facilities in China can be fraught with uncertainty, including economic, political, legal operational and
financial risks, and there can be no assurances that our China facilities will bring their intended benefits to us.
Many economic,
political, legal, operational and financial risks may prevent us from realizing our intended benefits in China in connection with the completion of the move of our manufacturing operations to Dongguan, China. These risks include:
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economic, political and social uncertainties in China;
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changes in, and the arbitrary enforcement of, bankruptcy laws, commercial laws, currency controls, import tariffs and duties, customs regulations and taxation laws
in China;
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local infrastructure problems, such as electrical power interruptions, in an area that has only recently undergone a very rapid industrial development;
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quality problems arising from the start up of new manufacturing processes by operators who lack experience with our sophisticated manufacturing equipment;
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transportation difficulties that may be encountered in receiving supplies and/or in shipping finished products by land or by air;
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an unwillingness or hesitancy on the part of customers to qualify their products in the new facilities;
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an inability to attract and retain sufficient and qualified management and engineering talent and other experienced employees;
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measures which may be introduced to control inflation or deflation;
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changes in the rate or method of taxation;
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changes in tax holidays;
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continuing fluctuations in the value of the Chinese Renminbi currency;
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modifications to fiscal, banking or monetary policies to reduce the rate of future growth in China; and
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imposition of additional restrictions on currency conversion and remittances abroad.
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While Chinas economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy in China, but may also have a negative effect on
us. For example, our operating results and financial condition may be adversely affected by governmental control over capital investments or changes in tax regulations applicable to us.
The economy in China has been transitioning from a planned economy to a more market-oriented economy. Despite recent transitions to a market-oriented
economy, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It
also exercises significant control over Chinas economic growth through allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary and banking policy and providing preferential treatment for
particular industries or companies.
The Chinese legal system is based on written statutes. These statutes remain largely untested and
prior court decisions interpreting them may be noted for reference but have limited value as precedents. Since 1979, the Chinese government has promulgated laws and regulations dealing with economic matters such as bankruptcy, foreign investment,
corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new and because of the limited volume of published cases and their
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non-binding nature, interpretation and enforcement of these laws and regulations involve significant uncertainty. In addition, as the Chinese legal system
develops, changes in such laws and regulations, their interpretation or their enforcement may lead to additional restrictions on our business.
The Chinese government and provincial and local governments have provided, and continue to provide, various incentives to Chinese domestic companies in the semiconductor industry, which includes ASAT China, our Chinese operating subsidiary,
in order to encourage development of the industry. Such incentives include tax rebates, reduced tax rates, tax holidays, favorable lending policies and other measures. Any of these incentives could be reduced or eliminated by governmental
authorities at any time. Any such reduction or elimination of incentives which may be provided to us could adversely affect our business and operating results.
There can be no assurances that economic, political, legal, operational and financial risks in China will not adversely affect our business.
Our corporate structure may restrict our ability to receive dividends from, and transfer funds to, ASAT China, our Chinese operating subsidiary, which could restrict our ability to make payments on our 9.25% senior
notes due 2011 or act in response to changing market conditions.
While ASAT Holdings is a Cayman Islands holding company, we conduct
our assembly and test operations through our Chinese subsidiary. The ability of this subsidiary to pay dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and
regulations. In particular, under China law, a Chinese subsidiary may pay dividends only after at least 10% of its net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of its registered capital. The profit
available for distribution from our Chinese subsidiary is determined in accordance with generally accepted accounting principles in China. This calculation may differ from one performed in accordance with U.S. GAAP. Our Chinese subsidiary was
founded in late December 2004 in connection with Phase II of the transition of our manufacturing operations from Hong Kong to Dongguan, China and has commenced operations. Moreover, its original registered capital is approximately $33.0 million, of
which approximately $10.6 million has been contributed as of April 30, 2007 and the remainder will be due by December 2007. This subsidiary also has an increased registered capital requirement of approximately an additional $20.0 million that
is due by 2009. Capital contributions to this subsidiary may be made by a mix of cash and in-kind (e.g., equipment) contribution. The ability of this subsidiary to pay dividends will depend ultimately on the profitability of its business. As a
result, we may not have sufficient distributions from our Chinese subsidiary to enable necessary profit distributions to us or any distributions to our shareholders in the future.
Payments by our Chinese subsidiary to us other than as dividends, such as payments of loan principal and interest, may be subject to governmental
approval and taxation. It is also not permitted under China law for our Chinese subsidiary to directly lend money to our Hong Kong or other subsidiaries. Any transfer of funds from ASAT Holdings to our Chinese subsidiary, either as a shareholder
loan or as an increase in registered capital, is subject to registration or approval of Chinese governmental authorities, including the relevant administration of foreign exchange or other relevant examining and approval authorities. Therefore, it
is difficult to change our capital expenditure plans once the relevant funds have been remitted to our Chinese subsidiary. These limitations on the free flow of funds between us and our Chinese subsidiary could restrict our ability to act in
response to changing market conditions and reallocate funds from our Chinese subsidiary to our other subsidiaries in a timely manner, or at all.
We
conduct our operations at a single location in China. Accordingly, we are vulnerable to natural disasters, and other disruptive regional events, which could cause us to lose revenue and perhaps lose customers.
We conduct our assembly and test operations in our facilities in Dongguan, China. Significant damage or other impediments to any of these facilities,
whether as a result of fire, weather, disease, civil strife, industrial
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strikes, breakdowns of equipment, difficulties or delays in obtaining imported spare parts and equipment, natural disasters, terrorist incidents, industrial
accidents or other causes, could temporarily disrupt or even shut down our operations, which would have an adverse effect on our financial condition and operating results.
With respect to our facilities in Dongguan, China, Changshi has procured insurance covering the buildings and public liability insurance, we have
procured insurance covering the contents of the buildings, public liability insurance and business interruption insurance. We cannot assure you that our insurance or the insurance procured by Changshi would be adequate to cover any direct or
indirect loss or liability resulting from any of the events described above.
Any disruptions in available power supplies in Dongguan, China could
disrupt our operations, reduce our sales and increase our expenses.
We have transferred all of our assembly and test operations to
Dongguan, China, and they are dependent on a reliable source of electrical power. For economic and continuous manufacturing operations, we are dependent to a substantial degree on electrical power supplied by state run power generating facilities.
China is now experiencing an electrical power shortfall that is expected to increase in the near term as the imbalance between capacity and demand grows. The projected power shortfall is expected to be most acute in southern China, including
Dongguan, China, where our factory is located. In Dongguan, China demand for power exceeded supply during most of calendar years 2004, 2005 and 2006 and the first half of 2007. Should our Dongguan, China facilities be subject to rolling blackouts or
should the power shortage result in brownouts of increased severity, our operations may suffer temporary shutdowns or be otherwise inconvenienced. We believe that the potential for blackouts and brownouts that could affect our operations at the
Dongguan, China facilities will be highest during warm weather conditions.
We currently have dedicated power supply lines to support our
Phase I and Phase II facilities. In addition, we currently have back-up generators that support a portion of production at our Dongguan, China facilities. Phase II of our move to China also included the installation of a separate dedicated power
supply line from an alternative power source, which we expect to provide independent and continuous back-up power. We expect that these dedicated power lines will not be subject to temporary or rolling blackouts, although they and our back-up
generators may not provide us with adequate power during prolonged blackouts. Any interruption in our ability to continue our operations at the Dongguan, China facilities could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue and increased expenses, any of which would substantially harm our business and results of operations.
In addition to the above, if retail electricity prices rise dramatically in Dongguan, China, we would expect our expenses to increase and our operating results to be adversely affected.
We may not be able to continue to reduce our cost structure. Even if we do, it may not reduce our operating expenses by as much as we anticipate.
Beginning in 2001, in response to a severe downturn in the semiconductor sector, we began to reduce costs. Since the end of the January 2002 quarter, we
have been implementing our corporate restructuring program in order to reduce our overall cost structure and achieve profitability. We implemented cost saving measures, including reductions in material, labor, overhead and administrative costs. We
continue to reduce our cost structure and have installed SAPs enterprise resource planning solution and Camstars manufacturing tracking and execution system to enable us to implement improved business processes, which steps have involved
implementation and integration problems that we are currently seeking to address. We have also completed the move of our assembly and test facilities from Hong Kong to lower-cost facilities in Dongguan, China. We cannot assure you that these cost
saving measures will lead to profitability or that any expected net savings will occur. We may continue to incur additional expenses associated with operating our assembly and test facilities in Dongguan, China. In addition, with respect to our new
information systems, including our implementation of the
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SAP system, there can be no assurances that we will not encounter delays, errors or cost-overruns and other adverse consequences in implementing such
systems. As we upgrade our information systems, we have had and may continue to encounter difficulties in integrating such technology into our business and we may find that such new systems may not be appropriate for our business. If our new
information systems prove to be inadequate or their implementation severely delayed, our business, financial condition and results of operations may be harmed.
We rely on the development and perfection of ownership interests in a substantial amount of intellectual property in our business. If we are unable to protect this intellectual property, we may lose advantages in innovation over our
competitors.
We have patents, confidentiality agreements, and other arrangements intended to protect certain of our proprietary
manufacturing processes and product technologies. As of April 30, 2007, we had approximately 50 issued U.S. patents. In addition, in May 2005, we entered into a multi-year cross-licensing agreement with LSI Logic Corporation (LSI)
under which LSI will provide us with a license to use its Flip Chip semiconductor package assembly technology. During the April 2005 quarter, we entered into a multi-year cross licensing agreement with Amkor under which we will provide Amkor with a
license for our TAPP semiconductor package technology and Amkor will provide us with a license for its Flip Chip semiconductor package technology. During the October 2003 quarter, we also entered into a quad flat pack no lead
chipscale package, or QFN, patent cross-license agreement with Amkor.
These arrangements and any future measures we take might not adequately cover or protect our intellectual property.
We may also fail to maintain, grow
or invest in research and development to strengthen our intellectual property. In particular, our competitors may be able to develop similar or superior products or manufacturing technologies, and many of these competitors invest greater amounts of
capital towards such development efforts than we do. As a result, our patent portfolio may not have the breadth or depth of that of some of our competitors. Also, we cannot assure you that the Asian countries in which we manufacture and market our
products will protect our intellectual property rights to the same extent as does the United States. In particular, the intellectual property laws of China, where we have moved our assembly and test facilities, do not protect our intellectual
property rights to the same extent as does the United States. This could leave us vulnerable to willful patent infringement or to the theft of trade secret information. In addition, even if we have valid protections in place, we may not have
sufficient financial and legal resources to protect or enforce our rights. Furthermore, because many of our products and technologies are not covered by any patents or pending patent applications, they are susceptible to independent duplication
and/or reverse engineering by competitors.
We are vulnerable to intellectual property infringement claims by third parties and may need to enforce our
intellectual property rights against third parties.
The semiconductor industry is characterized by frequent claims regarding patent
infringement. From time to time, third parties may claim that we are infringing on their intellectual property rights. Such claims could have a serious adverse effect on our business and financial condition.
If a third party were to bring a valid legal claim against us for patent infringement, we could be required to:
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discontinue the use of any of our processes considered infringing;
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cease the manufacture, use, import and sale of infringing products;
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pay substantial royalties and/or damages;
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develop non-infringing technologies; or
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acquire licenses to the technology that we had allegedly infringed.
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We may seek licenses from such parties, but they could either refuse to grant us a license or demand commercially unreasonable terms. We might not have sufficient resources both to pay for licenses and to remain
competitive. Such infringement claims could also cause us to incur substantial liabilities and to have to suspend
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or permanently cease the use of critical technologies or processes for the production and/or sale of major products. For instance, we settled a patent
litigation case with Motorola, Inc., or Motorola, and Freescale Semiconductor, Inc., or Freescale, in connection with their claim of a breach under a patent cross-license agreement in July 2005.
We may also need to enforce our patents and other intellectual property rights against infringement by third parties. If we were called to defend against
a claim of patent infringement, or were we compelled to litigate to assert our intellectual property rights, we could incur substantial legal and court costs and be required to consume substantial management time and engineering resources in the
process.
We could be adversely affected by an adverse outcome in legal proceedings to which we are, or in the future may become, subject.
On December 8, 2006, ASAT Limited, one of our subsidiaries, received an additional tax assessment from the Hong Kong Inland Revenue
Department (HKIRD) with respect to the deductibility of certain expenses for Hong Kong profits tax purposes for fiscal year 2000/2001. Queries were raised by the HKIRD concerning the deductibility of interest expenses related to certain
borrowings of ASAT Limited for profits tax purposes and whether the related borrowings were used towards revenue-generating activities, which allow the consequential interest expenses to be deductible for tax purposes. The assessment requires us to
pay HK$18.8 million (approximately US$2.4 million) by January 12, 2007. On December 29, 2006, we filed an objection to the HKIRD for the full amount. On January 29, 2007, we filed a request to the HKIRD to reconsider its holdover claim and on
January 30, 2007, the HKIRD had offered us an unconditional holdover, i.e., waiver, for 50% of the total tax in dispute (approximately HK$9.4 million or US$1.2 million). Although the case is not yet concluded and we are still required to provide
further evidence to the HKIRD showing that the borrowings were used towards revenue-generating activities, the HKIRD has requested us to make prepayment for the remaining 50% of the total tax in dispute. On January 31, 2007, we filed a proposal to
the HKIRD for installment payments for the remaining HK$9.4 million (approximately US$1.2 million) and the proposal was accepted on March 27, 2007. If the HKIRD accepts the evidence provided and reverses its assessment, all prepayments made will be
refunded to us. Our final tax liability, if any, will depend upon the quality of evidence provided and we are still in the process of gathering information. As of April 30, 2007, we recorded a provision of US$1.2 million for the amount of tax in
dispute.
In addition, we have in the past and may in the future become involved in various intellectual property, product liability,
commercial, environmental, and tax litigations and claims, government investigations and other legal proceedings that arise from time to time in the ordinary course of our business. Litigation is inherently unpredictable, and we could in the future
have a judgment rendered against us or enter into settlement of claims that could have a material adverse effect on our results of operations. In addition, if we receive a final unsatisfied judgment in any litigation not covered by insurance in
excess of $10 million that is not cured within 60 days following such judgment, there will be an event of default under the indenture governing our 9.25% senior notes due 2011 and our purchase money loan agreement. Upon an event of default, either
the trustee or the holders of at least 25% of the outstanding principal amount of the notes may declare the amounts payable on the notes due and payable. In the event that our obligations on the notes are accelerated at a time when we do not have
sufficient funds to repay the amount due on the notes, there will be a payment default on the notes and our financial results will be materially adversely affected. Similarly, if our obligations under the purchase money loan agreement are
accelerated when we do not have sufficient funds to repay the amounts due, a cross-default could arise under the indenture and our business financial results and operations would be materially adversely affected.
The loss of key senior management and engineers could negatively impact our business prospects. In addition, our inability to attract and retain key personnel at all
levels would limit our ability to develop new and enhanced assembly and test services.
We depend on our ability to attract and retain
senior management, highly skilled technical, managerial, sales and marketing personnel. Competition for senior management, highly skilled technical, managerial, sales and marketing personnel is intense, particularly in Hong Kong and Southern China,
and the retention of skilled
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engineering personnel in our industry typically requires competitive compensation packages. In attracting and retaining such personnel and other personnel at
all level, we may be required to incur significantly increased compensation costs. We cannot predict whether we will be successful in attracting and retaining the personnel we need to successfully develop and market new and enhanced assembly and
test services in order to grow our business and achieve profitability.
On September 1, 2006 our former Chief Executive Officer
resigned for personal reasons. Our current Acting Chief Executive Officer assumed his position for the interim period during which we are actively searching for a permanent Chief Executive Officer. Our current Acting Chief Executive Officer is a
member of our board of directors and is affiliated with one of our principal shareholder groups, QPL. On July 17, 2007, our former Acting Chief Financial Officer resigned, and on July 18, 2007 our permanent Chief Financial Officer assumed
his position. Our former Acting Chief Financial Officer is and continues to be a member of our board of directors and is affiliated with one of our principal shareholder groups, the investor group. Our current Chief Financial Officer is the brother
of our former Acting Chief Financial Officer. Although we are currently in the process of searching for permanent replacement, we cannot assure you that we will be successful in attracting and retaining a permanent Chief Executive Officer in the
near future or that our current Acting Chief Executive Officer will continue to serve ASAT until permanent hire is made.
In connection
with our ongoing corporate restructuring to improve efficiency, various senior management, officers, managers, engineers and other personnel in various departments have left our company. Their responsibilities are currently being assumed by other
personnel within the company or replaced with new hires. We cannot assure you that we will be successful in attracting and retaining sufficient and capable personnel at all levels and functions in our company to meet our human resources needs.
The loss of key suppliers or their failure to deliver sufficient quantities of materials on a timely basis could negatively impact our business
prospects. Our inability to qualify second sources for certain suppliers could limit our production capabilities.
The principal
materials used in our assembly process are polymer substrates, leadframes, gold wire and plastic molding compounds. In the ordinary course of business, we purchase most of our leadframes from QPL and its affiliates, our largest affiliated
shareholder group, and our substrates from several suppliers in Taiwan, Japan and Korea. To maintain competitive packaging operations, we must obtain from these suppliers, in a timely manner, sufficient quantities of acceptable quality materials and
equipment at competitive prices. We purchase all of our materials on a purchase order basis and have no long-term contracts with any suppliers, other than the inventory management and supply agreement we entered into with QPL Limited, or QPLL, and
Talent Focus Industries Limited, or Talent Focus, on October 27, 2005. From time to time, particularly during industry upturns, vendors have extended lead times or limited the supply of required materials to us because of vendor capacity
constraints and, consequently, we have experienced difficulty in obtaining acceptable materials on a timely basis. In addition, particularly during industry upturns, prices that we pay for materials may increase due to increased industry demand.
This increase could negatively impact our operating results especially if we are unable to pass this cost on to our customers. In addition, increasing commodity prices have negatively impacted our supply purchases because our vendors have passed on
the price increases to us. Further, if any of our vendors were to cease operations for any reason, we may experience difficulty in obtaining acceptable materials from alternative vendors on a timely, cost effective basis. For example, in the April
2004 quarter, an upstream vendor to one of our key suppliers announced the discontinuance of the production of metalized tape of a certain composition. This discontinuance forced our suppliers to send end of life notices to almost a
dozen of its customers, several of whom were highly dependent on products assembled with the discontinued material.
Environmental, health and safety
laws could impose material liability on us and our financial condition may be negatively affected if we are required to incur significant costs of compliance.
Our operations in China are required to comply with various Chinese environmental laws and regulations administered by the central and local government environmental protection bureaus, including any environmental
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rules introduced by the local Chinese governments in Dongguan, China. These laws impose controls on our air and water discharges, on the storage, handling,
discharge and disposal of chemicals, and on employee exposure to hazardous substances and impose fees for the discharge of waste substances above prescribed levels, require the payment of fines for serious violations and provide that the Chinese
national and local governments may at their own discretion close or suspend any facility which fails to comply with orders requiring it to cease or cure operations causing environmental damage. If these laws were to change, they could require us to
incur costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination. Stricter enforcement of existing laws, the adoption of new laws or regulations or our failure to comply with these laws or
regulations could cause us to incur material liabilities and require us to incur additional expense, curtail our operations and restrict our ability to grow.
We do not anticipate making material environmental capital expenditures in connection with our current operations in our Dongguan, China facilities. However, we cannot predict whether future environmental, health and
safety laws in China will require additional capital expenditures or impose other process requirements upon us, curtail our operations, or restrict our ability to expand our operations. We could be subject to material liabilities if the governments
in China adopt new environmental, health and safety laws, we fail to comply with new or existing laws, or other issues relating to hazardous substances arise.
The implementation of new environmental regulatory legal requirements, such as lead free initiatives, could, and do, impact our product designs and manufacturing processes. The impact of such regulations on our
product designs and manufacturing processes could, and do, affect the timing of compliant product introductions, the cost of our products as well as their commercial success. For example, a directive in the European Union banned the use of lead and
other heavy metals in electrical and electronics equipment beginning July 1, 2006. As a result, our customers selling products in Europe began demanding products from component manufacturers, such as us, that do not contain these banned
substances. Because most of our existing assembly processes utilize a tin-lead alloy as a soldering material in the manufacturing process, we changed some of our assembly processes and materials for specified products and we redesigned some of our
assembly processes and products to use soldering that does not contain lead in response to this legislation. The redesign has required increased research and development costs and manufacturing and quality control costs. In addition, the products we
assemble to comply with the new regulatory standards may not meet the same reliability levels as our products assembled with non-compliant materials and processes. If we are unable to successfully and timely redesign existing products and introduce
new products that meet the standards set by environmental regulation and our customers, sales of our products could decline, which could materially adversely affect our business, financial condition and results of operations.
Some of our costs are denominated in foreign currencies and the continued depreciation of the U.S. dollar against such foreign currencies, including the Chinese
Renminbi, could increase these costs.
While substantially all of our revenues are U.S. dollar denominated, a portion of our costs are
denominated in other currencies, primarily Chinese Renminbi, Hong Kong dollars and, to a lesser extent, Japanese yen.
The Hong Kong dollar historically has accounted for the largest share of our costs, but we are now increasingly
exposed to the Chinese Renminbi. Because the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the range varying between HK$7.75 per U.S. dollar and HK$7.85 per U.S. dollar since 2005, we have not experienced significant
foreign exchange gains or losses associated with that currency. However, the Hong Kong government could change the trading band at HK$7.75 to HK$7.85 per U.S. dollar at any time. The depreciation of the U.S. dollar against the Hong Kong dollar would
generally increase our Hong Kong dollar expenses, which could have an adverse effect on our financial condition and results of operations.
Additionally, our exposure to fluctuations in the value of the Chinese Renminbi has significantly increased due to the completed move of our manufacturing facilities to Dongguan, China. From 1994 to July 2005, the conversion of Renminbi
into foreign currencies, including Hong Kong and U.S. dollars, was based on rates set by the Peoples Bank of China, which were set daily based on the previous days interbank foreign market exchange
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rate and current exchange rates on the world financial markets. As a result, the exchange rate of the Renminbi to the U.S. dollar was previously
substantially pegged or fixed. On July 21, 2005 the government of China announced that the exchange rate of the Renminbi was being appreciated against the U.S. dollar and that the Renminbi would henceforth have a more flexible exchange rate
within a narrow band that would float against a basket of foreign currencies. However, the Chinese government may decide to change or abandon this policy at its sole discretion at any time in the future. As of September 30, 2007, the exchange rate
was RMB7.52 to US$1.00 as compared with RMB7.96 to US$1.00 as of September 30, 2006. This appreciation of the Renminbi against the U.S. dollar and any further appreciation in the exchange rate of the Renminbi against the U.S. dollar will increase
our costs relating to our Dongguan, China operations.
We may experience seasonality in the sales of our products, which could cause our operating
results to be adversely impacted.
We may experience a decline in business activity during the Lunar New Year and Chinas National
Day, which are major holidays celebrated in China. Many businesses within China are closed for a period of approximately 10 days around the Lunar New Year, which occurs in January or February of each year, and Chinas National Day, which begins
on October 1 of each year. This could lead to decreased sales during the fiscal quarters in which the Lunar New Year and Chinas National Day fall. We expect that as we conduct our business in China, we will experience seasonality,
although it is difficult for us to evaluate the degree to which seasonality may affect our business in future periods. In addition, we typically experience a slight decline in business activity in the period from the middle of our first fiscal
quarter through the beginning of our second fiscal quarter of each year (approximately June through August).
We have in the past been, and may in the
future be, in default or otherwise out of compliance with the covenants and conditions in the agreements governing our debt.
As we
continue to face commercial business challenges, we have occasionally been in default or otherwise been out of compliance with the covenants and conditions in the agreements governing our debt. Such defaults have been cured or otherwise remedied by
obtaining amendments or waivers from our creditors. However, we cannot assure you that we will not have additional defaults in the future, or that we will be able to obtain any necessary amendments or waivers to cure additional defaults in a timely
manner or at all. The occurrence of a default or the failure to obtain any necessary amendment or waiver could have a material adverse effect on our business, financial condition and results of operations. In addition, these difficulties could
disrupt our ongoing business, distract our management and employees, increase our expenses and cause us to seek to undertake a restructuring of our obligations with our creditors, and we cannot give assurances that we would be able to accomplish a
restructuring on commercially reasonable terms, if at all.
On August 1, 2007, we did not pay the regularly scheduled interest payment
of approximately $7.0 million on our 9.25% senior notes due 2011. We subsequently paid such interest payment, including accumulated penalty interest, on August 28, 2007 which is within the 30-day grace period permitted under the indenture
governing such notes.
We issued Series A Preferred Shares and warrants in connection with the preferred shares financing arrangement,
warrants in connection with the purchase money loan facility with our two principal shareholder groups, warrants in connection with amending the purchase money loan facility and warrants in connection with the recently approved amendments to the
indenture governing our 9.25% senior notes due 2011, which can have a significant dilutive effect upon our shareholders.
In July 2005,
we entered into a settlement agreement with Freescale, the former semiconductor products division of Motorola with whom we had an intellectual property infringement dispute. In connection with the settlement agreement, we issued to Freescale a
five-year warrant to purchase 10,937,500 of our ordinary shares, which is the equivalent of 729,167 ADSs, at an exercise price of $0.16 per share (equivalent to $2.40 per ADS). See Item 4Information on the CompanyBusiness
OveriewLegal Proceedings.
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As described in Item 5Operating and Financial Review and ProspectsCapital Expenditures
and Material Financing Arrangements, in October 2005, we completed our preferred shares financing arrangement and satisfied the conditions for the effectiveness of our purchase money loan facility with our two principal shareholder groups. We
issued warrants in connection with the preferred shares commitment to two of our principal shareholder groups and to a member of the JPMP shareholder group in connection with the purchase money loan facility, and subsequently issued additional
warrants in connection with the borrowing of the first tranche of funding under the purchase money loan facility to the lenders that funded the first tranche of loans. The holders can convert their Series A Preferred Shares into ordinary shares at
any time prior to their maturity. The initial conversion price of the Series A Preferred Shares was $0.09 per ordinary share (equivalent to $1.35 per ADS), but was reset on October 31, 2006 to $0.065 per ordinary share (equivalent to $0.975 per
ADS). The conversion price is subject to adjustment under anti-dilution provisions, including weighted average based anti-dilution protection in the event of issuance of certain equity securities, and shall be proportionally adjusted for share
splits, dividends, recombinations and similar events. The warrants are exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), subject to adjustment for stock splits and certain other situations specified in the warrants.
We have also issued additional Series A Preferred Shares and warrants in connection with our rights offering.
On August 23, 2007, we
agreed to issue warrants for ordinary shares in connection with the amendment to our purchase money loan agreement, which was required as a condition to closing the solicitation of consents to amend our indenture governing our 9.25% senior notes due
2011, as described below. These warrants will be issued to the lenders under the purchase money loan agreement, subject to certain conditions specified therein. These warrants would, in the aggregate, be exercisable for a total of approximately 4.9%
of ASAT Holdings total outstanding ordinary shares on a fully diluted basis (inclusive of ordinary shares issuable upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the eligible holders of our 9.25%
senior notes due 2011). The warrants will have an exercise price of $0.01 per ordinary share and will expire on February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions contained therein. These
warrants and the ordinary shares into which they will be exercisable are not registered under the Securities Act of 1933, or any state securities laws, and will be issued in a private transaction under Regulation D and/or in an offshore transaction
under Regulation S. Unless the warrants and ordinary shares are registered in the future, they may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act and applicable
state laws.
On August 27, 2007, we agreed to issue warrants for ordinary shares in connection with the amendment of the indenture
governing our 9.25% senior notes due 2011. These warrants will be issued to eligible holders of our 9.25% senior notes due 2011 who consented to our solicitation of consents ending August 23, 2007 to amend the indenture governing our 9.25%
senior notes due 2011, subject to certain conditions specified therein. These warrants would, in the aggregate, be exercisable for a total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis
(inclusive of ordinary shares issuable upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the lenders under its purchase money loan agreement). The warrants will have an exercise price of $0.01 per ordinary
share and will expire on February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions contained therein. These warrants and the ordinary shares into which they will be exercisable are not registered
under the Securities Act of 1933, or any state securities laws, and will be issued in a private transaction under Regulation D and/or in an offshore transaction under Regulation S. Unless the warrants and ordinary shares are registered in the
future, they may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act and applicable state laws.
If holders convert the Series A Preferred Shares or exercise any of the foregoing warrants, we will issue additional ordinary shares, and such issuances
will be dilutive to our holders of ordinary shares and ADSs.
In addition, we have the option to pay the semiannual dividend due on our
outstanding Series A Preferred Shares in our ordinary shares, and we have done so for each dividend payment date thus for. On September 15, 2006, we paid the dividend by issuing 36.73 ordinary shares per Series A Preferred Share and 11,020,338
24
ordinary shares in the aggregate to members of the investor group and Everwarm Limited, a wholly owned subsidiary of QPL, and issuing 9.97 ordinary shares
per Series A Preferred Share and 97,706 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares. On March 15, 2007, we
paid the dividend by issuing 26.74 ordinary shares per Series A Preferred Share and 8,021,906 ordinary shares in the aggregate to members of the investor group and Everwarm Limited, and by issuing 26.74 ordinary shares per Series A Preferred Share
and 262,025 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares. On September 15, 2007, we paid the dividend by
issuing 84.84 ordinary shares per Series A Preferred Share and 25,452,045 ordinary shares in the aggregate to members of the investor group and Everwarm Limited, and issuing 84.84 ordinary shares per Series A Preferred Share and 825,876 ordinary
shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares. Future dividend payments on the Series A Preferred Shares in such shares or our
ordinary shares will be dilutive to holders of ordinary shares or ADSs. In addition, if such shareholders sell substantial amounts of their ADSs in the public market during a short period of time, prices of these securities may decline
significantly.
If we receive other than an unqualified opinion on the adequacy of our internal control over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002 or identify other issues in our internal controls, or if we are unable to deliver accurate and timely financial information, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the market price of our ADSs.
Section 404 of the Sarbanes-Oxley Act of 2002
requires a public company to include a report of management on the companys internal control over financial reporting in their annual reports on Form 20-F that contains an assessment by management of the effectiveness of the companys
internal control over financial reporting. Because we qualify as a non-accelerated filer under SEC rules and regulations, such report of management will not be required until the end of our fiscal year ended April 30, 2008. In May 2007, the
Public Company Accounting Oversight Board, or PCAOB, approved Auditing Standard No. 5 An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements, or Auditing Standard No. 5, which
supersedes PCAOB Auditing Standard No. 2 An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. In the same month, the SEC approved the issuance of interpretive guidance
regarding managements evaluation and assessment of internal control over financial reporting. Under Auditing Standard No. 5, auditors are only required to provide one opinion on the effectiveness on internal controls (i.e., eliminating the
requirement for an auditors opinion on management assessment). We are currently implementing a number of measures intended to meet the foregoing objectives with respect to internal controls, delivery of financial information, and compliance
with Section 404, and we will need to make significant improvements in our internal controls on an ongoing basis to accomplish these objectives.
We have had major changes in our financial management, including the resignation of a former Chief Financial Officer in June 2006, former Chief Executive Officer and Acting Chief Financial Officer on September 1,
2006 and former Acting Chief Financial Officer on June 17, 2007. Although we have recently appointed our permanent Chief Financial Officer on June 18, 2007, we cannot assure you that we will be able to retain him. Although we are currently
in the process of searching for a permanent Chief Executive Officer, we cannot assure you that we will be able to attract and retain a permanent Chief Executive Officer and this may impact our ongoing efforts to attain compliance with the
Section 404 requirements. Significant resources have been, and may continue to be, required to implement and maintain effective controls and procedures in order to remedy control deficiencies. For example, we have hired, and may need to
continue to hire, additional employees and outside consultants with accounting and financial reporting expertise and may need to provide further training for our existing employees. If additional personnel are needed, we cannot assure you that we
will be able to recruit qualified personnel in a timely and cost-efficient manner to meet our requirements.
25
We are in the process of conducting a comprehensive review of our financial and accounting systems and
our internal controls and procedures. We cannot assure you that our ongoing review will not identify additional control deficiencies or that we will be able to implement improvements to our internal controls in a timely manner. If any identified
control deficiencies are not remedied or were to reoccur, if we fail to implement improvements in our internal controls in a timely manner, or if we fail to otherwise attain compliance with the Section 404 requirements, our ability to assure
timely and accurate financial reporting may be adversely affected. In addition, as a result of these reviews or otherwise, we cannot assure you that we will not need to make adjustments to any current period operating results or to operating results
that have been previously publicly announced or otherwise experience an adverse affect on our operating results, financial condition or business. Moreover, if our independent auditors interpret the Section 404 requirements and the related rules
and regulations differently from us or if our independent auditors are not satisfied with our internal controls over financial reporting or with the level at which it is documented, tested or monitored, they may issue a qualified opinion. Any of the
foregoing could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our ADSs to decline.
Outbreaks of epidemics and communicable diseases in Hong Kong, China and other parts of Asia may disrupt our business operations, causing us to lose customers and
revenue.
In early calendar year 2003, China, Hong Kong and certain other countries, largely in Asia, experienced the spread of the
Severe Acute Respiratory Syndrome, or SARS, virus. The SARS virus was believed to have first originated in Southern China and then spread to Hong Kong before becoming an international health concern. The World Health Organization and several
countries issued travel warnings against international travel to Hong Kong, China and several other Asian nations during the period of the alert. This severely curtailed customer visits to our facilities. In addition, we have been unable to obtain
insurance coverage at commercially reasonable rates for business interruptions resulting from the spread of communicable diseases. In that regard, there can be no assurance that the SARS virus and/or a different or even more virulent virus will not
make a reappearance in the future. If such an outbreak were to occur in Hong Kong and China, and if the outbreak were to be prolonged, uncontrolled and/or associated with high mortality, our operations could be severely impacted, such as through
plant closures and the imposition of other emergency measures, any of which would have material adverse effect on our financial condition and results of operations. Furthermore, any outbreak in any of our premises or manufacturing plants could
result in our management and employees being quarantined and our operations being required to be suspended.
26
ITEM 4.
|
INFORMATION ON THE COMPANY
|
HISTORY AND DEVELOPMENT
ASAT Holdings was incorporated in the Cayman Islands on October 20, 1999 as a
limited liability company under the Companies Law (Revised) of the Cayman Islands. The principal executive office for ASAT Holdings is located at 14th Floor, 138 Texaco Road, Tsuen Wan, New Territories, Hong Kong. ASAT Holdings registered
office in the Cayman Islands is Ugland House, P.O. Box 309, South Church Street, George Town, Grand Cayman, Cayman Islands. Our telephone number in Hong Kong is (852) 2408-7811, and the telephone number for our registered office in the Cayman
Islands is (345) 949-8066.
Capital expenditures decreased to $17.7 million for the year ended April 30, 2007 from $23.5 million
and $40.7 million for the years ended April 30, 2006 and 2005, respectively. These expenditures for fiscal year 2007 were incurred primarily to support the requirements for our business. Expenditures were also made on the facilitization
of our new manufacturing facilities located in Dongguan, China. Our capital expenditures are incurred in the ordinary course of our business and operations and are generally funded out of our cash flow from operations and with the proceeds
of financing activities. Further information with respect to capital expenditures and funding sources is set forth in Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources.
Recapitalization
On October 29, 1999, three
groups of private equity funds separately managed by or affiliated with JPMP Master Fund Manager, L.P. (formerly Chase Capital Partners), Olympus Capital Holdings Asia and Orchid Asia Holdings LLC purchased a 50% equity interest in ASAT Holdings
from QPL. Following the completion of our public offering of ADSs on July 14, 2000, this investor group held an approximately 42% equity interest in ASAT Holdings.
BUSINESS OVERVIEW
We are a global provider of
semiconductor package design, assembly and test services. We are a leading developer of advanced packages and have achieved significant growth in chipscale packages, including the Fine Pitch Ball Grid Array, or fpBGA, and LPCC package families. We
are an acknowledged early developer of the quad flat pack no-lead, or QFN package, and the inventor of TAPP
, as evidenced by our U.S. patents covering these technologies. We
also provide semiconductor test services, particularly for mixed-signal semiconductors which perform both analog and digital functions.
We
work closely with customers to design and provide advanced assembly and test solutions for each new product generation. We provide assembly and test services from our Dongguan, China facilities. We also provide package design services and thermal
and electrical modeling from our Milpitas, California, Hong Kong and Dongguan, China facilities. Our sales offices and representatives are strategically located in the United States, Germany, Hong Kong, Singapore and South Korea, allowing us to work
directly with customers at their facilities to provide effective package design and customer service. Through this network, we are able to provide highly focused design and production services with rapid time-to-market design and production
solutions. During the fiscal year ended April 30, 2007, we shipped products to over 100 customers and many of our top customers are among the worlds largest semiconductor companies. Our top three customers (in alphabetical order) by net
sales for the year ended April 30, 2007 were Analog Devices, Inc., Broadcom Corporation and Samsung Electronics Co., Ltd. These customers accounted for 62.8% of our total net sales for the fiscal year ended April 30, 2007.
We historically conducted all our assembly and test operations in Hong Kong. As part of our overall strategy to remain competitive, we moved all of our
Hong Kong manufacturing operations to China in order to reduce our costs and to provide better access to the high-growth semiconductor market in China. We completed the transfer of all of our equipment to Dongguan, China during the fiscal year ended
April 30, 2007, and are in the process of finishing the qualification process with our customers for our products. We are committed to
27
continuing to reduce our costs while ensuring full operation of our assembly and test facilities in Dongguan, China. We conducted this move to Dongguan,
China in two phases. To launch Phase I of this transition to China, in August 2002, we entered into a 15-year lease agreement and a 6-year management agreement with Changshi, our development partner in the Zhenan Technology and Industrial Park,
Changan County, Dongguan City, Guangdong, China. In August 2003, our modern Phase I 180,000 square foot facility (the Phase I facility) was completed by Changshi to our specifications. In May 2004, we entered into another lease agreement
with Changshi to build a 300,000 square foot Phase II facility (the Phase II facility) immediately adjacent to our Phase I facility. The Phase II facility lease also involves Changshis subsidiary, Dongguan Changan ASAT
Semiconductor Assembly and Test Factory, which holds the subject land use rights. Under the terms of the lease agreement, we lease the completed Phase II factory building from Changshi for a period of 15 years. The Phase II facility was completed
during the second quarter of fiscal 2006. During the fiscal year ended April 30, 2007, our Hong Kong assembly and test operations were shut down, all of our assembly and test operations were transferred to Dongguan, China and the installation
of our equipment was completed. Both of our Dongguan, China facilities are now fully operational.
Business Strategy
Our overall business strategy has remained unchanged, which strategy is to grow our market share, focus on margins, lower costs and achieve profitability
on a sustained basis. The principal elements of our strategy include:
|
|
|
Increasing our competency to gain market share by achieving higher levels of customer satisfaction
. In particular, we have achieved faster response times as
a result of our leaner organizational structure that was implemented as part of our recent cost reduction programs and a more responsive, state-of-the-art facility that allows us to turn around orders rapidly. Our manufacturing output in Dongguan,
China continues to improve, resulting in better cycle times and yields. We believe that our improved operating metrics have increased our competitiveness and not only allow us to generate additional orders from existing customers, but are also
leading to new business opportunities and increased market share. Additionally, we expect that the equipment we have in place, and selected equipment that we plan to purchase to expand our capabilities, will provide us with sufficient capabilities
to meet our expected customer requirements.
|
|
|
|
Creating strategic customer teams to focus ou
r
resources on strategic accounts.
We are focusing on increasing sales to our strategic customers who
have the ability to add more business to existing product lines where we are already qualified. We have dedicated cross functional teams consisting of Sales, Customer Service, Engineering and Production focused along customer lines, which enables us
to respond more effectively to customer requirements and efficiently allocate resources throughout the organization.
|
|
|
|
Strengthening top customers while concurrently diversifying our customer base
. We will continue to try to strengthen our relationships with existing top
customers, while concurrently pursuing new customers in an effort to diversify our customer base.
|
|
|
|
Focusing on customer driven new product development.
This effort involves increasing our applications engineering function and participating in new customer
driven product introductions, which we believe has traditionally been a strength of our company. For example, we are developing a thinner package technology, what we call our Thin LPCC. We believe this technology will be in high demand as it will be
used in the newest generation of consumer and portable devices.
|
|
|
|
Continuing to reduce our cost structure and increase our working capital.
Over the last year, as a result of the completion of our move to China we have
achieved a more efficient manufacturing process that enables us to achieve enhanced quality, cycle times and yields. We continue to manage costs resulting in a leaner and more efficient organizational structure, which provides us with a more
competitive cost structure that can enhance our margin and working capital.
|
28
Semiconductor Packages
We offer assembly services for a broad range of semiconductor packaging including chipscale (small) and non-chipscale (large) packages. Most of the revenue derived from test services comes from test services performed
in connection with assembly services. The following table sets forth the breakdown of net sales by product category and as a percentage of total net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
(in thousands of dollars)
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chipscale packages (CSP)
|
|
$
|
46,540
|
|
$
|
86,567
|
|
$
|
105,850
|
|
$
|
115,028
|
|
$
|
120,194
|
Non-CSP laminate packages
|
|
|
31,281
|
|
|
35,887
|
|
|
21,651
|
|
|
17,119
|
|
|
16,048
|
Non-CSP leadframe packages
|
|
$
|
57,747
|
|
|
69,468
|
|
|
47,055
|
|
|
36,966
|
|
|
19,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
135,568
|
|
|
191,922
|
|
|
174,556
|
|
|
169,113
|
|
|
155,736
|
Test
|
|
|
14,522
|
|
|
22,752
|
|
|
19,855
|
|
|
13,002
|
|
|
9,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
150,090
|
|
$
|
214,674
|
|
$
|
194,411
|
|
$
|
182,115
|
|
|
164,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(in percentage)
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chipscale packages (CSP)
|
|
31
|
%
|
|
40
|
%
|
|
54
|
%
|
|
63
|
%
|
|
73
|
%
|
Non-CSP laminate packages
|
|
21
|
|
|
17
|
|
|
11
|
|
|
10
|
|
|
10
|
|
Non-CSP leadframe packages
|
|
38
|
|
|
32
|
|
|
24
|
|
|
20
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
90
|
|
|
89
|
|
|
89
|
|
|
93
|
|
|
95
|
|
Test
|
|
10
|
|
|
11
|
|
|
11
|
|
|
7
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductors devices are an integral
component in a wide variety of everyday products, including telecommunications systems, personal computers, consumer electronics, office equipment and automotive products. Semiconductor packages are critical to the chips performance and
functionality and facilitate the integration of the semiconductor device into the end-product. We offer a wide range of semiconductor packages for a broad spectrum of electronic products. Our products and services can be grouped into four
categories: chipscale packages (CSP), non-CSP laminate packages, non-CSP leadframe packages and test services. In the chipscale package category, we have been recognized for our leadership position in advanced technology, most notably for our LPCC
and TAPP
product families.
Semiconductor packaging protects the enclosed
semiconductor chip and provides a network of connections between the chip and a printed circuit board. Non-CSP leadframe packages are a distinct packaging family type in that the chip is first attached to a metallic leadframe and then electrical
interconnects (usually with fine gold bonding wires) are provided between the chips active components and the corresponding leadframe electrical contacts. The chip and leadframe are then encapsulated in plastic leaving external metal leads
from the leadframe exposed and surrounding the edge of the package. These exposed leads will enable the device to be electrically connected to the circuit board on which it will be mounted. By contrast, in non-CSP laminate packages, the chip is
mounted on a printed circuit board substrate (not on a metallic leadframe) to which it is electrically connected (usually with fine gold bonding wires) to printed metallic interconnect circuitry that is in turn electrically connected to the printed
circuit board via solder balls which have been incorporated as electrical contacts on the bottom of the package.
29
Chipscale Packages (CSP)
Chipscale packages include both leadframe and laminate based packages and are typically used in
high-end packaging of semiconductors for applications that require small device footprints and high electrical and thermal performance characteristics. Our chipscale packages have advanced thermal and electrical characteristics. These advanced
characteristics are necessary to maximize the performance of high frequency semiconductor chips used in sophisticated end-products. The chipscale packages are slightly larger than a semiconductor chip, which allow reduced package inductance and
enhanced electrical performance. Chipscale packages are often designed for semiconductors that require dense ball arrays in very small package sizes, such as wireless telephones, personal digital assistants, video cameras, digital cameras and
pagers. We currently offer fpBGA, LPCC and TAPP
chipscale packages.
fp
BGA. Fine Pitch BGA, or fpBGA, is one of the most widely used semiconductor packages in the industry and is found in a wide range of device applications such as memory, application specific integrated circuits, or ASICs, logic,
analog, RF devices and small programmable logic devices or PLDs. The end user applications for this package type are primarily cell phones and pagers, notebook computers, personal digital assistants, or PDAs, or other wireless/portable personal
computing systems. fpBGA packages offer a cost-effective packaging option for integrated circuit devices for a wide range of I/O counts while meeting the markets increasing requirements for small, light and thin package configurations.
LPCC
. The Leadless Plastic Chip Carrier, or LPCC, is our patented version of the industry standard quad flat pack, no lead
device known widely as the QFN plastic package. The QFN is a new class of advanced packaging that was largely developed internally by ASAT in calendar 1998. Our LPCCs are designed for use in mobile communications, particularly cell phones,
analog to digital and digital to analog circuits, and the power management circuits widely used in consumer electronics. These packages are based on a new technology which relies on conventional leadframes as the base material. Unlike traditional
metal leadframe packages, however, the leads in LPCC packages do not protrude from the package but are flat with the package surface. Additionally, LPCCs are chipscale packages with high density leads with an improved thermal and electrical
performance that is similar to fpBGAs, a combination that enhances board level performance. LPCCs can be manufactured using conventional tooling and therefore do not require large scale capital expenditures for manufacture.
TAPP
.
Our Thin Array Plastic
Packaging, or TAPP
, is another of our proprietary product technology packages which provides metallic contacts to the circuit board allowing high density circuitry in a small footprint
package. We believe TAPP
is the next generation of leadframe based chipscale packaging technology which will allow semiconductors to operate at higher frequencies with greater thermal
performance in smaller and thinner packages at a relatively lower cost compared to industry standard QFN packaging technologies.
Non-CSP Laminate
Packages
Non-CSP laminate packages are characterized by a semiconductor chip mounted on an organic substrate, typically a printed
circuit board substrate. After the electrical bonding pads on the semiconductor chip have been wire bonded to the corresponding electrical leads on or within the substrate, the upper surface of the substrate, including the semiconductor chip, is
encapsulated with a polymer resin-based material. Non-CSP laminate package technology is used in high performance applications, including hand held consumer products, enterprise networks, wireless products, high speed telecommunications switching
stations and routers, computer printer and servers, internet applications, desktop and notebook personal computers and global positioning systems.
PBGA
. Plastic BGA, or PBGA, is a popular non-CSP laminate package technology which was first developed to accommodate the increasingly high lead counts required for advanced semiconductors and to provide an increased circuit density
per unit area. In a PBGA package, the semiconductor chip is placed on top of a laminate (plastic or tape) substrate rather than directly onto a metallic leadframe. The chip is connected to the circuitry in the substrate by a series of fine gold
wires that are bonded to the top of the substrate near its edges. On the bottom of the substrate is a grid of solder balls that connect the packaged device to a printed circuit board.
30
TBGA
. Our patented Tape BGA, or TBGA, packages offer superior thermal management and enhanced
electrical performance using a flexible circuit substrate bonded to a copper plate. The TBGA also allows for a higher routing density than our conventional PBGA packages. These packages are designed for use in complex semiconductor products such as
high speed test systems, wireless communications systems and networking systems.
Flip Chip Packages
. Like conventional PBGA
products, flip chip packages generally use solder balls to connect to the printed circuit board. Within the flip chip package, however, the chip is connected to these balls by the use of an array of solder bumps on the active surface of the chip as
opposed to the traditional method used in PBGA of wire bonding the chip to the interconnects to the solder balls. To attach the chip to the electrical interconnects imbedded in the laminate substrate, the chip is flipped over so that the active
surface and the solder bumps align directly with the corresponding electrical bonding pads on the substrate. This method of attachment further improves thermal and electrical performance of the chip and enables a higher density of interconnections
which facilitates smaller packages. Flip chip technology can be used in a wide array of applications ranging from consumer products to highly sophisticated ASICs, digital signal processors and memory packages. Flip chip technology is considered by
many in the semiconductor industry to be the next generation of BGA packaging technology. We introduced our flip chip packages to our customers during fiscal year 2002.
Non-CSP Leadframe Packages
Non-CSP leadframe packages are characterized by a semiconductor chip
mounted on a metallic leadframe which together are encapsulated in a plastic mold compound with metal leads surrounding the perimeter of the package. As a first step in the manufacturing process, the chip is attached to a leadframe, which is usually
performed for multiple devices on a single multi-site carrier used in assembly. The electrical contacts for the active elements, ground and power leads in the chip are then wire bonded to corresponding electrical leads on the leadframe.
The chip is then encapsulated in a plastic package, with the ends of the leadframe protruding from the edges of the package to enable electrical connection to a printed circuit board. This packaging type has evolved from packages designed to be
plugged into the printed circuit board by inserting the leads into holes on the printed circuit board to the more modern surface mount design, in which the leads or pins are soldered directly to the surface of the printed circuit board. Specific
packaging customization and evolutionary improvements are continually being engineered to improve electrical and thermal performance, reduce the size of packages and enable multi-chip package assembly capability.
Non-CSP leadframe packages are used in almost every electronics application, including automobiles, household appliances, desktop and notebook computers
and telecommunications products. We offer several types of non-CSP leadframe packages to satisfy the variations in our customers end-products such as our Quad Flat Package, or QFP. We also provide additional non-CSP leadframe packages, such as
EDQUAD, which enable advanced thermal characteristics. These advanced characteristics are necessary to maximize the performance of high-power semiconductor chips used in sophisticated end-products.
EDQUAD
. Our patented Enhanced Dissipation QUAD, or EDQUAD, technology for non-CSP leaded products offers what we believe to be the superior
thermal performance in conventional leaded plastic packages. This group of packages is designed specifically for high performance applications where large semiconductor die with a low to medium high number of inputs and outputs are required to be
packaged in standard plastic leaded packages.
Test Services
We provide a wide array of test services for digital logic, analog and mixed signal products and have recently expanded our RF test capabilities. Testing is the final stage in the semiconductor production process and
involves using sophisticated test equipment and test programs to electronically test different operating specifications of the encapsulated semiconductor device. These test specifications included electrical
31
functionality, and conformance to voltage, current and timing parameters. We are able to test semiconductor chips upon initial delivery from the foundry in
the wafer form as well as after they are packaged. We have engineers and test personnel located globally who work closely with customers at their facilities to develop test programs and provide test services.
Digital Test
. We test a variety of digital semiconductors, including high performance devices used in computers, consumer applications, and
communication systems. Specific digital semiconductors tested include field-programmable-arrays (FPGA), microcontrollers, high-speed digital interface devices, digital ASICs, and custom digital designs.
Analog
. We test a variety of analog devices applicable to the analog device sector, including power devices, amplifiers, and switches. The
majority of these devices are used in consumer applications such as mobile phones, PDAs, and mobile computing devices.
Mixed-Signal
Test
. We test a variety of mixed-signal semiconductors, including those used in communication applications such as network routers and switches; broadband products such as internet and set-top boxes; mobile communication products such as cell
phones and wireless networks; and other consumer electronic products. Mixed-signal testing involves testing a single device which has both analog and digital functions designed within its block structures.
RF Test
. We specialize in testing RF semiconductors, including those found in cell phones, wireless applications such as Bluetooth, and wireless
LAN products. We believe our cost-effective RF test technology, combined with our test engineering and production expertise, provides a competitive advantage for us.
Geographic Markets
We believe we operate in a single business segment comprising the assembly and
test services of integrated circuits to customers in the semiconductor industry. Our net sales are generated from the following geographical locations representing the geographical areas from which sales invoices were issued for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands of dollars)
|
|
Hong Kong
|
|
$
|
185,865
|
|
|
$
|
177,207
|
|
|
$
|
161,516
|
|
United States
|
|
|
104,830
|
|
|
|
60,481
|
|
|
|
37,915
|
|
China (excluding HK)
|
|
|
9,774
|
|
|
|
74,278
|
|
|
|
379,631
|
|
Transfer between geographic areas
|
|
|
(106,058
|
)
|
|
|
(129,851
|
)
|
|
|
(414,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
194,411
|
|
|
$
|
182,115
|
|
|
$
|
164,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany sales between geographic areas were recorded at cost plus a mark-up. Such transfers,
including unrealized profits, are eliminated on consolidation.
32
Our customers are primarily United States, Asian and European multinational companies. We ship completed
packages at the direction of our customers to various destinations. The following table provides a breakdown of the percentage of net sales by geographic destination:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
United States
|
|
54.2
|
%
|
|
33.2
|
%
|
|
23.0
|
%
|
Asia (a)
|
|
43.9
|
%
|
|
63.0
|
%
|
|
70.6
|
%
|
Hong Kong
|
|
0.4
|
%
|
|
2.3
|
%
|
|
3.4
|
%
|
Europe
|
|
1.5
|
%
|
|
1.5
|
%
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
(a)
|
For the Companys net sales by geographic destination, Asia mainly represents Singapore, Taiwan, Japan, Malaysia, China (excluding Hong Kong), Philippines and Korea.
|
The geographical distribution of the Companys identifiable assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
2005
|
|
2006
|
|
2007
|
Hong Kong
|
|
$
|
128,218
|
|
$
|
93,564
|
|
$
|
71,404
|
China
|
|
|
42,927
|
|
|
78,094
|
|
|
54,209
|
Asia (b)
|
|
|
175
|
|
|
117
|
|
|
159
|
United States
|
|
|
7,342
|
|
|
9,635
|
|
|
9,296
|
Germany
|
|
|
84
|
|
|
51
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178,746
|
|
$
|
181,461
|
|
$
|
135,137
|
|
|
|
|
|
|
|
|
|
|
(b)
|
For the Companys identifiable assets, Asia represents Singapore and Korea.
|
Marketing, Sales, Distribution and Customer Support
We sell our assembly and test services to our customers and support
them through a network of international offices. To better serve our customers, our offices are located near our largest customers or near a concentration of several of our customers. Our offices and representatives are located in California, Texas
and Massachusetts in the United States, and in Hong Kong, Singapore, South Korea, and Germany. We have reorganized our customer service, general and administrative presence in connection with the completion of the move of our manufacturing
operations to Dongguan, China. We offer global drop shipment services, whereby we deliver assembled and tested semiconductors to destinations in any part of the world as instructed by our customers, including to their end-customers.
We have dedicated account managers, application engineers and customer service representatives to work as teams in servicing customers and developing new
business. Each of these teams focuses on specific customers and/or geographic regions. As part of this emphasis on developing business, these teams:
|
|
|
jointly work with customers on design and technology advancement;
|
|
|
|
develop and implement focused strategies for broadening our customer base;
|
|
|
|
proactively address customer next generation silicon and end customer product applications; and
|
|
|
|
maintain close communication with production and provide timely feedback to our customers.
|
Our marketing efforts focus on creating a brand awareness and familiarity with ASAT and our
advanced assembly and test services as well as technologies such as LPCC and TAPP
, which offer customer
33
diversification opportunities for ASAT. We enhance our marketing efforts by holding technical seminars for packaging engineers, making technical
presentations to our customers end customers, and publishing research articles in trade journals and periodicals. We will continue to evaluate what is most effective for customer support and will allocate resources to identified areas of
importance so that optimal coverage is provided to ensure that we have the best exposure to new opportunities that may be presented to us.
Customers
We provide semiconductor assembly and test services to over 100 customers worldwide. We design, assemble and test semiconductor
packages for end-applications in a variety of industries. During the years ended April 30, 2007, 2006 and 2005, approximately 61%, 52% and 54%, respectively, of our total net sales were from assembling and testing of semiconductors used in
communications application, approximately 7%, 13% and 8%, respectively, of our total net sales in each period were from semiconductors used in personal computers/computing applications, while the remainder of our total net sales were from
semiconductors used in consumer and automotive/industrial applications. The table below sets forth information regarding a number of our customers that are important to our business in terms of sales volume, strategic relationships, advanced
technology demand or potential growth:
|
|
|
|
|
Industry
|
|
Customers
|
|
Applications
|
Wireless Communication
|
|
Analog Devices, Inc., Atheros Communications, Inc., Broadcom Corporation, Murata Manufacturing Co. Ltd., Texas Instruments Incorporated
|
|
Bluetooth; Wi-Fi; wireless handsets; wireless LAN; RF
|
|
|
|
Wired Communication
|
|
Agilent Technologies, Inc., Altera Corporation, Analog Devices, Inc., Applied Micro Circuits Corporation, Broadcom Corporation, Philips Electronics N.V.
|
|
Internet applications; networking; signal processing; telecom; routers
|
|
|
|
Consumer
|
|
Actel Corporation, Anadigics, Inc., Analog Devices, Inc., Broadcom Corporation, Samsung Electronics Ltd., SigmaTel Inc., STMicroelectronics N.V.
|
|
CD and DVD players; camcorders; digital cameras; home audio and video entertainment; PDAs; Digital Audio Player; set-top boxes for direct satellite broadcast; video capture
applications
|
|
|
|
Automotive/Industrial
|
|
Analog Devices, Inc., Agilent Technologies, Inc., Samsung Electronics Ltd., STMicroelectronics N.V.
|
|
Automotive applications; ATE tester; entertainment, global positioning systems; instrumentation; power management, power systems; telematics
|
|
|
|
Personal Computers/Computing
|
|
Anadigics, Inc., Agilent Technologies, Inc., Analog Devices, Inc.,
Vimicro Corp.
|
|
Desktop and mobile PCs; PC servers; web-camera; power management systems; printers; optical storage
|
Many of our customers are leading telecommunications and networking device manufacturers, whose
products require sophisticated semiconductor capabilities. Our success in becoming a provider of chipscale packaging technologies is due in significant part to our strong relationships with these customers and our
34
dedication to working closely with them to develop innovative solutions for their increasingly complex semiconductor performance requirements.
We plan on diversifying our customer base by seeking new customers in the wireless and personal computers/computing industries, particularly those with
advanced packaging needs across multiple market sectors, and by leveraging existing customer relationships to sell to a broader array of market sectors. In addition, we believe that there is a discernible long-term trend towards semiconductor
companies outsourcing their assembly and test services. We plan to continue to capitalize on this trend in implementing our diversification strategy.
Operations
As part of our corporate restructuring program, we moved all of our Hong Kong manufacturing operations to
Dongguan, China in order to significantly reduce our costs and access the high-growth semiconductor market in China. The state-of-the-art Dongguan facility comprises over 560,000 square feet and is one of the largest and most advanced semiconductor
subcontract assembly and test manufacturing facilities in China. Strategically located in Dongguan, China, about 90 minutes from Hong Kong, the facility offers higher productivity, improved efficiency, and close proximity to our key end users.
We have invested in the latest generation ERP systems, which deliver better
real-time visibility and control of our manufacturing process across different manufacturing operations. In addition, we offer production lines for the most advanced packaging technologies, including leading quad flat no-lead (QFN) technology with
its Leadless Plastic Chip Carrier (LPCC), fine pitch BGA, Flip Chip, Thin Array Plastic Package (TAPP
), and enhanced leaded packages.
The move has resulted in benefits from reduced manufacturing costs in China and a highly motivated and cost efficient workforce. We believe that the
facilities in Dongguan, China will serve as a gateway into the rapidly growing China market.
We believe that total quality management is a
key element of our semiconductor assembly operations, our 480,000 square foot factory facilities in Dongguan, China are ISO 9001, ISO 14001 and TS 16949 certified. ISO 9001 and TS 16949 are worldwide manufacturing quality certification programs for
product design and industrial quality that are administered by an independent standards organization.
Management Information Systems
We have purchased and have installed SAPs enterprise resource planning software and Camstars manufacturing tracking and execution system
software to support our customer service and cost containment efforts. The SAP software system is designed to provide resource planning in areas such as customer service, sales and distribution, purchasing and logistics and financial controls. The
Camstar manufacturing system is designed to manage, monitor and synchronize manufacturing activities and integrate them with core business processes. We believe the coordination of operations between our Hong Kong, Dongguan, China and worldwide
sales offices and our customers has been enhanced by the implementation of the SAP and Camstar manufacturing information systems, although we continue to experience implementation and integration challenges with the SAP and Camstar systems. While
installation of the SAP and Camstar manufacturing information systems has been completed, we continue to expend resources to implement and integrate these systems into our operations.
Materials and Suppliers
The principal materials used in our assembly process are polymer substrates,
leadframes, gold wire and plastic molding compounds. We work closely with our primary materials suppliers to ensure that materials are available and delivered on time. In the ordinary course of business, we purchase most of our leadframes from QPL
and our substrates from several suppliers in Taiwan, Japan and Korea. We purchase our wire bonders and
35
test equipment from major international manufacturers. We periodically purchase equipment through several suppliers to meet our assembly and test
requirements. We work closely with major suppliers to ensure that equipment is delivered on time and that the equipment meets our stringent performance specifications.
Competition
We believe the principal elements of competition in the overall independent
semiconductor packaging market include technical competence, sophistication of design services, quality, time-to-market, array of assembly services, production yields, customer service and price. In the area of test services, we compete on the basis
of quality, cycle time, pricing, location, available capacity, engineering capability, technical competence, customer service and flexibility. We believe that competition in the chipscale packaging and test industries centers primarily on service,
technology, price and expertise.
Our customers typically rely on at least two independent assembly and test providers. Semiconductor
assembly and test providers must pass a lengthy and rigorous qualification process that typically can take from three to six months. In addition, customers incur substantial costs in qualifying each new semiconductor assembler. Due to these factors
and the heightened time-to- market demands of semiconductor end-users, semiconductor manufacturers incur significant costs in switching assembly and test providers and thus are often reluctant to change or add their providers.
The semiconductor assembly and test industry is highly fragmented, with currently more than 50 independent providers of semiconductor assembly services
worldwide. We believe our principal competitors include Advanced Semiconductor Engineering, Inc., Amkor, Carsem (M) Sdn. Bhd., Siliconware Precision Industries Co., Ltd. and STATS ChipPAC Ltd. We also compete indirectly with the in-house
assembly and test service resources of many of our largest customers, the IDMs.
We believe that our primary competitive advantage is our
focus on identifying and meeting our customers needs in the most timely and efficient manner. We have a reputation in the industry for being able to quickly turnaround ad hoc requests. This is a distinct competitive advantage given the inherently
volatile nature of the industry. As well, we have a rich history of providing advance technology with our leading package families. Also, we believe that our manufacturing facilities in Dongguan, China are a distinct advantage as competitive pricing
will become an increasingly important factor in the ability to attract new business. Furthermore, our process engineering teams continually monitor and seek to improve the existing manufacturing processes in order to achieve greater cost savings and
improved cycle times.
Intellectual Property
We have obtained or applied for patents in the United States and certain international jurisdictions relating to a number of our advanced semiconductor package designs and assembly manufacturing processes. As of April 30, 2007, we had
approximately 50 issued United States patents. Among those issued United States patents are several key patents for our LPCC and the TAPP product families. We were issued patents on LPCC product types and TAPP product types in 2001, 2002
and 2003, respectively. Our primary trademark is ASAT and the ASAT logo and that trademark is registered in the United States and in several international locations where we principally do business. On November 14, 2003, we
announced that we had entered into a comprehensive patent cross-license agreement with Amkor for our respective QFN semiconductor design and manufacturing process technology patents. The cross-license agreement includes Amkors and our
currently issued QFN patents, as well as future QFN patents that may be granted to either party during the term of the license. Amkors QFN product family includes the proprietary MicroLeadFrame, or MLF products, and our QFN product family
includes our proprietary LPCC product family. On April 6, 2005, we announced that we entered into a multi-year cross-licensing agreement with Amkor under which we will provide Amkor with a license for our TAPP semiconductor package
technology, and Amkor will provide us with a license for its Flip Chip semiconductor package technology. On May 17, 2005, we also entered into a multi-year cross-licensing
36
agreement with LSI Logic Corporation (LSI) under which LSI will provide us a license to use its Flip Chip semiconductor package assembly
technology.
We believe that our ability to succeed depends in large part on the technological skills of our engineering and manufacturing
employees and in their ability to continue to innovate and improve our technologies. We encourage our employees to continue to invent and innovate so as to maintain our competitiveness in the international marketplace.
Seasonality
Our current operations are not generally
subject to significant seasonal fluctuations, although we typically experience a slight downturn in the period from the middle of the first fiscal quarter through the beginning of the second fiscal quarter of each year (approximately June through
August). We do not believe that seasonality has had a material effect on our business, financial condition or results of operation. However, we expect that as we conduct more of our business in China, we will experience seasonality, including a
decline in business activity during the Lunar New Year and Chinas National Day, although it is difficult for us to evaluate the degree to which seasonality may affect our business in future periods.
Legal Proceedings
QPL entered into a patent cross
license agreement with Motorola on October 1, 1993 (the Immunity Agreement). Under the terms of the Immunity Agreement, QPL had been obligated to pay quarterly royalties to Motorola on a per solder ball pad basis for all BGA
Packages, as defined therein. QPL, through its then subsidiary ASAT Limited, paid royalties on certain products and not others based on its understanding of the obligations under the Immunity Agreement. When QPL assigned certain semiconductor
assets to the Company in 1999, ASAT Limited continued to make payments to Motorola, even though the Immunity Agreement was not assigned to the Company or any of its subsidiaries.
Motorola approached the Company in December 2002 claiming that the Company had assumed QPLs obligations under the Immunity Agreement. It
commissioned a third-party auditor to audit the royalty payments the Company had made for the three-year period ended October 31, 2002. Based on the results of that audit, Motorola asserted that QPL and the Company collectively owed additional
royalties of $8,000,000 along with interest under either the Immunity Agreement or implied in fact contract that mirrors the terms of the Immunity Agreement. The bulk of the amount claimed stemmed from Motorolas contention that the
Company and QPL owe royalties for the manufacture of fpBGA products, a contention that both entities denied.
On April 9, 2003, the
Company and its subsidiary, ASAT, Inc., as co-plaintiffs initiated a lawsuit against Motorola in the United States District Court for the Northern District of California (the Court) by filing a complaint for Declaratory Judgment seeking
a declaration from the court that neither plaintiff owed Motorola any royalty payments under the Immunity Agreement or any other agreement. Motorola counter-claimed for breach of contract against the Company, ASAT, Inc., ASAT Limited and QPL,
seeking $8,000,000 plus interest accruing at the rate of 1% per month on the alleged unpaid royalties. The substantial majority of Motorolas demand was directed to the Company and its subsidiaries.
In July 2005, the Company entered into a formal settlement agreement and mutual release with Motorola and Freescale, the former semiconductor products
division of Motorola, to fully and finally compromise, settle and discharge the claims, controversies, demands and disputes between the parties. The formal written settlement agreement was executed in July 2005 and was filed with the Court on
July 18, 2005. Under the settlement agreement and mutual release, we agreed to pay Freescale a total of $2.0 million in cash. We also agreed to provide Freescale with a rebate of 20% on all future products sales and services invoiced by us to
Freescale until the aggregate amount of the rebate provided to Freescale by us totals $1.75 million. This 20% rebate shall not expire until the maximum total rebate of $1.75 million is paid back to Freescale. We also issued a 5-year warrant
37
to Freescale for $1.75 million to purchase 10,937,500 ordinary shares, which is the equivalent of 729,166 ADSs, initially exercisable at a price of $0.16 per
ordinary share (equivalent to $2.40 per ADS).
Environmental Matters
Semiconductor assembly and test services produce a small amount of chemical waste. Since we had an assembly facility in Hong Kong prior to its move to Dongguan, China, disposal and storage of chemical waste from our
assembly and test services were subject to Hong Kong laws and government regulations. These laws impose controls on our air and water discharges, on the storage, handling, discharge and disposal of chemicals, and on employee exposure to hazardous
substances. For instance, a waste disposal facility is required under Hong Kong law to be installed before a license from the government may be granted for disposal of chemical waste. We hold a valid chemical waste disposal license granted by the
Hong Kong government authority which will expire on October 30, 2007, however, this license will now have limited use since our assembly and test services have been moved to Dongguan, China.
Our operations in China are required to comply with various Chinese environmental laws and regulations administered by the central and local government
environmental protection bureaus. We are also subject to the environmental rules introduced by the local Chinese governments in Dongguan, China. These laws impose controls on our air and water discharges, on the storage, handling, discharge and
disposal of chemicals, and on employee exposure to hazardous substances. If these laws were to change, they could require us to incur costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination.
Stricter enforcement of existing laws, the adoption of new laws or regulations or our failure to comply with these laws or regulations could cause us to incur material liabilities and require us to incur additional expense, curtail our operations
and restrict our ability to grow. The Chinese national and local environmental laws and regulations impose fees for the discharge of waste substances above prescribed levels, require the payment of fines for serious violations and provide that the
Chinese national and local governments may at their own discretion close or suspend any facility which fails to comply with orders requiring it to cease or cure operations causing environmental damage. Under the terms of our lease agreement with
Changshi, they have agreed to assist us in procuring the necessary environmental licenses and permits in Dongguan, China, including a Certificate of Waste Substance Discharge. Furthermore, in accordance with the Administration Measures of the
Certificate of Waste Substances Discharge of Guangdong Province, the Certificate of Waste Substances Discharge must be subject to the annual review by the local authority of environmental protection. Our Phase I facility in Dongguan, China received
an Interim Certificate of Waste Substance Discharge for its probationary production on November 10, 2003. After the Dongguan facility became fully operational, the local authority of environmental protection conducted an assessment on the waste
substances discharge facilities and a formal Certificate of Waste Substance Discharge was issued in December 2004 for our Phase I facility for a term of one year and six months, which expired in June 2006. Upon completion of our Phase II facility
and migration of the entire manufacturing operations to Dongguan, China, we were engaged in the process of applying for the same formal Certificate of Waste Substance Discharge for the collective of Phase I and II facilities. We do not anticipate
incurring any significant costs in connection with procuring these licenses and permits.
38
ORGANIZATIONAL STRUCTURE
As of April 30, 2007, ASAT Holdings had the following direct or indirect
wholly-owned subsidiaries:
|
|
|
|
|
|
|
|
Name
|
|
Place of Incorporation
|
|
Percentage of
Beneficial Ownership
|
|
|
Principal Activities
|
ASAT Limited (1)
|
|
Hong Kong
|
|
100
|
%
|
|
Sales, marketing and customer services and investment holding
|
Timerson Limited (2)
|
|
Hong Kong
|
|
100
|
%
|
|
Sales, marketing and customer services
|
ASAT, Inc.
|
|
California, United States
|
|
100
|
%
|
|
Sales, marketing and customer services
|
ASAT (Finance) LLC
|
|
Delaware, United States
|
|
100
|
%
|
|
Financial services
|
ASAT (Cayman) Limited
|
|
Cayman Islands
|
|
100
|
%
|
|
Investment holding
|
ASAT (S) Pte. Ltd.
|
|
Singapore
|
|
100
|
%
|
|
Sales, marketing and customer services
|
ASAT Korea Limited
|
|
South Korea
|
|
100
|
%
|
|
Sales, marketing and customer services
|
ASAT GmbH
|
|
Germany
|
|
100
|
%
|
|
Sales, marketing and customer services
|
ASAT Semiconductor (Dongguan) Limited
|
|
Peoples Republic of China
|
|
100
|
%
|
|
Assembly and test services for packaged integrated circuits
|
New ASAT (Finance) Limited
|
|
Cayman Islands
|
|
100
|
%
|
|
Financial services
|
Newhaven Holdings Limited
|
|
British Virgin Islands
|
|
100
|
%
|
|
Holding company
|
RBR Trading Holding (Curaçao) N.V.
|
|
Netherlands Antilles
|
|
100
|
%
|
|
Holding company
|
R.B.R. Trading Holding B.V.
|
|
Netherlands
|
|
100
|
%
|
|
Holding company
|
ASAT S.A. (3)
|
|
France
|
|
99.9
|
%
|
|
None
|
(1)
|
With effect from July 31, 2006, the entire assembly and test operations of ASAT Limited were transferred to ASAT Semiconductor (Dongguan) Limited and ASAT Limited became the
sales organization and corporate head office of the ASAT group.
|
(2)
|
With effect from September 30, 2006, the entire assembly and test operations of Timerson Limited were transferred to ASAT Semiconductor (Dongguan) Limited and Timerson Limited
became dormant. Timerson Limited still holds a valid license for carrying out contract processing in China.
|
(3)
|
In connection with the exercise of our option to purchase ASAT S.A. from QPL in December 2000, which was effective in January 2001, we purchased from Newhaven, RBR Antilles and
R.B.R. Netherlands. R.B.R. Netherlands owns approximately 99.9% of ASAT S.A. As ASAT S.A. has been under court administration since November 20, 2001, we no longer consolidate ASAT S.A.s financial results with our financial statements.
|
ASAT Holdings is a Cayman Islands holding company and does not have any material operations or assets other than its
beneficial ownership of the entire issued share capital of ASAT Limited and Newhaven Holdings Limited. The financial statements of ASAT Holdings include all of the above listed subsidiaries except for ASAT S.A.
39
The following chart illustrates our corporate structure as of April 30, 2007:
(1)
|
On July 14, 2000, we completed our offering of ADSs to the public. We sold 6,666,666 ADSs, representing 100,000,000 ordinary shares of ASAT Holdings in our offering of ADSs to
the public. Public shareholders held approximately 18.1% of the ownership interest in ASAT Holdings as of April 30, 2007.
|
(2)
|
QPL holds an approximate 42.5% ownership interest in ASAT Holdings Limited through its wholly owned subsidiaries, The Industrial Investment Company Limited, QPL (U.S.) Inc. and
Everwarm Limited, which hold approximately 38.1%, 2.8% and 1.6% ownership interests in ASAT Holdings Limited, respectively.
|
(3)
|
Several private equity funds separately managed by or affiliated with JPMP and Olympus Capital Holdings Asia collectively owned approximately 39.4% of the outstanding ordinary
shares of ASAT Holdings Limited as of April 30, 2007.
|
(4)
|
Timerson is a nominee shareholder of ASAT Limited, holding one share in ASAT Limited in trust for ASAT Holdings Limited.
|
(5)
|
ASAT (Cayman) Limited is a nominee shareholder of Timerson Limited, holding one share in Timerson Limited in trust for ASAT Limited.
|
(6)
|
In connection with the exercise of our option to purchase ASAT S.A. from QPL in December 2000, which was effective in January 2001, we purchased from Newhaven, RBR Antilles and
R.B.R. Netherlands. R.B.R. Netherlands owns approximately 99.9% of ASAT S.A. As ASAT S.A. has been under court administration since November 20, 2001, we no longer consolidate ASAT S.A.s financial results with our financial statements.
|
40
LEASES
In connection with the establishment of our Dongguan facility, the company entered into the following
leases.
In August 2002 we entered into a lease agreement pursuant to which Changshi constructed an 180,000 square foot factory facility
and leased the facility to us beginning in September 2003 for a term of 15 years. We are obligated to pay monthly rental payments of HK$1.4 million (approximately $179 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the first six
years of the rental term, HK$350 thousand (approximately $45 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the seventh to eleventh years and HK$385 thousand (approximately $49 thousand at an assumed exchange rate of HK$7.80 per
$1.00) for the twelfth to fifteenth years. From October 30, 2004 and during the term of the lease, we have an option and a right of first refusal to purchase the facility and the related land-use right at prices fixed in a predetermined
schedule or, subsequent to October 2009, at prices based on the then fair market value of the factory facilities and related land use right. Additionally, under a management services agreement, we were obligated to pay Changshi a monthly management
service fee of HK$506 thousand (approximately $65 thousand at an assumed exchange rate of HK$7.80 per $1.00), which amount includes a land use rights fee, foreign exchange remittance fees and certain administrative and management charges, commencing
September 2003. Over the six year term of this agreement, Changshi has agreed to support the operation of the facility by nominating employees for staffing of the facility, maintaining the facility and its systems in good repair and operating
condition (at our cost) and assisting us with handling Chinese governmental and regulatory matters.
In May 2004, we entered into another
lease agreement with Changshi to build a 300,000 square foot Phase II facility immediately adjacent to our Phase I facility. The Phase II facility lease also included the participation of the Changshi subsidiary that holds the subject land use
right, Dongguan Changan ASAT Semiconductor ASAT Assembly and Test Factory. Under the terms of the lease agreement, we lease the Phase II factory from Changshi for a period of 15 years starting from August 2005. We are obligated to pay monthly
payments of HK$1.4 million (approximately $179 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the first six years of rental term and HK$700 thousand (approximately $90 thousand at an assumed exchange rate of HK$7.80 per $1.00) per
month for the seventh to fifteenth years of the lease term. From October 31, 2008 and during the term of the lease, we have an option and a right of first refusal to purchase the facility and the related land-use right of the land at prices
fixed in a predetermined schedule starting during the period from October 2008 to July 2011, and thereafter at prices based on the then fair market value of the facility and related land-use right. Additionally, under a management services agreement
with a six-year term, we are obligated to pay Changshi a monthly management service fee of approximately HK$639 thousand (approximately $82 thousand at an assumed exchange rate of HK$7.80 per $1.00), starting from August 2005, and Changshi has
agreed to support the operation of the facility by nominating employees for staffing of the facility, maintaining the facility and its systems in good repair an operating condition (at our cost) and assisting us with handling Chinese governmental
and regulatory matters.
PROPERTY, PLANT AND EQUIPMENT
Our headquarters and administrative offices operations are located in a leased
11,200 square foot facility in the Tsuen Wan district of Hong Kong. All assembly operations in this facility have ceased and been moved to our Dongguan, China facilities in July 2006. ASAT HK leases our Hong Kong facility under a lease with a
one-year term expiring on August 31, 2008, with an option to extend for an additional year.
On December 20, 2003,
ASAT HK entered into a sale and purchase agreement with a third party to dispose of its 131,000 square foot test facility in Hong Kong for approximately $4 million. The closing of sale and purchase agreement was completed on February 21, 2004.
We leased back a portion of the property under an operating lease for a monthly rental fee of approximately $31 thousand. The lease term is three years commencing from February 21, 2004. All test operations in this facility have ceased and been
moved to our Dongguan, China facilities in July 2006.
41
We have completed the move of our manufacturing operations and all operational equipment to Dongguan,
China. This move occurred in two phases. In Phase I of this transition of our operations, Changshi completed the construction and finish of the interior and fixtures of a modern facility to our specifications in Dongguan, China in August 2003. The
Phase I facility covers approximately a total of 180,000 square feet of office, storage, utilities and manufacturing space and has an adjacent six story 63,000 square foot dormitory for housing factory workers. Both Phase I buildings are constructed
on a gated 525,000 square foot lot, in a high-tech industrial park. In the July 2004 quarter, construction of a 300,000 square foot Phase II facility immediately adjacent to the Phase I facility commenced. This facility houses the balance of our
former Hong Kong manufacturing operations plus provides space for future expansion of our assembly and test operations. Construction of the Phase II facility and finish of its interior and fixtures is complete and provides approximately 300,000
square feet of usable floor space.
Our capital expenditures incurred in connection with the completion of the move of our manufacturing
operations to Dongguan, China were generally funded out of our cash flow from operations and with the proceeds of financing activities, including the financing from two of our principal shareholder groups. As of April 30, 2007, we had
commitments for capital expenditures of approximately $1.2 million. For more detail on the Dongguan, China facilities and our plans with respect to these facilities, see Item 3Key InformationRisk Factors and Item
5Operations and Financial Review and ProspectsOperating Results. We believe that our current facilities are in good condition and adequate to meet the requirements of our present operations.
ITEM 4A.
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UNRESOLVED STAFF COMMENTS
|
Not Applicable.
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
You should read the following discussion and analysis in conjunction with the selected consolidated financial data, the consolidated financial statements, and the accompanying notes, and other financial information about ASAT which
appear elsewhere in this Annual Report. The following discussion includes various forward-looking statements that involve risks and uncertainties. See Forward-looking Statements for special information regarding our forward-looking
statements.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to going concern assumption, allowance for doubtful accounts,
revenues, inventories, asset impairments, income taxes, commitments and contingencies. We base our estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and judgments under different assumptions or conditions. A summary of our significant accounting
policies used in the preparation of consolidated financial statements appears in Note 2 of the notes to the consolidated financial statements included in this report.
The U.S. Securities and Exchange Commission, or SEC, has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most
difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the policies of basis of presentation, revenue recognition and risk of loss, inventory
42
valuation, impairment of long-lived assets, deferred income taxes and commitments and contingent liabilities. For all financial statement periods presented,
there have been no modifications to the application of these critical accounting policies.
Basis of Presentation.
We determined
that the going concern basis of presentation is appropriate based on our estimates and judgments of future performance of the Company, future events and projected cash flows. At each balance sheet date, we evaluate our estimates and judgments as
part of our going concern assessments. We believe that there are sufficient financial and cash resources to finance the company as a going concern in the next twelve months. Accordingly, we have prepared our financial statements on a going concern
basis.
Revenue Recognition and Risk of Loss.
We do not take ownership of customer-supplied semiconductor wafers or die. The title
and risk of loss remains with the customers for these materials at all times. Accordingly, the cost of the customer-supplied materials is not included in the consolidated financial statements. No revenue is recognized unless there is persuasive
evidence that an arrangement exists, the price is fixed or determinable, delivery has occurred and services rendered and our ability to collect is reasonably assured. Revenue net of discount from the assembly and test of semiconductor products is
recognized when title and risk of loss relating to our materials transfer to the customer, which transfer generally takes place when the product is shipped to the customer from our facility. Shipping and handling costs associated with product sales
are included in cost of sales. Such policies are consistent with provisions in the SECs Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue
Recognition.
Inventory Valuation.
At each balance sheet date, we evaluate our ending inventories for obsolete and
non-saleable items. This evaluation considers analyses of actual and projected future sales levels by product compared with inventories on hand, and evidence of customers expectation to buy back excess inventories as per our written supplier
agreements. To project future sales, we make estimates based on customers forecasted demand and historical sales performance. In addition, we consider the need to write down to net realizable value of inventories we believe to be obsolete or
non-saleable. Remaining inventory balances are adjusted to approximate the lower of cost or net realizable value. If future demand or market conditions are less favorable than our projections, we would consider additional inventory write-downs which
would be reflected in cost of sales in the period a determination is made.
Impairment of Long-Lived Assets
. We routinely consider
whether indicators of impairment of long-lived assets are present in accordance with Statements of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. For this purpose,
assets are grouped at the lowest level for which separate cash flow information is available. For long-lived assets to be held and used, we determine whether the estimated undiscounted cash flows attributable to the assets in question are less than
their carrying values. If such indicators are present, we recognize an impairment charge equal to the difference between the fair value and the carrying value of such assets. Fair value is best determined by quoted market prices in active markets.
If quoted market prices are not available, other methods that can be used include discounted future cash flows or appraisals. If the assets determined to be impaired are to be held and used, we recognize an impairment charge to the extent the fair
value attributable to the asset is less than the assets carrying value. The fair value of the asset then becomes the assets new carrying value, which we depreciate over the remaining estimated useful life of the asset. We may incur
impairment losses in future periods if factors influencing our estimates change or if our expectations for future revenues and the ability to utilize our assets change. While our cash flow assumptions and estimated useful lives are consistent with
our business plan, there is significant judgment involved in determining these cash flows.
In addition, we evaluate our asset utilization
and consider whether certain long-lived assets should be either written off or held for disposal. Assets classified as held for disposal are separately presented and are measured at the lower of their depreciated cost or fair value less costs to
sell. A loss is recognized for any initial or subsequent write-down to fair value less costs to sell. A gain is recognized for any subsequent increase in fair value less costs to sell, but not in excess of the cumulative loss previously recognized.
A gain or loss not previously recognized that results from the sale of a long-lived asset is to be recognized at the date of sale.
43
Deferred Income Taxes
. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We need to make judgments to estimate future taxable income and consider prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we
determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is
more likely than not the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed. We provided a full valuation allowance against the deferred tax assets of subsidiaries in both the United States
and Hong Kong as of April 30, 2007, 2006 and 2005 due to uncertainties surrounding the realizability of these benefits in future tax returns.
Commitments and Contingent Liabilities
. At each balance sheet date, when a loss contingency exists, we assess the likelihood that future events will confirm the loss or impairment of an asset or the incurrence of a liability, which
may include probability of an outcome of litigation unfavorable to us, and determine whether conditions for accrual of loss contingencies as stated in SFAS No.5, Accounting for Contingencies are met. For this purpose, an estimated loss
from a loss contingency is accrued by a charge to the statement of operations if (1) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of financial
statements, and (2) the amount of loss can be reasonably estimated. Accordingly, no accrual is made if one or both of these conditions are not met. The nature of such loss contingency, if any, is disclosed in the notes to the financial
statements.
New Accounting Standard
In July 2006, the FASB released FIN 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under FIN 48, the
financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities full knowledge of the position and all relevant facts, but without considering time values. FIN 48 is effective for annual
periods beginning after December 15, 2006. We are in the process of assessing the impact of this recent accounting pronouncement.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Our management is in the process of evaluating the potential impact of this standard.
In
February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. FAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASBs long-term measurement objectives for accounting for financial instruments. FAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 does not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value. This Statement does not establish requirements for recognizing and measuring dividend income, interest income, or interest expense. This Statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
44
measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. FAS
159 is effective for financial statements issued for fiscal years beginning after November 15, 2007.
OPERATING RESULTS
Operating Environment and Overview
Industry Demand
. The semiconductor industry has been highly cyclical and, beginning in the July 2004 quarter, the semiconductor industry
experienced a downturn, and our net sales on a quarterly basis decreased from that time through our July 2005 quarter. This decline in our net sales can be attributed to a variety of factors, including: excess capacity in the assembly and test
industry and related price pressure, a significant shift in our product mix, and an inventory correction within the semiconductor industry. Since the July 2005 quarter, the semiconductor industry has experienced a gradual recovery, but we failed to
capture all the benefits of such recovery that we might otherwise obtain due to disruptions in our operations during our move to Dongguan, China in 2006. As a result, our sales for fiscal year ended April 30, 2006 was decreased by 6.3% from the
fiscal year ended April 30, 2005. As the migration of our operations to China was not completed until the October 2006 quarter, the non-availability of production facilities together with the requisite customer re-qualification at our new
Dongguan facilities caused further impact to our revenue growth. In the April 2007 quarter, there was a downturn in the semiconductor market as a result of soft demand in the end user markets which reflects an inventory corrections and led to our
customers cutting back production orders. The above factors cause the Companys turnover for the fiscal year ended April 30, 2007 declined by 9% as compared to that of fiscal year ended April 30, 2006.
Technology Migration
. The semiconductor industry is subject to technology migration as increasingly complex semiconductor applications with higher
performance requirements and greater functionality are developed. Typically, the newest semiconductor applications with the highest performance initially demand the highest price. Pricing and margins on these products generally decline as they are
replaced by newer products with enhanced performance characteristics. Accordingly, the semiconductor industry (including the assembly and test industry) must continually develop products with greater functionality and performance.
Pricing and Revenue Recognition
. We charge our customers on a per unit basis, with price per unit varying depending on the complexity of the
package requested by the customer. Our pricing is significantly influenced by general demand in the semiconductor industry and by the sophistication of our assembly and test services. Other factors affecting pricing include the cost of components
and raw materials, the order size, strength and history of our relationships with our customers and our capacity utilization. Revenues are recognized net of discounts from packaged semiconductors sold directly to customers when persuasive evidence
of an arrangement exists, the price is fixed or determinable, delivery has occurred and services are rendered, and collectibility is reasonably assured.
Cost of Sales
. The most significant components of cost of goods sold are raw materials, fixed manufacturing costs, labor and depreciation. Industry trends significantly affect our raw material costs, which
account for a majority of our cost of sales.
Impairment of Property, Plant and Equipment
. We routinely consider whether indicators
of impairment of long-lived assets are present in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. For this purpose, assets are grouped at the lowest level for which separate cash flow
information is available. For long-lived assets to be held and used, we determine whether the estimated undiscounted cash flows attributable to the assets in question are less than their carrying values. If such indicators are present, we recognize
an impairment charge equal to the difference between the fair value and the carrying value of such assets. Fair value is best determined by quoted market prices in active markets. If quoted market prices are not available, other methods that can be
used include discounted future cash flows or appraisals. If the
45
assets determined to be impaired are to be held and used, we recognize an impairment loss based on the excess of the carrying amount of the assets over their
respective fair value. The fair value of the asset then becomes the assets new carrying value, which we depreciate over the remaining estimated useful life of the asset. On December 20, 2003, we entered into a sale and purchase agreement
with a third party to dispose of our factory building for test operation in Hong Kong for approximately $4.0 million. The sale was completed on February 21, 2004 and, as a result of the sale of the property in February 2004, an impairment
charge of $2.4 million was recognized and recorded in the January 2004 quarter.
The continuous weakness in net sales and the substantial amount of operating losses, which mainly resulted from a shift in product mix and decrease in
average selling prices in the second half of fiscal year 2005, triggered us to perform an impairment review of our long-lived assets in the April 2005 quarter. We compared the undiscounted cashflow to the carrying values of our long-lived assets.
For long-lived assets which the carrying values exceeded the undiscounted cashflow, we determined the fair values of these long-lived assets based on the discounted cash flow model. Accordingly, we recorded a non-cash impairment charge of $16.5
million in relation to the long-lived assets associated with certain chipscale packages in the April 2005 quarter. In addition, in connection with this review we determined that certain wire bonders and test equipment were either technologically
obsolete or with low utilization and would not be fully utilized in our operations. As a result, we determined to write off or write down these equipment items, which resulted in another $3.4 million impairment charge in the April 2005 quarter.
During the April 2006 quarter, we recognized a total of $3.9 million of impairment losses for property, plant and equipment which were not transferable to our facilities in Dongguan, China and could not be sold. We had performed the impairment
review as of April 30, 2007 and the result did not indicate the needs of any further write down or write-off of the property, plant and equipment is required. We may incur impairment losses in future periods if factors influencing our estimates
change or if our expectations for future revenues and the ability to utilize our assets change. While our cash flow assumptions and estimated useful lives are consistent with our business plan, there is significant judgment involved in determining
these cash flows.
Research and Development
. Because our new packaging technologies usually involve extensions and evolutions of
existing technologies, we have been able to develop new products in recent years without significantly increasing our research and development expenditures. Our focus on working closely in the package design process with customers to develop
packages for application specific standard products enables us to use our research and development resources efficiently. During each of our last three fiscal years, our research and development expenditures to develop technologies that would
satisfy our customers future requirements have been reduced from $4.5 million to $2.2 million. We believe that by focusing our research and development resources on a few carefully selected and closely monitored projects, we will be able to
both upgrade our assembly technology processes and refine the development of our leading edge package technologies without increasing our year-over-year research and development expenditures. To help optimize the use of our research and development
resources, we will continue to partner with our customers in the development of advanced technologies. However, there are risks associated with our reductions in research and development expenditures in the recent years. See Item 3Key
InformationRisk Factors
Our ability to rapidly develop and successfully bring to market advanced technologies and services is important to maintaining our competitive position and profitability.
Customers
. For each year ended April 30, 2007, 2006 and 2005, our single largest customer accounted for approximately 53.7%, 32.6% and 21.1%,
respectively, of net sales, while for those same years our top ten customers accounted for approximately 79.3%, 74.0% and 69.5%, respectively, of net sales. Broadcom Corporation accounted for 10.0% or more of net sales in the years ended
April 30, 2007 and 2006, while each of Analog Devices, Inc., Broadcom Corporation and Infineon accounted for 10.0% or more of net sales in the year ended April 30, 2005.
46
Results of Operations
The following table sets forth ASATs results of operations as a percentage of net sales during the years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Net sales
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
|
|
93.5
|
|
|
81.2
|
|
|
93.8
|
|
|
92.7
|
|
|
90.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
6.5
|
|
|
18.8
|
|
|
6.2
|
|
|
7.3
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
16.1
|
|
|
11.5
|
|
|
14.1
|
|
|
16.2
|
|
|
13.4
|
|
Research and development
|
|
3.5
|
|
|
2.1
|
|
|
2.3
|
|
|
2.2
|
|
|
1.3
|
|
Reorganization expenses
|
|
0.5
|
|
|
|
|
|
0.5
|
(2)
|
|
2.6
|
(5)
|
|
1.5
|
(7)
|
Litigation settlement
|
|
|
|
|
|
|
|
2.4
|
(3)
|
|
|
|
|
|
|
Impairment of property, plant and equipment
|
|
54.5
|
(1)
|
|
1.1
|
|
|
10.3
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(4)
|
|
2.1
|
(6)
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|
|
|
Facilities and relocation charges
|
|
|
|
|
0.1
|
|
|
|
|
|
0.6
|
|
|
1.8
|
(8)
|
Total operating expenses
|
|
74.6
|
|
|
14.8
|
|
|
29.6
|
|
|
23.7
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
(68.1
|
)
|
|
4.0
|
|
|
(23.4
|
)
|
|
(16.4
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)
|
|
(8.9
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)
|
Other income, net
|
|
1.1
|
|
|
0.3
|
|
|
0.4
|
|
|
1.9
|
|
|
0.4
|
|
Charges on early redemption of 12.5% senior notes
|
|
|
|
|
(4.8
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)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(9.1
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)
|
|
(7.2
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)
|
|
(7.7
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)
|
|
(9.1
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)
|
|
(11.9
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)
|
Loss before income taxes
|
|
(76.1
|
)
|
|
(7.7
|
)
|
|
(30.7
|
)
|
|
(23.6
|
)
|
|
(20.4
|
)
|
Income tax benefit (expense)
|
|
10.1
|
|
|
|
|
|
(0.4
|
)
|
|
0.3
|
|
|
(0.8
|
)(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(66.0
|
)%
|
|
(7.7
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)%
|
|
(31.1
|
)%
|
|
(23.3
|
)%
|
|
(21.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects a non-cash impairment charge of $81.8 million for property, plant and equipment in fiscal year 2003.
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(2)
|
Reflects a charge of $928 thousand associated with headcount reduction of approximately 300 workers primarily in our Hong Kong operations.
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(3)
|
Reflects a settlement amount of $4.6 million settled in the form of cash, warrants and rebates on future business associated with a settlement agreement that was executed with
Freescale in fiscal year 2005.
|
(4)
|
Reflects a charge of $19.9 million for the write-off and impairment related to certain property, plant and equipment in fiscal year 2005.
|
(5)
|
Reflects a charge of $4.7 million associated with headcount reduction of approximately 1,000 workers primarily in our Hong Kong operations.
|
(6)
|
Reflects a charge of $3.9 million for the write-off related to certain property, plant and equipment which could not be transferred to our new manufacturing facility in Dongguan,
China and could not be sold in fiscal year 2006.
|
(7)
|
Reflects a charge of $2.5 million associated with headcount reduction of approximately 370 workers primarily in our Hong Kong operations.
|
(8)
|
Reflects a charge of $3.0 million associated with the transfer of our assembly and test operations from Hong Kong to Dongguan, China.
|
(9)
|
The income tax expense for the fiscal year ended April 30, 2007 was primarily attributable to provision for Hong Kong profits tax concerning a tax dispute with respect to
fiscal year 2000.
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47
Fiscal Year Ended April 30, 2007 Compared to Fiscal Year Ended April 30, 2006
Net sales.
Net sales decreased by 9.5% to $164.9 million for the year ended April 30, 2007 as compared to $182.1 million for the year ended
April 30, 2006.
Net sales for assembly services decreased by 7.9% to $155.7 million for the year ended April 30, 2007 as
compared to $169.1 million for the year ended April 30, 2006. The decrease in net sales for assembly services during the year was mainly attributed to the decrease in unit sales volume due to various factors including interruption from the
migration of our operations from Hong Kong to Dongguan and the inventory corrections that took place in April 2007 quarter. Net sales for assembly services accounted for 94.5% and 92.9% of total net sales for the years ended April 30, 2007 and
2006, respectively. Net sales from chipscale packages represented 77.1% of assembly sales for the year ended April 30, 2007 as compared to 68.0% of assembly sales for the year ended April 30, 2006. Our mix of assembly services shifted
mostly toward chipscale packages during the year ended April 30, 2007 as compared to the corresponding prior year.
Net sales from
test services decreased by 30.0% to $9.1 million for the year ended April 30, 2007 as compared to $13.0 million for the year ended April 30, 2006. This decrease is primarily attributable to a decrease in unit test volume as a result of
excess capacity in the market for test services.
The communications market remained our largest market segment, representing 61% and 52%
of total revenue for the years ended April 30, 2007 and 2006, respectively. The industrial, automotive and others markets accounted for approximately 23% and 26% of total revenue for the years ended April 30, 2007 and 2006, respectively.
The personal computers and computing market segments accounted for approximately 7% and 13% of total revenue for the years ended April 30, 2007 and 2006, respectively. The consumer market accounted for 9% of total revenue for the year ended
April 30, 2007, which remained unchanged from the corresponding prior year.
Gross profit.
Gross profit for the year ended
April 30, 2007 was $14.9 million, as compared to gross profit of $13.3 million for the year ended April 30, 2006. Gross margin increased to 9.1% for the year ended April 30, 2007, as compared to 7.3% for the year ended April 30,
2006. This increase was attributable to our ability to reduce our manufacturing costs after the migration of our entire manufacturing operations to China. Labor costs were reduced as a result of our access to skilled and low cost workforce in China.
While production efficiency has improved with the support from the new factory premises with an improved layout design, we continue to explore options to improve our cost structure during the course of localization. For the year ended April 30,
2007, we recorded $1.6 million in inventory write-offs, as compared to $1.8 million for the year ended April 30, 2006. In analyzing whether to write-off inventory, we determine the amount of excess and obsolete inventory based on the forecasted
demand we receive from our customers. We write-off inventory in a fiscal period once we determine that the inventory will either not be utilized in production based on our customers forecasts or is not recoverable from our customers. We also
write-off inventory if the net realizable value of the inventory is smaller than its carrying value.
Selling, general and
administrative.
Selling, general and administrative expenses decreased by 25.1% to $22.1 million for the year ended April 30, 2007, as compared to $29.4 million for the year ended April 30, 2006, while net sales decreased by 9.5% in
the same period. This decrease primarily resulted from the shut down of our Hong Kong manufacturing operations by the end of July 2006, cost reduction as a result of the reorganization of our sales teams in Hong Kong, the U.S. and Europe and
reallocation of our customer services team and back office functions in China, and certain pre-operating expenses, including rental and utilities expenses incurred by the Dongguan, China manufacturing facility charged in the year ended
April 30, 2006 which were no longer charged to selling, general and administrative expenses in the current year.
Research and
development.
Research and development expenses decreased by 45.4% to $2.2 million for the year ended April 30, 2007, as compared to $4.1 million for the year ended April 30, 2006. The reduction of
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research and development expenses for the year was a result of the improved cost structure of our manufacturing operations in Dongguan, China, and the
completion of certain major projects and reduced investment in new projects.
Reorganization expenses.
During the years ended
April 30, 2007 and April 30, 2006, we incurred $2.5 million and $4.7 million in reorganization expenses (pre-tax), respectively, consisting of severance payments in connection with a work force reduction of approximately 370 and 1,000
employees, respectively, as part of the move of our manufacturing operations to Dongguan, China and corporate reorganization.
Impairment of property, plant and equipment.
No impairment of property, plant and equipment was recorded during the year ended April 30, 2007. During the year ended April 30, 2006, we recorded an impairment charge of $3.9
million which mainly represented a write-off of certain property, plant and equipment which could not be transferred to our new manufacturing facility in China and which could not be sold.
Other income, net.
Other income, net decreased from $3.4 million for the year ended April 30, 2006 to $0.6
million for year ended April 30, 2007, was primarily due to a $2.3 million reversal to other income for the previously accrued write-off of ASAT S.A., our business in France that was closed as part of our global restructuring in November 2001,
that was recorded in the year ended April 30, 2006.
The three-year statue of limitations, which began in the third quarter of fiscal 2003 and was applicable to the claims arising out of the closure of ASAT S.A., expired during the
third quarter of fiscal 2006. There was no such income in the year ended April 30, 2007.
Facilities and relocation
charges.
During the years ended April 30, 2007 and April 30, 2006, we incurred approximately $3.0 million and $1.1 million, respectively, in facilities and relocation charges in connection with the transfer of our assembly and test
operations from Hong Kong to Dongguan, China.
Interest expenses.
Interest expense was $19.5 million for the year ended
April 30, 2007, as compared to $16.6 million for the year ended April 30, 2006, representing a $2.9 million increase. Of the $19.5 million recorded in the year ended April 30, 2007, $13.9 million was attributable to interest on our
9.25% senior notes due 2011. The remaining balance represented interest paid for capital lease obligations and the short-term bank loans, as well as the amortization of deferred charges relating to the issuance of our 9.25% senior notes due 2011,
Series A Preferred Shares, and our purchase money loan facility. Of the $16.6 million recorded in the year ended April 30, 2006, $13.9 million was attributable to interest on our 9.25% senior notes due 2011. The remaining balance mainly
represented interest paid for capital lease obligations and the short-term bank loans, as well as the amortization of deferred charges relating to the issuance of 9.25% senior notes due 2011, Series A Preferred Shares, and our purchase money loan
facility.
Income tax (expenses) benefit.
During the year ended April 30, 2007, we incurred an income tax expense of $1.3
million as compared to an income tax benefit of $649 thousand for the year ended April 30, 2006. The effective tax rate for the year ended April 30, 2007 was 3.7% as compared to a (1.5%) effective tax rate for the year ended
April 30, 2006. The income tax expense for the year ended April 30, 2007 was primarily attributable to provision for Hong Kong profits tax concerning a tax dispute with respect to the fiscal year 2000. The income tax benefit for the year
ended April 30, 2006 was primarily attributable to a tax refund from our U.S. operations, which was partially offset by an income tax expense paid for our German operations.
Fiscal Year Ended April 30, 2006 Compared to Fiscal Year Ended April 30, 2005
Net sales.
Net sales decreased by 6.3% to $182.1 million for the year ended April 30, 2006 as compared to $194.4 million for the year ended April 30, 2005.
Net sales for assembly services decreased by 3.1% to $169.1 million for the year ended April 30, 2006 as compared to $174.6 million for the year
ended April 30, 2005. Such decrease in net sales was mainly caused by a
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decline in average selling prices by 4.2% and a shift in product mix. Net sales for assembly services accounted for 92.9% and 89.8% of total net sales for
the years ended April 30, 2006 and 2005, respectively. Net sales from chipscale packages represented 68.0% of assembly sales for the year ended April 30, 2006 as compared to 60.6% of assembly sales for the year ended April 30, 2005.
Our mix of assembly services shifted more toward chipscale packages during the year ended April 30, 2006 as compared to the corresponding prior period and chipscale packages tend to carry a lower per unit sales amount than other packages that
we produce.
Net sales from test services decreased by 34.5% to $13.0 million for the year ended April 30, 2006 as compared to $19.9
million for the year ended April 30, 2005. This decrease was primarily attributable to decreases in test business from a few of our major customers resulting from decreases in their own forecasts and decreases in average selling price as a
result of excess capacity in the market for test services.
The industrial, automotive and others market accounted for approximately 26% of
total net sales for the year ended April 30, 2006 as compared with 23% of total net sales for the year ended April 30, 2005. The communication market remained our largest market and accounted for 52% and 54% of total net sales for the
years ended April 30, 2006 and 2005, respectively. The personal computers/computing market accounted for approximately 13% and 8% of total net sales for the years ended April 30, 2006 and 2005, respectively, while the consumer market
accounted for 9% and 15% of total net sales for the years ended April 30, 2006 and 2005, respectively.
We estimate that approximately
65.3% of total net sales during the year ended April 30, 2006 represented packages shipped to distribution centers with destinations in Asia as compared with 44.3% of total net sales in the corresponding prior period. Our top three customers
during the year ended April 30, 2006 accounted for 48.2% of our total net sales as compared to 44.0% in the corresponding prior period.
Gross profit.
Gross profit for the year ended April 30, 2006 was $13.3 million as compared to a gross profit of $12.1 million for the year ended April 30, 2005. Gross margin increased to 7.3% for the year ended
April 30, 2006 from 6.2% in the corresponding prior period, primarily driven by our lower manufacturing cost structure in China, a change in product mix, a reduction in depreciation as a result of certain assets being fully depreciated and an
asset impairment charge recorded during fiscal year 2005. We wrote-off inventory of $1.8 million during the year ended April 30, 2006 as compared with $2.4 million in the corresponding prior period.
Selling, general and administrative.
Selling, general and administrative expenses increased by 7.3% to $29.4 million for the year ended
April 30, 2006 as compared to $27.5 million for the year ended April 30, 2005. This increase was primarily caused by additional expenses, including rent, rates and management fees, incurred prior to achieving volume production in our Phase
II facility and expenses constituting consulting and maintenance fees for our new SAP and Camstar systems.
Research and development.
Research and development expenses decreased to $4.1 million for the year ended April 30, 2006 as compared to $4.5 million for the year ended April 30, 2005. A significant portion of theses expenditures was focused on further developing
advanced semiconductor packaging technologies.
Reorganization expenses.
As part of our plan to move our manufacturing operations to
China and our corporate reorganization activity, we continued to lay-off staff in our Hong Kong manufacturing operations. During the year ended April 30, 2006, we incurred $4.7 million of reorganization expenses (pre-tax) consisting of
severance payments resulting from a workforce reduction of approximately 1,000 employees. During the year ended April 30, 2005, we laid off approximately 300 employees and incurred reorganization expenses (pre-tax) of $928 thousand.
Impairment of property, plant and equipment.
During the year ended April 30, 2006, we recorded an impairment charge of $3.9 million which
mainly represented a write-off of certain property, plant and equipment which could not be transferred to our new manufacturing facility in China and which could not be sold. During the year ended April 30, 2005, the continued weakness in net
sales and a substantial amount of operating losses,
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which mainly resulted from a shift in product mix and decrease in average selling prices in the second half of fiscal year 2005, triggered us to perform an
impairment review of our long-lived assets in the April 2005 quarter. We compared the undiscounted cashflow to the carrying values of our long-lived assets. For long-lived assets for which the carrying values exceeded the undiscounted cashflow, we
determined the fair value of these long-lived assets based on the discounted cash flow model. Accordingly, we recorded a non-cash impairment charge of $16.5 million in relation to the long-lived assets associated with certain chipscale packages in
the April 2005 quarter. In addition, in connection with this review we determined that certain wire bonders and test equipment were either technologically obsolete or subject to low utilization and would not be fully utilized in our operations. As a
result, we determined to write-off or write-down these items, which resulted in another $3.4 million impairment charge in the April 2005 quarter.
Other income, net.
Other income, net increased to $3.4 million for the year ended April 30, 2006 as compared to $0.7 million for the year ended April 30, 2005. The increase was primarily due to a $2.3 million reversal of
the previously accrued write-off of ASAT S.A., our business in France that was closed as part of our global restructuring in November 2001. The three-year statute of limitations, which began in the third quarter of fiscal 2003 and was applicable to
the claims arising out of the closure of ASAT S.A., expired during the third quarter of fiscal 2006. A net gain on disposal of property, plant and equipment of $14 thousand was recorded for the year ended April 30, 2006, while a net loss on
disposal of property, plant and equipment of $136 thousand was recorded for the year ended April 30, 2005. The increase in the two factors mentioned above was partially offset by a reduction in interest income from $639 thousand for the year
ended April 30, 2005 to $394 thousand for the year ended April 30, 2006. The decrease in interest income was attributed to the overall decrease in our cash balances from $32.7 million as of April 30, 2005 to $11.9 million as of
April 30, 2006.
Facilities and relocation charges.
During the year ended April 30, 2006, we incurred $1.1 million of
facilities and relocation charges in connection with the move of our manufacturing operations from Hong Kong to Dongguan, China. No such charges were incurred during the year ended April 30, 2005.
Interest expenses.
Interest expense increased to $16.6 million for the year ended April 30, 2006 as compared to $15.0 million for the year
ended April 30, 2005. Of the $16.6 million recorded in the year ended April 30, 2006, $13.9 million was attributed to interest on our 9.25% senior notes due 2011, while the remaining balance represented interest paid for capital lease
obligations, the purchase money loan facility and the short-term bank loans, as well as the amortization of deferred charges relating to the issuance of our 9.25% senior notes due 2011, Series A Preferred Shares and purchase money loan facility. Of
the $15.0 million recorded in the year ended April 30, 2005, $13.9 million was attributed to interest on our 9.25% senior notes due 2011, while the remaining balance represented interest paid for capital lease obligations and short-term bank
loans, as well as the amortization of deferred charges.
Income tax benefits (expenses).
During the year ended April 30, 2006,
we incurred an income tax benefit of $649 thousand as compared to an income tax expense of $748 thousand for the year ended April 30, 2005. The effective tax rate for the year ended April 30, 2006 was 1.5% as compared to a
(1.3%) effective tax rate for the year ended April 30, 2005.
The income tax benefit for the year ended April 30, 2006 was primarily attributable to a tax refund from our U.S. operations, which was offset by an income tax
expense paid for our German operations. The income tax expense for the year ended April 30, 2005 was primarily attributable to our U.S. and German operations. The valuation allowance increased from $13.2 million as of April 30, 2005 to
$23.5 million as of April 30, 2006, which was caused by an increase in net operating losses carried forward.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases.
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LIQUIDITY AND CAPITAL RESOURCES
Cash on hand, excluding restricted cash, as of April 30, 2005, 2006 and
2007 was $32.7 million, $11.9 million and $7.3 million, respectively.
Net Cash Provided by (Used in) Operating Activities
Fiscal Year Ended April 30, 2007 Compared to Fiscal Year Ended April 30, 2006 and 2005
For the year ended April 30, 2007, our net cash provided by operating activities was $10.4 million, as compared to net cash used in operating
activities of $7.1 million for the year ended April 30, 2006. This increase in net cash provided by operating activities was primarily due to a decrease in net loss and an improvement in working capital management as a result of our improved
control over inventory holding costs and close monitoring of accounts receivables to ensure timely collection.
For the year ended
April 30, 2006, our net cash used in operating activities was $7.1 million as compared to net cash provided by operating activities of $1.9 million for the year ended April 30, 2005. This increase in net cash used in operating activities
was primarily due to a decrease in non-cash operating expenses, a reduction in collections from trade receivables, an increase in inventory balances and an increase in restricted cash. The $7.1 million net cash used in operating activities is
attributable to a net loss of $42.4 million that was offset by $32.5 million net non-cash operating expenses and net cash of $2.8 million provided by changes in net operating assets and liabilities. Net non-cash operating expenses included
depreciation of property, plant and equipment and amortization of deferred charges, reversal of stock-based compensation expenses, non-cash impairment charge of property, plant and equipment and net gain on disposal of property, plant and equipment.
For the year ended April 30, 2005, net cash provided by operating activities was $1.9 million as a result of a net loss of $60.4
million that was offset by $52.9 million in net non-cash operating expenses and net cash of $9.4 million provided by changes in net operating assets and liabilities. Net non-cash operating expenses included in net loss in the year ended
April 30, 2005 included depreciation and amortization, amortization of stock-based compensation expenses, net loss on disposal of property, plant and equipment and non-cash impairment charge of property, plant and equipment.
Net Cash Used in Investing Activities
Fiscal Year Ended
April 30, 2007 Compared to Fiscal Year Ended April 30, 2006 and 2005
Net cash used in investing activities was $17.6
million for the year ended April 30, 2007, compared to $23.4 million for the year ended April 30, 2006. The investing activities consisted of schedule payments paid to Wellmean, a local contractor for the facilitation of the ASAT China
plant and purchase of equipment and machinery to enhance our production capability in meeting needs of our customers new package design.
Net cash used in investing activities was $23.4 million for the year ended April 30, 2006 as compared to $40.7 million for the year ended April 30, 2005. Capital expenditures were $23.5 million for the year ended April 30,
2006 as compared to $40.7 million in the corresponding prior period. Capital expenditures were primarily paid for the purchase of equipment and machinery to support the requirements for our business. Capital expenditures were also made on the
development of the new SAP Enterprise Resources Planning (ERP) system and Camstar Manufacturing Execution Systems (MES) as well as the facilitization
of our new manufacturing facility located in Dongguan, China.
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Net Cash Provided by Financing Activities
Fiscal Year Ended April 30, 2007 Compared to Fiscal Year Ended April 30, 2006 and 2005
Net cash provided by financing activities was $2.5 million for the year ended April 30, 2007, as compared to $9.7 million for the year ended April 30, 2006. Cash provided by financing activities for the year ended April 30,
2007 included $3.8 million from the draw down of new short-term bank loans, $0.5 million in proceeds from our rights offering and $0.2 million
in proceeds from stock options exercised, which was offset by $2.0 million in repayment of
capital lease obligations. Cash provided by financing activities for the year ended April 30, 2006 included net proceeds of $9.2 million from borrowing the first tranche of our purchase money loan facility, proceeds of $7.5 million from the
issuance of Series A Preferred Shares (another $7.5 million for the issuance of Series A Preferred Shares to QPL was in the form of a waiver of accounts payable owing to QPL) and proceeds from the exercise of stock options of $109 thousand.
These proceeds were offset by $1.7 million of the payment of deferred financing expenses associated with our $30.0 million private financing arrangements, repayment of a short-term bank loan of $4.2 million and repayment of capital lease
obligations of $1.2 million.
Cash provided by financing activities during the year ended April 30, 2005 included proceeds from
equipment sale-leaseback transactions of $6.5 million, an increase in short term bank borrowings of $4.2 million net of repayment and proceeds from the exercise of stock options of $233 thousand. In addition, $617 thousand in deferred financing
expenses associated with the issuance of 9.25% senior notes due 2011 was paid during the year ended April 30, 2005. We also paid $510 thousand in other deferred financing costs and $746 thousand as repayment of capital lease obligations during
the year ended April 30, 2005.
Capital Expenditures and Material Financing Arrangements
Capital expenditures
Capital
expenditures decreased to $17.7 million for the year ended April 30, 2007 from $23.5 million for the year ended April 30, 2006. This decrease was due primarily to our general cost reduction plan and more stringent controls on capital
expenditures, as well as reduced expenditures as a result of the completion of our move to China. For the year ended April 30, 2007, we incurred capital expenditures to enhance our production capability in meeting the requirements of our
customers new package design and on the facilitization of our new manufacturing plant. For the year ended April 30, 2006, we incurred capital expenditures for additional machinery and equipment to meet the capacity requirements of our
customers and development of the new ERP and MES as well as the facilitization of our new manufacturing plant. For the year ended April 30, 2005, we incurred capital expenditures for the development of a new SAP enterprise resource planning
solution, development of a Camstar manufacturing tracking and execution system, partial payment for interior finish and fixtures of the Phase II factory facilities and the acquisition of new assembly and test equipment for expanding capacity of our
LPCC product line.
During the year ended April 30, 2005, we sold certain equipment for $6.5 million to TGGT Equipment (HK) Limited
(TGGT) that was then leased back from TGGT. Under the lease agreements, we are required to pay to TGGT on a quarterly basis the greater of (i) lease payment based on the reported usage of the equipment and (ii) a minimum
commitment. The initial terms of the lease agreements expire upon the earlier of the date that the committed usage has been achieved or 14 quarters after the commencement date of the lease agreements. As of April 30, 2007, outstanding
obligations amounted to approximately $2.6 million.
Pursuant to these sale-leaseback arrangements, TGGT entered into a separate term loan
facility agreement for up to $5.0 million with Standard Chartered Bank. We and ASAT HK have fully and unconditionally guaranteed to Standard Chartered Bank the obligations of TGGT for this $5.0 million term loan facility.
In late December 2005, we were notified by Standard Chartered Bank of its unwillingness to grant an extension beyond January 15, 2006 for us to meet
a net worth requirement, which was a condition of our guarantee. On March 31, 2006, we deposited $3.3 million in cash with Standard Chartered Bank as collateral for
53
our guarantee obligations and, in consideration thereof, Standard Chartered Bank amended the term loan facility agreement and removed the net worth and
financial requirements. On July 24, 2006, Standard Chartered Bank released us and ASAT HK from our guarantees. During the fiscal year ended April 30, 2007, Standard Chartered Bank had released, in several trenches, the secured deposit of
$1.5 million. As of April 30, 2007, the total secured deposit held by Standard Chartered Bank was $1.8 million.
As of April 30,
2007, we had commitments for capital expenditures of approximately $1.2 million. These capital expenditures are expected to be used for maintenance and enhancement of our production equipment at our Dongguan, China facilities. We currently intend to
fund our capital expenditures with the existing cash resources and positive cash flow generated from the savings that we expected to be realized from reductions in cost structure from the completion of the move of our manufacturing operations to
Dongguan, China. We will also continue to seek financing from customers and external financing to fund our future capital expenditures. The execution of these plans are highly dependent upon the progress of our business growth and the technological
requirements to maintain the competition edge of our company.
Material financing arrangements
Our subsidiary, ASAT China, was party to a Loan Agreement, dated February 23, 2005, with China Construction Bank, providing for a loan in the
original principal amount of RMB40 million (equivalent to approximately $4.8 million). The loan bore interest at a rate of 5.022% per annum and matured on February 28, 2006. We guaranteed ASAT Chinas obligations under the loan
agreement. In April 2005, we made a partial repayment of principal in the amount of $604 thousand under this loan agreement and, during the year ended April 30, 2006, the remaining $4.2 million was fully repaid.
On July 31, 2005, we entered into agreements for a private financing of $30 million with JPMP Master Fund Manager, L.P. (JPMP) related
funds and QPL, two of our principal shareholder groups, and affiliates of these two entities, in the form of a $15 million preferred share financing and a $15 million purchase money loan facility.
The preferred share financing provided for the issuance and sale of 300,000 Series A Preferred Shares for a total price of $15 million and the issuance
of five-year warrants for a total of 20 million ordinary shares exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), of which five-year warrants for a total of 5 million ordinary shares were issued as an
arrangement fee. The securities purchase agreement for the Series A Preferred Share financing was amended and restated on October 27, 2005 to, among other things, add Olympus-ASAT II, L.L.C. (Olympus), as a party. The Series A
Preferred Share financing closed on October 27, 2005.
The second $15.0 million of this financing is a purchase money loan facility
from Asia Opportunity Fund, L.P., an affiliate of JPMP, and related funds. The facility may be drawn upon in two tranches. The first tranche of $10.0 million may be drawn upon if our consolidated cash position falls below $10.0 million. A second
tranche of an additional $5.0 million may be drawn upon if our consolidated cash position again falls below $10.0 million. The maturity date of the loans made in a tranche was originally two years from the date such tranche is advanced. The interest
rate payable on the loans is 15% per annum, with interest to be paid on a quarterly basis. We issued the administrative agent, on the date of the issuance and sale of Series A Preferred Shares described above, warrants to purchase an aggregate
of 5,000,000 ordinary shares, which is the equivalent of 333,333 ADSs, exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS).
On January 25, 2006, we borrowed the first $10.0 million tranche of funding under the purchase money loan facility. In return for drawing upon the first tranche, we issued the lenders under the purchase money
loan facility warrants to purchase an aggregate of 15,668,170 ordinary shares, which is the equivalent of 1,044,544 ADSs, exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), as well as paid a commitment fee of $850,000
on a pro rata basis to the lenders that funded the first tranche. In each case, the warrants are exercisable for five years from the date of issuance. On July 31, 2007, the second $5.0 million tranche commitment expired and was not drawdown.
Therefore, the remaining second tranche of $5 million is no longer available to us.
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On August 23, 2007, we amended the purchase money loan facility to extend the maturity due date of
the $10.0 million principal amount until April 30, 2009 and to extend the payment due date for interest payments (and interest on such interest) for March 31, 2006, June 30, 2006, September 30,
2006, December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007 to become due on October 31, 2007. In return for amending the purchase money loan facility, we agreed to issue to the lenders under the
purchase money loan facility warrants exercisable, in the aggregate, for a total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis (inclusive of ordinary shares issuable upon exercise of warrants
to the holders themselves and which ASAT Holdings will grant to the eligible holders of our 9.25% senior notes due 2011). The warrants will have an exercise price of $0.01 per ordinary share and will expire on February 1, 2011, subject to
adjustment as provided in the warrants and the other terms and conditions contained therein.
On October 10, 2007, we amended the
purchase money loan facility to extend the payment due date for interest including any penalty interest as required by the agreement. Interest that was due or will be due for payment on or before December 31, 2008 will be due and payable on
December 31, 2008.
The purchase money loan facility is unsecured and contains various affirmative and negative covenants binding on
us and our subsidiaries, including limitations on our and our subsidiaries ability to incur indebtedness, grant liens on assets, pay dividends and enter into transactions with affiliates. In addition, we will be required to repay the loans
with the net proceeds of certain issuances of equity and debt and certain asset sales.
We have agreed to file a registration statement
covering the resale of the shares issuable upon exercise of the Series A Preferred Shares and warrants described above. We have obtained an extension of the date by which we are required to have this registration statement effective until
October 31, 2007.
As required by the securities purchase agreement, in July 2006, we completed a rights offering of the Series A
Preferred Shares and warrants for the benefit of existing shareholders, excluding the purchasers of the Series A Preferred Shares and certain other shareholders that waived participation in the rights offering. In the rights offering, we distributed
one subscription right for every 1,850 of our ordinary shares, or for every 123 of our ADSs, owned. Each subscription right entitled the recipient to purchase for $50.00 a unit consisting of one Series A Preferred Share and a warrant to purchase 50
ordinary shares. We sold 9,799 units in this offering and received gross proceeds of $489,950 in the rights offering.
On March 15,
2006, we paid the semiannual dividend due on our outstanding Series A Preferred Shares. We paid the dividend in our ordinary shares, issuing 11.15 of our ordinary shares per Series A Preferred Share and 3,345,054 ordinary shares in the aggregate to
members of the investor group and Everwarm Limited, a wholly-owned subsidiary of QPL.
On September 15, 2006, we paid the semiannual
dividend due on our outstanding Series A Preferred Shares. We paid the dividend in our ordinary shares, issuing 36.73 ordinary shares per Series A Preferred Share and 11,020,338 ordinary shares in the aggregate to members of the investor group and
Everwarm Limited, and issuing 9.97 ordinary shares per Series A Preferred Share and 97,706 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series
A Preferred Shares.
On March 15, 2007, we paid semiannual dividend due on our outstanding Series A Preferred Shares. We paid the
dividend in our ordinary shares, issuing 26.74 ordinary shares per Series A Preferred Share and 8,021,906 ordinary shares in the aggregate to members of the investor group and Everwarm Limited, and issuing 26.74 ordinary shares per Series A
Preferred Share and 262,025 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares.
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On September 15, 2007, we paid semiannual dividend due on our outstanding Series A Preferred Shares.
We paid the dividend in our ordinary shares, issuing 84.84 ordinary shares per Series A Preferred Share and 25,452,045 ordinary shares in the aggregate to members of the investor group and Everwarm Limited, and issuing 84.84 ordinary shares per
Series A Preferred Share and 825,876 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares.
On May 1, 2006, we entered into a financing agreement with a customer to provide us $6.0 million of financing in the form of advance payments for
assembly and test services, subject to certain conditions. The advance was made to us on June 9, 2006. The primary purpose of this financing is to purchase new equipment to support the customers production capacity demands. This financing
bears no interest and is to be repaid beginning in January 2007 by off-setting amounts against our receivables from our future sales to the customer up to a fixed maximum monthly amount, with any difference between this maximum amount and
receivables from our sales to the customer in a given month being paid by us in cash. As of April 30, 2007, the outstanding balance on this customer financing was $4.0 million. The agreement contains various affirmative and negative covenants,
including notice requirements for specified actions or events, restrictions on acquisitions and dispositions of property, business or assets, and transactions with affiliates. Events of default under the agreement include failure by ASAT to pay or
perform its obligations under the agreement, cross defaults with specified indebtedness and bankruptcy events. Upon the occurrence of an event of default, the customer may require us to repay the remaining balance of the advance payment.
In September 2006, ASAT China obtained a revolving credit facility of $3.8 million from a Chinese bank. The interest rate payable on the revolving
credit facility is 6.12% per annum, with interest to be paid on a monthly basis. The revolving credit facility is secured by the pledge of certain equipment of ASAT China purchased with the proceeds of such facility and may be extended after
one year. On October 8, 2006, the Company drew down $2.5 million, and on April 30, 2007, the Company drew down the remaining balance of this revolving credit facility. In September 2007, ASAT China rolled over the original $2.5 million for
another year at the interest rate of 7.29%. All of which remains outstanding as of the date of this Annual Report.
We have occasionally
been in default or otherwise been out of compliance with the covenants and conditions in the agreements governing our debt. Such defaults have been cured or otherwise remedied by obtaining amendments or waivers from our creditors.
On August 1, 2007, we did not pay the regularly scheduled interest payment of approximately $7.0 million on our 9.25% senior notes due 2011. We have
subsequently paid such interest payment, including accumulated penalty interest, on August 28, 2007, which was within the 30 days grace period permitted under the indenture governing such notes due 2011 (the Senior Notes).
On August 27, 2007, we received consent from the 98% of the holders of the Senior Notes to the amendment of certain provisions of the
indenture (Indenture), dated as of January 26, 2004, pursuant to which the Senior Notes were issued and the waiver of certain defaults and events of default that may have occurred or may occur. The amendments included:
(i) elimination of restrictions on the value of the assets that may be held by ASAT China; (ii) expand the ability of our company and our subsidiaries to secure financing from additional sources; and (iii) extend the deadline for us
to fulfill our reporting obligations under the Indenture.
In September 2007, ASAT China obtained a revolving credit facility of RMB150
million (approximately US$20 million) with a term of one year. This facility is secured by certain trade receivables of ASAT China. This facility has not been drawn down as of the date of this Annual Report.
We believe that our existing cash and cash equivalents and anticipated cash flow from operations based on current market conditions and funds from
various financing arrangements described above will be sufficient to meet our anticipated cash needs in the ordinary course of business for at least the next twelve months.
56
Debt.
As of April 30, 2007, our total outstanding debt was approximately $164.7 million,
consisting of $150.0 million of 9.25% senior notes due 2011, $2.6 million of capital lease obligations, $8.3 million under our purchase money loan facility (the principal amount of the loan which we must repay is $10 million) and $3.8 million under
our revolving credit facility with a Chinese bank. The Indenture, dated as of January 26, 2004, by and among New ASAT (Finance) Limited, ASAT Holdings Limited and its subsidiaries referred to therein as Guarantors, and The Bank of New York, as
trustee (the Indenture), governing the 9.25% senior notes requires the Company to comply with certain covenants, which in addition to limiting our ability to incur debt, limit our ability to:
|
|
|
Pay dividends, redeem capital stock and make certain other restricted payments or investments, including loans, guarantees and advance;
|
|
|
|
Incur additional indebtedness, including guarantees, or issue certain equity interests;
|
|
|
|
Merge, consolidate or sell all or substantially all of our assets;
|
|
|
|
Issue or sell capital stock of some of our subsidiaries;
|
|
|
|
Sell or exchange assets or enter into new businesses;
|
|
|
|
Create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
|
|
|
|
Create liens on assets; and
|
|
|
|
Enter into particular types of transactions with affiliates or related persons.
|
Our purchase money loan facility contains these restrictions plus additional restrictions on our ability to incur debt.
Contractual Obligations
. The following table summarizes our existing contractual obligations for future debt repayments, lease obligations and
capital expenditures as of April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
|
(in thousands)
|
Long-term debt (1)
|
|
205,500
|
|
13,875
|
|
27,750
|
|
163,875
|
|
|
Purchase money loan (2)
|
|
13,190
|
|
|
|
13,190
|
|
|
|
|
Operating leases (3)
|
|
29,937
|
|
4,774
|
|
7,897
|
|
4,666
|
|
12,600
|
Capital lease obligations (4)
|
|
2,622
|
|
1,859
|
|
760
|
|
3
|
|
|
Capital expenditures (5)
|
|
1,190
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
252,439
|
|
21,698
|
|
49,597
|
|
168,544
|
|
12,600
|
|
|
|
|
|
|
|
|
|
|
|
Principal and interest for the 9.25%
senior notes that would accrue are included.
Interest for the purchase money loan
that would accrue is included based on an interest rate of 15% per annum. Interest on overdue interest that would accrue is included based on an interest rate of 20% per annum.
We lease certain land, buildings,
equipment and machinery and motor vehicles under operating lease agreements expiring at various times through July 2020. We had a lease of a Hong Kong manufacturing facility that expired in February 2007. We also negotiated an early termination of
the lease of a different Hong Kong office and manufacturing facility, with the expiration date changed from March 2007 to August 2006. We have subsequently renewed our annual lease for reduced Hong Kong office space, with the current
57
expiration date being August 31, 2009. We entered into a lease of a factory facility (the Phase I facility) in Dongguan, China in August
2002, under which the lessor was responsible for the design and construction of the interior finish and fixtures of the factory buildings. We are obligated to pay a monthly rental payment and management service fee for a period of 15 years from
September 2003.
On May 7, 2004, we entered into a lease agreement of another factory facility (the Phase II facility) in
Dongguan, China, under which the lessor was responsible for the design and construction of the factory building. We are obligated to pay a monthly lease payment for a term of 15 years starting from August 1, 2005. Under the terms of the Phase
II facility lease, we are obligated to pay a monthly payment of $179 thousand for the first six years of the lease term and $90 thousand per month starting from the seventh year of the lease term.
Future minimum lease payments under operating leases as of April 30, 2007 are as follows:
|
|
|
|
|
$000
|
Fiscal year ending April 30:
|
|
4,774
|
2008 (the remainder of fiscal year)
|
|
4,572
|
2009
|
|
3,325
|
2010
|
|
2,692
|
2011
|
|
1,974
|
2012
|
|
12,600
|
|
|
|
Thereafter
|
|
29,937
|
|
|
|
(4)
|
Capital lease obligation
|
Equipment
During the fiscal year ended April 30, 2005, we sold certain equipment for $6.5 million. The equipment was leased back from the purchaser (the
purchaser-lessor) under leases pursuant to which we are required to pay to the purchaser-lessor on a quarterly basis the greater of (i) a lease payment based on the reported usage of the equipment or (ii) a minimum commitment.
The initial terms of the leases expire upon the earlier of the date that the committed usage has been achieved under the leases or 14 quarters after the lease commencement date. In connection with the sale-leaseback, we recognized a gain of
approximately $115 thousand on disposal of fixed assets, which is being deferred and amortized in the consolidated statement of operations against depreciation expenses over the term of the leases.
Future minimum lease payments under capital lease obligations as of April 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
Equipment
$000
|
|
Motor
vehicle
$000
|
|
Total
$000
|
Fiscal year ending April 30:
|
|
|
|
|
|
|
2008
|
|
1,844
|
|
15
|
|
1,859
|
2009
|
|
730
|
|
15
|
|
745
|
2010
|
|
|
|
15
|
|
15
|
2011
|
|
|
|
3
|
|
3
|
Total minimum lease payments
|
|
2,574
|
|
48
|
|
2,622
|
Less: amounts representing interest
|
|
35
|
|
7
|
|
42
|
Present value of minimum payments
|
|
2,539
|
|
41
|
|
2,580
|
Current portion
|
|
1,809
|
|
13
|
|
1,822
|
|
|
|
|
|
|
|
Non-current portion
|
|
730
|
|
28
|
|
758
|
|
|
|
|
|
|
|
At the inception of the lease, we paid to the purchaser-lessor a deposit and prepaid rent amount of
$1.6 million. As of April 30, 2007 and 2006, the amount of this deposit classified as other non-current assets in consolidated balance sheets was $0.7 million and $1.6 million, respectively.
58
At the end of each of the initial lease terms, we have an option to (i) return all equipment to the
purchaser-lessor; (ii) purchase all the equipment at prices based on the then fair market values of the equipment; or (iii) extend the lease terms by two additional quarters and purchase the equipment at the price of $1,000 for each piece
of equipment. Pursuant to these sale-leaseback arrangements, the purchaser-lessor entered into a separate term loan facility agreement for up to $5.0 million with a bank in Hong Kong (the Lender). Upon demand by the Lender, we and one of
our subsidiaries fully and unconditionally guaranteed the obligations of the purchaser-lessor under the $5.0 million term loan facility. We believe that this guarantee (the Guarantee) has the characteristics set forth in Financial
Accounting Standards Board (FASB) Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which requires initial recognition
of the guarantee at fair value upon its inception. Nonetheless, the fair value of the Guarantee is considered to be insignificant given the risk of loss on such Guarantee at the date of its inception and, therefore, no amount was recognized in the
consolidated financial statements on the inception date.
On March 31, 2006, we deposited $3.3 million in cash with the Lender as
collateral for the Guarantee obligations. In consideration thereof, the Lender released us and one of our subsidiaries from the Guarantee. The Lender will return the deposit to us upon repayment of the term loan facility by the purchaser-lessor. The
deposit was classified as restricted cash in the consolidated balance sheets as of April 30, 2007 and April 30, 2006. On February 12, 2007, an agreement has been reached between us and the Lender to return $1.5 million of the $3.3
million deposit. On August 7, 2007, the Lender agreed to further return $0.9 million. As such $0.9 million of the restricted cash has been classified from non-current asset to current asset.
Motor vehicle
We are currently
leasing a motor vehicle. This lease is classified as a finance lease and, as of April 30, 2007, has a remaining lease term of 3.3 years.
(5)
|
As of April 30, 2007 and April 30, 2006, we had contracted for capital expenditures on property, plant and equipment of $1.2 million and $2.9 million, respectively.
|
RESEARCH AND DEVELOPMENT
We believe we are an industry leader in the development of new packages and new
assembly manufacturing processes and focus our research and development efforts on developing new package designs and new assembly processes, as well as improving the performance of our existing packages and processes. We believe that providing
timely and effective improvements in assembly technology is a key factor for success in the packaging market. This effort often involves close cooperation with our customers. This cooperation has enabled us to participate in the development of
technology for next generation package designs. In this effort, we have built a talented research and development team that works closely with customers early in the new product development cycle. When the selection of a package is critical to the
overall development of a semiconductor device, our design engineers work with our customers to select, design, model and develop the optimum package for that specific device.
We have dedicated teams of engineers in Dongguan, China, Hong Kong and the United States to provide package design services as well as thermal and
electrical performance computer simulation and measurement services. In fiscal year 2006, we transferred all remaining engineers from our Hong Kong facility to Dongguan, China. We plan to expand our design and engineering services to more fully
participate in the early stages of our customers design process. We strive to understand our customers new semiconductor design and packaging needs to design advanced packaging solutions for each new product generation. Our relationships
with our customers enables us to proactively anticipate our customers needs and to move quickly bring the resulting package technologies to market. We seek to differentiate our package design services by working more closely with customers to
co-develop packages in parallel with the development of the integrated circuit itself. Given the growing co-dependencies between integrated circuit design on the one hand and package design on the other that are required to meet the
demands of high-performance, fast signal, thermally demanding and reliable circuits, we believe that we will be able to remain competitive in the marketplace for advanced packaging designs by offering customers the required engineering talent and
design expertise at the outset of the development effort.
59
In addition to our internal and co-development work with our customers, we also work closely with our
equipment and material suppliers in developing advanced processing capabilities and materials for use in our assembly processes. During our last three fiscal years, our research and development expenditures ranged between $2.2 million and $4.5
million or approximately 1.3% to 2.3% of net sales. In fiscal years 2006 and 2007, our research and development expenditures were $4.1 million or approximately 2.2% of net sales $2.2 million or approximately 1.3% of net sales, respectively. However,
the decrease in our research and development expenditures in the last five fiscal years, particularly between fiscal years ended April 30, 2006 and 2007, may adversely affect us. See Item 3Key InformationRisk FactorsOur
ability to rapidly develop and successfully bring to market advanced technologies and services is important to maintaining our competitive position and profitability.
We have a proven track record of introducing innovative packages to the market. We target our research and development efforts toward leading edge
packaging technologies and as a result of these efforts, we have made significant accomplishments in packaging, including the following:
|
|
|
We believe we are an acknowledged developer of the rapidly expanding and industry-wide standard package type known as the quad flat no-lead (QFN) device and have
issued U.S. patents for our LPCC product and our proprietary manufacturing processes. We also have several variations of QFN packages and methods for their manufacture with U.S. patent protection, including multi-row QFN and TAPP process for
manufacturing the various QFN packages. The QFN package technology is now generally recognized as the leading chipscale package format and has become a JEDEC standard.
|
|
|
|
We are a leading developer in what we believe may be the next generation QFN product type, our proprietary TAPP technology. The manufacturing processes for
our TAPP product family have been fine tuned by such techniques as high-density strip configuration to reduce costs and increase throughput. At the same time, we have been able to reduce the overall package dimensions to the point where the
finished package is truly chipscale and is not much larger than the semiconductor die itself. Our TAPP product was adopted as a JEDEC standard for the packaging industry.
|
|
|
|
For flip chip technology, which has become a more common packaging format in many of our existing customers product portfolios, we have continued
to invest in research and development and have sought to differentiate our flip chip assembly capability by offering package and assembly technologies for use with the latest generation of integrated circuits, which utilize low-K
dielectric materials and copper interconnects.
|
TREND INFORMATION
Please see Operating Results and Item 4Information on the
CompanyBusiness Overview for trend information.
OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet arrangements consist of the agreements relating to our
Phase I and Phase II facilities in Dongguan, China. We entered into a lease for our Phase I facility in Dongguan, China in August 2002 under which the lessor was responsible for the design and construction of the factory facility. We are obligated
to pay a monthly rental payment and management service fee for a period of 15 years from September 2003. These monthly rental payments of HK$1.4 million (approximately $179 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the first six
years of the rental term, HK$350,000 (approximately $45 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the seventh to eleventh years and HK$385,000 (approximately $49 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the
twelfth to fifteenth years. Under the terms of the lease, we have an option and a right of first refusal to purchase the Phase I facility and the land-use right of the land on which the facility is located at prices fixed in a predetermined schedule
or, subsequent to October 2009, at prices based on the then fair market value of the factory facility and the related land use right. The highest price for the Phase I facility and the related land-use right listed on the predetermined schedule to
the
60
lease agreement is HK$108.4 million (approximately $13.9 million at an assumed exchange rate of HK$7.80 per $1.00), which is the amount we would be obligated
to pay if we were to exercise our option and right of first refusal under the lease in October 2004.
We also entered into a lease for our
Phase II facility in Dongguan, China in May 2004 under which the lessor was responsible for the design and construction of the facility. We are obligated to pay a monthly lease payment for a term of 15 years starting from August 2005. Under the
terms of this Phase II lease, we are obligated to pay monthly payments of HK$1.4 million (approximately $179 thousand at an assumed exchange rate of HK$7.8 per $1.00) for the first six years of rental term and HK$700 thousand (approximately $90
thousand at an assumed exchange rate of HK$7.80 per $1.00) per month for the seventh to fifteenth years of the rental term. From October 31, 2008 and onward during the term of the lease, we have an option and a right of first refusal to
purchase the Phase II facility and the land-use right of the land on which the facility is located at prices fixed in a predetermined schedule during the period from October 2008 to July 2011 and thereafter at prices based on the then fair market
value of the facility and the related land-use right. The highest price for the Phase II facility and the related land-use right listed on the predetermined schedule to the lease agreement is HK$60.0 million (approximately $7.7 million at an assumed
exchange rate of HK$7.80 per $1.00), which is the amount that we would be obligated to pay if we were exercise our option and right of first refusal under the Phase II lease in October 2008.
These arrangements enabled us to lease the Phase I and Phase II facilities from a third party rather than finance the construction of the facilities
ourselves. If we had financed the construction of the Phase I and Phase II facilities, we would have been required to recognize a liability for obligations that we would undertake in connection with the financing.
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information about the persons who serve as
directors and senior management of ASAT Holdings as of the date of this Annual Report. Shareholders are entitled to re-elect the board of directors at each annual meeting. Senior management are appointed by, and serve at the discretion of, the board
of directors. The business address of each director is 14th Floor, QPL Industrial Building, 138 Texaco Road, Tsuen Wan, New Territories, Hong Kong.
Directors
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Position Held Since
|
Kei W. Chua
|
|
34
|
|
Director
|
|
June 2005
|
Peter Hopper
|
|
48
|
|
Director
|
|
September 2006
|
Kevin Kit Tong Kwan
|
|
48
|
|
Director
|
|
March 2006
|
Tung Lok Li
|
|
55
|
|
Director
|
|
October 1999
|
Joseph A. Martin
|
|
59
|
|
Director
|
|
March 2004
|
Henry C. Montgomery
|
|
71
|
|
Director and Chairman of the Board and the Audit Committee
|
|
Director since June 2004
Chairman since June
2005
|
Glen G. Possley
|
|
67
|
|
Director
|
|
November 2005
|
Stephen M. Shaw
|
|
46
|
|
Director and Chairman of the Compensation Committee and the Nominating and Governance Committee
|
|
Director since February 2003
Chairman of the Committees
since October 2004
|
Eugene Suh
|
|
40
|
|
Director
|
|
August 2005
|
61
Senior Management
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Position Held Since
|
Tung Lok Li
|
|
55
|
|
Acting Chief Executive Officer
|
|
September 2006
|
Kei Hong Chua
|
|
36
|
|
Executive Vice President and Chief Financial Officer
|
|
July 2007
|
Joseph A. Martin
|
|
59
|
|
Executive Vice President of Sales and Marketing
|
|
September 2006
|
Ernest Tan
|
|
53
|
|
Senior Vice President of Manufacturing
|
|
May 2007
|
Leo M. Higgins III
|
|
56
|
|
Senior Vice President, Engineering and Technology
|
|
June 2006
|
Peter Tin
|
|
50
|
|
Senior Vice President of Quality and Reliability Assurance
|
|
June 2007
|
Kevin T.S. Kong
|
|
34
|
|
Vice President, General Counsel and Secretary
|
|
General Counsel since January 2006
Secretary since March 2006
Vice President since May 2007
|
There are no family relationships between any director and senior executive, except that
Mr. Kei W. Chua, our director, and Mr. Kei Hong Chua, our chief financial officer, are brothers.
Kei W. Chua
is a
Partner of CCMP Capital Asia Pte. Ltd. (formerly known as J.P. Morgan Partners Asia Pte. Ltd.). From 1999 to 2000, Mr. Chua was Vice President of Cerberus Capital Management, a special situations investment fund. Before joining Cerberus,
Mr. Chua worked as an investment banker at Donaldson, Lufkin & Jenrette in both New York and Asia. Mr. Chua received a B.A. degree from Columbia University.
Peter Hopper
is a Managing Director of CCMP Capital Asia Pte. Ltd. (formerly known as J.P. Morgan Partners Asia Pte. Ltd.). Recently,
Mr. Hopper has focused on supporting venture capital and private equity companies investing in technology companies in Asia. Prior to 2003, Mr. Hopper was with Philips Electronics where he served in many operational, general management and
chief executive officer roles with a number of business units, including the chief executive officer of the mobile display business unit based in Hong Kong. Mr. Hopper holds a Business Studies degree from Northumbria University and an M.B.A.
from Manchester Business School from the U.K.
Kevin Kit Tong Kwan
is currently a member of the Board of Directors of QPL. Prior to
joining QPL in 1999, Mr. Kwan spent 20 years providing auditing, accounting and corporate advisory services at PricewaterhouseCoopers and public and private companies in Hong Kong and overseas. In addition, Mr. Kwan held various financial
control management positions with the China International Trust and Investment Corporation group of companies. Mr. Kwan is currently a nonexecutive director of Wafer Systems Limited, a Greater China-based provider of technologies for the
network infrastructure market. Mr. Kwan is a fellow member of the Chartered Association of Certified Accountants and the Hong Kong Institute of Certified Public Accountants. Mr. Kwan has a bachelors degree in commerce from the
University of Southern Queensland, Australia.
Tung Lok Li
has over 25 years of experience in the semiconductor sector and was
previously Chairman of ASATs Board and has served and continues to serve as the Chairman of the Board of QPL, which has been listed on the Stock Exchange of Hong Kong since 1989. Mr. Li was the Chairman of the Board of Peak Plastic until
he resigned in October 2001. Mr. Li holds a B.S. degree in chemical engineering from the University of Wisconsin, Madison.
Kei
Hong Chua
is our Executive Vice President and Chief Financial Officer. He has nearly 15 years of banking, finance and accounting experience. Prior to assuming this position, Mr. Kei Hong Chua was head of
62
Standard Chartered Banks Alternate Investment Group in China, where he was responsible for proprietary investments in special situations across
Asia. Previously, he served as a senior manager in Corporate Finance and Business Recovery Services at PricewaterhouseCoopers in Hong Kong and as a senior manager in Arthur Andersens Global Corporate FinanceCorporate Restructuring
Services in New York. In addition, he served as a founding partner and CFO of Vertical Think, Inc., a management and consulting firm for companies engaged in eBusiness. He is a certified public accountant. Mr. Kei Hong Chua received a B.S.
degree in finance and accounting, with magna cum laude honors, from New York University.
Joseph A. Martin
is our Executive
Vice President of Sales and Marketing. Prior to assuming this position, Mr. Martin was Chief Executive Officer of QPL International Holdings, a position he occupied from February 2004 through September 1, 2006. From 1993 until he joined
QPL, Mr. Martin was with ASAT where he served in a number of senior level management positions, including Senior Vice President of Strategic Planning, Chief Operating Officer and as a Director. From 1983 until he joined ASAT, Mr. Martin
was with Amkor Electronics where he held various senior level positions, including Vice President of European Sales and Vice President of Marketing for Amkors advanced product lines. Prior to that, Mr. Martin held various sales,
management and engineering positions with TRW, Thompson CSF, and Texas Instruments. Mr. Martin received his undergraduate degree in chemistry from Lamar University.
Henry C. Montgomery
has more than 40 years of finance and management experience and is currently the chairman and chief executive officer of Montgomery Pacific Outsourcing, LLC, an accounting and financial
services and sourcing firm, and the chairman of Montgomery Professional Services Corporation, a financial and human resources services firm. Previously, Mr. Montgomery held senior-level management positions at various technology companies
including Spectrian Corporation, Indus International, Inc., Pinnacle Micro, Inc., SyQuest Technology, Inc., Trilogy Limited, WordStar International Corporation, Saga Corporation, Memorex Corporation, and Fairchild Camera and Instrument Corporation.
He also held positions at McKinsey & Company, ITT Corporation and Arthur Andersen & Co. Mr. Montgomery currently serves on the board of directors of two other publicly traded companies. He serves as chairman of the board and
chairman of the audit committee and a member of the compensation committee for Catalyst Semiconductor, Inc. and as a director, chairman of the audit committee and as a member of the compensation committee for Swift Energy Company.
Mr. Montgomery holds a bachelors degree in economics from Miami University in Oxford, Ohio.
Dr. Glen G. Possley
has 38 years of experience in the semiconductor business focused on operations management, product and process development and engineering. From January 1998 to the present, Dr. Possley served as a managing general partner at Glen-Ore
Associates, a consulting company focused on the semiconductor business. From January 1998 to January 2000, he was a partner at International Technology Ventures and N-Able Group. Dr. Possley serves as the director and member of the audit
committee for Novellus Systems, Inc., and as a director, chairman of the corporate governance and nominating committee and as a member of audit committee and compensation committee for Catalyst Semiconductor Inc. He received a B.S. in Mathematics
from Western Illinois University and a Ph.D. in Physical Chemistry from the University of Kentucky.
Stephen M. Shaw
is President of
SMS Development, Inc. Previously, Mr. Shaw was a senior partner with McKinsey and Company where he spent 16 years principally engaged in corporate strategy and organizational development projects for clients with a large presence in China.
Prior to joining McKinsey, Mr. Shaw held several positions of increasing responsibility at Procter and Gamble and Paine Webber Capital. Mr. Shaw holds a Sc.B. degree in electrical engineering and an A.B. in economics from Brown University
and an M.B.A. from Harvard Business School.
Eugene Suh
is a Partner at CCMP Capital Asia Pte. Ltd. (formerly known as J.P. Morgan
Partners Asia Pte. Ltd.). Prior to joining CCMP Capital Asia Pte. Ltd., Mr. Suh was an associate director for one year in the Distressed Debt Investment Group at Bear Stearns in Hong Kong where he was responsible for sourcing and evaluating
distressed debt investments in Korea, Thailand and Hong Kong. Previously, Mr. Suh was a director at
63
Ferrier Hodgson, an internationally affiliated group that focuses on advising distressed corporations and banks in corporate finance, operational turnarounds
and debt restructing transactions. Before joining Ferrier Hodgson, Mr. Suh was a member of Ernst & Youngs Restructuring and Reorganizational Group in New York. Mr. Suh is a certified public accountant. Mr. Suh holds a
B.A. from Trinity College in the U.S. and an M.B.A. from the Stern School of Business at New York University.
Ernest Tan
is our
Senior Vice President of Operations. He has over 30 years of operational experience from the electronics industry. Prior to joining ASAT, Mr. Tan held senior level operational roles for Intel, Motorola and Flextronics in Asia, the United States
and other regions. In his positions in operational management, he has focused on improving key customer interface to allow greater integration into customers capital budgeting cycle and improved service level. Mr. Tan holds diplomas in
Electrical Engineering and Management Sciences. He studied his Masters in Business Administration at the Brunel University, UK.
Dr. Leo M. Higgins III
has 27 years of experience in the semiconductor packaging industry, and has been with ASAT, Inc. for three years, earlier as the Director of Applications Engineering, and now as the Vice President of
Engineering and Technology. Prior to joining ASAT, Dr. Higgins was with Siemens directing new IC Packaging Technology, die bonder development, and laser via drilling business development. Previously, he directed R&D organizations at
Motorola Semiconductor, Prime Computer, Cabot/Augat Ceramics and Kyocera. He holds 27 issued U.S. patents in microelectronic packaging. Dr. Higgins holds a B.S., M.S. and Ph.D. in Ceramic Engineering from Rutgers University.
Peter Tin
is our Senior Vice President of Quality and Reliability Assurance. He has more than 20 years experience in engineering, supplier
management, reliability and quality positions in semiconductor, consumer electronics and transportation industries in the United States and Greater China. He most recently was a member of the management team of Philips Consumer Electronics in the
Business Groups of Mobile Infotainment and Mobile Phones based in Hong Kong. Mr. Tin previously served as ASATs vice president of quality from 2004 to 2005. Mr. Tin has also held various quality and reliability management positions
with SanDisk, Western Digital, Bombardier Transportation, and National Semiconductor. Mr. Tin is a Six Sigma blackbelt and is also a certified reliability engineer and certified quality engineer by the American Society for Quality. Mr. Tin
holds a M.S. degree in reliability engineering, a B.S. degree in aerospace and a B.S. degree in mechanical engineering from the University of Arizona.
Kevin T.S. Kong
is our Vice President, General Counsel and Secretary. He joined ASAT after years of private practice with international law firms in New York and Shanghai. Prior to joining ASAT, Mr. Kong
was an associate at the Shanghai office of Sidley Austin Brown & Wood LLP and the New York office of Holland & Knight LLP. He concentrated in mergers and acquisitions, corporate and structured finance. Mr. Kong received a B.A.
in economics and political science from Columbia University and a J.D. from the Cornell Law School. Mr. Kong is a member of the New York Bar.
On September 1, 2006 our former Chief Executive Officer and Acting Chief Financial Officer resigned for personal reasons. Our current Acting Chief Executive Officer assumed his position for the interim period during which we are
actively searching for a permanent Chief Executive Officer. Our current Acting Chief Executive Officer is a member of our board of directors and is affiliated with one of our principal shareholder groups, QPL. On July 17, 2007, our former
Acting Chief Financial Officer resigned, and on July 18, 2007 our permanent Chief Financial Officer assumed his position. Our former Acting Chief Financial Officer is and continues to be a member of our board of directors and is affiliated with
one of our principal shareholder groups, the investor group. Our current Chief Financial Officer is the brother of our former Acting Chief Financial Officer. For further information, see Item 7Major Shareholders and Related Party
TransactionsRelated Party Transactions. We are currently in the process of searching for permanent replacement.
64
COMPENSATION
For the year ended April 30, 2007, we paid an aggregate compensation to our senior
management and directors as a group of approximately $2.5 million. For the year ended April 30, 2006, we paid an aggregate compensation to our senior management and directors as a group of approximately $2.0 million. For the year ended
April 30, 2007, the aggregate amount accrued and unpaid by us to provide fees, pension retirement or similar benefits for our directors and executive officers as a group was approximately $0.2 million (2006: nil).
Some of our executive officers have entered into employment agreements or arrangements with us that entitle these executive officers to certain
separation benefits in the event that they are terminated either without cause or due to a change in control as those terms are generally understood. Upon termination without cause, some executive officers may receive
severance amounts equaling from 30 days base salary to six months base salary. Additionally, several executive officers are entitled to receive severance payments in line with the amounts specified regarding a termination without cause, if they are
constructively terminated resulting from a material change in duties and responsibilities, a significant reduction in salary, a change in reporting relationships, etc.
For information on stock options held by directors and officers as a group, see Share Ownership.
BOARD PRACTICES
Under the Restated Articles of Association of ASAT Holdings as amended, the board consists of
no fewer than three and no greater than ten directors. Shareholders are entitled to re-elect the board of directors at each annual general meeting. Vacancies on the board can be filled by a majority of the directors present at a board meeting and
vacancies of independent director seats also require approval by a majority of the independent directors. Vacancies can also be filled by a written resolution signed by all directors. In accordance with Nasdaq Marketplace Rule 4350(c)(1), our board
of directors has determined that Mr. Montgomery, Mr. Possley and Mr. Shaw are independent directors under the applicable rules promulgated by Nasdaq.
Pursuant to the shareholders agreement among the investor group (either directly or through managed or affiliated funds), QPL and certain other investors, those parties have agreed to vote their shares so that:
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three of the directors are individuals selected by QPL,
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three of the directors are individuals selected by Asia Opportunity Fund, L.P., and
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three independent directors are individuals selected by Asia Opportunity Fund, L.P. and nominated by QPL for recommendation to board of directors for approval and
appointment by the board of directors, subject to decrease as their respective shareholding decreases.
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See Item
7Major Shareholders and Related Party TransactionsShareholders Agreement. The investor group and QPL also agreed that as their respective shareholding decreases below specified thresholds, they will cause a related number of
directors, which they previously appointed to resign and those seats shall be filled by nominee(s) approved by a majority of the continuing directors present at a board meeting and a majority of the independent directors.
Board of Directors Committees
Our audit
committee consists of three members: Mr. Montgomery, Mr. Possley and Mr. Shaw. Mr. Montgomery serves as chairman and the designated financial expert of the audit committee. The audit committee performs the following duties, among
others: to appoint, determine funding for and oversee the activities of the independent auditor; to review the independence and performance of the independent auditors; to pre-approve all audit and permitted non-audit services to be provided by the
independent auditors; to review audited annual financial statements and other related financial matters; to review our annual and interim quarterly financial results and the associated financial news releases; to discuss with management and
independent auditors
65
the quality and adequacy of our internal financial controls, critical accounting policies and practices, and all material written communications between the
independent auditor and management; to receive and review on a confidential basis all complaints received regarding our accounting controls or practices; and to review and approve any related party transactions involving us and any of our officers
or directors. The charter of the audit committee is available on our website at
http://www.asat.com/investor/governance
.
php.
Our compensation committee consists of three members: Mr. Shaw, Mr. Montgomery and Mr. Possley. Mr. Shaw serves as chairman of the compensation committee. The compensation committee performs the following duties, among
others: to review matters relating to the compensation of directors, senior management and employees; to administer our stock option plan, including the granting of individual incentive stock option awards; to oversee the adoption, implementation
and administration of any of our short-term incentive and bonus plans; and to oversee the adoption, revision, implementation and administration of all of our employee benefit plans. The charter of the compensation committee is available on our
website at
http://www.asat.com/investor/governance
.
php.
Our nominating and governance committee consists of three members:
Mr. Shaw, Mr. Montgomery and Mr. Possley. Mr. Shaw serves as chairman of the nominating and governance committee. The nominating and governance committee performs the following duties, among others: to oversee the nominating
process for the independent directors who will serve on the board of directors; to assist in insuring that the board of directors meets its fiduciary obligations to our shareholders; and to insure that the board of directors and ASAT follow
appropriate corporate governance standards. The charter of the nominating and governance committee is available on our website at
http://www.asat.com/investor/governance.php.
In addition, ad-hoc committees may be formed by the board of directors from time to time to address specific matters.
EMPLOYEES
As of April 30, 2007, we employed 2,389 full-time employees, of whom 41 were employed in
research and development, 1,400 in assembly, 104 in test services, 717 in material control, quality control, facility engineering and assurance, 75 in marketing, sales and customer services and 52 in administration. There were 69 employees located
in Hong Kong, 2,278 in China, 32 in the U.S., seven in Asia (excluding Hong Kong and China) and three in Europe. We believe our relationship with our employees is generally good. None of our employees belong to a union.
SHARE OWNERSHIP
Stock Option Plan
We adopted the 2000 Stock Option Plan or the plan, on July 6, 2000. We have authorized 110,000,000 ordinary shares for issuance under the plan, equivalent to 7,333,333 ADSs. The plan is a
non-qualified, discretionary option grant program under which eligible individuals may be granted options to purchase ordinary shares. Under the plan, the board and when so delegated, the Compensation Committee of the board, will determine which
individuals will be granted options, the number of ordinary shares subject to the option, the exercise price for the shares, the vesting periods and any other terms that will apply as the board deems appropriate and consistent with the plan. The
individuals eligible to participate in our stock option plan includes officers, employees, consultants and non-employee directors of the ASAT group companies. The plan is designed to attract employees and important individuals to the ASAT group
companies and to provide recipients with a proprietary interest in the financial success of ASAT. We implemented the Stock Option plan on July 11, 2000, when we granted stock options for 76,655,065 ordinary shares at a per share exercise price
equal to $2.40 per ordinary share (equivalent to $36.00 per ADS). Our stock options generally expire 10 years from the grant date.
On
January 24, 2003 we announced the Employee Stock Option Exchange Program, a voluntary stock option exchange program for our officers, employees and certain directors. We offered eligible stock option
66
holders with exercise prices above the equivalent current bid price of our ADSs to voluntarily cancel their outstanding options. In exchange, participants
were offered new stock options at the fair market value of our ADSs no sooner than six months and one day after the cancellation of the options. The cancellation occurred on February 24, 2003 at the expiration of the offer to participate. Under
the terms of the Stock Option Exchange Program, options for 60,822,235 ordinary shares (equivalent to 4,054,815 ADSs) were surrendered for cancellation at a weighted average exercise price of $1.94 per ordinary share (equivalent to $29.1 per ADS)
and, on August 29, 2003, options for 32,948,550 ordinary shares at an exercise price of $0.288 per ordinary share (equivalent to options for 2,196,570 ADSs at an exercise price of $4.32 per ADS) were granted to these participants who were still
employed by us at that date to replace the surrendered options. All newly granted replacement options have the same vesting schedule as the cancelled options.
As of April 30, 2007, we had outstanding stock options for 27,748,185 ordinary shares, equivalent to 1,849,879 ADSs, with a weighted average exercise price of $0.24 per ordinary share (equivalent to $3.66 per ADS
including options granted pursuant to the Stock Option Exchange Program as described in the previous paragraph). Of the total amount of outstanding stock options as of April 30, 2007, we have outstanding stock options granted to our directors
and executive officers as a group for 12,819,870 ordinary shares, equivalent to 854,658 ADSs, with a weighted average exercise price of $0.20 per ordinary share (equivalent to $2.99 per ADS).
The following chart sets forth as of April 30, 2007 the total ordinary shares that may be received by option holders upon exercise of currently
outstanding options, the weighted average exercise price of those outstanding options and the numbers of ordinary shares that are still available for future issuance under the plan after considering the stock options currently outstanding. All of
the options currently outstanding and described below have been or can be issued pursuant to our 2000 Stock Option Plan. The plan has been approved by our stockholders.
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Plan Category
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Number of
shares to be
issued upon
exercise of
outstanding
options
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Weighted
average exercise
prices of
outstanding
options per
ordinary share
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|
Weighted-
average exercise
price of
outstanding
options per ADS
|
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Number of
shares
remaining
available for
future issuance
under
equity
compensation
plan
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Equity compensation plans approved by stockholders 2000 Stock Option Plan
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27,748,185
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$
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0.24
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$
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3.66
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69,598,820
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Equity compensation plan not approved by stockholders
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None
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None
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Total
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27,748,185
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$
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0.24
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$
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3.66
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69,598,820
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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MAJOR SHAREHOLDERS
The following table contains information concerning the ownership of our ordinary shares
and our Series A Preferred Shares by each person who we know beneficially owns 5% or more of our ordinary shares or our Series A Preferred Shares as of April 30, 2007. The share ownership information of our ordinary shares in the following
table is based on information contained in statements on Schedule 13D or Schedule 13G filed by the shareholders with the SEC or information furnished to us by the shareholders. The percentage ownership of our ordinary shares in the table below is
based on 704,348,844 ordinary shares outstanding as of April 30, 2007. The share ownership information of our Series A Preferred Shares in the following table is based on information contained in our register of members. The percentage
ownership of our Series A Preferred Shares in the table below is based on 300,000 Series A Preferred Shares outstanding as of April 30, 2007.
67
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Shareholder
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Number of
Ordinary Shares
Owned
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Percentage of
Ordinary
Shares
Beneficially
Owned
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Number of
Series A
Preferred
Shares
Owned (6)
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Percentage of
Series A
Preferred
Shares
Beneficially
Owned
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JPMP Master Fund Manager, L.P. related funds:
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Asia Opportunity Fund, L.P. (1)
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130,311,457
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18.5
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%
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71,369
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23.8
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%
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Chase Asia Investment Partners II (Y), LLC (1)
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52,187,871
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7.4
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%
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28,583
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9.5
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%
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CAIP Co-Investment Fund Parallel Fund (I) C.V. (1)
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12,651,186
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1.8
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%
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6,929
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2.3
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%
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CAIP Co-Investment Fund Parallel Fund (II) C.V. (1)
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8,434,099
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1.2
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%
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4,619
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1.6
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%
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|
|
|
|
|
|
|
|
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|
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203,584,613
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28.9
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%
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111,500
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37.2
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%
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Olympus Capital Holdings Asia related funds (2)(3)
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74,141,536
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10.5
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%
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38,500
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12.8
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%
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QPL International Holdings Limited (4)(5)
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299,193,649
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42.5
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%
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150,000
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50.0
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%
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(1)
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The amount of shares reported consists of ordinary shares owned by Asia Opportunity Fund, L.P. (Asia Fund), Chase Asia Investment Partners II (Y), LLC
(CAIP), CAIP Co-Investment Fund Parallel Fund (I) C.V. (CAIP Parallel I) and CAIP Co-Investment Fund Parallel Fund (II) C.V. (CAIP Parallel II and collectively with Asia Fund, CAIP and CAIP Parallel I, the
J.P. Morgan Entities). The sole member of CAIP is J.P. Morgan Asia Investment Partners, L.P. (JPM Investment), whose general partner is J.P. Morgan Asia Equity Partners, L.P. (JPM Equity). The general partner of
each of the Asia Entities is Asia Opportunity Company (Asia Opportunity), a wholly owned subsidiary of JPM Equity. The general partners of JPM Equity are JPMP Asia Equity Company, a Cayman Islands exempted company and wholly owned
subsidiary of JPMP Master Fund Manager, L.P., whose general partner is JPMP Capital Corp., a wholly owned subsidiary of JPMorgan Chase & Co., a publicly traded company, and Liu Asia Equity Company, a Cayman Islands exempted company.
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(2)
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See Olympus Capital Holdings Asia below.
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(3)
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Daniel R. Mintz, Director, Funding Managing Director and President of Olympus Capital Holdings Asia (Olympus Capital), Lawrence S. Miao, Director, Founding Managing
Director and Vice President of Olympus Capital, Frederick J. Long, Director, Founding Managing Director and Vice President of Olympus Capital, and Jeffrey E. Glat, Managing Director, Chief Financial Officer, Secretary and Treasurer of Olympus
Capital, are the control persons and executive officers of Olympus Capital, the entity which has the power to vote, or direct the vote, and the sole power to dispose of, or direct the disposition of, all of the Ordinary Share held of record by
Olympus-ASAT II, L.L.C.
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(4)
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The ordinary shares are held by The Industrial Investment Company Limited, QPL (US) Inc. (formerly Worltek International Limited) and Everwarm Limited, wholly owned subsidiaries of
QPL, and the Series A Preferred Shares are held by Everwarm Limited.
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(5)
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In his most recently filed statement on Schedule 13D, Mr. Tung Lok Li, one of our directors, stated that he may be deemed to have voting or investment power over these
securities. See Directors and Executive Officers.
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(6)
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Each Series A Preferred Share is currently convertible into 769.231 ordinary shares.
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Olympus Capital Holdings Asia
Olympus Capital Holdings Asia, an investment management firm, is a
company limited by shares organized under the laws of the Cayman Islands. Olympus Capital Holdings Asia serves as investment manager of Olympus-ASAT II, L.L.C. As such, Olympus Capital Holdings Asia has the sole power to vote, or direct the vote, or
direct the vote, and the sole power to dispose of, or direct the disposition of, all of the ordinary shares held of record by this entity.
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QPL International Holdings Limited
QPL (Holdings) Ltd. was formed in 1981 under the name of Quality Platers Limited. In 1989, QPL (Holdings) Ltd. undertook a group reorganization scheme whereby its listing was replaced by QPL International Holdings
Limited which was incorporated in Bermuda in 1989.
Directors and Executive Officers
Other than Mr. Tung Lok Li, none of our directors or executive officers individually beneficially owns more than 1% of our outstanding ordinary
shares. Mr. Tung Lok Li, one of our directors and our Acting Chief Executive Officer, beneficially owns approximately 38.1% of QPL, which in turn indirectly owns approximately 299,193,649 ordinary shares or approximately 42.5% of ASAT
Holdings ordinary shares. In his most recently filed amendment to his statement on Schedule 13D, Mr. Li stated that he may be deemed to be the beneficial owner of the 299,193,649 ordinary shares industry held by QPL pursuant to Rule 13d-3
of the Exchange Act. In addition, Mr. Li beneficially owns 1,448,010 ordinary shares, which is equivalent to 96,534 ADSs, and owns stock options for 2,500,000 ordinary shares, which is equivalent to 166,666 ADSs, at an exercise price of
$4.32 per share with an expiration date on August 29, 2013.
Shareholders Agreement
The shareholders listed in the table above, Orchid Hong Kong Investment Holdings and certain other investors, or shareholders entered into a
shareholders agreement relating to transfers of ASAT Holdings ordinary shares, voting rights and other matters. Under the shareholders agreement, the shareholders agreed to vote their ordinary shares and take all action so that three directors
on the board of director are appointed by Asia Opportunity Fund, L.P., three by QPL and three independent directors are individuals selected by Asia Opportunity Fund, L.P. and nominated by QPL for recommendation to the board of directors for
approval and appointment by the board of directors, subject to decrease as their respective shareholding decreases. Orchid Hong Kong Investment Holdings is no longer a party to the shareholders agreement.
The agreement also limits the ability of shareholders to transfer their ordinary shares in ASAT Holdings, except with respect to sales to transfer to
permitted transferees, sales on Nasdaq or on any other internationally recognized stock exchange on which the ordinary shares are listed, or through a registered public offering, in each case, subject to laws and regulations of the relevant
jurisdiction. These share transfer restrictions include rights of first offer, tag along rights and the right of QPL, Asia Fund and CAIP to require the other shareholders to participate in a sale of ordinary shares to a third party if the per share
purchase price meets a minimum threshold and if other conditions are met, as more fully described in the shareholders agreement. The investor group has signed an agreement generally to vote in unison.
Our Dividend Distribution Policy
Our policy is not
to pay dividends on our ordinary shares or our ADSs for the foreseeable future. Furthermore, our ability to pay dividends will be restricted by the covenants of the indenture governing our 9.25% senior notes due 2011, our purchase money loan
agreement and foreign law and exchange restrictions.
Our Series A Preferred Shares are entitled to a semi-annual dividend equal to 13% of
the purchase price therefor, or $50, payable in arrears on March 15 and September 15. Such dividends are payable, at our option, in cash unless payment in cash is prohibited by law or by the terms of our debt instruments, or in additional
Series A Preferred Shares or ordinary shares of the Company.
On March 15, 2006, we paid the semiannual dividend due on our
outstanding Series A Preferred Shares. We paid the dividend in our ordinary shares, issuing 11.15 of our ordinary shares per Series A Preferred Share and 3,345,054 ordinary shares in the aggregate to members of the investor group and Everwarm
Limited, a wholly-owned subsidiary of QPL. On September 15, 2006, we paid the next semiannual dividend due on our outstanding Series A Preferred Shares. We paid the dividend in our ordinary shares, issuing 36.73 ordinary shares per Series
69
A Preferred Share and 11,020,338 ordinary shares in the aggregate to members of the investor group and Everwarm Limited, and issuing 9.97 ordinary shares per
Series A Preferred Share and 97,706 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares. On March 15, 2007, we paid
semiannual dividend due on our outstanding Series A Preferred Shares. We paid the dividend in our ordinary shares, issuing 26.74 ordinary shares per Series A Preferred Share and 8,021,906 ordinary shares in the aggregate to members of the investor
group and Everwarm Limited, and issuing 26.74 ordinary shares per Series A Preferred Share and 262,025 ordinary shares in the aggregate to holders of Series A Preferred Shares who subscribed to our rights offering, all in accordance with the terms
of our Series A Preferred Shares. On September 15, 2007, we paid semiannual dividend due on our outstanding Series A Preferred Shares. We paid the dividend in our ordinary shares, issuing 84.84 ordinary shares per Series A Preferred Share and
25,452,045 ordinary shares in the aggregate to members of the investor group and Everwarm Limited, and issuing 84.84 ordinary shares per Series A Preferred Share and 825,876 ordinary shares in the aggregate to holders of Series A Preferred Shares
who subscribed to our rights offering, all in accordance with the terms of our Series A Preferred Shares. Future dividend payments on the Series A Preferred Shares in such shares or our ordinary shares will be dilutive to holders of ordinary shares
or ADSs. In addition, if such shareholders sell substantial amounts of their ADSs in the public market during a short period of time, prices of these securities may decline significantly. See Item 3Key InformationRisk
Factors
We issued Series A Preferred Shares and warrants in connection with the preferred shares financing arrangement, warrants in connection with the purchase money loan facility with our two principal shareholder groups, warrants in
connection with amending the purchase money loan facility and warrants in connection with the recently approved amendments to the indenture governing our 9.25% senior notes due 2011, which can have a significant dilutive effect upon our
shareholders.
RELATED PARTY TRANSACTIONS
In March 2001, we entered into a supply agreement with QPLL and Talent Focus, both
wholly-owned subsidiaries of QPL, one of our principal shareholders, pursuant to which QPLL and Talent Focus, as our preferred suppliers, agreed to supply leadframes based on our orders from time to time during the term of the contract (the
Original Supply Agreement). QPL is our largest affiliated shareholder group. In addition, Mr. Tung Lok Li, our acting chief executive officer, is chairman of the board of QPL and beneficially owns approximately 38.1% of QPL. The
Original Supply Agreement expired on April 30, 2004. The prices for the leadframes provided to us under this Original Supply Agreement were fair market value plus a premium of not less than 5% of fair market value. We believe that the premiums
paid to QPL for leadframe materials under the Original Supply Agreement were fair and reasonable for a number of reasons, including: (i) we have been consistently granted priority for needed capacity for our orders even though QPL has been
operating in an environment during which it must allocate products among its other customers, (ii) QPL engineers have consistently given us first priority to address quality or production related issues with us, (iii) QPL engineers have
consistently worked closely with our engineers and production managers to expeditiously design and manufacture leadframes to our customer specifications, (iv) the close proximity of the QPL manufacturing facilities to our assembly operations,
first in Tsuen Wan, Hong Kong and more recently in Dongguan, China, have resulted in the expeditious delivery of leadframes to us, and (v) QPL has been willing to hold inventory for us and/or our customers under our just-in-time
inventory management system. Fair market value under this expired contract was determined by reference to the quotations obtained from two or more reputable vendors in the integrated circuit industry selected by us and approved by QPLL and Talent
Focus.
Pursuant to an interim supply agreement, dated as of May 1, 2004, we purchased from April 30, 2004 to May 1, 2005
substantially all of our leadframe requirements from QPLL and Talent Focus on substantially the same terms as described in the Original Supply Agreement. Notwithstanding the terms of this interim supply agreement that require us to purchase
leadframes from QPLL and Talent Focus at a 5% premium, we purchased our leadframes on a purchase order basis without any premium.
On
June 23, 2005, we entered into a new supply agreement with QPLL and Talent Focus that covered purchases from QPLL and Talent Focus from May 1, 2005. The new supply agreement principally governed the
70
supply and delivery of lead frame, heat sinks and other related products to us based on our orders during the term of the new supply agreement. The new
supply agreement also governed the treatment of the inventory supply arrangements under the new supply agreement between the parties, as well as the extended payment term granted to us by QPLL and Talent Focus. Under the new supply agreement, the
number of account payable days was extended to ninety days from the date of issuance of an invoice.
On October 27, 2005, we entered
into an Amended and Restated Supply Agreement with QPLL and Talent Focus (the Amended Supply Agreement) amending and restating our June 23, 2005 agreement governing the supply and delivery of leadframes, heat sinks and other related
products to us based on our orders during the term of the Amended Supply Agreement and the treatment of the inventory supply arrangements under the Amended Supply Agreement. In connection with the financing agreements of two of our principal
shareholder groups, we, QPLL and Talent Focus entered into this Amended and Restated Supply Agreement to provide that the payment terms shall be no more than (a) 30 days for invoices issued prior to November 16, 2005 and (b) for
invoices issued after November 15, 2005 but prior to October 27, 2006, the longer of (i) 60 days or (ii) the average of such actual payable days achieved, consistent with past practice between us and our subsidiaries on the one
hand and our material vendors on the other hand (as they are defined in the Amended Supply Agreement), but in no event longer than 90 days; provided that all invoices issued on or before October 14, 2005 were deemed immediately due and payable
as of the date of the Amended Supply Agreement. The Amended Supply Agreement is effective until October 27, 2006, and thereafter shall automatically be renewed for additional 12 month terms, unless the Amended Supply Agreement is terminated by
us upon written notice not less than six calendar months prior to the expiration date or otherwise in accordance with the provisions of the Amended Supply Agreement. We have not terminated the Amended Supply Agreement, and it continues to be
effective.
We purchase a significant amount of our leadframe requirements from QPL, as well as, to a significantly lesser extent, other
raw materials, tooling and spare parts. We purchased leadframe requirements, other raw materials, tooling and spare parts from QPL amounting to $25.0 million, $22.9 million and $9.7 million for the years ended April 30, 2005, 2006 and 2007,
respectively. All purchases from QPL are made in accordance with the Amended Supply Agreement. We also used to lease office and assembly space from QPL under a three-year term lease agreement which expired on March 31, 2007 and obtained certain
services from QPL in Hong Kong, including chemical waste treatment and disposal services and repair and maintenance services. However, on April 30, 2005, QPL sold this facility and transferred the lease without any changes to its terms to a
third party unrelated to QPL or the Company. We paid rental expenses to QPL of $2.6 million, nil and nil for the years ended April 30, 2005, 2006 and 2007 and paid administrative management and service fees of $47 thousand, nil and nil for the
years ended April 30, 2005, 2006 and 2007, respectively. The expenses incurred by us in connection with these purchases, leased facilities and services from QPL totaled in the aggregate of approximately $28.1 million, $22.9 million and $9.7
million for the fiscal years ended April 30, 2005, 2006 and 2007, respectively.
In addition, we provide management information
services and building facility services to QPL under a cost sharing agreement. We received services income from the provision of such services of $106 thousand, $19 thousand and nil for the fiscal years ended April 30, 2005, 2006 and 2007,
respectively.
The amount due to QPL, which represented the net payable to QPL as a result of all of the above, was unsecured and interest
free.
On July 31, 2005, we entered into agreements for a private financing of $30 million with JPMP Master Fund Manager, L.P.
(JPMP) related funds and QPL, two of our principal shareholder groups, and affiliates of these two entities, in the form of a $15 million preferred share financing and a $15 million purchase money loan facility.
The preferred share financing provided for the issuance and sale of 300,000 Series A Preferred Shares for a total price of $15 million and the issuance
of five-year warrants for a total of 20 million ordinary shares
71
exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), of which five-year warrants for a total of 5 million ordinary shares
were issued as an arrangement fee. The securities purchase agreement for the Series A Preferred Share financing was amended and restated on October 27, 2005 to, among other things, add Olympus-ASAT II, L.L.C. (Olympus), as a party.
The Series A Preferred Share financing closed on October 27, 2005.
The second $15.0 million of this financing is a purchase money
loan facility from Asia Opportunity Fund, L.P., an affiliate of JPMP, and related funds. The facility may be drawn upon in two tranches. The first tranche of $10.0 million may be drawn upon if our consolidated cash position falls below $10.0
million. A second tranche of an additional $5.0 million may be drawn upon if our consolidated cash position again falls below $10.0 million. The second tranche of an additional $5.0 million expired on July 31, 2007 and was not drawn down.
Therefore, the remaining second tranche of $5 million is no longer available to us. The maturity date of the loans made in a tranche was originally two years from the date such tranche is advanced. The interest rate payable on the loans is
15% per annum, with interest to be paid on a quarterly basis. We issued the administrative agent, on the date of the issuance and sale of Series A Preferred Shares described above, warrants to purchase an aggregate of 5,000,000 ordinary shares,
which is the equivalent of 333,333 ADSs, exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS).
On
January 25, 2006, we borrowed the first $10.0 million tranche of funding under the purchase money loan facility. In return for drawing upon the first tranche, we issued the lenders warrants to purchase an aggregate of 15,668,170 ordinary
shares, which is the equivalent of 1,044,544 ADSs, exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), as well as paid a commitment fee of $850,000 on a pro rata basis to the lenders that funded the first tranche. In
each case, the warrants are exercisable for five years from the date of issuance.
On August 23, 2007, the purchase money loan
facility was amended to extend the maturity due date of the $10.0 million principal amount until April 30, 2009 and to extend the payment due date for interest payments (and interest on such interest) for March 31, 2006, June 30,
2006, September 30, 2006, December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007 to become due on October 31, 2007. In return for amending the purchase money loan facility, we agreed to
issue to the lenders under the purchase money loan facility warrants exercisable, in the aggregate, for a total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis (inclusive of ordinary shares
issuable upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the eligible holders of our 9.25% senior notes due 2011). The warrants will have an exercise price of $0.01 per ordinary share and will expire on
February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions contained therein.
The
purchase money loan facility is unsecured and contains various affirmative and negative covenants binding on us and our subsidiaries, including limitations on our and our subsidiaries ability to incur indebtedness, grant liens on assets, pay
dividends and enter into transactions with affiliates. In addition, we will be required to repay the loans with the net proceeds of certain issuances of equity and debt and certain asset sales.
We have agreed to file a registration statement covering the resale of the shares issuable upon exercise of the Series A Preferred Shares and warrants
described above. We have obtained an extension of the date by which we are required to have this registration statement effective until October 31, 2007.
As required by the securities purchase agreement, in July 2006, we completed a rights offering of the Series A Preferred Shares and warrants for the benefit of existing shareholders, excluding the purchasers of the
Series A Preferred Shares and certain other shareholders that waived participation in the rights offering. In the rights offering, we distributed one subscription right for every 1,850 of our ordinary shares, or for every 123 of our ADSs, owned.
Each subscription right entitled the recipient to purchase for $50.00 a unit consisting of one Series A Preferred Share and a warrant to purchase 50 ordinary shares. We sold 9,799 units in this offering and received gross proceeds of $489,950 in the
rights offering.
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On September 1, 2006, our board of directors appointed Tung Lok Li as Acting Chief Executive
Officer. Mr. Li is Chairman of QPL, one of our principal shareholder groups, and a member of our board of directors. Mr. Li will assume his position for the interim period while we continue our search for a permanent Chief Executive
Officer. While Mr. Li will continue to serve as a member of our board of directors, his employment contract with us expressly prohibit him from entering into any related party transactions with QPL. On September 1, 2006, our board of
directors appointed Joseph Martin as Executive Vice President of Sales and Marketing. Mr. Martin was Chief Executive Officer of QPL, one of our principal shareholder groups, and is a member of our board of directors. Mr. Martin resigned
from his position with QPL effective September 1, 2006 to avoid any conflicts of interest with his current position at ASAT. On July 18, 2007, our board of directors appointed Kei Hong Chua as Chief Financial Officer. Mr. Kei Hong
Chua succeeds his brother, Mr. Kei W. Chua, our former Acting Chief Financial Officer and a current member of our board of directors, who is affiliated with one of our principal shareholder groups, the investor group.
Compliance with Nasdaq Marketplace Rule 4350
Pursuant to Nasdaq Marketplace Rule 4350(a)(1), we have elected to follow certain of our home country practices in lieu of certain of the requirements of Nasdaq Marketplace Rule 4350. In connection with this decision, we have filed with
Nasdaq an opinion letter from Maples and Calder, our Cayman Islands counsel, informing Nasdaq that our practices are not prohibited by Cayman Islands law, including any home country practices that we may elect to follow in any future period provided
that such practices are not prohibited by Cayman Islands law. The following are the requirements of Nasdaq Marketplace Rule 4350 for which we are following home country practices in lieu of Marketplace Rule 4350 requirements:
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Marketplace Rule 4350(i)(1), which requires shareholder approval prior to the issuance of securities when the issuance or potential issuance will result in a change
of control of the issuer, in connection with the commitments from QPL and JPMP for them and their affiliates to provide us up to $30 million financing, which is comprised of a commitment from QPL and JPMP to purchase $15 million of our Series A
Preferred Shares and a $15 million purchase money loan commitment from Asia Opportunity Fund, L.P., an affiliate of JPMP and related funds. See Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources
for a detailed description of this purchase money loan commitment and convertible preferred shares commitment.
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Marketplace Rule 4350(c)(1), which requires a majority of the board of directors to be comprised of independent directors. Currently only three of the
Companys nine directors are independent within the meaning of Marketplace Rule 4350(c)(1). Pursuant to the shareholders agreement among the investor group, QPL and certain other investors, those parties have agreed to vote their shares so that
three of our directors are selected by QPL, three of our directors are selected by Asia Opportunity Fund, L.P., and three independent directors are individuals selected by Asia Opportunity Fund, L.P. and nominated by QPL for recommendation to board
of directors for approval and appointment by the board of directors, subject to decrease as their respective shareholding decreases. See Item 7Major Shareholders and Related Party TransactionsShareholders Agreement and
Item 6Directors, Senior Management and EmployeesBoard Practices.
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Marketplace Rule 4350(c)(4)(A), which requires director nominees to be either selected, or recommended for the board of directors selection, by a majority of
the independent directors or a nominations committee comprised solely of independent directors. This requirement conflicts with the requirements of the shareholders agreement as described further above. See Item 7Major Shareholders and
Related Party TransactionsShareholders Agreement and Item 6Directors, Senior Management and EmployeesBoard Practices.
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Marketplace Rule 4350(d)(3), which requires the audit committee to have the specific responsibility and authority to select the Companys auditors. The parties
to the shareholders agreement have agreed to vote their shares so that the board of directors shall appoint as our auditors an internationally recognized accounting firm selected by Asia Opportunity Fund, L.P. and approved by QPL. See Item
7Major Shareholders and Related Party TransactionsShareholders Agreement.
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73
ITEM 8.
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FINANCIAL INFORMATION
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See Item 18
Financial Statements.
ITEM 9.
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THE OFFER AND LISTING
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Market Price InformationAmerican
Depositary Shares (ADSs)
Our ordinary shares trade in the form of ADSs evidenced by American Depositary Receipts, or ADRs. Our ADSs are
quoted on the Nasdaq Capital Market under the symbol ASTT. Information relating to our ADSs has been restated to give effect to the ADS ratio change from one ADS for every five ordinary shares to one ADS for every 15 ordinary shares
effective December 22, 2006. The Bank of New York acts as the depositary of our ADSs. The table below presents the high and low closing prices for our ADSs traded on the Nasdaq Global Market or the Nasdaq Capital Market, as applicable, for the
periods presented.
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Price per ADS on Nasdaq
Global Market or Nasdaq
Capital Market
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High ($)
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Low ($)
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2003
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$
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5.91
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$
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1.05
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2004
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13.80
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1.26
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2005
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7.38
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2.64
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2006
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3.84
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1.65
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2007
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3.21
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0.60
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Price per ADS on Nasdaq
Global Market or Nasdaq
Capital Market
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High ($)
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Low ($)
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Quarterly Highs and Lows
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Fiscal Year Ended April 30, 2006
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First Quarter
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$
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3.24
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$
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2.34
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Second Quarter
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2.61
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1.65
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Third Quarter
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3.84
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1.77
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Fourth Quarter
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3.72
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2.64
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Fiscal Year Ended April 30, 2007
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First Quarter
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$
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3.21
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$
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1.50
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Second Quarter
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1.62
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0.60
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Third Quarter
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2.37
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1.32
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Fourth Quarter
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2.02
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0.92
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Fiscal Year Ended April 30, 2008
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First Quarter
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$
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1.42
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$
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0.77
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Second Quarter (through October 12, 2007)
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1.10
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0.39
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Monthly Highs and Lows (most recent six months)
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April
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$
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1.32
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$
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0.92
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May
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1.42
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1.17
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June
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1.22
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0.85
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July
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0.94
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0.77
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August
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0.79
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0.39
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September
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0.81
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0.40
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October (through October 12, 2007)
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1.10
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0.75
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Following the offering of our ADSs in July 2000, our ADSs were quoted on the Nasdaq Global Market
(formerly the Nasdaq National Market) until June 2003. On June 26, 2003, as we did not meet the listing requirements for the Nasdaq Global Market, Nasdaq approved our application to transfer to the Nasdaq Capital Market (formerly the Nasdaq
SmallCap Market), where our ADSs were quoted from July 1, 2003 to April 12, 2004. On April 12, 2004, the ADSs once again became quoted on the Nasdaq Global Market. On November 28, 2005, as we again did not meet the listing
requirements for the Nasdaq Global Market, Nasdaq approved our application to transfer to the Nasdaq Capital Market, effective November 30, 2005.
On July 30, 2007, we received a compliance notice from Nasdaq stating that, for a period of 30 consecutive trading days, our ADSs had closed below the minimum bid price of $1.00 per share as required under Nasdaq
Marketplace Rule 4320(e)(2)(E)(i) for continued listing on the Nasdaq Capital Market. In accordance with Nasdaq Marketplace Rule 4310(c)(8)(D), we have been provided with 180 calendar days, until January 28, 2008, to regain compliance with the
Nasdaq Capital Markets continued listing requirements or be subject to delisting. If compliance cannot be demonstrated by January 28, 2008, Nasdaq will determine whether we meet the initial listing criteria for the Nasdaq Capital Market, other
than the bid price requirement. If we meet the initial listing criteria, we may be granted an additional 180 calendar days to regain compliance with the bid price requirement. If we are not eligible for this additional compliance period, Nasdaq will
provide written notification that our ADSs will be delisted. On September 17, 2007, we received a Nasdaq Staff Determination letter indicating that the Companys market value of listed securities has been below $35,000,000 as required for
continued inclusion by Marketplace Rule 4320(e)(2)(B) and that its American Depositary Shares are, therefore, subject to delisting. The Company was also notified by Nasdaq at that time that it does not comply with the minimum stockholders
equity of $2,500,000 or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years, which are also requirements for continued listing on the Nasdaq
Capital Market. We have appealed the Staff Determination and have received a hearing date of November 1, 2007 for such appeal. At the hearing, the Company will be required to address the foregoing non-compliance with the Nasdaq listing rules.
Nasdaqs delisting action has been stayed, pending a final written determination by the Nasdaq Listing Qualifications Panel following the hearing. Our ADSs are currently trading on the Nasdaq Capital Market under the trading symbol
ASTT. See Item 3Key InformationRisk FactorsThe market price of our ADSs may be volatile and you may not be able to resell your ADSs at or above the price you paid, or at all. In addition, the liquidity of the ADSs
may also be adversely affected by delisting if we cannot meet Nasdaq Capital Market listing requirements.
All of the ordinary shares
issued and outstanding are registered shares and not bearer shares, are fully paid, duly authorized and validly issued and have a par value $0.01 per share. There is no public trading market for our ordinary shares.
ITEM 10.
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ADDITIONAL INFORMATION
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RESTATED MEMORANDUM AND RESTATED ARTICLES OF ASSOCIATION
We were incorporated on October 20, 1999 in the
Cayman Islands as an exempted company with limited liability, and our affairs are governed by our Restated Memorandum and Restated Articles of Association and The Companies Law (as revised) of the Cayman Islands and the common law of the Cayman
Islands. The following is a summary of the Restated Memorandum and Restated Articles of Association, including rights and privileges pertaining to our ordinary shares and Series A Preferred Shares.
Objects and Purpose
Our Restated Memorandum of
Association provides that the objects for which we are established are unrestricted.
Directors
The Restated Articles of Association provide that any contract or arrangement in which a director of ours is interested shall be approved by a majority of
the disinterested directors or by the shareholders in a general
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meeting prior to entry into the contract or arrangement. No director (except for the independent directors) shall be entitled to any remuneration for serving
as a director. Our board of directors may exercise all the powers to borrow money without restriction. There is no mandatory age limit by which directors must retire. There is no shareholding qualification for directors.
Share Capital
We have a total authorized share
capital of $30,000,000, divided into 2,999,000,000 ordinary shares of par value $0.01, 704,348,844 of which were outstanding as of April 30, 2007, and 1,000,000 Series A Redeemable Convertible Preferred shares, of par value $0.01 per share,
309,799 of which were outstanding as of April 30, 2007. All of the ordinary shares issued and outstanding are registered shares and not bearer shares, and are fully paid, duly authorized and validly issued.
Cayman Islands laws provides that share capital may be increased in such manner as is provided for in the articles of association of the relevant
company. Our Restated Articles of Association provide that our share capital may be increased by ordinary resolution of the shareholders. The Restated Articles of Association are permissive of a repurchase or a reduction in share capital subject to
approval by special resolution and such additional approvals as are required under the Companies Law of the Cayman Islands (in the case of reduction of capital, this would required approval of the Grand Court of the Cayman Islands).
Ordinary Shares
. There are no limitations in our Restated Articles of Association or under Cayman Islands law on the right to own securities,
including the rights of non-resident or foreign shareholders to hold or exercise voting rights although no shares in an exempted company may be offered to the public in the Cayman Islands.
Voting rights
. The holders of ordinary shares are entitled on a show of hands to one vote per holder and on a poll to one vote per share on all
matters to be voted on by our shareholders.
Dividend Rights
. Holders of the ordinary shares are entitled to share equally, share
for share, if dividends are declared on our ordinary shares, whether such dividends are payable in cash, property or securities. Any dividend unclaimed after a period of six years from the date when it was declared shall be forfeited and shall
revert to us.
Liquidation Rights, Other Rights
. In the event of a voluntary or an involuntary liquidation, dissolution or winding
up, the holders of our ordinary shares are entitled to share equally, share for share, in the assets available for distribution and shall be entitled to receive all assets and funds remaining and available for distribution, divided on a pro rata
basis according to the number of ordinary shares owned. Except as set forth above, holders of our ordinary shares have no conversion or redemption rights. Our Restated Articles of Association contain provisions dealing with the manner in which
capital calls can be made on shareholders but these only apply to situations in which the ordinary shares are issued partly paid and are subject to the specific terms of issue of such partly paid shares.
Series A Preferred Shares
Issue Price
The effective issue price of each Series A Preferred Share is $50.00.
Conversion Price
Each Series A Preferred Share is convertible at the holders option into
ordinary shares at a conversion price equal to $0.09 per ordinary share (equivalent to $1.35 per ADS). The conversion price is subject to adjustment as follows:
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the conversion price is subject to customary adjustments for share splits, dividends, re-combinations and similar transactions;
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subject to certain exceptions specified in our Restated Articles of Association, the conversion price will be adjusted on a weighted-average basis in the event of
any future issuance of ordinary shares or securities convertible, exchangeable or exercisable into ordinary shares, subject to certain exceptions, for no consideration or for consideration per share less than either the then-effective conversion
price of the ordinary shares, as determined based on the average closing prices of our ADSs for a thirty day trading period ending three days prior to the date of determination; and
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the conversion price is subject to a potential reset on October 31, 2006 to 80% of the average trading price of our ADSs during the preceding three months if
such amount were below the conversion price of $0.09 per ordinary share (equivalent to $1.35 per ADS), subject to a floor of $0.065 per ordinary share ($0.975 per ADS).
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With respect to the second bullet point above, the exceptions include:
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(1)
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ordinary shares issued upon conversion of the Series A Preferred Shares and the exercise of any warrants issued pursuant to the securities purchase agreement or the purchase money
loan agreement;
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(2)
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ordinary shares or other equity securities (as defined in our Restated Articles of Association) issued or issuable to our employees, consultants or directors directly or pursuant to
a stock option plan or restricted stock plan approved by our Board of Directors;
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(3)
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ordinary shares or warrants with an exercise price that is equal to or greater than the fair market value (as defined in our Restated Articles of Association) on the date of
issuance issued to financial institutions or lessors in connection with commercial credit arrangements or equipment financings;
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(4)
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ordinary shares or other equity securities issuable upon exercise of equity securities outstanding as of the closing date of the securities purchase agreement; and
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(5)
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ordinary shares or warrants issued for non-cash consideration in connection with any arms length agreement with a commercial or trade entity in connection with the delivery or
purchase of goods and services in the ordinary course of business approved by our board of directors.
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No adjustment to the
conversion price shall be required unless the adjustment would require an increase or decrease of at least 1.0% in the conversion price. However, any adjustments not required to be made as a result of the preceding sentence will be carried forward
and taken into account in any subsequent adjustment. If the holders of at least 66 2/3% of the then outstanding Series A Preferred Shares consent in writing to limit, or waive in its entirety, any anti-dilution adjustment to which the holder of the
Series A Preferred Shares would otherwise be entitled to under our Restated Articles of Association, we will not be required to make any adjustment with respect to the Series A Preferred Shares in excess of such limit or at all, as the terms of such
consent dictate.
Voting; Transferability
The Series A Preferred Shares have no voting rights except as required by applicable law. No holder of Series A Preferred Shares may assign or transfer any Series A Preferred Shares or any rights, interests or obligations thereunder without
the prior written approval of a majority of the Series A Preferred Shares then outstanding, subject to certain exceptions. The Restated Articles of Association permit the assignment or transfer of Series A Preferred Shares to a permitted transferee
(as defined in the shareholders agreement among our major shareholders, which are generally the general partners and limited partners of a fund which is a shareholder or wholly-owned subsidiaries of QPL) or to a party to the shareholders agreement
among our major shareholders or their successors or assigns that agrees to be bound by the terms of such articles.
Dividends
The Series A Preferred Shares will accrue dividends at the rate of 13% per annum, payable semi-annually in arrears on March 15 and
September 15 of each year, commencing March 15, 2006. Such dividends will be payable, at our option, either in cash, unless payment in cash is prohibited by law or by the terms of our debt
77
instruments, or in additional Series A Preferred Shares or ordinary shares. Each of the indenture governing our 9.25% senior notes due 2011 and our purchase
money loan agreement currently prohibits payment of the dividends on the Series A Preferred Shares in cash and are likely to do so for the foreseeable future.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of us, the holders of Series A Preferred
Shares will be entitled to receive, prior to and in preference to the distribution of any of our assets to holders of ordinary shares, an amount equal to 100% of the issue price of the Series A Preferred Shares, plus all accrued and unpaid
dividends. Upon the completion of the distribution to the holders of Series A Preferred Shares, our remaining assets available for distribution to our shareholders will be distributed among the holders of the Series A Preferred Shares and our
ordinary shares pro rata based on the number of ordinary shares held by each on an as-converted basis. Mergers, acquisitions and certain similar transactions will be deemed to be a liquidation, dissolution or winding up of us for these purposes.
Redemption
The Series A Preferred
Shares are redeemable, in whole or in part, at the option of the holders on or after May 4, 2011. In such event, the redemption price for the Series A Preferred Shares will equal the issue price of the Series A Preferred Shares plus accrued and
unpaid dividends to, but excluding, the redemption date. However, we will be under no obligation to redeem any Series A Preferred Shares unless the redemption is permitted by the terms of indenture governing our 9.25% senior notes due 2011, our
purchase money loan agreement and our facilities with Standard Chartered Bank.
The Series A Preferred Shares are also redeemable at our
option, in whole or in part, at any time at a redemption price equal to the higher of (i) the issue price of the Series A Preferred Shares plus accrued and unpaid dividends thereon to, but excluding, the redemption date, and (ii) the
aggregate fair market value of the ordinary shares into which the Series A Preferred Shares are then convertible.
In calculating the
redemption price, fair market value will be determined as follows:
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if traded on the Nasdaq Global Market, the Nasdaq Capital Market or over the counter, the fair market value shall be deemed to be the average closing prices of our
ADSs over the thirty (30) day trading period ending three trading days prior to the determination date and dividing such average by the number of ordinary shares represented by each ADS; and
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if there is no public market for the ADSs, transfer market value shall be determined in good faith by our board of directors.
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Warrants
. In a private placement transaction in October 1999, we issued 155,000 units consisting of 155,000 warrants to purchase ordinary share of
ASAT holdings and $155,000,000 aggregate principal amount of 12.5% senior notes due 2006 of ASAT (Finance) LLC, all of which notes were redeemed on February 25, 2004 and are no longer outstanding. Each warrant entitled the holder, subject to
specific conditions, to subscribe for 114.19 of our ordinary shares at an exercise price of $0.39 per share, subject to adjustment under specified circumstances. As a result of a share dividend of 47 ordinary shares for each outstanding share
undertaken contemporaneously with the completion of our offering of ADSs on July 14, 2000, the total number of our ordinary shares issuable upon exercise of the warrants was adjusted from 371,132 shares to 17,699,450 shares, and the exercise
price for the warrants was adjusted from $18.60 per ordinary share to $0.39 per ordinary share. The warrants were exercisable at any time on or after November 1, 2001 and expired on November 1, 2006.
In July 2005 we entered into a settlement agreement with Freescale Semiconductor, Inc. In connection with the settlement agreement, we issued to
Freescale Semiconductor, Inc. a five-year warrant to purchase 10,937,500 of our ordinary shares, which is the equivalent of 729,167 ADSs, at an exercise price of $0.16 per share (equivalent to $2.40 per ADS).
78
In connection with the closing of the private financing, we issued five-year warrants to purchase an
aggregate of 20,000,000 ordinary shares exercisable at the price of $0.01 per share, of which warrants to purchase a total of 5,000,000 ordinary shares were issued as an arrangement fee. In connection with the closing of the rights offering, we
issued five-year warrants to purchase an aggregate of 489,950 ordinary shares exercisable at the price of $0.01 per share.
In connection
with the closing of the purchase money loan agreement, we issued five-year warrants to purchase an aggregate of 5,000,000 ordinary shares exercisable at a price of $0.01 per share as an arrangement fee. On January 25, 2006, we issued five-year
warrants to purchase an aggregate of 15,668,170 ordinary shares exercisable at a price of $0.01 per share in connection with our borrowing of the first tranche of funding under the purchase money loan agreement.
On August 23, 2007, we agreed to issue warrants for ordinary shares in connection with the amendment to our purchase money loan agreement, which was
as required as a condition to closing the solicitation of consents to amend our indenture governing our 9.25% senior notes due 2011, as described below. These warrants will be issued to the lenders under the purchase money loan agreement, subject to
certain conditions specified therein. These warrants would, in the aggregate, be exercisable for a total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis (inclusive of ordinary shares issuable
upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the eligible holders of our 9.25% senior notes due 2011). The warrants will have an exercise price of $0.01 per ordinary share and will expire on
February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions contained therein.
On
August 27, 2007, we agreed to issue warrants for ordinary shares in connection with the amendment of the indenture governing our 9.25% senior notes due 2011. These warrants will be issued to eligible holders of our 9.25% senior notes due 2011
who consented to our solicitation of consents ending August 23, 2007 to amend the indenture governing our 9.25% senior notes due 2011, subject to certain conditions specified therein. These warrants would, in the aggregate, be exercisable for a
total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis (inclusive of ordinary shares issuable upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the
lenders under its purchase money loan agreement). The warrants will have an exercise price of $0.01 per ordinary share and will expire on February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions
contained therein.
Share Option Plans
. We adopted the 2000 Stock Option Plan, or the plan, on July 6, 2000. We have authorized
110,000,000 ordinary shares for issuance under the plan. This is equivalent to 7,333,333 ADSs. The plan is a non-qualified, discretionary option grant program under which eligible individuals may be granted options to purchase ordinary shares. Under
the plan, the board of directors and, when so delegated, the compensation committee of the board of directors, will determine which individuals will be granted options, the number of ordinary shares subject to the option, the exercise price for the
ordinary shares, the vesting periods and any other terms as the board of directors deems appropriate and consistent with the plan. The individuals eligible to participate in the plan includes officers, employees, consultants and non-employee
directors of the ASAT group companies. The plan is designed to attract employees and important individuals to the ASAT group companies and to provide recipients with a proprietary interest in the financial success of ASAT.
As of April 30, 2006, we had outstanding stock options for 42,140,245 ordinary shares, equivalent to 2,809,350 ADSs, with a weighted average
exercise price of $0.328 per ordinary share (equivalent to $4.92 per ADS including options granted pursuant to the Stock Option Exchange Program as described in the previous paragraph). Of the total amount of outstanding stock options as of
April 30, 2006, we have outstanding stock options granted to our directors and executive officers as a group for 19,425,000 ordinary shares, equivalent to 1,295,000 ADSs, with a weighted average exercise price of $0.28 per ordinary share
(equivalent to $4.20 per ADS).
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On January 24, 2003, we announced an employee stock exchange program, a voluntary stock option
exchange program for our employees, employee director and non-employee directors. We offered eligible stock option holders with exercise prices above the current bid price of our ADSs the option of voluntarily canceling their outstanding options. In
exchange, participants were to be granted new stock options at the fair value of our ADSs no sooner then six months and one day after the cancellation of the options, which cancellation occurred on February 24, 2003. Under the terms of the
stock option exchange program, 60,822,235 options for ordinary shares (equivalent to 12,164,447 options to purchase ADSs) were surrendered for cancellation.
On August 29, 2003, options for 32,948,550 ordinary shares (equivalent to 2,196,570 ADSs) were granted under the employee stock option exchange
program at an exercise price of $0.288 per ordinary share (equivalent to $4.32 per ADS) to those participants who were still employed by us on that date. All newly granted options have the same date vesting schedules as the cancelled options.
ADS Repurchase Program
. During the fiscal years ended April 30, 2001 and 2002, we repurchased 6,273,000 and 780,000
ordinary shares at total costs of approximately $5.3 million and $541 thousand, respectively, under our ADS repurchase program announced in January 2001.
Changing Shareholder Rights
A special resolution of shareholders (that is a resolution passed by a two thirds majority of
ordinary shareholders present at a properly convened and constituted shareholder meeting or unanimously in writing by all shareholders) is required to change the rights attaching to the ordinary shares.
Transfer of Shares
Under our Restated Articles of
Association, ordinary shares are freely transferable by way of an instrument of transfer as prescribed by the board of directors and Series A Preferred Shares are transferable only with the consent of the holders of a majority of the outstanding
Series A Preferred Shares.
Ordinary shares held by QPL, the investor group or their permitted transferees are subject to a shareholders
agreement between those parties. Under that agreement, the parties are not allowed to transfer any ordinary shares unless to permitted transferees, in registered public offerings, on Nasdaq or an internationally recognized stock exchange on which
the ordinary shares are listed, or in accordance with the right of first offer, tag along and drag along requirements in the agreement, subject to applicable law, including United States securities law. Any ordinary share owned by QPL, the investor
group or their permitted transferees will be released from these contractual transfer restrictions once the ordinary share is sold in a registered public offering, or on Nasdaq or an internationally recognized stock exchange on which the ordinary
shares are listed. The ADSs sold in the offering of our ADSs completed on July 14, 2000 by the selling shareholders, and the ordinary shares represented by the ADSs have not been subject to these transfer restrictions since completion of the
offering of our ADSs. See Item 7Major Shareholders and Related Party TransactionsShareholders Agreement.
Differences in
Corporate Law
The Companies Law of the Cayman Islands is modeled after that of England but does not follow recent United Kingdom
statutory enactments and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements
. Cayman Islands
law does not provide for mergers as that expression is understood under United States corporate law. Mergers in the United States generally require the approval of a majority of the outstanding common stock of both entities involved in the proposed
merger. In the Cayman Islands, however, there are statutory provisions that facilitate the reconstruction and amalgamation of companies,
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provided that the arrangement is approved by a majority of the shareholders or of each class of shareholders, as the case may be, and creditors with whom the
arrangement is to be made and who must represent a majority in number representing three-fourths in value of the shareholders or of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by
proxy at a meeting or meetings convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to
the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it satisfies itself that:
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the statutory provisions as to majority vote have been complied with;
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the shareholders have been fairly represented at the meeting in question;
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the arrangement is such as a businessman would reasonably approve; and
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the arrangement is not one that would more properly be sanctioned under a different provision of the Companies Law.
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When a take-over offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period, require the
holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction is approved, the dissenting shareholder would have no rights comparable to appraisal rights, which
would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
In addition, Cayman Islands law does not specifically require shareholder approval for a disposition of all or substantially all of an entitys
assets, which in the United States would typically require approval by at least a majority of the holders of the outstanding common stock of the entity proposing to dispose of its assets.
Shareholders Suits
. Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court.
Reported derivative actions have been brought but have not succeeded for technical reasons. In principle, a derivative action may not be brought by a minority shareholder. Instead, we would be the proper plaintiff. However, based on English
authorities, which are of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
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a company is acting or proposing to act illegally or ultra vires;
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the act complained of, although not ultra vires, could be effected only if authorized by more than a simple majority vote (which has not be obtained); or
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those who control the company are perpetrating a fraud on the minority.
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Indemnification
Cayman Islands law does not limit the extent to which a companys articles of
association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the
consequences of committing a crime. Our Restated Articles of Association permit us to indemnify officers and directors for losses, damages, cost and expenses incurred in their capacities as such if they acted in good faith and in a manner they
reasonably believed to be in our best interests, and in any criminal action, if they had no reasonable cause to believe their conduct was unlawful. If the director or officer is found liable by the court, we may indemnify him only if the court
determines that the director or officer is fairly and reasonably entitled to indemnity.
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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to
directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable as a matter of United States law.
Annual General Meeting
As a matter of Cayman Islands law, we are not required to hold an annual general meeting of shareholders. If we do hold an annual general meeting then we
are required to call such meeting on not less than 21 days notice. Directors may call a meeting of shareholders at any other time. Where a special resolution is to be proposed at the meeting, such meeting shall be called by not less than 21
days notice in writing to all shareholders. Any other general meeting is required to be called by not less than 14 days notice in writing to all shareholders.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under
Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements.
MATERIAL CONTRACTS
In March 2001, we entered into a supply agreement with QPLL and Talent Focus, both
wholly-owned subsidiaries of QPL, pursuant to which QPLL and Talent Focus, as our preferred suppliers, agreed to supply leadframes based on our orders from time to time during the term of the contract. QPL is our largest affiliated shareholder
group. The Original Supply Agreement expired on April 30, 2004. The prices for the leadframes provided to us under this Original Supply Agreement were fair market value plus a premium of not less than 5% of fair market value. We believe that
the premiums paid to QPL for leadframe materials under the Original Supply Agreement were fair and reasonable for a number of reasons, including: (i) we have been consistently granted priority for needed capacity for our orders even though QPL
has been operating in an environment during which it must allocate product among their its other customers, (ii) QPL engineers have consistently given us first priority to address quality or production related issues with us, (iii) QPL
engineers have consistently worked closely with our engineers and production managers to expeditiously design and manufacture leadframes to our customer specifications, (iv) the close proximity of the QPL manufacturing facilities to our
assembly operations, first in Tsuen Wan, Hong Kong and more recently in Dongguan, China, have resulted in the expeditious delivery of leadframes to us, and (v) QPL has been willing to hold inventory for us and/or our customers under our
just-in-time inventory management system. Fair market value under this expired contract was determined by reference to the quotations obtained from two or more reputable vendors in the integrated circuit industry selected by us and
approved by QPLL and Talent Focus.
Pursuant to an interim supply agreement, dated as of May 1, 2004, we purchased from April 30,
2004 to May 1, 2005 substantially all of our leadframe requirements from QPLL and Talent Focus on substantially the same terms as described in the Original Supply Agreement. Notwithstanding the terms of this interim supply agreement that
require us to purchase leadframes from QPLL and Talent Focus at a 5% premium, we purchased our leadframes on a purchase order basis without any premium.
On June 23, 2005, we entered into a new supply agreement with QPLL and Talent Focus. The new supply agreement principally governed the supply and delivery of lead frame, heat sinks and other related products to
us based on our orders during the term of the new supply agreement. The new supply agreement also governed the treatment of the inventory supply arrangements under the new supply agreement between the parties, as well as the extended payment term
granted to us by QPLL and Talent Focus. Under the new supply agreement, the number of account payable days was extended to ninety days from the date of issuance of an invoice.
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On October 27, 2005, we entered into an Amended and Restated Supply Agreement with QPLL and Talent
Focus (the Amended Supply Agreement) amending and restating our June 23, 2005 agreement and governing the supply and delivery of leadframes, heat sinks and other related products to us based on our orders during the term of the
Amended Supply Agreement and the treatment of the inventory supply arrangements under the Amended Supply Agreement. In connection with the financing agreements of two of our principal shareholder groups, we, QPLL and Talent Focus entered into this
Amended and Restated Supply Agreement to provide that the payment terms shall be no more than (a) 30 days for invoices issued prior to November 16, 2005 and (b) for invoices issued after November 15, 2005 but prior to
October 27, 2006, the longer of (i) 60 days or (ii) the average of such actual payable days achieved, consistent with past practice between us and our subsidiaries on the one hand and our material vendors on the other hand (as they
are defined in the Amended Supply Agreement), but in no event longer than 90 days; provided that all invoices issued on or before October 14, 2005 were deemed immediately due and payable as of the date of the Amended Supply Agreement. The
Amended Supply Agreement is effective until October 27, 2006, and thereafter shall automatically be renewed for additional 12 month terms, unless the Amended Supply Agreement is terminated by us upon written notice not less than six calendar
months prior to the expiration date or otherwise in accordance with the provisions of the Amended Supply Agreement.
As part of our
corporate restructuring program, we made a strategic decision to move all of our Hong Kong manufacturing operations to Dongguan, China in order to significantly reduce our costs and access the high-growth semiconductor market in China. To launch
what we call Phase I of this transition of our operations to China, in August 2002 we entered into a lease agreement pursuant to which Changshi has constructed an 180,000 square foot factory facility and leased the facility to us starting from
September 2003 for a term of 15 years. We are obligated to pay monthly rental payments of HK$1.4 million (approximately $179 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the first six years of the rental term, HK$350 thousand
(approximately $45 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the seventh to eleventh years and HK$385 thousand (approximately $49 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the twelfth to fifteenth years.
From October 30, 2004 and during the term of the leases, we have an option and a right of first refusal to purchase the facility and the related land-use right at prices fixed in a predetermined schedule or, subsequent to October 2009, at
prices based on the then fair market value of the factory facilities and related land use right. Additionally, under a management services agreement, we were obligated to pay Changshi a monthly management service fee of HK$506 thousand
(approximately $65 thousand at an assumed exchange rate of HK$7.80 per $1.00), which amount includes a land use rights fee, foreign exchange remittance fees and certain administrative and management charges for the next six year term, commencing
September 2003. Over the six year term of this agreement, Changshi has agreed to support the operation of the facility by nominating employees for staffing of the facility, maintaining the facility and its systems in good repair and operating
condition (at our cost) and assisting us with handling Chinese governmental and regulatory matters.
In May 2004, we entered into another
lease agreement with Changshi to build a 300,000 square foot Phase II facility immediately adjacent to our Phase I facility. The Phase II facility lease also included the participation of the Changshi subsidiary that holds the subject land use
right, Dongguan Changan ASAT Semiconductor ASAT Assembly and Test Factory. Under the terms of the lease agreement, we lease the Phase II factory from Changshi for a period of 15 years starting from August 2005. We are obligated to pay monthly
payments of HK$1.4 million (approximately $179 thousand at an assumed exchange rate of HK$7.80 per $1.00) for the first six years of rental term and HK$700 thousand (approximately $90 thousand at an assumed exchange rate of HK$7.80 per $1.00) per
month for the seventh to fifteenth years of the lease term. From October 31, 2008 and during the term of the lease, we have an option and a right of first refusal to purchase the facility and the related land-use right of the land at prices
fixed in a predetermined schedule starting during the period from October 2008 to July 2011, and thereafter at prices based on the then fair market value of the facility and related land-use right. Additionally, under a management services
agreement, we are obligated to pay Changshi a monthly management service fee of approximately HK$639 thousand (approximately $82 thousand at an assumed exchange rate of HK$7.80 per $1.00) for a period of six years, starting from the commencement
date of the lease, and over the six year term of the agreement, Changshi has agreed to support the operation of the facility by
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nominating employees for staffing of the facility, maintaining the facility and its systems in good repair an operating condition (at our cost) and assisting
us with handling Chinese governmental and regulatory matters.
On August 5, 2004, we entered into an agreement to engage a third party
vendor, Wellmean, to complete the interior finish and fixtures of our Phase II facility. The acquisition of capital equipment and the installation service charges under the terms of this agreement have been valued at approximately $28.9 million,
which amount has been split into a series of three payments totaling approximately $14.4 million followed by 24 monthly payments in the amount of $609 thousand per month. We made the first and second payments of approximately $2.9 million and $7.2
million, respectively, during the year ended April 30, 2005. During the year ended April 30, 2006, we made payments totaling approximately $7.8 million to Wellmean. In April 2006, Wellmean agreed to defer the 3 monthly installments for
March to May of 2006, totaling approximately $1.8 million, to June 2006. In June 2006, Wellmean further agreed to defer the 3 monthly installments for June to August of 2006, totaling approximately $1.8 million, to September 2006. During the year
ended April 30, 2007, we made payments totaling approximately $8.6 million to Wellmean. As of April 30, 2007, the outstanding balance payable to Wellmean was approximately $3 million.
On July 31, 2005, we entered into agreements for a private financing of $30 million with JPMP Master Fund Manager, L.P. (JPMP) related
funds and QPL, two of our principal shareholder groups, and affiliates of these two entities, in the form of a $15 million preferred share financing and a $15 million purchase money loan facility.
The preferred share financing provided for the issuance and sale of 300,000 Series A Preferred Shares for a total price of $15 million and the issuance
of five-year warrants for a total of 20 million ordinary shares exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), of which five-year warrants for a total of 5 million ordinary shares were issued as an
arrangement fee. The securities purchase agreement for the Series A Preferred Share financing was amended and restated on October 27, 2005 to, among other things, add Olympus-ASAT II, L.L.C. (Olympus), as a party. The Series A
Preferred Share financing closed on October 27, 2005.
The second $15.0 million of this financing is a purchase money loan facility
from Asia Opportunity Fund, L.P., an affiliate of JPMP, and related funds. The facility may be drawn upon in two tranches. The first tranche of $10.0 million may be drawn upon if our consolidated cash position falls below $10.0 million. A second
tranche of an additional $5.0 million may be drawn upon if our consolidated cash position again falls below $10.0 million. The maturity date of the loans made in a tranche is two years from the date such tranche is advanced. The interest rate
payable on the loans is 15% per annum, with interest to be paid on a quarterly basis. We issued the administrative agent, on the date of the issuance and sale of Series A Preferred Shares described above, warrants to purchase an aggregate of
5,000,000 ordinary shares, which is the equivalent of 333,333 ADSs, exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS).
On January 25, 2006, we borrowed the first $10.0 million tranche of funding under the purchase money loan facility. In return for drawing upon the first tranche, we issued the lenders warrants to purchase an
aggregate of 15,668,170 ordinary shares, which is the equivalent of 1,044,544 ADSs, exercisable at a price of $0.01 per ordinary share (equivalent to $0.15 per ADS), as well as paid a commitment fee of $850,000 on a pro rata basis to the lenders
that funded the first tranche. In each case, the warrants are exercisable for five years from the date of issuance. The purchase money loan facility is unsecured and contains various affirmative and negative covenants binding on us and our
subsidiaries, including limitations on our and our subsidiaries ability to incur indebtedness, grant liens on assets, pay dividends and enter into transactions with affiliates. In addition, we will be required to repay the loans with the net
proceeds of certain issuances of equity and debt and certain asset sales. On August 23, 2007, the purchase money loan facility was amended to extend the maturity due date of the $10.0 million principal amount until April 30, 2009 and to
extend the payment due date for interest payments (and interest on such interest) for March 31, 2006, June 30, 2006, September 30, 2006, December 31, 2006, March 31, 2007, June 30, 2007 and
September 30, 2007 to become due on October 31, 2007. In return for amending the purchase money loan facility, we agreed to issue to the lenders under the purchase money loan
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facility warrants exercisable, in the aggregate, for a total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully
diluted basis (inclusive of ordinary shares issuable upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the eligible holders of our 9.25% senior notes due 2011). The warrants will have an exercise price of
$0.01 per ordinary share and will expire on February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions contained therein.
We have agreed to file a registration statement covering the resale of the shares issuable upon exercise of the Series A Preferred Shares and warrants described above. We have obtained an extension of the date by
which we are required to have this registration statement effective until October 31, 2007.
As required by the securities purchase
agreement, in July 2006, we completed a rights offering of the Series A Preferred Shares and warrants for the benefit of existing shareholders, excluding the purchasers of the Series A Preferred Shares and certain other shareholders that waived
participation in the rights offering. In the rights offering, we distributed one subscription right for every 1,850 of our ordinary shares, or for every 123 of our ADSs, owned. Each subscription right entitled the recipient to purchase for $50.00 a
unit consisting of one Series A Preferred Share and a warrant to purchase 50 ordinary shares. We sold 9,799 units in this offering and received gross proceeds of $489,950 in the rights offering.
On May 1, 2006, we entered into a financing agreement, as amended from time to time, with one of our customers to provide us $6.0 million of
financing in the form of advance payments for assembly and test services, subject to certain conditions. The advance was made to us on June 9, 2006 and is included in accrued liabilities and other payable in the Companys consolidated
balance sheet as of April 30, 2007. The primary purpose of this financing was to purchase new equipment to support the customers production capacity demands. This financing bears no interest and is being repaid beginning in January 2007
by off-setting amounts against our receivables from future sales to the customer up to a fixed maximum monthly amount, and to the extent the maximum amount exceeds the receivables from our sales to the customer in a given month, the difference shall
be paid by us in cash. As of April 30, 2007, the outstanding balance on this customer financing was $4.0 million.
In September 2006,
ASAT Semiconductor (Dongguan) Limited (ASAT China), a wholly-owned subsidiary of us, obtained a revolving credit facility for $3.8 million with a term of one year, renewable after one year. On October 8, 2006, we drew down $2.5
million, and on April 30, 2007, we drew down the remaining balance of this revolving credit facility. In September 2007, ASAT China rolled over the original $2.5 million for another year. All of which remains outstanding as of the date of this
Annual Report.
On August 27, 2007, we agreed to issue warrants for ordinary shares in connection with the amendment of the indenture
governing our 9.25% senior notes due 2011. These warrants will be issued to eligible holders of our 9.25% senior notes due 2011 who consented to our solicitation of consents ending August 23, 2007 to amend the indenture governing our 9.25%
senior notes due 2011, subject to certain conditions specified therein. These warrants would, in the aggregate, be exercisable for a total of approximately 4.9% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis
(inclusive of ordinary shares issuable upon exercise of warrants to the holders themselves and which ASAT Holdings will grant to the lenders under its purchase money loan agreement). The warrants will have an exercise price of $0.01 per ordinary
share and will expire on February 1, 2011, subject to adjustment as provided in the warrants and the other terms and conditions contained therein.
In September 2007, ASAT China obtained a revolving credit facility of RMB150 million (approximately US$20 million) with a term of one year. This facility is secured by certain trade receivables of ASAT China. This
facility has not been drawn down as of the date of this Annual Report.
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EXCHANGE CONTROLS AND OTHER LIMITATIONS
The laws of the Cayman Islands where ASAT Holdings is incorporated
and those of Hong Kong where we operate our businesses and the Restated Memorandum and Restated Articles of Association of ASAT Holdings do not impose exchange control or restrictions on the remittance of dividends or other payments to nonresident
holders of the ordinary shares and ADSs.
TAXATION
We discuss below the material United States federal income tax and general Cayman Islands and Hong
Kong tax consequences of the beneficial ownership and disposition of the ADSs, ordinary shares and Series A Preferred Shares. This discussion is based on laws, regulations, rulings, income tax conventions or treaties, administrative practices and
judicial decisions in effect at the date of this Annual Report. Subsequent legislative, judicial or administrative changes or interpretations may be retroactive and could affect your tax consequences.
Your tax treatment as a holder of ADSs, ordinary shares or Series A Preferred Shares may vary depending upon your particular situation, and some holders
may be subject to special rules not discussed below. We do not discuss below the state, local and foreign (other than Cayman Islands and Hong Kong) tax consequences of the ownership and disposition of the ADSs, ordinary shares or Series A Preferred
Shares. This summary does not address all tax aspects that may be important to you as a holder of our securities.
You are urged to consult your own tax
advisors as to your particular tax consequences of the ownership, exercise and disposition of our ADSs, ordinary shares or Series A Preferred Shares, including whether any state, local or foreign tax laws apply to you.
United States Taxation
The following is a general
discussion of the material United States federal income tax considerations relevant to the ownership and disposition of the ADSs, ordinary shares or Series A Preferred Shares. This summary is based on existing United States federal income tax law,
which is subject to change, possibly retroactively. The discussion addresses only persons that hold ADSs, ordinary shares or Series A Preferred Shares as capital assets, which generally is property held for investment, under the United States
Internal Revenue Code of 1986, as amended (the Code), and that use the United States dollar as their functional currency. The discussion does not consider the circumstances of particular purchasers, such as banks, insurance companies,
tax-exempt organizations, dealers, traders who elect to mark-to-market, persons holding ADSs, ordinary shares or Series A Preferred Shares as part of a hedge, straddle, or conversion transaction, persons treated as owning 10% or more of the voting
power of our shares, and that are subject to special tax rules that may differ from those discussed below.
For purposes of this
discussion, U.S. holder means a beneficial owner of ADSs, ordinary shares or Series A Preferred Shares that is:
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an individual who is a citizen or resident of the United States;
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a corporation, or other entity taxable as a corporation, created in or organized under the laws of the United States or any of its political subdivisions;
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a trust (1) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have
the authority to control all substantial decisions of the trust, or (2) that was in existence on August 20, 1996, was treated as a United States person under the Code on the preceding day and elected to continue to be so treated; or
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an estate the income of which is subject to United States federal income taxation regardless of its source.
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Non-U.S. holder means a beneficial owner of ADSs, ordinary shares or Series A Preferred Shares that is not a U.S. holder.
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If a partnership (including for this purpose any entity treated as partnership for United States federal
income tax purposes) is a beneficial owner of the ADSs, ordinary shares or Series A Preferred Shares, the United States tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the
partnership. A holder of ADSs, ordinary shares or Series A Preferred Shares that is a partnership and partners in such partnership should consult their own tax advisors about the United States federal income tax consequences of holding and disposing
of the ADSs, ordinary shares or Series A Preferred Shares.
Taxation of ADSs, Ordinary Shares and Series A Preferred Shares
We believe that we are not subject to treatment as a passive foreign investment company for United States federal income tax purposes. Except as expressly
noted below, under the headings Passive Foreign Investment Company, the discussion below assumes that we will not be so treated.
Treatment of ADSs
. In general, for United States federal income tax purposes, United States holders of ADSs will be treated as the owners of the ordinary shares represented by the ADSs. Accordingly, no gain or loss will be recognized
upon the exchange of ADSs for a U.S. holders proportionate interest in the ordinary shares represented by such ADSs. A U.S. holders tax basis in the ordinary shares will be the same as its tax basis in the ADSs surrendered for such
shares, and the holding period in such shares will include the period during which the holder held the ADSs. The United States federal income tax consequences described below should apply regardless of whether a U.S. holder holds ADSs or ordinary
shares.
Treatment of the Series A Preferred Shares as Other than Preferred Stock for U.S. Federal Income Tax Purposes
. For U.S.
federal income tax purposes, shares of stock are considered preferred stock if in relation to other classes of stock outstanding, such stock enjoys certain limited rights and privileges (generally associated with specified dividend and liquidation
priorities) but does not participate in corporate growth to any significant extent. We believe that the Series A Preferred Shares should be considered to participate in corporate growth to a significant extent and, therefore, should not be
considered preferred stock for U.S. federal income tax purposes, based primarily on its entitlement in the event of our liquidation, dissolution or winding up to receive (i) prior to and in preference to the distribution of any of our assets to
holders of ordinary shares, an amount equal to 100% of the issue price of the Series A Preferred Shares, plus all accrued and unpaid dividends and (ii) upon the completion of the distribution to the holders of Series A Preferred Shares, a pro
rata share based on the number of ordinary shares held by each on an as-converted basis of our remaining assets available for distribution. Mergers, acquisitions and certain similar transactions will be deemed to be a liquidation, dissolution or
winding up of us for these purposes. We have not obtained and do not intend to obtain a ruling from the U.S. Internal Revenue Service with respect to whether the Series A Preferred Shares would be considered preferred stock for U.S. federal income
tax purposes, and our belief that it should not be is not free from doubt.
Taxation of Conversion of the Series A Preferred Shares to
Ordinary Shares
. A U.S. Holder generally will not recognize any income, gain or loss on the conversion of a Series A Preferred Share into ordinary shares, except with respect to cash received in lieu of a fractional ordinary share, which would
be treated as if the fractional share were received and then immediately redeemed for cash. The U.S. Holder generally will recognize gain or loss equal to the difference between the cash received and that portion of the U.S. Holders basis in
the Series A Preferred Shares attributable to the fractional ordinary share. In addition, if the Series A Preferred Shares are treated as preferred stock for U.S. federal income tax purposes, a portion of the ordinary shares received upon conversion
may be treated as a distribution if there are accrued dividends that have not yet been taken into account at the time of the conversion. In that case, the lesser of (i) the amount by which the fair market value of the ordinary shares received
on conversion exceeds the issue price of the Series A Preferred Shares and (ii) the amount of the dividends in arrears, would be treated as a distribution taxable as described below under the heading Distributions on ADSs, Ordinary
Shares and Series A Preferred Shares. The U.S. Holders adjusted tax basis in the ordinary shares (including any fractional share for which cash is paid, but excluding shares treated as a distribution as described above) will equal the
U.S. Holders adjusted tax basis in the Series A Preferred Shares. The basis in any ordinary shares treated as a distribution will equal the fair market
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value of such shares when received. The U.S. Holders holding period in the ordinary shares (other than shares treated as a distribution as described
above) will include the holding period in the Series A Preferred Shares. The holding period in any ordinary shares treated as a distribution will begin the day after the date of conversion.
Distributions on ADSs, Ordinary Shares and Series A Preferred Shares
. To the extent that a cash distribution on ADSs, ordinary shares or Series A
Preferred Shares is paid to a U.S. holder out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes, such distribution will be includable in the U.S. holders gross income in an amount
equal to the gross amount of such distribution, without reduction for any applicable foreign withholding tax. Dividends will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends
received from other United States corporations. Subject to certain limitations, dividends paid to non-corporate U.S. holders, including individuals, may be eligible for a reduced rate of taxation if we are deemed to be a qualified foreign
corporation for United States federal income tax purposes. A qualified foreign corporation includes a foreign corporation if:
(i) its
shares (or, according to the legislative history, its ADSs) on which dividends are paid are readily tradable on an established securities market in the United States; or
(ii) it is eligible for the benefits under a comprehensive income tax treaty with the United States.
The
ADSs are traded on the Nasdaq Capital Market. However, due to the absence of specific statutory provisions addressing the ADSs, there can be no assurance that we are a qualified foreign corporation, and, therefore, that such reduced rate of taxation
will apply to dividends paid with respect to our ADSs or ordinary shares. The reduced rate of taxation will not apply to dividends received in taxable years beginning after December 31, 2010 or on dividends paid with respect to our Series A
Preferred Shares. Each U.S. holder should consult its own advisor regarding the treatment of dividends.
To the extent that the amount of
any distribution on ADSs, ordinary shares or Series A Preferred Shares exceeds our current and accumulated earnings and profits, as determined for United States federal income tax purposes, a U.S. holders pro rata share of such excess amount
would be treated:
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as a nontaxable return of capital that would be applied against and would reduce the U.S. holders tax basis in its ADSs, ordinary shares or Series A Preferred
Shares until this basis is equal to zero; and
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to the extent excess distributions remain, as capital gain.
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Distributions on ADSs, ordinary shares or Series A Preferred Shares will be income from sources outside the United States and for tax years beginning before January 1, 2007, generally will be passive
income, and for tax years beginning after December 31, 2006, generally will be passive category income or general category income for purpose of computing the United States foreign tax credit allowable to a U.S.
holders.
The amount of any distribution paid in a currency other than the United States dollar will be the U.S. dollar value of the
payment made, determined at the spot foreign exchange rate on the date such payment is includable in the income of the U.S. holder, regardless of whether the payment is in fact converted into U.S. dollars. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend payment is includable in income to the date such payment is converted into United States dollars will be treated as United States source ordinary income or loss.
Constructive Dividends on Series A Preferred Shares
. The terms of the Series A Preferred Shares allow for changes in the conversion price under
certain circumstances. A change in conversion price that allows holders of Series A Preferred Shares to receive more ordinary shares on conversion may increase the holders proportionate interests in our earnings and profits or assets. In that
case, the holders would be treated as though they received a distribution in the form of our stock. Such a constructive stock distribution could be taxable to the holders of Series A Preferred Shares, although they would not actually receive any
cash or other property. A taxable constructive stock distribution could result, for example, the conversion price was reset on October 31, 2006, as
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described above under the heading Series A Preferred Shares. Not all changes in the conversion rate that allow holders of Series A Preferred
Shares to receive more stock on conversion, however, increase the Series A Preferred Shares holders proportionate interests in us. For instance, a change in conversion rate could simply prevent the dilution of the holders interests upon
a stock split or other change in capital structure. Changes of this type, if made pursuant to bona fide reasonable adjustment formula, are not treated as constructive stock distributions. Conversely, if an event occurs that dilutes the interests of
the holders of Series A Preferred Shares and the conversion rate is not adjusted, the resulting increase in the proportionate interests of other shareholders could be treated as a taxable stock distribution to them. Any taxable constructive stock
distributions resulting from a change to, or failure to change, the conversion price would be treated like distributions paid in cash or other property, as described above under the heading Distributions on ADSs, Ordinary Shares and
Series A Preferred Shares.
In addition, if the Series A Preferred Shares are considered preferred stock for U.S. federal income tax
purposes, they may be subject to certain redemption premium rules that would require the difference between the issue price of the Series A Preferred Shares and the redemption price to be included in income currently on a constant yield to maturity
basis over the period between the issue date of the Series A Preferred Shares and the first redemption date on May 4, 2011. If the amount of the difference between the issue price and the redemption price of the Series A Preferred Stock results
in a discount of more than 0.0025 multiplied by the number of complete years to the redemption date, and the Series A Preferred Shares are considered preferred stock for U.S. federal income tax purposes, the redemption premium rules will apply,
regardless of whether any actual distribution is received. The amounts required to be taken into income under the redemption premium rules are in addition to any other amounts treated as distributions pursuant to the rules described above.
Sale or Other Disposition
. A. U.S. holder generally will recognize gain or loss upon a sale or other taxable disposition of ADSs,
ordinary shares or Series A Preferred Shares in an amount equal to the difference between the United States dollar value of the amount realized on the sale or other taxable disposition and the U.S. holders adjusted tax basis in the ADSs,
ordinary shares or Series A Preferred Shares, as applicable. Such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if, at the time of sale or other taxable disposition, the U.S. holder held the ADS,
ordinary share or Series A Preferred Shares for more than one year. Any gain or loss recognized by a U.S. holder on a sale or other taxable disposition of ADSs, ordinary shares or Series A Preferred Shares will generally be treated as United States
source gain or loss for foreign tax credit purposes. A U.S. holders ability to deduct capital losses in respect of ADSs, ordinary shares or Series A Preferred Shares is subject to limitations.
Passive Foreign Investment Company
. We believe that we are not subject to treatment as a passive foreign investment company. However, because the
passive foreign investment company determination is made annually on the basis of facts and circumstances that may be beyond our control, and because the principles for applying the passive foreign investment company tests are complex, we cannot
assure you that we are not and will not become a passive foreign investment company. A company generally is considered a passive foreign investment company for any taxable year if either: 1) at least 75% of its gross income is passive income, or 2)
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. For this purpose, passive income
generally includes dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct of a trade or business and not derived from a related person), annuities and gains from assets that produce passive income. If we
own at least 25% by value of the equity shares of another corporation, we will be treated for purposes of the passive foreign investment company tests as owning a proportionate share of the assets of the other corporation, and as receiving directly
a proportionate share of the other corporations income. If we have been or are a passive foreign investment company for any taxable year, dividends paid by us to U.S. holders would not be eligible of the reduced rate of taxation applicable to
non-corporate U.S. holders, including individuals (seeDistributions on ADSs, Ordinary Shares and Series A Preferred Shares above). Additionally, U.S. holders generally would be required to treat any gain on the sale of the ADSs,
ordinary shares or Series A Preferred Shares as an excess distribution and may also be subject to an interest charge. The excess distribution
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or gain would be allocated ratably over their holding period, the amount allocated to the current tax year would be subject to tax as ordinary income, the
amount allocated to each previous tax year would be subject to tax at the highest applicable marginal rate in effect for that year and an interest charge would be imposed to recover the deemed benefit from the deferred payment of the tax. These
rules would effectively prevent a U.S. holder from treating the gain realized on the disposition of the ADSs, ordinary shares or Series A Preferred Shares as capital gain. You could avoid the application of the foregoing rules if, at the time you
acquired your ADSs, ordinary shares or Series A Preferred Shares, you were eligible for and timely made a mark-to-market election. We urge you to consult your tax advisor regarding the consequences of an investment in a passive foreign investment
company before purchasing ADSs, ordinary shares or Series A Preferred Shares.
Controlled Foreign Corporation
.
Generally, we
will be a CFC under Subpart F of the Code if more than 50% of the total combined voting power of all classes of our shares or the total value of our shares is owned, actually or constructively, by U.S. 10% Shareholders. A U.S. 10%
Shareholder is a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a estate or trust other than a foreign estate or trust (each as defined in Section 7701(a)(30) of the Code) which owns, actually or
constructively, 10% or more of the total combined voting power of all classes of our shares. Complex attribution rules apply in determining whether a person is treated as a U.S. 10% Shareholder and whether U.S. 10% Shareholders in the aggregate own
more than 50% of the total combined voting power of all classes of our shares or the total value of our shares.
Classification as a CFC
creates many complex results, one of which is the inclusion of certain income of a CFC by U.S. 10% Shareholders. If we are a CFC and you are a U.S. 10% Shareholder, you will be treated as having received a current distribution of your pro rata share
of (i) our Subpart F income (as defined in Section 952 of the Code), which generally includes income of a passive nature, and (ii) our earnings invested in U.S. property. You will be taxed currently on such deemed distribution, regardless of whether
we actually make such a distribution. Foreign tax credits (described above) may reduce the U.S. federal income tax on this amount.
In
addition, if you are or were a U.S. 10% Shareholder at any time during the five-year period ending with a sale or other taxable disposition of ADSs, ordinary shares, Series A Preferred Shares by you, gain from such disposition will be treated as
ordinary income to the extent of our earnings and profits (accumulated in our taxable years beginning after 1962, but only while the ADSs, ordinary shares, Series A Preferred Shares were held by you and while we were controlled)
attributable to the disposed ADSs, ordinary shares, Series A Preferred Shares.
If we are both a PFIC and a CFC, special rules may apply.
If you are a U.S. 10% Shareholder, we generally will not be treated as a PFIC with respect to you. This rule generally will be effective for your taxable years beginning after 1997 and for our taxable years ending with or within such taxable years.
Special rules will apply to you instead of the default PFIC rules under Section 1291 of the Code discussed above. Alternatively, if you are not a U.S. 10% Shareholder, those default PFIC rules will continue to apply to you unless you make a QEF
Election or a Mark-to-Market Election.
Due to the complexity of Subpart F, a more detailed review of these rules is outside the scope of
this discussion. We do not believe that we currently are a CFC. However, the principles for applying the tests described above are not entirely clear and this determination is based on factors beyond our control, such as the identity of our
shareholders, and in the case of our shareholders treated as pass-through entitles for U.S. federal income tax purposes, the identity of the owners of such entities. Accordingly, there can be no assurance that we will not be considered a CFC for the
current or any future taxable year. You should consult your tax advisor regarding the potential U.S. federal income tax consequences to you if we are or become a CFC.
Taxation of Non-U.S. Holders
. Distributions on ADSs, ordinary shares or Series A Preferred Shares to non-U.S. holder generally would not be subject to United States withholding tax or to United States federal
income tax unless such income is effectively connected with the conduct by such non-U.S. holder of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a U.S., permanent
establishment). Gain realized by a non-U.S. holder on the sale or other taxable disposition of ADSs,
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ordinary shares or Series A Preferred Shares generally will not be subject to United States federal income tax unless:
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the gain is effectively connected with the non-U.S. holders conduct of a trade or business in the United States (and, if required by an applicable income tax
treaty, is attributable to a U.S., permanent establishment), or
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the non-U.S. holder is an individual who was present in the United States for at least 183 days in the taxable year of the sale or other disposition and certain
other conditions are met.
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Information Reporting and Backup Withholding
. Proceeds from the sale or other
disposition of the ADSs, ordinary shares or Series A Preferred Shares may be subject to information reporting to the United States Internal Revenue Service and to a 28% United States backup withholding tax. Backup withholding will not apply,
however, to a corporation or to a holder who furnishes a correct taxpayer identification number or certificate of foreign status or who otherwise establishes an exemption from backup withholding.
Cayman Islands Taxation
The Cayman Islands currently
does not levy any taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to ASAT Holdings levied
by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. The Cayman Islands are not party to any double tax
treaties. There are no Cayman Islands restrictions on the repatriation of capital or earnings of a Cayman Islands public company to non-resident investors.
Hong Kong Taxation
The following is a general outline of the material tax considerations in relation to any beneficial
ownership and disposition of the ADSs or ordinary shares but it does not purport to deal with the tax consequences applicable to all categories of investors.
Tax on Dividends
. Under the laws of Hong Kong, a holder of the ADSs or ordinary shares is not subject to Hong Kong tax on dividends, whether by withholding or otherwise, paid by ASAT Holdings.
Profits Tax
. In general, no tax is imposed in Hong Kong in respect of gains from the sale of property, including ADSs and shares. However, trading
gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where such gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong profits tax which is
imposed at the rate of 17.5% for corporations and 16% for individuals during fiscal year 2007. Guidance provided by the Hong Kong Inland Revenue authority suggests that gains from sales or disposition of ADSs or ordinary shares issued outside of and
not listed in Hong Kong may be considered to be derived from or to arise in Hong Kong if the relevant purchase or sales contracts are negotiated and concluded in Hong Kong, and such gains may be subject to Hong Kong profit tax if those persons deal
or trade in the ADSs or ordinary shares as part of their business being carried out in Hong Kong. Whether profits of a trade are taken to be derived from Hong Kong is a question of fact and may vary depending upon the nature of the persons involved.
Stamp Duty
. A sale or purchase of shares is subject to Hong Kong stamp duty if the transfer of such shares is required to be
registered in Hong Kong. None of (1) the issuance of ordinary shares directly to the depositary or to the custodian for the account of the depositary, (2) the transfer and delivery of ordinary shares directly to the depositary or to the
custodian for the account of the depositary, and (3) the issuance of ADSs upon the deposit of ordinary shares with the depositary or the custodian as described in (1) or (2) above should attract stamp duty. No Hong Kong stamp duty is
payable in respect of any transfer of the ADSs or ordinary shares outside Hong Kong.
Estate Duty
. The Revenue (Abolition of Estate
Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong, pursuant to which estate duty ceased to be chargeable in Hong Kong in respect of the estates of persons passing away on or after that date. No Hong Kong estate duty is
payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of shares whose death occur on or after February 11, 2006.
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PRC Taxation
PRC Income Tax
. Our subsidiary in China, ASAT China, is a wholly-owned foreign enterprise and is subjected to the Foreign Investment Enterprise Tax Law of the PRC. The enacted tax rate is generally 33%. Based on the PRC tax law, ASAT
China is exempted from payment of PRC income tax for two years starting from its first profitable year of operations, followed by a 50% exemption for the next three years.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act of 1934,
as amended, or Exchange Act. Accordingly, we file reports, including annual reports on Form 20-F and current reports on Form 6-K, with the SEC. As a foreign private issuer, we are not subject to the proxy rules under Section 14 or the
short-swing insider profit disclosure rules under Section 16 of the Exchange Act. You may inspect and copy the reports and other information we file at the public reference facilities maintained by the Commission at 100 F Street, N.E.,
Washington, D.C. 20549. You may also obtain copies of such material by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. You may obtain information about the public reference room
by calling the SEC at 1-800-SEC-0330. In addition, you can review copies of some of our filings and the registration statement through the SECs EDGAR (Electronic Data Gathering, Analysis and Retrieval) System, available on the
SECs website (
http://www.sec.gov
).
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TEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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Substantially all of our revenue and costs, assets and liabilities have been denominated in either U.S. dollars or Hong Kong dollars. Substantially all our net sales are denominated and received in U.S. dollars. We purchase raw materials
and machinery and equipment primarily in a mix of U.S. dollars and Japanese yen. Labor, manufacturing cost, and administrative costs are incurred primarily in Hong Kong dollars, Chinese Renminbi and, to a lesser extent, U.S. dollars. Overall, we
estimate that in fiscal years 2007 and 2008, substantially all of our marketing costs and operating expenses (excluding depreciation) will be in Hong Kong dollars, U.S. dollars or Chinese Renminbi. Following our recapitalization in 1999,
substantially all borrowings have been in U.S. dollars.
The Hong Kong dollar historically has accounted for the largest share of our
costs. Because the exchange rate of the Hong Kong dollar to the U.S. dollar has remained close to the range varying between HK$7.75 per U.S. dollar and HK$7.85 per U.S. dollar since May 2005, we have not experienced significant foreign exchange
gains or losses associated with that currency. However, the Hong Kong government could change the trading band at HK$7.75 to HK$7.85 per U.S. dollar at any time. Depreciation of the U.S. dollar against the Hong Kong dollar or Japanese yen would
generally increase our Hong Kong dollar or Japanese yen expenses. Following the shut down of the Hong Kong manufacturing operations, our spending in Hong Kong dollars has been reduced.
Additionally, our exposure to fluctuations in the value of the Chinese Renminbi has significantly increased due to the completed move of our
manufacturing facilities to Dongguan, China. From 1994 to July 2005, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, was based on rates set by the Peoples Bank of China, which were set daily based on
the previous days interbank foreign market exchange rate and current exchange rates on the world financial markets. As a result, the exchange rate of the Renminbi to the U.S. dollar was previously substantially pegged or fixed. On
July 21, 2005 the government of China announced that the exchange rate of the Renminbi was being appreciated against the U.S. dollar and that the Renminbi would henceforth have a more flexible exchange rate within a narrow band that would float
against a basket of foreign currencies. However, the Chinese government may decide to change or abandon this policy at its sole discretion at any time in the future. As of September 30, 2007, the exchange rate was RMB7.52 to US$1.00 as compared with
RMB7.96 to US$1.00 as of September 30, 2006. This appreciation of the Renminbi against the U.S. dollar and any further appreciation in the exchange rate of the Renminbi against the U.S. dollar will increase our costs relating to our China
operations.
ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
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