Audited Condensed Consolidating Balance Sheet as of April 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASAT
HOLDINGS
LIMITED
|
|
|
NEW ASAT
(FINANCE)
LIMITED
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-
GUARANTOR
SUBSIDIARIES
|
|
|
ELIMINATING
ENTRIES
|
|
|
CONSOLIDATED
TOTAL
|
|
|
|
$000
|
|
|
$000
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
232
|
|
|
|
|
6,508
|
|
|
585
|
|
|
|
|
|
7,325
|
|
Current portion of restricted cash
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
|
900
|
|
Accounts receivable, net
|
|
|
|
|
|
|
17,543
|
|
|
161
|
|
|
|
|
|
17,704
|
|
Inventories
|
|
|
|
|
|
|
12,452
|
|
|
818
|
|
|
|
|
|
13,270
|
|
Prepaid expenses and other current assets
|
|
310
|
|
|
|
|
3,182
|
|
|
1,679
|
|
|
|
|
|
5,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
542
|
|
|
|
|
40,585
|
|
|
3,243
|
|
|
|
|
|
44,370
|
|
Restricted cash, net of current portion
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
|
900
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
74,414
|
|
|
5,168
|
|
|
|
|
|
79,582
|
|
Investment in and advance to consolidated entities
|
|
247,595
|
|
|
149,695
|
|
363,412
|
|
|
570
|
|
|
(761,272
|
)
|
|
|
|
Deferred charges and other non-current assets
|
|
1,503
|
|
|
3,774
|
|
4,989
|
|
|
19
|
|
|
|
|
|
10,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
249,640
|
|
|
153,469
|
|
484,300
|
|
|
9,000
|
|
|
(761,272
|
)
|
|
135,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance from consolidated entities
|
|
|
|
|
|
|
722,440
|
|
|
608
|
|
|
(723,048
|
)
|
|
|
|
Other current liabilities
|
|
57
|
|
|
3,469
|
|
43,950
|
|
|
9,086
|
|
|
|
|
|
56,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
57
|
|
|
3,469
|
|
766,390
|
|
|
9,694
|
|
|
(723,048
|
)
|
|
56,562
|
|
9.25% senior notes due 2011
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Other non-current liabilities
|
|
10,335
|
|
|
|
|
758
|
|
|
|
|
|
|
|
|
11,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
10,392
|
|
|
153,469
|
|
767,148
|
|
|
9,694
|
|
|
(723,048
|
)
|
|
217,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Redeemable Convertible Preferred Shares
|
|
5,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,743
|
|
Shareholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.01 par value)
|
|
7,114
|
|
|
|
|
7,271
|
|
|
10,723
|
|
|
(17,994
|
)
|
|
7,114
|
|
Less: Repurchase of share at par
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
Additional paid-in capital
|
|
230,701
|
|
|
|
|
15,601
|
|
|
|
|
|
(230
|
)
|
|
246,072
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
|
|
(184
|
)
|
Accumulated deficit
|
|
(4,239
|
)
|
|
|
|
(305,720
|
)
|
|
(11,233
|
)
|
|
(20,000
|
)
|
|
(341,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
233,505
|
|
|
|
|
(282,848
|
)
|
|
(694
|
)
|
|
(38,224
|
)
|
|
(88,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
249,640
|
|
|
153,469
|
|
484,300
|
|
|
9,000
|
|
|
(761,272
|
)
|
|
135,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Unaudited Condensed Consolidating Statement of Operations for the three months ended July 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASAT
HOLDINGS
LIMITED
|
|
|
NEW ASAT
(FINANCE)
LIMITED
|
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-
GUARANTOR
SUBSIDIARIES
|
|
|
ELIMINATING
ENTRIES
|
|
|
CONSOLIDATED
TOTAL
|
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
Net sales
|
|
|
|
|
|
|
|
96,920
|
|
|
34,307
|
|
|
(93,492
|
)
|
|
37,735
|
|
Cost of sales
|
|
47
|
|
|
|
|
|
99,182
|
|
|
31,171
|
|
|
(97,698
|
)
|
|
32,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
(47
|
)
|
|
|
|
|
(2,262
|
)
|
|
3,136
|
|
|
4,206
|
|
|
5,033
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
433
|
|
|
|
|
|
6,280
|
|
|
508
|
|
|
(1,994
|
)
|
|
5,227
|
|
Research and development
|
|
|
|
|
|
|
|
175
|
|
|
337
|
|
|
|
|
|
512
|
|
Reorganization expenses
|
|
|
|
|
|
|
|
60
|
|
|
72
|
|
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
433
|
|
|
|
|
|
6,515
|
|
|
917
|
|
|
(1,994
|
)
|
|
5,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Profit from operations
|
|
(480
|
)
|
|
|
|
|
(8,777
|
)
|
|
2,219
|
|
|
6,200
|
|
|
(838
|
)
|
Other income, net
|
|
2
|
|
|
3,720
|
|
|
5,671
|
|
|
749
|
|
|
(9,920
|
)
|
|
222
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred charges
|
|
(547
|
)
|
|
(252
|
)
|
|
(345
|
)
|
|
|
|
|
252
|
|
|
(892
|
)
|
Others
|
|
(516
|
)
|
|
(3,468
|
)
|
|
(3,470
|
)
|
|
(114
|
)
|
|
3,468
|
|
|
(4,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Profit before income taxes
|
|
(1,541
|
)
|
|
|
|
|
(6,921
|
)
|
|
2,854
|
|
|
|
|
|
(5,608
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
(99
|
)
|
|
(6
|
)
|
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) profit
|
|
(1,541
|
)
|
|
|
|
|
(7,020
|
)
|
|
2,848
|
|
|
|
|
|
(5,713
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) profit
|
|
(1,541
|
)
|
|
|
|
|
(7,020
|
)
|
|
2,848
|
|
|
|
|
|
(5,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Unaudited Condensed Consolidating Statement of Operations for the three months ended July 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASAT
HOLDINGS
LIMITED
|
|
|
NEW ASAT
(FINANCE)
LIMITED
|
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-
GUARANTOR
SUBSIDIARIES
|
|
|
ELIMINATING
ENTRIES
|
|
|
CONSOLIDATED
TOTAL
|
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
Net sales
|
|
|
|
|
|
|
|
56,048
|
|
|
35,604
|
|
|
(45,319
|
)
|
|
46,333
|
|
Cost of sales
|
|
|
|
|
|
|
|
57,225
|
|
|
36,064
|
|
|
(51,538
|
)
|
|
41,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
|
|
|
|
|
(1,177
|
)
|
|
(460
|
)
|
|
6,219
|
|
|
4,582
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
498
|
|
|
|
|
|
4,971
|
|
|
591
|
|
|
(684
|
)
|
|
5,376
|
|
Research and development
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
|
604
|
|
Reorganization expenses
|
|
|
|
|
|
|
|
421
|
|
|
|
|
|
|
|
|
421
|
|
Facilities and relocation charges
|
|
|
|
|
|
|
|
494
|
|
|
1,060
|
|
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
498
|
|
|
|
|
|
6,490
|
|
|
1,651
|
|
|
(684
|
)
|
|
7,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(498
|
)
|
|
|
|
|
(7,667
|
)
|
|
(2,111
|
)
|
|
6,903
|
|
|
(3,373
|
)
|
Other income, net
|
|
|
|
|
3,720
|
|
|
8,085
|
|
|
461
|
|
|
(12,035
|
)
|
|
231
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred charges
|
|
(678
|
)
|
|
(251
|
)
|
|
(346
|
)
|
|
|
|
|
251
|
|
|
(1,024
|
)
|
Others
|
|
(375
|
)
|
|
(3,469
|
)
|
|
(3,489
|
)
|
|
(1,462
|
)
|
|
4,881
|
|
|
(3,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(1,551
|
)
|
|
|
|
|
(3,417
|
)
|
|
(3,112
|
)
|
|
|
|
|
(8,080
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(1,551
|
)
|
|
|
|
|
(3,417
|
)
|
|
(3,112
|
)
|
|
|
|
|
(8,080
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
(1,551
|
)
|
|
|
|
|
(3,417
|
)
|
|
(3,107
|
)
|
|
|
|
|
(8,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Unaudited Condensed Consolidating Statement of Cash Flows for the three months ended July 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASAT
HOLDINGS
LIMITED
|
|
NEW ASAT
(FINANCE)
LIMITED
|
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-
GUARANTOR
SUBSIDIARIES
|
|
|
ELIMINATING
ENTRIES
|
|
|
CONSOLIDATED
TOTAL
|
|
|
|
$000
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
Net cash provided by (used in) operating activities
|
|
11
|
|
3,720
|
|
|
(2,889
|
)
|
|
3,137
|
|
|
|
|
|
3,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
7
|
|
|
|
|
(509
|
)
|
|
(580
|
)
|
|
(7
|
)
|
|
(1,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
|
(3,720
|
)
|
|
3,907
|
|
|
(644
|
)
|
|
7
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
18
|
|
|
|
|
509
|
|
|
1,913
|
|
|
|
|
|
2,440
|
|
Cash and cash equivalents at beginning of period
|
|
232
|
|
|
|
|
6,508
|
|
|
585
|
|
|
|
|
|
7,325
|
|
Effects of foreign exchange rates change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
250
|
|
|
|
|
7,017
|
|
|
2,498
|
|
|
|
|
|
9,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Unaudited Condensed Consolidating Statement of Cash Flows for the three months ended July 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASAT
HOLDINGS
LIMITED
|
|
|
NEW ASAT
(FINANCE)
LIMITED
|
|
|
GUARANTOR
SUBSIDIARIES
|
|
|
NON-
GUARANTOR
SUBSIDIARIES
|
|
|
ELIMINATING
ENTRIES
|
|
|
CONSOLIDATED
TOTAL
|
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
|
$000
|
|
Net cash (used in) provided by operating activities
|
|
(70
|
)
|
|
3,720
|
|
|
8,485
|
|
|
(4,052
|
)
|
|
|
|
|
8,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
(504
|
)
|
|
|
|
|
(6,255
|
)
|
|
(422
|
)
|
|
505
|
|
|
(6,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
490
|
|
|
(3,720
|
)
|
|
(846
|
)
|
|
4,644
|
|
|
(505
|
)
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
(84
|
)
|
|
|
|
|
1,384
|
|
|
170
|
|
|
|
|
|
1,470
|
|
Cash and cash equivalents at beginning of period
|
|
94
|
|
|
|
|
|
8,901
|
|
|
2,920
|
|
|
|
|
|
11,915
|
|
Effects of foreign exchange rates change
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
10
|
|
|
|
|
|
10,285
|
|
|
3,095
|
|
|
|
|
|
13,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended July 31, 2007 and 2006
You should read the following discussion and analysis together with our condensed consolidated financial statements and related notes included elsewhere in this report, which contain additional information helpful in
evaluating our operating results and financial condition.
Overview
We are a global provider of semiconductor package design, assembly and test services and a leading developer of advanced packages. We 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 and 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. For the
three months ended July 31, 2007, we shipped products to over 66 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 three
months ended July 31, 2007 were Broadcom Corporation, Samsung Electronics Co., Ltd and Sitel Semiconductor BV, these customers accounted for 71.7% of our total net sales for the three months ended July 31, 2007.
We historically conducted all our assembly and test operations in Hong Kong. As part of our overall strategy to lower costs, improve operating efficiencies and provide
better access to the high-growth semiconductor market in China, we moved all of our Hong Kong manufacturing operations to China. We completed the transfer of all of our equipment to Dongguan, China and the qualification process with our customers
for our products during the fiscal year ended April 30, 2007. We are committed to continuing to reduce our costs while ensuring high quality standards for our assembly and test operations in Dongguan, China.
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,
|
|
|
Three Months
Ended July 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in percentage)
|
|
|
(Unaudited)
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assembly services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Chipscale packages (CSP)
|
|
31
|
%
|
|
40
|
%
|
|
54
|
%
|
|
63
|
%
|
|
73
|
%
|
|
70
|
%
|
|
74
|
%
|
- Non-CSP laminate packages
|
|
21
|
|
|
17
|
|
|
11
|
|
|
10
|
|
|
10
|
|
|
9
|
|
|
10
|
|
- Non-CSP leadframe packages
|
|
38
|
|
|
32
|
|
|
24
|
|
|
20
|
|
|
12
|
|
|
13
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
90
|
|
|
89
|
|
|
89
|
|
|
93
|
|
|
95
|
|
|
92
|
|
|
96
|
|
Test services
|
|
10
|
|
|
11
|
|
|
11
|
|
|
7
|
|
|
5
|
|
|
8
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Strategy
Our
overall business strategy has remained unchanged, which strategy is to improve revenue and 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 our 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.
|
|
|
|
Expanding the level of business we do with top customers while concurrently diversifying our customer base
. We will continue to try to strengthen our
relationships with existing top customers, which offer the greatest opportunity for improved sales in the short-term, 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.
|
In implementing our strategic plan and growing our sales and
market shares, we have re-focused our sales organization and have added more sales resources with extensive sales experience and strong industry contacts to our US and European teams. This allows us to broaden our coverage in both markets. In
particular, we believe that the European market is an area where we should be able to cultivate more business based on our past relationships with many leading semiconductor companies. As our manufacturing operations are now based in China, which
was one of the fastest growing economic in the world, we are also actively pursuing domestic business opportunities. Our relationship with current customers remains strong and this serves as a platform for our on-going business growth. At the same
time, we are actively pursuing opportunities with new customers.
We also continue to focus on thinner packages as we believe that more customer
applications will be requiring these packages to accommodate larger displays in handheld devices, and it is also the trend to consolidate more functions into these products. Our primary focus for these development efforts are for products that will
utilize LPCC, TAPP and SiP package types.
Our manufacturing operations have shown continuous improvement since we moved to China, and we are leveraging
our new facility to expand revenue. We have the ability to accommodate un-forecasted upside orders and will help increasing revenue and drive market share gains. With its high levels of efficiency, we are now able to leverage the cost advantages of
this facility. The gross margin for fiscal quarter ended July 31, 2007 increased to 13.3% as compared to 9.9% for the fiscal quarter ended July 31, 2006 and net loss was reduced to $5.7 million for the fiscal quarter ended July 31,
2007 as compared to the net loss of $8.1 million for the fiscal quarter ended July 31, 2006. We anticipate that our cost structure will continue to improve as a result of better factory utilization, further optimization of manufacturing
processes and localization.
We are now seeing a strengthening of our overall business. Both potential and existing customers are showing increased
interest in doing business with the Company and we believe the momentum will continue.
21
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 in our annual report on Form 20-F for the fiscal year ended April 30, 2007 for further details.
Recently Adopted Accounting Standard
In July 2006, the FASB issued FASB Interpretations 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.
We adopted the provision of FIN 48 effective May 1, 2007 and determined that
there were no additional uncertain tax benefits or liabilities that need to be recorded.
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 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.
22
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.
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 July 31, 2007 and
April 30, 2007 due to uncertainties surrounding the realizability of these benefits in future tax returns.
23
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
Standards
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. We are 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 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. We are in the process of evaluating the potential impact of this
standard.
In December 2007, the FASB issued SFAS No. 141(revised 2007), Business combinations (SFAS No. 141(R)). SFAS No. 141(R)
requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and
liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal
years beginning on or after December 15, 2008. As of the date of this report, we do not have any acquisition and SFAS No. 141(R) does not have any impact to us as of the date of this report.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in consolidated Financial Statements, an amendment of ARB No.51 (SFAS No.
160). SFAS No. 160 clarifies that a noncontrolling or minority interest in a subsidiary is considered an ownership interest and, accordingly, requires all entities to report such interests in subsidiaries as equity in the consolidated
financial statements. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. As of the date of this report, we do not have any investments that are either not controllable by us or we own a minority interest and SFAS No.
160 does not have any impact to us as of the date of this report.
24
Results of Operations
The following table contains certain unaudited condensed consolidated statements of operations and comprehensive loss data for the periods listed and sets forth such data as a percentage of net sales for the periods listed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
Three Months Ended
|
|
|
|
July 31, 2007
|
|
|
July 31, 2006
|
|
|
|
($ in thousands: % of net sales)
|
|
Net sales
|
|
37,735
|
|
|
100.0
|
%
|
|
46,333
|
|
|
100.0
|
%
|
Cost of sales
|
|
32,702
|
|
|
86.7
|
|
|
41,751
|
|
|
90.1
|
|
Gross profit
|
|
5,033
|
|
|
13.3
|
|
|
4,582
|
|
|
9.9
|
|
Selling, general and administrative
|
|
5,227
|
|
|
13.9
|
|
|
5,376
|
|
|
11.6
|
|
Research and development
|
|
512
|
|
|
1.4
|
|
|
604
|
|
|
1.3
|
|
Reorganization expenses
|
|
132
|
|
|
0.3
|
|
|
421
|
|
|
0.9
|
|
Facilities and relocation charges
|
|
|
|
|
|
|
|
1,554
|
|
|
3.4
|
|
Total operating expenses
|
|
5,871
|
|
|
15.6
|
|
|
7,955
|
|
|
17.2
|
|
Loss from operations
|
|
(838
|
)
|
|
(2.3
|
)
|
|
(3,373
|
)
|
|
(7.3
|
)
|
Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006
Net Sales
The following table sets forth the breakdown of
net sales by product category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
Three Months Ended
|
|
|
|
July 31, 2007
|
|
|
July 31, 2006
|
|
|
|
($ in thousands: % of net sales)
|
|
Chipscale packages (CSP) assembly services
|
|
27,943
|
|
74.0
|
%
|
|
32,540
|
|
70.2
|
%
|
Non-CSP laminate packages assembly services
|
|
3,955
|
|
10.5
|
|
|
4,225
|
|
9.1
|
|
Non-CSP leadframe packages assembly services
|
|
4,407
|
|
11.7
|
|
|
5,858
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal for assembly services
|
|
36,305
|
|
96.2
|
|
|
42,623
|
|
92.0
|
|
Test services
|
|
1,430
|
|
3.8
|
|
|
3,710
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
37,735
|
|
100.0
|
|
|
46,333
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased by 18.6% to $37.7 million for the three months ended July 31, 2007 as compared to $46.3
million for the three months ended July 31, 2006.
Net sales for assembly services decreased by 14.8% to $36.3 million for the three months ended
July 31, 2007 as compared to $42.6 million for the three months ended July 31, 2006. The decrease in net sales for assembly services during the period was mainly attributable to a 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 the three months ended April 30, 2007. Net sales for assembly services accounted for 96.2% and 92.0% of
total net sales for the three months ended July 31, 2007 and 2006, respectively. Net sales from chipscale packages represented 74.0% of total net sales for the three months ended July 31, 2007 as compared to 70.2% of total net sales for
the three months ended July 31, 2006. Our mix of assembly services shifted mostly toward chipscale packages during the three months ended July 31, 2007 as compared to the corresponding prior period because of increased market demand for
those packages from new and existing customers.
Net sales from test services decreased by 61.5% to $1.4 million for the three months ended July 31,
2007 as compared to $3.7 million for the three months ended July 31, 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 48% and 61% of total revenue for the three months ended July 31, 2007 and 2006,
respectively. The industrial, automotive and others markets accounted for approximately 15% and 21% of total revenue for the three months ended July 31, 2007 and 2006, respectively. The consumer market accounted for approximately 20% and 7% of
total revenue for the three months ended July 31, 2007 and 2006, respectively. The personal computers and computing market segments accounted for 17% and 11% of total revenue for the three months ended July 31, 2007 and 2006, which
remained unchanged from the corresponding prior period.
25
Gross Profit
Gross profit for the three months ended July 31, 2007 was $5.0 million, as compared to gross profit of $4.6 million for the three months ended July 31, 2006. Gross margin increased to 13.3% for the three months ended July 31,
2007, as compared to 9.9% for the three months ended July 31, 2006. This increase was attributable to our ability to reduce our manufacturing costs after the migration of our entire manufacturing operations to China. In particular, labor costs
were reduced as a result of our access to skilled and low cost workforce in China, and production efficiency has improved due to an improved layout design in our new premises. We are continuing to explore ways to improve our cost structure during
the course of localization. For the three months ended July 31, 2007, we recorded $0.2 million in inventory write-offs, as compared to $nil for the three months ended July 31, 2006
Selling, General and Administrative
Selling, general and
administrative expenses decreased by 2.8% to $5.2 million for the three months ended July 31, 2007, as compared to $5.4 million for the three months ended July 31, 2006. 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.
Research and Development
Research and development expenses
decreased by 15.2% to $512 thousand for the three months ended July 31, 2007, as compared to $604 thousand for the three months ended July 31, 2006. The reduction of research and development expenses for the period was a result of the
improved cost structure of our operations in Dongguan, China, and more effective use of the external research facilities to supplement projects need.
Reorganization expenses
During the three months ended July 31, 2007 and 2006, we incurred $132 thousand and $421 thousand in
reorganization expenses (pre-tax), respectively, consisting of severance payments in connection with a work force reduction of approximately 20 and 100 employees, respectively, as part of the move of our manufacturing operations to Dongguan, China
and corporate reorganization.
Other Income, Net
During the three months ended July 31, 2007 and 2006, we earned $222 thousand and $231 thousand in other income, respectively, consisting of interest income and other miscellaneous income.
26
Facilities and Relocation Charges
During the three months ended July 31, 2007 and 2006, we incurred $nil and $1.5 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 Expense
Interest expense was $5.0 million for the three months ended July 31, 2007, as compared to $4.9 million for the three months ended July 31, 2006, representing a $0.1 million increase. Of the $5.0 million recorded in the three
months ended July 31, 2007, $3.5 million was attributable to interest on our 9.25% senior notes due 2011. The remaining balance represented interest paid for capital lease obligations and 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 $4.9 million recorded in the three months ended July 31, 2006, $3.5 million was attributable
to interest on our 9.25% senior notes due 2011. The remaining balance mainly represented interest paid for capital lease obligations, 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 expense
During the three months ended July 31, 2007, we incurred an income tax expense of $105 thousand as compared to $nil for the three months ended July 31, 2006. The income tax expense for the three months ended
July 31, 2007 was primarily attributable to provision for Hong Kong profits tax concerning a tax dispute with respect to the fiscal year 2000.
Liquidity and Capital Resources
Cash flow
. Cash and cash equivalents were $9.8 million as of July 31, 2007, as compared
to $13.4 million as of July 31, 2006, representing a decrease of $3.6 million.
Cash provided by operating activities
. For the three months
ended July 31, 2007, our net cash provided by operating activities was $4.0 million, as compared to $8.1 million for the three months ended July 31, 2006. This decrease in net cash provided by operating activities was primarily due to a
decrease in collection of accounts receivables.
Cash used in investing activities
. Net cash used in investing activities was $1.1 million for the
three months ended July 31, 2007, compared to $6.7 million for the three months ended July 31, 2006. The investing activities in both periods consisted primarily of the purchase of equipment and machinery to support the capital expenditure
requirements for our move of manufacturing operations to Dongguan, China.
Cash (used in) provided by financing activities
. Net cash used in
financing activities was $450 thousand for the three months ended July 31, 2007, as compared to $63 thousand of net cash provided by financing activities for the three months ended July 31, 2006. Cash used in financing activities for the
three months ended July 31, 2007 was for the repayment of capital lease obligations. Cash provided by financing activities for the three months ended July 31, 2006 included $490 thousand from our rights offering, which was partially offset
by $427 thousand for the repayment of capital lease obligations.
27
Capital Expenditures and Material Financing Arrangements
Capital commitments and expenditures
As of July 31, 2007, we had
commitments for capital expenditures of approximately $0.3 million. These capital expenditures would be used for 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 are now realizing and expect to realize in the future 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. The Company 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 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 million may be drawn upon if our consolidated cash position falls below $10 million. A second tranche of an additional $5 million may be drawn upon if our consolidated cash position again falls
below $10 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 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 million tranche commitment expired and was not drawdown. Therefore, the remaining second tranche of $5 million is no longer available to us.
On August 23, 2007, we amended the purchase money loan facility to, among other things, extend the maturity due date of the $10 million principal amount until
April 30, 2009 and 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 not more than 5% of ASAT Holdings total outstanding ordinary shares on a fully diluted basis. On October 1, 2007, we issued in total of 35,766,900 warrants to the lenders. These warrants would, in the aggregate,
be exercisable for a total of approximately 4.6% of our total outstanding ordinary shares on a fully diluted basis. 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.
28
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 December 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.
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 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 July 31, 2007, the outstanding balance on this customer financing was $2 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. As of the date of this report, we have fully repaid the advance payment.
29
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 which was due in October 2007. In September 2007, ASAT China rolled over the original $2.5 million for another year at the interest rate of 7.29%. On
April 30, 2007, the Company drew down the remaining balance of this revolving credit facility. As such, the entire borrowing of $3.8 million with regard to this revolving credit facility remains outstanding as of the date of this 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 $6.9 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 our 9.25% senior notes due 2011.
On August 23, 2007, we received consent from approximately 98% of our 9.25%
senior notes due on 2011 to enter into a supplemental indenture dated August 27, 2007, which amended certain provisions of the Indenture and waived 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 return, we agreed to issue warrants for ordinary shares in connection with the amendment of the Indenture and these warrants will be issued to eligible holders of our 9.25%
senior notes due 2011 who consented to the solicitation of consents ended August 23, 2007 to amend the Indenture, subject to certain conditions specified therein. On October 1, 2007, we issued in total of 35,766,900 warrant to the eligible
holders. These warrants would, in the aggregate, be exercisable for a total of approximately 4.6% of our total outstanding ordinary shares on a fully diluted basis. 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 $20 million) with a term of one year. This facility is secured by certain trade receivables of ASAT China.
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.
Debt.
As of July 31, 2007, our total
outstanding debt was approximately $164.8 million, consisting of $150.0 million of 9.25% senior notes due 2011, $2.1 million of capital lease obligations, $8.8 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 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.
30
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 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.
Related Party Transactions
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 raw materials from QPL amounting to $2.1 million and $3.0 million for the three
months ended July 31, 2007 and 2006, respectively. All purchases from QPL are made in accordance with the Amended and Restated Supply Agreement, dated as of October 27, 2005, entered into among ASAT Limited, Talent Focus Industries Limited
and QPL Limited.
The amount due to QPL, which represented the net payable to QPL as a result of the above, was unsecured and interest free.
As of July 31, 2007, we have outstanding loan, net of fair value adjustment, and interest payable to Asia Opportunity Fund, L.P., an affiliate of JPMP, and related
funds of $8.8 million and $2.6 million which are recorded in Purchase Money Loan and Other Payable, Net of Current Portion in our condensed consolidated balance sheet, respectively.
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. Our
inability or failure to do so could adversely affect our business, financial condition and results of operations.
31
Subsequent Events
On August 1, 2007, we did not pay the regularly scheduled interest payment of approximately $6.9 million on our 9.25% senior notes due 2011. We subsequently paid such interest payment, including accumulated
penalty interest, for a total of $7.0 million on August 28, 2007 and within the 30 days grace period permitted under the Indenture.
On
August 23, 2007, the purchase money loan facility was amended to, among other things, extend the maturity due date of the $10 million principal amount until April 30, 2009 and 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 the Companys total outstanding ordinary shares
on a fully diluted basis (inclusive of ordinary shares issuable upon exercise of warrants to the holders themselves and which the Company 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.
On August 23, 2007, we received consent from
approximately 98% of the holders of the $150 million aggregate principal amount of 9.25% senior notes due 2011 to enter into a supplemental indenture dated August 27, 2007, which amended certain provisions of the Indenture and 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 return, we agreed to issue warrants for ordinary shares in connection with the amendment of the
Indenture and these warrants will be issued to eligible holders of our 9.25% senior notes due 2011 who consented to the solicitation of consents ended August 23, 2007 to amend the Indenture, subject to certain conditions specified therein. On
October 1, 2007, we issued in total of 35,766,900 warrant to the eligible holders. These warrants would, in the aggregate, be exercisable for a total of approximately 4.6% of our total outstanding ordinary shares on a fully diluted basis. 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 renewed $2.5 million of its $3.8 million credit facility from a Chinese bank for another year. As such, the entire borrowing of $3.8
million with regard to this revolving credit facility remains outstanding as of the date of this report. In September 2007, ASAT China obtained a revolving credit facility of RMB150 million (approximately $20 million) with a term of one year. The
facility is secured by certain trade receivables of ASAT China and has not been drawn as of the date of this report.
In September 2007, ASAT China
obtained a revolving credit facility of RMB150 million (approximately $20 million) with a term of one year. This facility is secured by certain trade receivables of ASAT China.
On October 17, 2007, we were informed by the Nasdaq Listing Qualifications Panel that we had regained compliance with Nasdaqs $35 million minimum market value requirement for continued listing. As a result,
our appeal hearing with Nasdaq was moot and cancelled, and our ADSs remain listed on the Nasdaq Capital Market. Previously, on September 17, Nasdaq notified us that our ADSs were subject to delisting due to failure to maintain Nasdaqs $35
million minimum market value requirement, and we subsequently filed for a Nasdaq appeal hearing.
On October 25, 2007, we were informed by Nasdaq that
the Company had regained compliance with Nasdaqs $1.00 minimum bid price requirement for continued listing. Previously, on July 30, 2007, Nasdaq notified us that our ADSs failed to maintain the minimum bid price of $1.00 over the previous
30 consecutive business days as required by the Nasdaq. Since then, the closing bid price of our ADS has regained compliance with Nasdaq minimum continued listing requirements.
Currently, there is no Nasdaq delisting action with respect to us.
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Forward Looking Statements Disclaimer
This document contains statements and information that involve risks, uncertainties and assumptions. These statements and information constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are all
statements that concern plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact, including, but not limited to, those that are identified by
the use of words such as anticipates, believes, estimates, expects, intends, plans, predicts, projects and similar expressions. Risks and uncertainties
that could affect us include, without limitation, dependence on the highly cyclical nature of the semiconductor industry, our ability to rapidly develop and successfully bring to market advanced technologies and services, the concentration of our
business in the communications sector, the incurrence of significant capital expenditures for manufacturing technology and equipment, the success of operating our assembly and test facilities in Dongguan, China, the ability to employ and retain
management and staff employees, our high debt leverage, our ability to service our debt obligations and the restrictive covenants contained in the agreements governing our indebtedness, fluctuating demand and continuous downward pressure on selling
prices in the semiconductor industry, low capacity utilization rates, loss of a large customer, weaknesses in global economies, natural disasters, losses of power to our facilities in Dongguan, China, volatility in the market price of our ADSs,
including the effects of the adjustment to our ADS ratio, delisting of our ADSs, environmental regulation, fluctuation in foreign currencies, uncertainty as to demand from our customers over both the long-term and short-term, competitive pricing and
declines in average selling prices we experience, the timing and volume of orders relative to our production capacity, complexity in our assembly processes, the availability of financing, competition and the greater operating and financial resources
of competitors, ability to successfully complete potential acquisitions and integrate other parties into our business, dependence on raw material and equipment suppliers, ability to transfer funds to and from our Chinese operating subsidiary,
seasonality in sales of our products and the enforcement of intellectual property rights by or against us. Should one or more of such risks and uncertainties materialize, or should any underlying assumption prove incorrect, actual outcomes may vary
materially from those indicated in the applicable forward-looking statements. Any forward-looking statement or information contained in this document speaks only as of the date the statement was made.
For a more detailed discussion of the known material risks and uncertainties facing the Company, please refer to the Risk Factors below.
We do not intend to update or revise any forward-looking statements made herein to reflect actual results or changes in assumptions, future events or otherwise.
Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Sensitivity
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 U.S. dollars. Overall, we estimate that in fiscal years 2008 and 2009, substantially all of our marketing costs and
operating expenses (excluding depreciation), will be in U.S. dollars or Chinese Renminbi. Following our recapitalization in 1999, substantially all borrowings have been in U.S. dollars, except for the revolving credit facility of $3.8 million from a
local Chinese bank, which is denominated in Renminbi.
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 current pegged rate of HK$7.80 = $1.00 since 1983, we have not experienced significant foreign exchange gains or losses associated with that currency. However, the
Hong Kong government could change the pegged rate or abandon the peg altogether. Depreciation of the U.S. dollar against the Hong Kong dollar would generally increase our Hong Kong dollar expenses. Following the shut down of the Hong Kong
manufacturing operations, our spending in Hong Kong dollars has been significantly 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
November 30, 2007, the exchange rate was RMB7.37 to $1.00 as compared to RMB7.84 to $1.00 as of November 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 in U.S. dollar terms.
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
. We maintain disclosure
controls and procedures, as such term is defined in Rule
13a15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our Acting Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Our Acting Chief Executive Officer and our Chief Financial Officer assumed their respective positions and responsibilities with us starting only as of September 1, 2006 and July 18, 2007, respectively and make their
conclusions in reliance upon the representations of management employees regarding internal controls and procedures prior to the assumption of their current positions.
Based on their evaluation as of the end of the period covered by this report, our Acting Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that material information related to the Company
and its consolidated subsidiaries is made known to management, including the Acting Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.
During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
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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 three months ended July 31, 2007 of $2.4 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 under which drawdowns were permitted
for a period of one year, renewable after 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 report. In September 2007, ASAT China obtained a revolving credit facility of RMB150 million (approximately $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 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 facilities 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 Risk 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:
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our customer relationships and orders with our customers could deteriorate;
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suppliers would be less willing to supply us or extend credit on acceptable terms, if at all;
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employee attrition could increase; and
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lenders could be unwilling to provide or refinance our debt.
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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 three months ended July 31, 2006 and 2007, the earnings to fixed charges deficiency were $8.1 million and
$5.6 million, respectively. 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 revolving 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.
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 was filed as an exhibit to our annual report on Form 20-F for the fiscal year ended April 30, 2007 which is incorporated herein by reference. 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 our annual report on Form 20-F for the fiscal year ended April 30, 2007, incorporated herein by reference. You should refer to Item 7Major Shareholders and Related Party
TransactionsRelated Party Transactions and Item 10Additional InformationMaterial Contracts in our annual report on Form 20-F for the fiscal year ended April 30, 2007 for further details. 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 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.
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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 report, collectively owned approximately 39.4% of the outstanding ordinary shares of ASAT Holdings as of July 31, 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 July 31, 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 in our annual report on Form 20-F for the fiscal year ended April 30, 2007. 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, including the effect 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, 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 Rule 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. On October 25, 2007, we were informed by Nasdaq that we had regained compliance with Nasdaqs $1.00 minimum bid price requirement for
continued listing.
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On September 17, 2007, Nasdaq notified us that our market value of listed securities has been below $35,000,000 as
required for continued inclusion by Nasdaq Marketplace Rule 4320(e)(2)(B) and that ADSs are, therefore, subject to delisting. We also notified by Nasdaq at that time that we did 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
subsequently appealed the Staff Determination on September 24, 2007. On October 17, 2007, we received a Nasdaq notice stating that the market value of our listed securities has been greater than $35,000,000 for at least 10 consecutive
business days. Accordingly, we regained compliance, and our appeal hearing with Nasdaq was moot and cancelled.
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.
If our ADSs are delisted, the liquidity and price of our ADSs most probably will be negatively impacted. 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.
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.
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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 61% and 48% of total net sales for the three months ended July 31, 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 few 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 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 We currently
intend to fund our future capital expenditures with the existing cash resources and positive cash flow generated from the savings from reductions in our 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 consistent 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.
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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.
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., and 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.
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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.
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.
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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.
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 the three months ended July 31, 2007 and 2006, our single largest
customer accounted for approximately 61% and 48% of net sales. For the three months ended July 31, 2007, our five largest customers by net sales accounted for approximately 77% of net sales and our ten largest customers by net sales accounted
for approximately 85% of net sales. For the three months ended July 31, 2006, our five largest customers by net sales accounted for approximately 72% of net sales and our ten largest customers by net sales accounted for approximately 82% 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.
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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 76% of our net sales during the three months ended July 31, 2007 and 70% of our net sales
during the three months ended July 31, 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.
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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.
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.
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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 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
was increased from $33 million to $53 million on March 30, 2006. As of the date of this report, we have contributed $33 million and within December 2007 we will inject a further $3 million capital contribution. The balance of the remaining capital
contribution will be 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.
Under the new Peoples Republic of China (PRC) Enterprise Income Tax Law effective January 1, 2008 (the New EIT Law), dividends payable
to foreign investors which are derived from sources within the PRC may be subject to income tax at the rate of 20% by way of withholding. Since we are a holding company and our income are mainly derived from dividend income from our PRC
subsidiary, ASAT China, dividends that we declare from such income may by deemed derived from sources with the PRC for purposes of the New EIT Law and therefore subject to a 20% withholding tax While the New EIT Law stipulates that such
taxes may be exempted or reduced, since no rules or guidance concerning the new tax law have been issued yet, it is unclear under what circumstances, and to what extent, such tax would be exempted or reduced. If we are required under the New EIT Law
to withhold PRC income tax on dividends payable to our non-PRC shareholders, our financial condition and results of operations may be harmed. As of the date of this report, we do not intend to distribute dividends other than dividends required under
our Preferred Shares.
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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 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 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.
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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 July 31, 2007, we had approximately 54 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 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.
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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 $2.4 million) by January 12, 2007. On December 29, 2006, we filed an objection to the HKIRD for the full amount. On January 30, 2007, the HKIRD had offered us an unconditional
holdover, i.e., an agreement to defer payment, of 50% of the total tax in dispute (approximately HK$9.4 million or $1.2 million) until the final tax position is determined. 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 $1.2 million) tax in dispute 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 July 31, 2007, we recorded a provision of $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 engineering personnel in our industry typically requires competitive compensation packages. In attracting and retaining such personnel and other personnel at all levels, 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.
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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 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.
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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 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 November 30, 2007, the exchange rate was RMB7.37 to $1.00 as compared with RMB7.84 to $1.00 as of November 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 our 9.25% senior notes due 2011.
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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 OverviewLegal
Proceedings in our annual report on Form 20-F for the fiscal year ended April 30, 2007 for further details.
As described in Item
5Operating and Financial Review and ProspectsCapital Expenditures and Material Financing Arrangements in our annual report on Form 20-F for the fiscal year ended April 30, 2007, 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. On October 1, 2007, these warrants were 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 4.6% 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. On
October 1, 2007, these warrants were 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 4.6% 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.
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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 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 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.
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.
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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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
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