packaging, testing and direct shipment of semiconductors to end users designated by our customers and solution-based proactive original design manufacturing, or ODM, with our customers. In addition, we started generating revenues from our real estate business in 2010. Our net revenues increased from NT$94,430.9 million in 2008 and NT$85,775.3 million in 2009 to NT$188,742.8 million (US$6,477.1 million) in 2010.
Discussed below are several factors that have had a significant influence on our financial results in recent years.
Pricing and Revenue Mix
We price our services on a cost-plus basis, taking into account the actual costs involved in providing these services, with reference to prevailing market prices. The majority of our prices and revenues are denominated in U.S. dollars. Any significant fluctuation in the exchange rates, especially between NT dollars and U.S. dollars will affect our costs and, in turn, our pricing.
In the case of semiconductor packaging, the cost of the silicon die, typically the most costly component of the packaged semiconductor, is usually not reflected in our costs (or revenues) since it is generally supplied by our customers on a consignment basis.
The semiconductor industry is characterized by a general trend towards declining prices for products and services of a given technology over time. In addition, during periods of intense competition and adverse conditions in the semiconductor industry, the pace of this decline may be more rapid than in other years. The average selling prices of our packaging and testing services have experienced sharp declines during such periods as a result of intense price competition from other independent packaging and testing companies that attempt to maintain high capacity utilization levels in the face of reduced demand.
Declines in average selling prices have been partially offset over the last several years by changes in our revenue mix. In particular, revenues derived from packaging more advanced package types, such as flip-chip BGA, higher density packages with finer lead-to-lead spacing, or pitch, and testing of more complex, high-performance semiconductors have increased as a percentage of total revenues. We intend to continue to focus on packaging more advanced package types, such as BGA and flip-chip BGA, developing and offering new technologies in packaging and testing services and expanding our capacity to achieve economies of scale, as well as improving production efficiencies for older technologies, in order to mitigate the effects of declining average selling prices on our profitability.
Our profitability for a specific package type does not depend linearly on its average selling price. Some of our more traditional package types, which typically have low average selling prices, may well command steadier and sometimes higher margins than more advanced package types with higher average selling prices.
High Fixed Costs
Our operations, in particular our testing operations, are characterized by relatively high fixed costs. We expect to continue to incur substantial depreciation and other expenses as a result of our acquisitions of packaging and testing equipment and facilities. Our profitability depends in part not only on absolute pricing levels for our services, but also on utilization rates for our packaging and testing equipment, commonly referred to as “capacity utilization rates.” In particular, increases or decreases in our capacity utilization rates could have a significant effect on gross margins since the unit cost of packaging and testing services generally decreases as fixed costs are allocated over a larger number of units. The capacity utilization rates of the machinery and equipment installed at our production facilities typically depend on factors such as the volume and variety of products packaged or tested using such machinery and equipment, the efficiency of our operations in terms of the loading and adjustment of machinery and equipment for the packaging or testing of different products, the complexity of the different products to be packaged or tested, the amount of time set aside for the maintenance and repair of the machinery and equipment, and the experience and schedule of work shifts of operators.
The current generation of advanced testers typically cost between US$1.0 million and US$3.0 million each, while wire bonders used in packaging typically cost between US$60,000 and US$70,000 each. In 2008, 2009 and 2010, our depreciation, amortization and rental expense included in cost of revenues as a percentage of net revenues
was 17.3%, 19.4% and 9.9%, respectively. The decrease in depreciation, amortization and rental expense as a percentage of net revenues in 2010 compared to 2009 was primarily a result of (i) an increase in our revenues, which, in particular, includes the revenues generated from our electronic manufacturing services since our acquisition of Universal Scientific, and (ii) a relatively low fixed cost from depreciation and amortization for our electronic manufacturing business compared to our packaging and testing businesses. We begin depreciating our equipment when it is available for use. There may sometimes be a time lag between when our equipment is available for use and when it achieves high levels of utilization. In periods of depressed industry conditions, such as the fourth quarter of 2008, we experienced lower than expected demand from customers, resulting in an increase in depreciation relative to net revenues. In particular, the capacity utilization rates for our testing equipment are more severely affected during an industry downturn as a result of a decrease in outsourcing demand from integrated device manufacturers, which typically maintain larger in-house testing capacity than in-house packaging capacity.
In addition to purchasing testers, we also lease a portion of our testers, which we believe allows us to better manage our capacity utilization rates and cash flow. Since testers operated under operating leases can be replaced with more advanced testers upon the expiration of the lease, we believe that these operating leases have enabled us to improve our capacity utilization rates by allowing us to better align our capacity with changes in equipment technology. For more information about our testers, including the number of testers under lease, see “Item 4. Information on the Company—Business Overview—Equipment—Testing.”
Raw Material Costs
As testing requires minimal raw materials, substantially all of our raw material costs are accounted for by packaging, the production of interconnect materials and electronic manufacturing services. In particular, our electronic manufacturing services acquired in 2010 require more significant demand of raw materials than our packaging and the production of interconnect materials. In 2008, 2009 and 2010, raw material cost as a percentage of our net revenues was 28.9%, 29.8% and 46.9%, respectively.
We have developed copper wire to gradually replace gold in order to benefit from the lower material cost of copper. However, gold wire is still one of the principal raw materials we use in our packaging processes, and the recent volatility in the price of gold has affected our cost of revenues. In 2010, the spot rate for gold fluctuated from approximately US$1,052 per ounce to approximately US$1,426 per ounce according to the statistics published by The London Bullion Market Association. It may be difficult for us to adjust our average selling prices to account for fluctuations in the price of gold. We expect that gold wire will continue to be an important raw material for us and we therefore expect to continue to be subject to significant fluctuations in the price of gold.
Significant Acquisitions
On May 30, 2008, we acquired, by way of a scheme of arrangement under Singapore law, all the outstanding ordinary shares of ASE Test that we did not already directly or indirectly own, making ASE Test our wholly-owned subsidiary. See “Item 4. Information on the Company—History and Development of the Company—ASE Test Share Acquisition and Privatization.” On May 30, 2008, ASE Inc. acquired from minority shareholders of ASE Test the remaining 53.4% of shares it did not own. As a result of the transaction, beginning on June 1, 2008, 100.0% of ASE Test’s net income or loss has been reflected in our consolidated net income.
In February 2010, we, along with our two subsidiaries, J&R Holding Limited and ASE Test, through a cash and stock tender offer, acquired 641,669,316 common shares of Universal Scientific at NT$21 per share, amounting to NT$13,475.1 million (US$462.4 million) in total, resulting in our controlled ownership over Universal Scientific. As a result, Universal Scientific became our subsidiary. In August 2010, we acquired additional 222,243,661 shares of Universal Scientific through another tender offer at NT$21 per share, amounting to NT$4,667.1 million (US$160.2 million) in total. We owned 99.2% of the outstanding common shares of Universal Scientific as of April 30, 2011. See “Item 4. Information on the Company—History and Development of the Company—Acquisition of Shares of Universal Scientific.”
Since our acquisitions of ASE Test and Universal Scientific, their results of operations have been consolidated into our results of operations. Any losses by ASE Test or Universal Scientific may have significant adverse effects on our net income.
Recent ROC GAAP Accounting Pronouncements
Effective January 1, 2011, the Company adopted the newly issued ROC SFAS No. 41 “Operating Segments.” The requirements of the statement are based on the information about the components of the Company that the management uses to make decisions about operating matters. SFAS No. 41 requires identification of operating segments on the basis of internal reports that are regularly reviewed by the Company’s chief operating decision makers in order to allocate resources to the segments and assess their performance. This statement supersedes ROC SFAS No. 20, “Segment Reporting.” We believe the adoption of the new statement will not have a material impact on our consolidated financial statements in 2011.
Effective January 1, 2011, the Company adopted the newly revised ROC SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revision include that loans and receivables originated by the Company are now covered by SFAS No. 34. We believe the adoption of the new statement will not have a material impact on our consolidated financial statements in 2011.
Critical Accounting Policies and Estimates
Preparation of our consolidated financial statements requires us to make estimates and judgments in applying our critical accounting policies which have a significant impact on the results we report in our consolidated financial statements. We continually evaluate these estimates and assumptions. Actual results may differ from these estimates under different assumptions and conditions. Significant accounting policies are summarized as follows.
Revenue Recognition. Revenues are recognized when the rewards of ownership or services and the significant risk of the goods or services has been transferred to the buyers. Other criteria that we use to determine when to recognize revenue are:
| | · | existence of persuasive evidence of an arrangement; |
| | · | the selling price is fixed or determinable; and |
| | · | collectibility is reasonably assured. |
Our customers bear the title and risk of loss for those bare semiconductor wafers that we receive and package into finished semiconductors and/or those packaged semiconductors that we receive and test for performance specifications. Accordingly, the cost of customer-supplied semiconductor materials is not included in our consolidated financial statements.
These policies are consistent with provisions issued by the SEC. An appropriate sales discount and return allowance is recognized in the period during which the sale is recognized, and is estimated based on historical experience, the management’s judgment and relevant factors.
Allowance for Doubtful Accounts. We periodically record a provision for doubtful accounts based on our evaluation of the collectibility of our accounts receivable. The total amount of this provision is determined by us as follows. We first identify the receivables of customers that are considered to be a higher credit risk based on their current overdue accounts with us, difficulties collecting from these customers in the past or their overall financial condition. For each of these customers, we estimate the extent to which the customer will be able to meet its financial obligations to us, and we record an allowance that reduces our accounts receivable for that customer to the amount that we reasonably believe will be collected. For all other customers, we maintain an allowance for doubtful accounts equal to a percentage of their aggregate accounts receivable. As of December 31, 2008, 2009 and 2010, the allowance we set aside for doubtful accounts was NT$99.2 million, NT$68.7 million and NT$134.0 million (US$4.6 million), respectively. Additional allowances may be required in the future if the financial condition of our customers or general economic conditions further deteriorate, and this additional allowance would reduce our net income.
Inventories. Inventories are recorded at cost when acquired and stated at the lower of cost or net realizable values. Inventories are written down to net realizable value item by item. Materials received from customers for processing, mainly of semiconductor wafers, are excluded from inventories, as title and risk of loss remains with the
customers. An allowance for loss on decline in market value and obsolescence is provided based on the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. An additional inventory provision may be required if actual market conditions are less favorable than those projected.
Valuation Allowances for Deferred Income Tax Assets. Tax benefits arising from deductible temporary differences, unused tax credits and net operating loss carryforwards are recognized as deferred income tax assets. We record a valuation allowance to the extent that we believe it is more likely than not that deferred income tax assets will not be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need and amount for the valuation allowance. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of our net recorded amount, an adjustment to our deferred income tax assets would increase income in the period such determination was made. Alternatively, should we determine that we would not be able to realize all or part of our deferred income tax assets in the future, an adjustment to our deferred income tax assets would decrease income in the period such determination was made.
Realizability of Long-Lived Assets. We are required to evaluate our equipment and other long-lived assets for impairment whenever there is an indication of impairment. If certain criteria are met, we are required to record an impairment charge.
In accordance with ROC SFAS No. 35, long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under ROC GAAP, if the recoverable amount increases in a future period, the amount previously recognized as impairment will be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss had been recognized. We measure any impairment for long-lived assets based on a projected future cash flow. If the long-lived assets are determined to be impaired, we recognize an impairment loss to the extent the present value of discounted cash flows attributable to the assets are less than their carrying value. We also perform a periodic review to identify assets that are no longer used and are not expected to be used in future periods. An impairment charge is recorded to the extent, if any, that the carrying amount of the idle assets exceeds their fair value. The process of evaluating the potential impairment of long-lived assets requires significant judgment. We are required to review for impairment groups of assets related to the lowest level of identifiable independent cash flows. In addition, we must make subjective judgments regarding the remaining useful lives of assets and the expected future revenue and expenses associated with the assets. Any changes in these estimates based on changed economic conditions or business strategies may result in material impairment charges in future periods.
In accordance with U.S. GAAP, long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed by comparing undiscounted net cash flows of the assets against the carrying amount of the assets. If the recoverability test indicates that an impairment has occurred, the impairment loss is the amount of the asset’s carrying amount in excess of the related fair value.
In 2008, 2009 and 2010, we recognized impairment losses of NT$87.4 million, nil, and NT$169.9 million (US$5.8 million) on property, plant and equipment, and NT$34.6 million, NT$11.1 million and NT$37.1 million (US$1.3 million) on idle assets, respectively. See note 13 and note 16 to our consolidated financial statements included in this annual report.
Business Combinations. When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience, information obtained from the management of the acquired companies and independent external service providers’ reports. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the synergistic benefits expected to be derived from the acquired business. In addition, pursuant to the revised U.S. GAAP, we need to
measure the fair value of the investment we originally held and the noncontrolling interest. Before the revised U.S. GAAP became effective on January 1, 2009, the noncontrolling interest was measured at carrying amount, the same way as current ROC GAAP does. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.
For example, we acquired ASE Test in May 2008, Universal Scientific through tender offers in February and August 2010 and EEMS Test Singapore in August 2010 (see “Item 4 – Information on the Company – History and Development of the Company”); pursuant to ROC SFAS No. 25 “Business Combinations,” No. 37 “Intangible Assets,” and U.S. GAAP guidance relating to business combinations and goodwill and other intangible assets, acquired tangible assets and liabilities as well as identified intangible assets were valued at estimates of their current fair values. The valuation of acquired intangible assets was determined based on management’s estimates. In addition, the amortization method of these intangible assets is based on future economic benefits over the estimated life. In addition, we also recognized goodwill which represents the excess of the purchase price over the estimated fair value of the net assets acquired. See our consolidated statements of cash flow as well as note 14 and note 33(k) to our consolidated financial statements included in this annual report.
Goodwill. Goodwill is evaluated for impairment at least annually and we test for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Goodwill is evaluated for impairment by comparing the carrying value of the cash-generating unit to which the goodwill has been allocated to its recoverable amount. Recoverable amount is defined as the higher of a cash-generating unit’s fair value less costs to sell or its “value in use,” which is defined as the present value of the expected future cash flows generated by the assets. In conducting the future cash flow valuation, we make assumptions about future operating cash flows, the discount rate used to determine present value of future cash flows, and capital expenditures. Future operating cash flows assumptions include sales growth assumptions, which are based on our historical trends and industry trends, and gross margin and operating expense growth assumptions, which are based on the historical relationship of those measures compared to sales and certain cost cutting initiatives. An impairment charge is incurred to the extent the carrying value exceeds the recoverable amount. As of December 31, 2010, we had goodwill of NT$10,408.0 million (US$357.2 million) and NT$10,298.5 million (US$353.4 million) under ROC GAAP and U.S. GAAP, respectively. Based on our analysis, there is no impairment as of December 31, 2010. Our conclusion could, however, change in the future if actual results differ from our estimates and judgments under different assumptions and conditions.
Valuation of Long-term Investments. We hold long-term investments in public and non-public entities. We evaluate these long-term investments periodically for impairment based on market prices, if available, the financial condition of the investee company, economic conditions in the industry, and our intent and ability to hold the investment for a long period of time. These assessments usually require a significant amount of judgment, as a significant decline in the market price may not be the best indicator of impairment. Whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable, we measure the impairment based on the market prices, if available, or the projected future cash flow of the investments, the underlying assumptions for which had been formulated by such investments internal management team, taking into account sales growth and capacity utilization. Under U.S. GAAP, we evaluate long-term investments using the above mentioned criteria and, to the extent any decline in the value of a long-term investment is determined to be other than temporary, an impairment charge is recorded in the current period. Under ROC GAAP, we use similar method to determine the impairment charge recorded in the current period but there is no such term called “other-than-temporary-impairment” under ROC GAAP. Several of the long-term investments held by us are recognized as the equity method investments, financial assets carried at cost or available-for-sale financial assets. Any significant decline in the investments or financial assets could affect the value of the long-term investment and an impairment charge may occur. In 2008, we recognized an impairment of NT$21.4 million on our investment in ID Solutions, Inc. In 2009, we did not record any impairments on long-term investments. In 2010, we recognized an impairment of NT$41.7 million (US$1.4 million) on our investments in StarChips Technology Inc. See note 12 to our consolidated financial statements included in this annual report.
Stock-based Compensation. Employee stock options granted on or after January 1, 2008 are accounted for under ROC SFAS No. 39, “Accounting for Share-based Payment.” Under the statement, the value of the stock options granted, which is equal to the best available estimate of the number of stock options expected to vest
multiplied by the grant-date fair value, is expensed on a straight-line basis over the vesting period. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates. The grant-date fair value involves a number of factors, such as expected dividend yield, expected volatility, expected life and the effects of early exercise, which require the management’s judgments. Employee stock options granted on or before December 31, 2007 were accounted for under the interpretations issued by the ROC Accounting Research and Development Foundation. We adopted the intrinsic value method, under which compensation cost was recognized on a straight-line basis over the vesting period.
Under U.S. GAAP, stock-based compensation expense includes compensation expense for all unvested stock-based compensation awards granted prior to January 1, 2006 that are expected to vest, based on the grant-date fair value estimated in accordance with the transition method and the original provision of the U.S. guidance relating to accounting for stock-based compensation. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of the U.S. guidance relating to share-based payment.
Results of Operations
The following table sets forth, for the periods indicated, financial data from our consolidated statements of income, expressed as a percentage of net revenues.
| | | Year Ended December 31, | |
| | | 2008 | | | 2009 | | | 2010 | |
| | | (percentage of net revenues) | |
| ROC GAAP: | | | | | | | | | |
Net revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Packaging | | | 77.7 | | | | 79.2 | | | | 53.5 | |
Testing | | | 20.1 | | | | 18.4 | | | | 11.6 | |
Electronic manufacturing services | | | – | | | | – | | | | 31.6 | |
Others | | | 2.2 | | | | 2.4 | | | | 3.3 | |
Cost of revenues | | | (76.6 | ) | | | (78.6 | ) | | | (78.5 | ) |
Gross profit | | | 23.4 | | | | 21.4 | | | | 21.5 | |
Operating expenses | | | (11.1 | ) | | | (10.7 | ) | | | (8.7 | ) |
Income from operations | | | 12.3 | | | | 10.7 | | | | 12.8 | |
Non-operating expense, net | | | (2.3 | ) | | | (0.9 | ) | | | (0.7 | ) |
Income before income tax | | | 10.0 | | | | 9.8 | | | | 12.1 | |
Income tax expense | | | (2.4 | ) | | | (1.7 | ) | | | (1.9 | ) |
Net income | | | 7.6 | % | | | 8.1 | % | | | 10.2 | % |
| Attributable to | | | | | | | | | | | | |
| Net income of parent company’s shareholders | | | 6.5 | % | | | 7.9 | % | | | 9.7 | % |
| Minority interest in net income of subsidiaries | | | 1.1 | | | | 0.2 | | | | 0.5 | |
| | | | 7.6 | % | | | 8.1 | % | | | 10.2 | % |
The following table sets forth, for the periods indicated, the gross margins for our packaging, testing services and electronic manufacturing services and our total gross margin. Gross margin is calculated by dividing gross profits by net revenues.
| | | | |
| | | | | | | | | | |
| | | (percentage of net revenues) | |
| ROC GAAP: | | | | | | | | | |
| Gross profit | | | | | | | | | |
| Packaging | | | 19.7 | % | | | 18.5 | % | | | 21.1 | % |
| Testing | | | 32.9 | % | | | 28.2 | % | | | 37.6 | % |
| Electronic manufacturing services | | | – | | | | – | | | | 10.9 | % |
| Overall | | | 23.4 | % | | | 21.4 | % | | | 21.5 | % |
The following table sets forth, for the periods indicated, a breakdown of our total cost of revenues and operating expenses, expressed as a percentage of net revenues.
| | | | |
| | | | | | | | | | |
| | | (percentage of net revenues) | |
| ROC GAAP: | | | | | | | | | |
| Cost of revenues | | | | | | | | | |
| Raw materials | | | 28.9 | % | | | 29.8 | % | | | 46.9 | % |
| Labor | | | 15.4 | | | | 15.0 | | | | 10.8 | |
| Depreciation, amortization and rental expense | | | 17.3 | | | | 19.4 | | | | 9.9 | |
| Others | | | 15.0 | | | | 14.4 | | | | 10.9 | |
| Total cost of revenues | | | 76.6 | % | | | 78.6 | % | | | 78.5 | % |
| Operating expenses | | | | | | | | | | | | |
| Selling | | | 1.2 | % | | | 1.4 | % | | | 1.5 | % |
| General and administrative | | | 6.0 | | | | 5.1 | | | | 3.9 | |
| Research and development | | | 3.9 | | | | 4.2 | | | | 3.3 | |
| Total operating expenses | | | 11.1 | % | | | 10.7 | % | | | 8.7 | % |
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Revenues. Net revenues increased 120.0% to NT$188,742.8 million (US$6,477.1 million) in 2010 from NT$85,775.3 million in 2009, primarily due to the revenues contributed from the electronic manufacturing services business we acquired in 2010 and the recovery of the global economy. Packaging revenues increased 48.8% to NT$101,071.3 million (US$3,468.5 million) in 2010 from NT$67,935.5 million in 2009. Testing revenues increased 39.0% to NT$21,957.0 million (US$753.5 million) in 2010 from NT$15,795.1 million in 2009. In addition, we recorded revenues of NT$59,577.4 million (US$2,044.5 million) generated from our electronic manufacturing services business as a result of our acquisition of Universal Scientific in 2010. The increase in packaging revenues was primarily due to an increase in the demand for our services and an increase in the revenues generated from our copper wire bonding solutions. The increase in testing revenues was primarily due to an increase in testing volume.
Gross Profit. Gross profit increased 121.1% to NT$40,544.6 million (US$1,391.4 million) in 2010 from NT$18,341.7 million in 2009. Our gross profit as a percentage of net revenues, or gross margin, increased to 21.5% in 2010 from 21.4% in 2009. Our gross margin for packaging increased to 21.1% in 2010 from 18.5% in 2009. This increase was primarily due to a decrease in depreciation expense as a percentage of our net packaging revenues, partially offset by an increase in the raw material costs as a percentage of our net packaging revenues. Our gross margin for testing increased to 37.6% in 2010 from 28.2% in 2009. This increase was primarily due to a decrease in depreciation expense as a percentage of net testing revenues as a result of our improved capacity utilization. Our gross margin for electronic manufacturing services was 10.9% in 2010. Raw material costs in 2010 were NT$88,556.1 million (US$3,039.0 million) compared to NT$25,536.0 million in 2009. As a percentage of net revenues, raw material costs increased to 46.9% in 2010 from 29.8% in 2009, primarily because, since we acquired Universal Scientific in February 2010, we started providing electronic manufacturing services, which entail greater raw material costs as a percentage to our net revenues. Depreciation, amortization and rental expenses in 2010 were NT$18,584.3 million (US$637.8 million), compared to NT$16,602.5 million in 2009. As a percentage of net revenues, depreciation, amortization and rental expenses decreased to 9.9% in 2010 from 19.4% in 2009. This decrease was primarily due to a relatively low depreciation expense as a percentage of net revenues in our electronic manufacturing business and an increase in our revenues. Labor cost in 2010 was NT$20,394.6 million (US$699.9 million) compared to NT$12,897.2 million in 2009. As a percentage of net revenues, labor cost decreased to 10.8% in 2010 from 15.0% in 2009, primarily because our new electronic manufacturing business has lower labor costs as a percentage of our net revenues.
Operating Income. Operating income increased 161.7% to NT$24,099.0 million (US$827.0 million) in 2010 compared to NT$9,209.9 million in 2009. Our operating income as a percentage of net revenues, or operating margin, increased to 12.8% in 2010 from 10.7% in 2009, primarily due to the improved capacity utilization, partially
offset by the lower operating income generated from our electronic manufacturing services as a percentage of net revenues. Operating expenses increased 80.1% to NT$16,445.6 million (US$564.4 million) in 2010 compared to NT$9,131.8 million in 2009. The increase in operating expenses was primarily due to increases in general and administrative expense, as well as the research and development expense. General and administrative expense increased 71.1% to NT$7,373.7 million (US$253.0 million) in 2010 from NT$4,310.7 million in 2009, primarily due to the increase in salaries and bonuses as a result of (i) our acquisition of Universal Scientific in February 2010, (ii) option cost recognized for our newly granted options in 2010, and (iii) an increase in the accrued salaries and bonuses based on our net income that have increased. General and administrative expense represented 3.9% of our net revenues in 2010 compared to 5.1% in 2009. Research and development expense increased 70.6% to NT$6,162.2 million (US$211.5 million), accounting for 3.3% of net revenues, in 2010 from NT$3,612.0 million, accounting for 4.2% of net revenues, in 2009. This increase in the research and development expense was primarily due to our acquisition of Universal Scientific in February 2010 and the increase of accrued salaries and bonuses based on our net income. Selling expense increased 140.6% to NT$2,909.6 million (US$99.9 million) in 2010 from NT$1,209.2 million in 2009. This increase was primarily due to our acquisition of Universal Scientific in February 2010. Selling expense as a percentage of net revenues increased to 1.5% in 2010 from 1.4% in 2009.
Non-Operating Income (Expense). We incurred a net non-operating expense of NT$1,275.4 million (US$43.8 million) in 2010 compared to a net non-operating expense of NT$821.5 million in 2009. This overall increase was primarily due to (i) an increase in our loss on disposal of property, plant and equipment, (ii) an increase in our impairment loss and (iii) a decrease in the income earned from equity investments, partially offset by a decrease in our net interest expense. We recognized income from equity method investments of NT$73.0 million (US$2.5 million) in 2010 compared to NT$330.1 million in 2009. The decrease was due to our acquisition of Universal Scientific, which was our equity-method investee and has become our consolidated subsidiary in 2010 after our acquisition. We recognized net interest expense of NT$1,170.8 million (US$40.2 million) in 2010 compared to NT$1,334.2 million in 2009, primarily due to decreases in interest rates and the reallocation of capital funds among subsidiaries. We recognized impairment losses of NT$251.4 million (US$8.6 million) in 2010 compared to NT$11.1 million in 2009, primarily due to the increase in impairment losses on equity method investments, property, plant and equipment in 2010.
Net Income. Net income, excluding minority interest, increased 171.9% to NT$18,337.5 million (US$629.3 million) in 2010 from NT$6,744.6 million in 2009. Our diluted earnings per ADS increased to NT$15.2 (US$0.5) in 2010 compared to diluted earnings per ADS of NT$5.9 in 2009. Our income tax expense increased 144.4% to NT$3,628.7 million (US$124.5 million) in 2010 from NT$1,484.9 million in 2009, primarily due to the increase in our income tax on the profit from our operation of real estate and our new businesses in 2010, namely the electronic manufacturing business.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Revenues. Net revenues decreased 9.2% to NT$85,775.3 million in 2009 from NT$94,430.9 million in 2008, primarily due to the decline in demand as a result of the global economic crisis. Packaging revenues decreased 7.4% to NT$67,935.5 million in 2009 from NT$73,391.6 million in 2008. Testing revenues decreased 17.0% to NT$15,795.1 million in 2009 from NT$19,021.4 million in 2008. The decrease in packaging revenues was primarily due to a decrease in average selling prices for our packaging services and the change of product portfolio. The decrease in testing revenues was primarily due to a decrease in average selling prices for our testing services and a decrease in testing volume. The decrease in average selling prices for our packaging and testing services was due to normal trends relating to the semiconductor industry. The decrease in testing volume resulted primarily from the global economic crisis.
Gross Profit. Gross profit decreased 16.9% to NT$18,341.7 million in 2009 from NT$22,083.2 million in 2008. Our gross profit as a percentage of net revenues, or gross margin, decreased to 21.4% in 2009 from 23.4% in 2008. Our gross margin for packaging decreased to 18.5% in 2009 from 19.7% in 2008. This decrease was primarily due to an increase in depreciation expenses and utility expenses as a percentage of net packaging revenues, partially offset by a decrease in the provision for inventory obsolescence as a percentage of net revenues. Our gross margin for testing decreased to 28.2% in 2009 from 32.9% in 2008. This decrease was primarily due to a decrease in the absorption of fixed cost as a result a decrease in net revenues. Raw material costs in 2009 were NT$25,536.0 million
compared to NT$27,275.6 million in 2008. As a percentage of net revenues, raw material costs increased to 29.8% in 2009 from 28.9% in 2008, primarily due to a change in our product mix toward packaging requiring more raw materials. Depreciation, amortization and rental expenses in 2009 was NT$16,602.5 million, compared to NT$16,370.6 million in 2008. As a percentage of net revenues, depreciation, amortization and rental expenses increased to 19.4% in 2009 from 17.3% in 2008 primarily due to the decrease in net revenues. Labor cost in 2009 was NT$12,897.2 million compared to NT$14,549.9 million in 2008. As a percentage of net revenues, labor cost decreased to 15.0% in 2009 from 15.4% in 2008, primarily because of the decrease in salary and bonus.
Operating Income. Operating income decreased 20.3% to NT$9,209.9 million in 2009 compared to NT$11,559.1 million in 2008. Our operating income as a percentage of net revenues, or operating margin, decreased to 10.7% in 2009 from 11.1% in 2008, primarily due to under absorption of fixed costs as a result of the decrease in net revenues. Operating expenses decreased 13.2% to NT$9,131.8 million in 2009 compared to NT$10,524.1 million in 2008. The decrease in operating expenses was primarily due to a decrease in general and administrative expense. General and administrative expense decreased 24.3% to NT$4,310.7 million in 2009 from NT$5,694.2 million in 2008. This decrease was primarily the result of a decrease in salaries and bonuses, and professional fees due to privatization of ASE Test in 2008. General and administrative expense represented 5.1% of our net revenues in 2009 compared to 6.0% in 2008. Research and development expense decreased 1.6% to NT$3,612.0 million, accounting for 4.2% of net revenues, in 2009 from NT$3,671.2 million, accounting for 3.9% of net revenues, in 2008. This increase in the research and development expense as a percentage of net revenues was primarily due to the decrease in net revenues. Selling expense increased 4.4% to NT$1,209.2 million in 2009 from NT$1,158.6 million in 2008. This increase was primarily due to an increase in salaries and bonuses. Selling expense as a percentage of net revenues increased to 1.4% in 2009 from 1.2% in 2008.
Non-Operating Income (Expense). We incurred a net non-operating expense of NT$821.5 million in 2009 compared to a net non-operating expense of NT$2,083.3 million in 2008. This overall decrease was primarily the result of a decrease in loss on the valuation of financial assets and liabilities, impairment losses and net interest expenses, an increase in the income earned from equity method investments. We had a net gain of NT$293.4 million in 2009 compared to a net loss on the valuation of financial assets and liabilities and foreign exchange of NT$163.3 million in 2008 primarily due to a decrease in valuation loss on the public stocks. We recognized income from equity method investments of NT$330.1 million in 2009 compared to NT$77.5 million in 2008. The increase was due to the improved operating performance of such equity method investments. We recognized net interest expense of NT$1,334.2 million in 2009 compared to NT$1,486.5 million in 2008, primarily due to decreases in interest rates. We recognized impairment losses of NT$11.1 million in 2009 compared to NT$293.3 million in 2008, primarily due to impairment losses on available-for-sale investments and equipment in 2008.
Net Income. Net income, excluding minority interest, increased 9.5% to NT$6,744.6 million in 2009 from NT$6,160.1 million in 2008. Our diluted earnings per ADS increased to NT$5.9 in 2009 compared to diluted earnings per ADS of NT$5.1 in 2008. Our income tax expense decreased 34.5% to NT$1,484.9 million in 2009 from NT$2,268.3 million in 2008, primarily due to a decrease in withholding tax on dividends imposed on some of our foreign subsidiaries, a decrease in the valuation allowance against the deferred tax assets and an in increase in tax-exempt income, offset by an increase in undistributed earnings.
Quarterly Net Revenues, Gross Profit and Gross Margin
The following table sets forth our unaudited consolidated net revenues, gross profit and gross margin for the quarterly periods indicated. The unaudited quarterly results reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair presentation of the amounts, on a basis consistent with the audited consolidated financial statements included elsewhere in this annual report. You should read the following table in conjunction with the audited consolidated financial statements and related notes included elsewhere in this annual report. Our net revenues, gross profit and gross margin for any quarter are not necessarily indicative of the results for any future period. Our quarterly net revenues, gross profit and gross margin may fluctuate significantly.
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| | | NT$ | | | NT$ | | | NT$ | | | NT$ | | | NT$ | | | NT$ | | | NT$ | | | NT$ | |
| | | (in millions) | |
| Consolidated Net Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Packaging | | | 16,591.2 | | | | 20,005.2 | | | | 21,131.1 | | | | 22,080.4 | | | | 25,699.6 | | | | 27,288.5 | | | | 26,002.8 | | | | 24,812.4 | |
Testing | | | 3,877.5 | | | | 4,587.4 | | | | 4,562.3 | | | | 4,662.4 | | | | 5,288.1 | | | | 6,017.3 | | | | 5,989.2 | | | | 5,338.9 | |
Electronic manufacturing services * | | | - | | | | - | | | | - | | | | 10,138.7 | | | | 14,725.7 | | | | 17,486.6 | | | | 17,226.4 | | | | 15,095.3 | |
Others | | | 412.4 | | | | 612.1 | | | | 599.1 | | | | 673.0 | | | | 702.5 | | | | 696.9 | | | | 4,064.7 | | | | 758.9 | |
Total | | | 20,881.1 | | | | 25,204.7 | | | | 26,292.5 | | | | 37,554.5 | | | | 46,415.9 | | | | 51,489.3 | | | | 53,283.1 | | | | 46,005.5 | |
| Consolidated Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Packaging | | | 3,166.5 | | | | 4,317.1 | | | | 4,496.1 | | | | 4,330.3 | | | | 5,484.0 | | | | 6,104.1 | | | | 5,402.2 | | | | 4,950.0 | |
Testing | | | 1,099.9 | | | | 1,612.6 | | | | 1,606.6 | | | | 1,610.0 | | | | 2,084.3 | | | | 2,333.0 | | | | 2,218.4 | | | | 1,644.0 | |
Electronic manufacturing services * | | | - | | | | - | | | | - | | | | 1,136.8 | | | | 1,623.0 | | | | 2,033.5 | | | | 1,688.9 | | | | 1,575.4 | |
Others | | | 304.5 | | | | 472.8 | | | | 579.6 | | | | 545.9 | | | | 657.6 | | | | 634.8 | | | | 2,657.8 | | | | 488.3 | |
Total | | | 4,570.9 | | | | 6,402.5 | | | | 6,682.3 | | | | 7,623.0 | | | | 9,848.9 | | | | 11,105.4 | | | | 11,967.3 | | | | 8,657.7 | |
| Consolidated Gross Profit (%) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Packaging | | | 19.1 | % | | | 21.6 | % | | | 21.3 | % | | | 19.6 | % | | | 21.3 | % | | | 22.4 | % | | | 20.8 | % | | | 19.9 | % |
Testing | | | 28.4 | % | | | 35.2 | % | | | 35.2 | % | | | 34.5 | % | | | 39.4 | % | | | 38.8 | % | | | 37.0 | % | | | 30.8 | % |
Electronic manufacturing services * | | | - | | | | - | | | | - | | | | 11.2 | % | | | 11.0 | % | | | 11.6 | % | | | 9.8 | % | | | 10.4 | % |
Overall | | | 21.9 | % | | | 25.4 | % | | | 25.4 | % | | | 20.3 | % | | | 21.2 | % | | | 21.6 | % | | | 22.5 | % | | | 18.8 | % |
| * | We have begun providing electronic manufacturing services as a result of our acquisition of Universal Scientific in February 2010. |
Our results of operations are affected by seasonality. In general, our first quarter net revenues have historically decreased over the preceding fourth quarter, primarily due to the combined effects of holidays in the United States, Taiwan and elsewhere in Asia. Moreover, the increase or decrease in net revenues of a particular quarter as compared with the immediately preceding quarter varies significantly. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our operating results are subject to significant fluctuations, which could adversely affect the market value of your investment.”
Exchange Rate Fluctuations
For quantitative and qualitative disclosure of our exposure to foreign currency exchange rate risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk—Foreign Currency Exchange Rate Risk.”
Taxation
The regular corporate income tax rate in the ROC applicable to us decreased from 25% in 2009 to 17%, effective January 1, 2010. The tax incentives schemes under the ROC Statute for Upgrading Industries expired on December 31, 2009, and under this statute we have been granted tax holidays covering the portion of our income attributable to eligible machinery and equipment upon receipt of a cash infusion from our shareholders or after the capitalization of retained earnings through the issuance of stock dividends, and tax credits of 7% for the purchase of qualifying manufacturing equipment. We can continue to enjoy the tax holidays that have been granted to us by the ROC tax authority. On April 16, 2010, the Legislative Yuan of ROC passed the Industrial Innovation Act, effective from January 1, 2010 to December 31, 2019. Under the Industrial Innovation Act, a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its income tax payable for the fiscal year in which these expenditures are incurred. However, the deduction may not exceed 30% of the income tax payable for that fiscal year.
As of April 30, 2011, we had five five-year tax exemptions on income derived from a portion of our operations in Kaohsiung, Taiwan. Two exemptions will expire on December 31, 2013 and December 31, 2016, respectively. We are in the process of applying for the use of the remaining three exemptions in connection with our operations in
Kaohsiung, Taiwan, following the completion of the related capacity expansions. As of April 30, 2011, we also had two five-year tax exemptions for two cash injections from our shareholders in connection with our operations in Chung Li, Taiwan, both exemptions will expire at the end of 2011. In addition, some of our subsidiaries, such as ASE Test Taiwan and PowerASE, are entitled to certain tax exemptions on income derived from a portion of their respective operations. The aggregate tax benefits of such exemptions for the years ended December 31, 2008, 2009 and 2010 were NT$598.4 million, NT$654.8 million and NT$979.0 million (US$33.6 million), respectively.
In addition, since we have facilities located in special export zones such as the Nantze Export Processing Zone in Taiwan, we enjoy exemptions from various import duties, commodity taxes and sales taxes on imported machinery, equipment, raw materials and components which are directly used for manufacturing finished goods. Finished goods produced by companies located in these zones and exported or sold to others within the zones are exempt from otherwise applicable commodity or business taxes in Taiwan.
Under the ROC Income Tax Act, all earnings generated in a year which are not distributed to shareholders as dividends in the following year will be assessed a 10% undistributed earnings tax. As a result, if we do not distribute all of our annual earnings as either cash or stock dividends in the following year, these undistributed earnings will be subject to the 10% undistributed earnings tax.
The ROC government enacted Alternative Minimum Tax Act, or AMT Act, which became effective on January 1, 2006. The alternative minimum tax, or AMT, imposed under the AMT Act is a supplemental tax of 10% of taxable income, which includes most income that is exempt from income tax under various legislation such as tax holidays. If the amount of income tax determined by the AMT Act falls below the amount of the AMT, any difference will be payable. The AMT rate for business entities is 10%. However, the AMT Act grandfathered certain tax exemptions granted prior to the enactment of the AMT Act.
In 2009, our effective income tax rate decreased to 18% from 24% in 2008 primarily due to a decrease in withholding tax on dividends imposed on some of our foreign subsidiaries, a decrease in the valuation allowance against the deferred tax assets and an increase in tax-exempt income, offset by an increase in undistributed earnings. In 2010, our effective income tax rate decreased to 16% primarily due to the decrease in income tax rate in ROC. We believe that our future estimated taxable income will be sufficient to realize the current and noncurrent portion of our net deferred tax assets recorded as of December 31, 2010.
Inflation
We do not believe that inflation in Taiwan or elsewhere has had a material impact on our results of operations.
U.S. GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with ROC GAAP, which differ in certain material respects from U.S. GAAP. The following table sets forth a comparison of our net income and shareholders’ equity in accordance with ROC GAAP and U.S. GAAP as of and for the periods indicated.
| | | As of and For the Year Ended December 31, | |
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| | | NT$ | | | NT$ | | | NT$ | | | US$ | |
| | | (in millions) | |
| Net income: | | | | | | | | | |
ROC GAAP | | | 7,207.5 | | | | 6,903.5 | | | | 19,194.9 | | | | 658.7 | |
U.S. GAAP | | | 6,645.6 | | | | 5,520.4 | | | | 18,924.1 | | | | 649.4 | |
| Total shareholders’ equity: | | | | | | | | | | | | | | | | |
ROC GAAP | | | 71,960.8 | | | | 74,713.7 | | | | 91,839.3 | | | | 3,151.7 | |
U.S. GAAP | | | 67,405.7 | | | | 69,515.7 | | | | 86,474.9 | | | | 2,967.6 | |
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Note 32 to our consolidated financial statements included in this annual report provides a description of the significant differences between ROC GAAP and U.S. GAAP as they relate to us and a reconciliation of net income and shareholders’ equity. Significant differences between ROC GAAP and U.S. GAAP include impairment loss
reversal, undistributed earnings tax, stock-based compensation, business combination and noncontrolling interest treatment.
Recent U.S. GAAP Accounting Pronouncements
In June 2009, the FASB issued new guidance relating to the transfer of financial assets. The new guidance requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. The new guidance becomes effective for annual reporting periods beginning after November 15, 2009. The adoption of the new guidance did not have a material impact on our consolidated financial position and results of operations.
In June 2009, the FASB issued new guidance to improve financial reporting by enterprises involved with variable interest entities, or VIE. The new guidance modifies the approach for determining the primary beneficiary of a VIE. Under the modified approach, an enterprise is required to make a qualitative assessment whether it has (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If an enterprise has both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate the VIE. The new guidance becomes effective for annual reporting periods beginning after November 15, 2009. Based on our analysis, the adoption of the new guidance did not result in the identification of any VIEs where we are the primary beneficiary.
In September 2009, the FASB issued an accounting standard update which provides guidance on how to separate consideration in multiple-deliverable arrangements and significantly expands disclosure requirements. The standard establishes a hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The update is effective for annual reporting periods beginning on or after June 15, 2010. Based on our analysis, we currently do not anticipate that the new guidance will have a material effect on our consolidated financial position and results of operations.
In January 2010, the FASB issued an accounting update that amended the guidance and clarified the disclosure requirements about fair market value measurement. These amended standards require new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which will be effective for us as of January 1, 2011, the remaining new disclosure requirements were effective for us as of January 1, 2010. We have included these new disclosures, as applicable, in note 33(j) to our consolidated financial statements included in this annual report.
In January 2010, the FASB issued an accounting update to clarify the scope of decrease in ownership provisions of ASC 810-10 and expanded the disclosures required upon deconsolidation of a subsidiary. We are required to retrospectively apply this guidance for the year ended December 31, 2009. The adoption of the guidance did not have a material impact on our consolidated financial position and results of operations.
In April 2010, the FASB issued an accounting update that provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period in which it is achieved, only if the milestone meets all criteria to be considered substantive. This standard will be effective for us on a prospective basis as of January 1, 2011. Based on our analysis, we currently do not anticipate that the new guidance will have a material effect on our consolidated financial position and results of operations.
In April 2010, the FASB issued an accounting update to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities
trades must not be considered to contain a market, performance, or service condition. Therefore, an entity should not classify such an award as a liability if it otherwise qualifies for classification in equity. This guidance is effective for annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment to the opening balance of retained earnings for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. Earlier application is permitted. Based on our analysis, we currently do not anticipate that the new guidance will have a material effect on our consolidated financial position and results of operations.
In December 2010, the FASB issued an accounting update to require that supplemental pro forma information disclosures pertaining to acquisitions should be presented as if the business combination(s) occurred as of the beginning of the prior annual period when comparative financial statements are presented. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations consummated in periods beginning after December 15, 2010. Early adoption is permitted. We will make the required disclosures prospectively as of the date of the adoption for any material business combinations or series of immaterial business combinations that are material in the aggregate.
In December 2010, the FASB issued an accounting update to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. For public entities, this guidance is effective for impairment tests performed during entities’ fiscal years that begin after December 15, 2010. Early application will not be permitted. Based on our analysis, we currently do not anticipate that the new guidance will have a material effect on our consolidated financial position and results of operations.
We have historically been able to satisfy our working capital needs from our cash flow from operations. We have historically funded our capacity expansion from internally generated cash and, to the extent necessary, the issuance of equity securities and long-term borrowings. If adequate funds are not available on satisfactory terms, we may be forced to curtail our expansion plans. Moreover, our ability to meet our working capital needs from cash flow from operations will be affected by the demand for our packaging, testing services and electronics manufacturing services, which in turn may be affected by several factors. Many of these factors are outside of our control, such as economic downturns and declines in the prices of our services or products caused by a downturn in the industry. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our operating results are subject to significant fluctuations, which could adversely affect the market value of your investment.” To the extent we do not generate sufficient cash flow from our operations to meet our cash requirements, we will have to rely on external financing.
Net cash provided by operating activities amounted to NT$36,965.1 million (US$1,268.5 million) in 2010, primarily as a result of (i) our improved operation performance with net income of NT$19,194.9 million (US$658.7 million) and (ii) our non-cash depreciation and amortization in the amount of NT$19,854.5 million (US$681.3 million). Net cash provided by operating activities amounted to NT$15,517.2 million in 2009, primarily as a result of adjustment for non-cash depreciation and amortization of NT$17,638.0 million. Net cash provided by operating activities amounted to NT$30,728.8 million in 2008, primarily as a result of adjustments for non-cash depreciation and amortization of NT$17,244.9 million. The increase in net cash provided by operating activities in 2010 compared to 2009 was primarily due to the cash inflows from (i) the increase of net income, (ii) the decrease in accounts receivables and (iii) the decrease in construction in process related to property development. The decrease in net cash provided by operating activities in 2009 compared to 2008 was primarily due to cash outflow as a result of an increase in accounts receivable and construction in process related to property development, partially offset by cash inflow as a result of an increase in accounts payable.
Net cash used in investing activities amounted to NT$36,085.5 million (US$1,238.3 million) in 2010, primarily due to the acquisition of property, plant and equipment of NT$34,109.1 million (US$1,170.5 million). Net cash used
in investing activities amounted to NT$15,980.7 million in 2009, primarily due to the acquisition of property, plant and equipment of NT$11,445.6 million. Net cash used in investing activities amounted to NT$36,359.2 million in 2008, primarily due to the acquisition of our subsidiaries for NT$26,490.5 million, the acquisition of property, plant and equipment of NT$18,583.3 million, offset by net proceeds from disposal of available-for-sale financial assets of NT$9,021.6 million.
Net cash provided by financing activities in 2010 amounted to NT$1,701.5 million (US$58.4 million). This amount reflected primarily our proceeds obtained from long-term bank loans in the amount of NT$32,586.2 million (US$1,118.3 million), partially offset by (i) our repayment of bank loans, including short-term borrowings, in the amount of NT$28,506.5 million (US$978.3 million), (ii) our distributed cash dividends in the amount of NT$1,940.7 million (US$66.6 million), and (iii) our repurchase of treasury stock in the amount of NT$1,185.2 million (US$40.7 million). Net cash used in financing activities in 2009 amounted to NT$2,778.5 million. This amount reflected primarily cash dividends of NT$2,575.7 million and the repurchase of treasury stock of NT$1,314.3 million, which was partially offset by the net proceeds from the bank loans and capital lease obligations of NT$2,005.5 million. Net cash provided by financing activities in 2008 amounted to NT$13,862.4 million. This amount reflected primarily net proceeds from long-term bank loans and capital lease obligations of NT$30,162.4 million, which was offset by the distribution of cash dividends of NT$8,826.6 million and repayment of bonds payable of NT$5,550.0 million.
As of December 31, 2010, our primary source of liquidity was NT$23,397.6 million (US$802.9 million) of cash and equivalent and NT$1,697.0 million (US$58.2 million) of financial assets—current. Our financial assets—current primarily consisted of mutual funds and financial notes. As of December 31, 2010, we had total unused short-term credit lines of NT$72,558.1 million (US$2,490.0 million), and total unused long-term credit lines of NT$28,113.9 million (US$964.8 million). As of December 31, 2010, we had working capital of NT$25,864.4 million (US$887.6 million).
As of December 31, 2010, we had total borrowings of NT$69,508.4 million (US$2,385.3 million), NT$14,154.5 million (US$485.7 million) of which were short-term borrowings and NT$55,353.9 million (US$1,899.6 million) of which were long-term borrowings. In 2010, the maximum amount of our short-term borrowings was NT$26,795.1 million (US$919.5 million) and the average amount of our short-term borrowings was NT$21,197.7 million (US$727.4 million). The fluctuation was primarily because our working capital fluctuated during 2010 from time to time. The annual interest rate for borrowings under our short-term bank loans ranged from 0.72% to 5.90% as of December 31, 2010. Our short-term loans are primarily revolving facilities with a term of one year, each of which may be extended on an annual basis with lender consent. As of December 31, 2010, we had outstanding long-term bank loans, less current portion, of NT$52,363.7 million (US$1,797.0 million). As of December 31, 2010, the current portion of our long-term bank loans was NT$2,990.2 million (US$102.6 million). Our long-term borrowings typically carried variable annual interest rates which ranged between 0.70% to 4.40% as of December 31, 2010.
We have pledged a portion of our assets, with a carrying value of NT$2,509.1 million (US$86.1 million) as of December 31, 2010, to secure our obligations under our short-term and long-term facilities.
In June 2009, we entered into a syndicated loan agreement with a banking syndicate led by Citibank, N.A., Taipei Branch for a NT$12,000.0 million term loan facility for operating revolving fund, all of which we have drawn down in 2010, mainly to finance our acquisition of Universal Scientific.
In March 2008, we entered into a syndicated loan agreement with a banking syndicate led by Citibank, N.A., Taipei Branch for a NT$24,750.0 million term loan facility, which we and the lenders subsequently agreed to reduce to NT$17,500.0 million to afford us more flexibility to request additional loans in the future. As of June 3, 2008, we had drawn down NT$17,500.0 million, the full amount of the facility, to finance a portion of the consideration for our acquisition, by way of a scheme of arrangement under Singapore law, of all the outstanding ordinary shares of ASE Test that we did not already directly or indirectly own. In May 2008, we entered into an additional syndicated loan agreement with a banking syndicate led by Citibank, N.A., Taipei Branch for a US$200.0 million term loan facility, also for the purposes of financing our acquisition of ASE Test’s outstanding ordinary shares.
In March 2008, ASESH AT entered into a US$147.0 million five-year syndicated credit facility for our repayment requests and operating revolving fund, which the DBS Bank (China) Limited, Shanghai Branch acted as an arranger and agent. The facility bears interest at LIBOR plus 0.9% per annum.
Our long-term loans and facilities contain various financial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain financial ratios, such as liquidity ratio, indebtedness ratio, interest coverage ratio and other technical requirements. In general, 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, other than in connection with restructurings of consolidated entities, and encumber or dispose of assets. 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 our liquidity, as well as our financial condition and operations.
We have on occasion failed to comply with certain financial covenants in some of our loan agreements. Such non-compliance may also have, through broadly worded cross-default provisions, resulted in default under some of the agreements governing our other existing debt. For example, we failed to comply with certain financial covenants in some of our loan agreements as a result of additional borrowings to fund our privatization of ASE Test in May 2008, the distribution of cash dividends in August 2008, and our acquisition of Universal Scientific in February 2010; however, we have timely obtained waivers from our counterparties. If we are unable to timely remedy any of our non-compliance under such loan agreements or obtain applicable waivers or amendments, we would breach our financial covenants and our financial condition would be adversely affected. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Restrictive covenants and broad default provisions in our existing debt agreements may materially restrict our operations as well as adversely affect our liquidity, financial condition and results of operations.”
Our contingent obligations consist of guarantees provided by us to our subsidiaries. As of December 31, 2010, we have no contingent obligations.
We have made, and expect to continue to make, substantial capital expenditures in connection with the expansion of our production capacity. The table below sets forth our principal capital expenditures incurred for the periods indicated.
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| | | NT$ | | | NT$ | | | NT$ | | | US$ | |
| | | (in millions) | |
| Machinery and equipment | | | 12,312.5 | | | | 11,389.5 | | | | 30,238.2 | | | | 1,037.7 | |
| Building and improvements | | | 4,311.2 | | | | 1,242.4 | | | | 4,522.9 | | | | 155.2 | |
We have budgeted capital expenditures of approximately US$750-US$800 million for 2011, primarily to purchase machinery and equipment in connection with the expansion of our packaging and testing operations. We may adjust the amount of our capital expenditures upward or downward based on market conditions, the progress of our expansion plans and cash flow from operations. Due to the rapid changes in technology in the semiconductor industry, we frequently need to invest in new machinery and equipment, which may require us to raise additional capital. We cannot assure you that we will be able to raise additional capital should it become necessary on terms acceptable to us or at all. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Because of the highly cyclical nature of our industry, our capital requirements are difficult to plan. If we cannot obtain additional capital when we need it, our growth prospects and future profitability may be adversely affected.”
We believe that our existing cash, marketable securities, expected cash flow from operations and existing credit lines under our loan facilities will be sufficient to meet our capital expenditures, working capital, cash obligations under our existing debt and lease arrangements, and other requirements for at least the next 12 months. We currently hold cash primarily in U.S. dollars, New Taiwan dollars, Chinese yuan, Japanese yen, Malaysian ringgit and Korean won. As of December 31, 2010, we had contractual obligations of NT$55,010.5 million (US$1,887.8 million) due in
the next three years. We currently expect to meet our payment obligations through the expected cash flow from operations, long-term borrowings and the issuance of additional equity or equity-linked securities. We will continue to evaluate our capital structure and may decide from time to time to increase or decrease our financial leverage through equity offerings or borrowings. The issuance of additional equity or equity-linked securities may result in additional dilution to our shareholders.
From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment, acquisition or divestment.
Our treasury team, under the supervision of our chief financial officer, is responsible for setting our funding and treasury policies and objectives. Our exposure to financial market risks relate primarily to changes in interest rates and foreign currency exchange rates. To mitigate these risks, we utilize derivative financial instruments, the application of which is primarily to manage these exposures, and not for speculative purposes.
We have, from time to time, entered into interest rate swap transactions to hedge our interest rate exposure. As of December 31, 2010, we had NT$12,687.5 million and US$200.0 million outstanding in interest rate swap contracts for NT dollar and U.S. dollar, respectively. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Market Risk—Interest Rate Risk.” We have entered into forward exchange contracts, swap contracts, cross currency swap contracts and European foreign currency options contracts to hedge our existing assets and liabilities denominated in foreign currencies. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and note 5 and note 26 to our consolidated financial statements included in this annual report.
For 2008, 2009 and 2010, our research and development expenditures totaled approximately NT$3,671.2 million, NT$3,612.0 million and NT$6,162.2 million (US$211.5 million), respectively. These expenditures represented approximately 3.9%, 4.2% and 3.3% of net revenues in 2008, 2009 and 2010, respectively. We have historically expensed all research and development costs as incurred and none is currently capitalized. As of April 30, 2011, we employed 5,123 employees in research and development.
Packaging
We centralize our research and development efforts in packaging technology in our Kaohsiung, Taiwan facilities. After initial phases of development, we conduct pilot runs in one of our facilities before new technologies or processes are implemented commercially at other sites. Facilities with special product expertise, such as ASE Korea, also conduct research and development of these specialized products and technologies at their sites. One of the areas of emphasis for our research and development efforts is improving the efficiency and technology of our packaging processes and these efforts are expected to continue. We are also putting significant research and development efforts into the development and adoption of innovative technology. We work closely with manufacturers of our packaging equipment and materials in designing and developing the equipment and materials used in our production process. We also collaborate with our significant customers to co-develop new product and process technologies.
In addition to investing in the development of advanced package assembly technology and improving production efficiency, a significant portion of our research and development efforts is focused on the development of advanced substrate production technology for BGA packaging. Substrate is the principal raw material for BGA packages. Development and production of advanced substrates involve complex technology. We are currently working closely with certain first-tier substrate suppliers in Asia, primarily including those located in Japan, Taiwan and Korea. We believe that our successful cooperation with substrate suppliers to enhance the overall substrate production capability and to meet future advanced package requirement has enabled us to capture an increasingly important value-added component of the packaging process, helped ensure a stable and cost-effective supply of substrates for our BGA packaging operations and shortened time to market.
Testing
Our research and development efforts in the area of testing have focused primarily on developing advanced test solutions for customer requirement. These efforts include developing test software of logic/mixed-signal/RF/discrete semiconductors, characterization of semiconductors, layout design, electrical simulation for high frequency test board and developing software of parametric test data analysis. We work closely with our customers on the leading edge test technologies, such as 3D IC test and contactless test. Our research and development operations also include an equipment development group, which currently designs testing hardware and software for specific semiconductors to offer our customers cost effective test solutions.
Electronics Manufacturing Services
To further enhance the quality of our services and products, we focus on developing diversified and innovative products to improve our competitiveness. By leveraging our proprietary research and development expertise, we are able to provide our customers with high performance and cost-effective products and services by optimizing our product design, engineering and manufacturing capabilities. During the process of designing, as well as developing the technology for, our software and hardware, our research and development team also dedicates itself to discovering new know-how, and then applying such know-how to create new, advanced and improved products, processes, methodology and services. We are currently investing in the development of products used in electronic manufacturing services in relation to computers and peripherals, communications, industrial, automotive, and storage and server applications.
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
The following table sets forth the maturity of our contractual obligations as of December 31, 2010.
| | | | |
| | | | | | | | | | | | | | | | |
| | | NT$ | | | NT$ | | | NT$ | | | NT$ | | | NT$ | |
| | | (in millions) | |
| Contractual Obligations: | | | | | | | | | | | | | | | |
Long-term debt(1) | | | 55,449.2 | | | | 17,321.7 | | | | 34,420.7 | | | | 3,706.8 | | | | — | |
Capital lease obligations(2) | | | 39.6 | | | | 28.8 | | | | 10.8 | | | | — | | | | — | |
Operating leases(3) | | | 553.9 | | | | 286.6 | | | | 156.7 | | | | 110.6 | | | | — | |
Purchase obligations(4) | | | 2,785.2 | | | | 2,785.2 | | | | — | | | | — | | | | — | |
Total(5)(6)(7)(8) | | | 58,827.9 | | | | 20,422.3 | | | | 34,588.2 | | | | 3,817.4 | | | | — | |
| (1) | Excludes interest payments. |
| (2) | Represents our commitments under property leases less imputed interest. These obligations are recorded on our consolidated balance sheets. |
| (3) | Represents our commitments under leases for land, machinery and equipment such as testers, and office buildings and equipment. See note 29 to our consolidated financial statements included in this annual report. |
| (4) | Represents unpaid commitments for construction. These commitments are not recorded on our consolidated balance sheets as of December 31, 2010. See note 29 to our consolidated financial statements included in this annual report. Total commitments for construction of buildings were approximately NT$3,117.0 million (US$107.0 million), of which NT$331.8 million (US$11.4 million) had been paid as of December 31, 2010. |
| (5) | Excludes non-binding commitments to purchase machinery and equipment of approximately NT$4,981.0 million (US$170.9 million), of which NT$837.8 million (US$28.8 million) had been paid as of December 31, 2010. See note 29 to our consolidated financial statements included in this annual report. |
| (6) | Excludes payments that vary based upon our net sales or sales volume, such as commissions, service fees and royalty payments for technology license agreements. Royalty expenses in 2010 were approximately NT$335.8 million (US$11.5 million). See note 29 to our consolidated financial statements included in this annual report. |
| (7) | Excludes our minimum pension funding requirements since such amounts have not been determined. Under defined benefit pension plans, we made pension contributions of approximately NT$316.8 million (US$10.9 million) in 2010, and we estimate that we will contribute approximately NT$312.6 million (US$10.7 million) in 2011. See note 20 to our consolidated financial statements included in this annual report. |
| (8) | We recognized additional long term taxes payable of NT$17.6 million (US$0.6 million) and accrued interest and penalties of NT$20.6 million (US$0.7 million) related to uncertain tax positions in the year ended December 31, 2010. At that time, we were unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of the outcome of the tax audits. |
Directors
Our board of directors is elected by our shareholders in a general meeting at which a quorum, consisting of a majority of all issued and outstanding common shares, is present. The chairman is elected by the board from among the directors. Our nine-member board of directors, including two independent directors, is responsible for the management of our business.
The term of office for our directors is three years from the date of election. The current board of directors began serving on June 26, 2009. The terms of the current directors expire on June 25, 2012. Directors may serve any number of consecutive terms and may be removed from office at any time by a resolution adopted at a meeting of shareholders. Normally, all board members are elected at the same meeting of shareholders, except where the posts of one-third or more of the directors are vacant, at which time a special meeting of shareholders shall be convened to elect directors to fill the vacancies. We and our subsidiaries do not have service contracts with our directors that provide for benefits upon termination of employment.
Our board of directors established an audit committee on July 22, 2005 to satisfy the requirements of Rule 10A-3 under the Exchange Act. The audit committee is appointed by the board of directors and currently consists of Shen-Fu Yu and Ta-Lin Hsu, who are independent under Rule 10A-3 and financially literate with accounting or related financial management expertise. The audit committee has responsibility for, among other things, overseeing the qualifications, independence and performance of our independent auditors and the integrity of our financial statements.
The following table sets forth information regarding all of our directors as of April 30, 2011.
| | | | | | | | Other Significant Positions Held Outside of the ASE Group |
Jason C.S. Chang(1) (2) | | Director, Chairman and Chief Executive Officer | | 1984 | | 66 | | None |
Richard H.P. Chang(1) | | Director, Vice Chairman and President | | 1984 | | 64 | | None |
Tien Wu(2) | | Director and Chief Operating Officer | | 2003 | | 53 | | None |
Joseph Tung(2) | | Director, Chief Financial Officer and Vice President | | 1997 | | 52 | | Independent director of Ta Chong Bank Ltd. |
Raymond Lo(2) | | Director and General Manager, Kaohsiung packaging facility | | 2006 | | 57 | | None |
Jeffrey Chen(2) | | Director and Executive Vice President | | 2003 | | 47 | | None |
Rutherford Chang(3) | | Director | | 2009 | | 31 | | None |
| Shen-Fu Yu | | Independent Director | | 2009 | | 66 | | Supervisor, Dynapack International Technology Corporation |
| Ta-Lin Hsu | | Independent Director | | 2009 | | 68 | | Chairman and founder, H&Q Asia Pacific |
| (1) | Jason C.S. Chang and Richard H.P. Chang are brothers. |
| (2) | Representative of ASE Enterprises, a company organized under the laws of Hong Kong, which held 17.26% of our outstanding common shares as of March 31, 2011. All of the outstanding shares of ASE Enterprises are held by a company organized under the laws of the British Virgin Islands in trust for the benefit of the family of our Chairman and Chief Executive Officer, Jason C.S. Chang, who is the sole shareholder and director of that company. |
| (3) | Rutherford Chang is the son of Jason C.S. Chang |
Supervisors
We currently have five supervisors, each serving a three-year term. The current supervisors began serving on June 26, 2009, and their terms will expire on June 25, 2012. The supervisors’ duties and powers include investigation of our business condition, inspection of our corporate records, verification and review of financial statements to be presented by our board of directors at shareholders’ meetings, convening of shareholders’ meetings, representing us in negotiations with our directors and notification, when appropriate, to the board of directors to cease acting in contravention of any applicable law or regulation, our Articles of Incorporation or the resolutions of our shareholders’ meeting. Each supervisor is elected by our shareholders and cannot concurrently serve as a director, managerial officer or other staff member. The ROC Company Law requires at least one supervisor be appointed at all times, or two supervisors for a company with publicly issued equity shares, and that a supervisor’s term of office be no more than three years.
The following table sets forth information regarding all of our supervisors as of April 30, 2011.
| | | | | | | | Other Significant Positions Held Outside of the ASE Group |
Samuel Liu(1) | | Supervisor | | 2005 | | 63 | | None |
Tien-Szu Chen(1) | | Supervisor | | 2006 | | 49 | | None |
John Ho(1) | | Supervisor | | 1998 | | 56 | | None |
Yen-Yi Tseng(2) | | Supervisor | | 2000 | | 69 | | Chairman of Hung Ching |
Jerry Chang(3) | | Supervisor | | 2009 | | 33 | | None |
| (1) | Representative of ASE Test Taiwan. |
| (2) | Representative of Hung Ching. |
| (3) | Jerry Chang is the son of Richard H.P. Chang. |
In accordance with ROC law, each of our directors and supervisors is elected either in his or her capacity as an individual or as an individual representative of a corporation or government. Persons designated to represent corporate or government shareholders as directors are typically nominated by such shareholders at the annual general meeting and may be replaced as representatives by such shareholders at will. Of the current directors and supervisors, five represent ASE Enterprises, three represent ASE Test Taiwan and one represents Hung Ching. The remaining directors and supervisors serve in their capacity as individuals.
Executive Officers
The following table sets forth information regarding all of our executive officers as of April 30, 2011.
| | | | | | |
Jason C.S. Chang | | Chairman and Chief Executive Officer | | 27 | | 66 |
Richard H.P. Chang | | Vice Chairman and President | | 27 | | 64 |
Tien Wu | | Chief Operating Officer; Chief Executive Officer, ISE Labs | | 11 | | 53 |
Joseph Tung | | Chief Financial Officer and Vice President | | 16 | | 52 |
Raymond Lo | | President, ASE Test Taiwan; General Manager, Kaohsiung packaging facility | | 25 | | 57 |
| | | | | | |
Tien-Szu Chen | | President, PowerASE | | 23 | | 49 |
Chih-Chiang Lee | | President, ASESH AT | | 24 | | 49 |
Chun-Che Lee | | President, ASE Shanghai | | 27 | | 51 |
Ung Bae | | President, ASE Korea | | 13 | | 54 |
Chih-Hsiao Chung | | President, ASE Japan | | 11 | | 46 |
Kwai Mun Lee | | President, ASE South-East Asia operations | | 13 | | 48 |
Samuel Liu | | Chief Executive Officer, Universal Scientific | | 7 | | 63 |
Cheng-Jung Wei | | President, Universal Scientific | | 24 | | 47 |
Biographies of Directors, Supervisors and Executive Officers
Jason C.S. Chang has served as Chairman of ASE Inc. since its founding in March 1984 and as its Chief Executive Officer since May 2003. He is also a director of Universal Scientific. He holds a degree in electrical engineering from National Taiwan University and a master’s degree from the Illinois Institute of Technology. He is the brother of Richard H.P. Chang, our Vice Chairman and President.
Richard H.P. Chang has served as Vice Chairman of ASE Inc. since November 1999 after having served as President of ASE Inc. since its founding in March 1984, and served as Chief Executive Officer of ASE Inc. from July 2000 to April 2003. In February 2003, he was again appointed President of ASE Inc. upon the retirement of Mr. Leonard Y. Liu. He is currently the chairman of Universal Scientific. He holds a degree in industrial engineering from Chung Yuan Christian University of Taiwan. He is the brother of Jason C.S. Chang, our Chairman and Chief Executive Officer.
Tien Wu has served as a director of ASE Inc. since June 2003 and Chief Operating Officer since April 2006, prior to which he served as the President of Worldwide Marketing and Strategy of the ASE Group. Prior to joining ASE Inc. in March 2000, Mr. Wu held various managerial positions with IBM. He holds a bachelor’s degree in computer engineering from National Taiwan University, a master’s degree in mechanical engineering and a doctorate degree in applied mechanics from the University of Pennsylvania.
Joseph Tung has served as a director of ASE Inc. since April 1997 and Chief Financial Officer since December 1994. Before joining ASE Inc., Mr. Tung was a Vice President at Citibank, N.A. He received a degree in economics from the National Chengchi University of Taiwan and a master’s degree in business administration from the University of Southern California.
Raymond Lo has served as a director of ASE Inc. and General Manager of our packaging facility in Kaohsiung, Taiwan since April 2006. Mr. Lo also served as a supervisor of ASE Inc. between July 2000 and April 2006. Before joining ASE Inc., Mr. Lo was the Director of Quality Assurance at Zeny Electronics Co. He holds a degree in electronic physics from the National Chiao-Tung University of Taiwan.
Jeffrey Chen has served as a director of ASE Inc. since June 2003 and an Executive Vice President for Chairman Office. He is also director of Universal Scientific. Prior to joining ASE Inc., he worked in the corporate banking department of Citibank, N.A. in Taipei and as a Vice President of corporate finance at Bankers Trust in Taipei. He holds a degree in finance and economics from Simon Fraser University in Canada and a master’s degree in business administration from the University of British Columbia in Canada.
Rutherford Chang has served as a director of ASE Inc. since June 2009 and a special assistant to the Chairman of ASE Inc. since March 2005. He received a bachelor’s degree in psychology from Wesleyan University in Connecticut. He is the son of Jason C.S. Chang, our Chairman and Chief Executive Officer.
Shen-Fu Yu has served as an independent director of ASE Inc. since June 2009. He is also a supervisor of Dynapack International Technology Corporation. He has worked in Deloitte & Touche Accounting Firm as a
consultant from June 2003 to November 2006. He received a bachelor’s degree in Accounting in National Taiwan University and a master’s degree in Accounting from National ChengChi University.
Ta-Lin Hsu has served as an independent director of ASE Inc. since June 2009. He is currently the chairman and founder of H&Q Asia Pacific. He received a bachelor’s degree in physics from National Taiwan University, a master’s degree in electrophysics from the Polytechnic Institute of Brooklyn and a doctorate degree in Electrical Engineering from the University of California at Berkeley.
Samuel Liu has served as a supervisor of ASE Inc. since May 2005. He is currently the Chief Executive Officer for Universal Scientific. Mr. Liu has worked in the electronics industry for over 30 years in various technical and management roles. He holds a bachelor’s degree in electrical engineering from National Taiwan University and a doctorate degree in material science from Stanford University.
Tien-Szu Chen has served as a supervisor of ASE Inc. since June 2006. Mr. Chen holds a bachelor’s degree in industrial engineering from Chung Yuan Christian University in Taiwan.
John Ho has served as a supervisor of ASE Inc. since April 1998. He is also a director of Universal Scientific. He served as Chief Financial Officer of ASE Inc. from 1988 until 1995. He holds a degree in business administration from National Taiwan University and a master’s degree in business administration from the University of Iowa.
Yen-Yi Tseng has served as a supervisor of ASE Inc. since July 2000 and Chairman of Hung Ching since July 2002. Mr. Tseng served as President of Ret-Ser Engineering Agency from 1991 to 1998. He holds a degree in civil engineering from National Taiwan University and a master’s degree in system engineering from Asian Institute of Technology in Thailand. He was also a participant in the Program for Management Development at Harvard Business School.
Jerry Chang has served as a supervisor of ASE Inc. since June 2009. Prior to joining ASE Inc., he was an analyst at Morgan Stanley Asia. He received a bachelor’s degree in political economy from Williams College in Massachusetts. He is the son of Richard H.P. Chang, our Vice Chairman and President.
Chih-Chiang Lee has served as a President of ASESH AT since 2007 prior to which he has occupied various managing positions at ASE Inc. since 1988. Mr. Lee holds a degree in engineering management from National Tsing Hua University in Taiwan.
Chun-Che Lee has served as a President of ASE Shanghai since July 2005. Mr. Lee has also served as a President of R&D of ASE Inc., prior to which he was a vice president, director and manager of research and development at ASE Inc. since 1984. Mr. Lee holds a degree in aeronautic from the Tamkung University of Taiwan.
Ung Bae has served as President of ASE Korea since July 2008, after serving as Senior Vice President of ASE Korea since July 1999. Mr. Bae was Vice President of Motorola Korea, Limited before joining ASE Korea when we acquired Motorola Korea, Limited. He holds a degree in electronic engineering from the In-Ha university of Korea.
Chih-Hsiao Chung has served as President of ASE Japan since March 2011. Mr. Chung has also managed the sales and marketing of ASE Japan region since April 2007. Before joining ASE Inc., Mr. Chung was the Senoir Manager of Sale and Marketing at Kimberly Clark Co., Taiwan. He holds a master’s degree in business administration from the University of Wisconsin-Madison.
Kwai Mun Lee has served as President of our Southeast Asia operations, with responsibility for the operations of our Penang, Malaysia and Singapore manufacturing facilities, since March 2006. Before joining the ASE Group, Mr. Lee held senior management positions at Chartered Semiconductor and STATSChipPAC. He started his career as an engineer at Intel. He holds a degree in engineering from the Swinburne Institute of Technology in Australia.
Cheng-Jung Wei has served as a director of Universal Scientific since May 2008, the President of Universal Scientific since April 2008 and the vice president of Mobility Solution Business Unit of Universal Scientific since
September 2004. He joined Universal Scientific 23 years ago as an engineer in July 1987. He holds a bachelor’s degree in electrical engineering from Chinese Culture University and a master’s degree in business administration from Tunghai University.
The business address of our directors, supervisors and executive officers is our registered office.
In 2010, we paid to our directors, supervisors and executive officers approximately NT$333.2 million (US$11.4 million) in cash remuneration. We did not pay any remuneration in kind to our directors, supervisors or executive officers in 2010. In 2010, we accrued pension costs of NT$44.8 million (US$1.5 million) for retirement benefits for our management. The remuneration of our independent directors is set at NT$2 million per person per year. In addition, according to our Articles of Incorporation, not more than 2% of our annual net earnings (after recovering any losses incurred in prior years and deducting the legal reserve and special reserve provisions, if any) may be distributed as bonuses to our directors. 7% to 10% of our annual net earnings (after recovering any losses incurred in prior years and deducting the legal reserve and special reserve provisions, if any) may be distributed as a bonus to employees, including executive officers.
We have not provided any loans to or guarantees for the benefit of any of our directors, supervisors or executive officers. For information regarding our pension and other retirement plans and those of our subsidiaries, see note 20 to our consolidated financial statements included in this annual report.
ASE Inc. Employee Bonus and Stock Option Plans
We award bonuses to employees of ASE Inc. and its subsidiaries who are located in Taiwan based on overall income and individual performance targets. Prior to 2009, these employees were eligible to receive bonuses in the form of our common shares valued at par. Beginning in 2009, employees are eligible to receive bonuses in the form of our common shares valued at the closing price (after adjustment with consideration of the effects on the share price, if any, brought by cash and stock dividends resolved at shareholders’ meetings) of the common shares on the day prior to our shareholders’ meeting. Actual amounts of bonuses to individual employees are determined based upon the employee meeting specified individual performance objectives. In 2008, we granted an aggregate of 38,320,500 common shares as stock bonuses with an aggregate value of NT$383.2 million. At our annual shareholders’ meeting held on June 19, 2008, our shareholders, in addition to approving such stock bonuses, also approved NT$ 383.2 million as cash bonuses to employees. In 2009, we granted an aggregate value of NT$554.4 million in cash bonuses to our employees. In 2010, we granted an aggregate value of NT$607.0 million in cash bonuses to our employees. In 2011, our directors proposed a distribution of NT$1,523.1 million (US$52.3 million) as cash bonus to employees. The proposal is still awaiting shareholders’ approval.
We currently maintain four option plans, adopted in 2002, 2004, 2007 and 2010. Pursuant to these plans, our full-time employees as well as the full-time employees of our domestic and foreign subsidiaries are eligible to receive stock option grants. Each option entitles the holder to purchase one ASE Inc. common share at a price equal to (for the 2002, 2004 and 2007 plans), or not less than (for the 2010 plan), the closing market price on the date of the option issuance, such exercise price being subject to retroactive adjustment in the event of certain capital transactions in subsequent periods. Each option is exercisable upon vesting for five years. Forty percent of the options originally granted vest upon the second anniversary of the grant date, and an additional 10% of the options originally granted vest every six months thereafter. Each option expires at the end of the tenth year following its grant date. The options are generally not transferable. As of December 31, 2010, a total of 159,968,000 options had been granted under the 2002 plan, 145,989,000 of which had an original exercise price of NT$20.80 per share (currently adjusted to NT$8.5 per share) and 13,979,000 of which had an original exercise price of NT$24.6 per share (currently adjusted to NT$12.1 per share). As of December 31, 2010, a total of 139,917,000 options had been granted under the 2004 plan, 124,917,000 of which had an original exercise price of NT$26.60 per share (currently adjusted to NT$17.2 per share) and 15,000,000 of which had an original exercise price of NT$20.55 per share (currently adjusted to NT$14.0 per share). As of December 31, 2010, a total of 185,806,000 options had been granted under the 2007 plan. The original exercise price under the 2007 plan was NT$30.65 per share (currently adjusted to NT$26.9 per share). As of December 31, 2010, a total of 187,719,500 options have been granted under
the 2010 plan under which the original exercise price was NT$28.6 per share (currently adjusted to NT$26.0 per share).
ASE Mauritius Inc. Share Option Plan
As of December 31, 2010, ASE Mauritius Inc. maintained one option plan adopted in 2007. Under this plan, certain employees of ASE Mauritius Inc. and the ASE Group are granted options to purchase ordinary shares of ASE Mauritius Inc. at an exercise price of US$1.70, which exercise price was determined by taking into account a fairness opinion rendered by an independent appraiser and was reviewed by our accountants. Each option is exercisable upon vesting for five years and expires after ten years. As of December 31, 2010, a total of 30,000,000 options had been granted under this plan with an exercise price of US$1.70.
Universal Scientific Share Option Plans
As a result of our acquisition of Universal Scientific, we assumed option plans previously adopted by Universal Scientific and USI Enterprise Limited, one of Universal Scientific’s subsidiaries.
Universal Scientific had two option plans adopted in 2002 and 2007, under which certain employees of Universal Scientific and its subsidiaries were granted options to purchase common shares of Universal Scientific. Each option is exercisable upon vesting for five years and will expire after ten years. In June 2010, Universal Scientific and its employees reached an agreement to cancel the unexercised options with cash compensation at a fixed amount per unit. We recognized the compensation cost in the amount of NT$138.5 million (US$4.8 million) for the year ended December 31, 2010.
In addition, USI Enterprise Limited maintains two option plans adopted in 2007 and 2010, under which certain employees of Universal Scientific were granted options to purchase common shares of USI Enterprise Limited. Pursuant to the 2010 plan, certain of our employees were also granted options to purchase common shares of USI Enterprise Limited. Each option under these two plans is exercisable upon vesting for five years and will expire after ten years. As of December 31, 2010, we had 18,069,000 options outstanding with an exercise price of US$1.53 per share and 8,800,000 options outstanding with an exercise price of US$2.42 per share under these two plans respectively.
The following table sets forth, for the periods indicated, certain information concerning our employees for the dates indicated.
| | | | |
| | | | | | | | | | |
Total | | | 26,977 | | | | 29,538 | | | | 48,901 | |
| Function | | | | | | | | | | | | |
Direct labor | | | 15,114 | | | | 17,718 | | | | 28,715 | |
Indirect labor (manufacturing) | | | 6,704 | | | | 6,629 | | | | 11,301 | |
Indirect labor (administration) | | | 2,922 | | | | 2,661 | | | | 3,867 | |
Research and development | | | 2,237 | | | | 2,530 | | | | 5,018 | |
| Location | | | | | | | | | | | | |
Taiwan | | | 16,291 | | | | 16,927 | | | | 22,381 | |
Malaysia | | | 2,324 | | | | 2,110 | | | | 2,178 | |
PRC | | | 4,846 | | | | 7,170 | | | | 19,394 | |
Korea | | | 1,826 | | | | 1,910 | | | | 2,492 | |
Japan | | | 974 | | | | 758 | | | | 677 | |
Singapore | | | 380 | | | | 377 | | | | 848 | |
United States | | | 336 | | | | 286 | | | | 335 | |
Mexico | | | - | | | | - | | | | 593 | |
Others | | | - | | | | - | | | | 3 | |
The increase in our employee count in 2010 was primarily due to our acquisition of Universal Scientific in 2010 and the growth of our operations.
Eligible employees may participate in our employee share bonus plan and stock option plans and our subsidiaries’ share option plans, such as the option plans adopted by ASE Mauritius and USI Enterprise Limited. See “—Compensation.”
With the exception of ASE Korea’s employees, our employees are not covered by any collective bargaining arrangements. We believe that our relationship with our employees is good.
The following table sets forth certain information with respect to our common shares and options exercisable for our common shares held by our directors, supervisors and executive officers as of March 31, 2011.
| Director, Supervisor or Executive Officer | | | Number of ASE Inc. Common Shares Held | | | | Percentage of Total ASE Inc. Common Shares Issued and Outstanding | | | | Number of Options Held(1) | | | | Exercise Price of Options (NT$) | | Expiration Date of Options |
Jason C.S. Chang | | | 63,292,924 | | | | 1.05 | % | (2) | | 18,780,000 | | | | 8.50-26.90 | | 12/24/2012-5/6/2020 |
Richard H.P. Chang | | | 80,792,217 | | | | 1.34 | % | | | 10,570,000 | | | | 8.50-26.90 | | 12/24/2012-5/6/2020 |
Tien Wu | | | 2,589,934 | | | | 0.04 | % | | | * | | | | 26.00-26.90 | | 12/19/2017-5/6/2020 |
Joseph Tung | | | 2,873,591 | | | | 0.05 | % | | | * | | | | 8.50-26.90 | | 12/24/2012-5/6/2020 |
Raymond Lo | | | 1,525,519 | | | | 0.03 | % | | | * | | | | 12.10-26.90 | | 08/22/2013-5/6/2020 |
Jeffrey Chen | | | 1,820,671 | | | | 0.03 | % | | | * | | | | 26.00-26.90 | | 12/19/2017-5/6/2020 |
Rutherford Chang | | | 1,305,981 | | | | 0.02 | % | | | * | | | | 26.00-26.90 | | 12/19/2017-5/6/2020 |
Shen-Fu Yu | | | - | | | | - | | | | - | | | | - | | - |
Ta-Lin Hsu | | | - | | | | - | | | | - | | | | - | | - |
Samuel Liu | | | 245,739 | | | | 0.00 | % | | | * | | | | 17.20-26.00 | | 06/30/2014-5/6/2020 |
Tien-Szu Chen | | | 1,160,829 | | | | 0.02 | % | | | * | | | | 17.20-26.90 | | 06/30/2014-5/6/2020 |
John Ho | | | 2,294,633 | | | | 0.04 | % | | | * | | | | 17.20-26.90 | | 06/30/2014-5/6/2020 |
Yen-Yi Tseng | | | 18,866 | | | | 0.00 | % | | | * | | | | 26.00-26.90 | | 12/19/2017-5/6/2020 |
Jerry Chang | | | 377,590 | | | | 0.01 | % | | | * | | | | 8.50-26.90 | | 12/24/2012-5/6/2020 |
Chih-Chiang Lee | | | 1,547,817 | | | | 0.03 | % | | | * | | | | 26.00-26.90 | | 12/19/2017-5/6/2020 |
Chun-Che Lee | | | 2,323,515 | | | | 0.04 | % | | | * | | | | 12.10-26.90 | | 08/22/2013-5/6/2020 |
Ung Bae | | | - | | | | - | | | | * | | | | 8.50-26.90 | | 12/24/2012-5/6/2020 |
Chih-Hsiao Chung | | | 46,699 | | | | 0.00 | % | | | * | | | | 26.00-26.90 | | 12/19/2017-5/6/2020 |
Kwai Mun Lee | | | - | | | | - | | | | * | | | | 12.10-26.90 | | 08/22/2013-5/6/2020 |
Cheng-Jung Wei | | | 42,449 | | | | 0.00 | % | | | - | | | | - | | - |
| (1) | Each option covers one of our common shares. |
| (2) | In addition to holding 1.05% of our common shares directly, Jason C.S. Chang is the sole shareholder and director of a company that holds all the outstanding shares of ASE Enterprises, which holds 17.26% of our common shares. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.” |
| * | The sum of the number of common shares held and the number of common shares issuable upon exercise of all options held is less than 1% of our total outstanding common shares. |
The following table sets forth information known to us with respect to the beneficial ownership of our common shares, as of March 31, 2011, by each shareholder known by us to beneficially own more than 5% of our outstanding common shares and all directors, supervisors and executive officers as a group.
| | | Common Shares Beneficially Owned | |
Name of Shareholder or Group | | | | | | |
ASE Enterprises(1) | | | 1,044,341,034 | | | | 17.26 | % |
Directors, supervisors and executive officers as a group(2) | | | 1,278,451,933 | | | | 21.13 | % |
| (1) | ASE Enterprises is a company organized under the laws of Hong Kong. All of the outstanding shares of ASE Enterprises are held by a company organized under the laws of the British Virgin Islands in trust for the benefit of the family of our Chairman and Chief Executive Officer, Jason C.S. Chang, who is the sole shareholder and director of that company. |
| (2) | Includes shareholding of ASE Enterprises, ASE Test Taiwan and Hung Ching. |
The following table sets forth information relating to our common shares held directly by our consolidated subsidiaries and our equity method investee as of March 31, 2011.
| | | Common Shares Beneficially Owned | |
| | | | | | |
ASE Test(1) | | | 69,402,638 | | | | 1.15 | % |
ASE Test Taiwan(2) | | | 8,638,913 | | | | 0.14 | % |
J&R Holding Limited(3) | | | 36,749,966 | | | | 0.61 | % |
Hung Ching(4) | | | 67,347,182 | | | | 1.11 | % |
| (1) | ASE Test is our wholly-owned subsidiary. ASE Test’s ownership of our common shares is the result of the merger of ASE Material with and into us in August 2004 and subsequent dividends upon shares received in connection with this merger. |
| (2) | ASE Test Taiwan was our 99.99%-owned subsidiary as of March 31, 2011. |
| (3) | J&R Holding Limited is our wholly-owned subsidiary. J&R Holding Limited’s ownership of our common shares is the result of the merger of ASE Chung Li with and into us in August 2004 and subsequent dividends upon shares received in connection with this merger. |
| (4) | As of March 31, 2011, we held 26.22% of the outstanding shares of Hung Ching. |
In connection with the merger of ASE Chung Li and ASE Material with and into ASE Inc. in August 2004, we and ASE Test established a trust to hold and dispose of 149,175,000 and 5,000,000 of our common shares that were issued to ASE Test and ASE Test Taiwan, respectively, upon completion of the merger. As a result, the trustee appointed under the trust agreement has become one of our shareholders until such common shares are sold as permitted under the rules and regulations of the Taiwan Stock Exchange and the terms and conditions of the trust agreement. As of March 31, 2011, as a result of stock dividends and our acquisition of Universal Scientific through a cash and stock tender offer, the total amount of our common shares held by the trust was 76,956,800. See “—Related Party Transactions.”
As of March 31, 2011, none of our major shareholders had voting rights different from those of our other shareholders. There were no significant changes in our major shareholders or significant changes in the percentage ownership of any of our major shareholders in 2010.
As of March 31, 2011, a total of 6,050,060,512 common shares were outstanding. With certain limited exceptions, holders of common shares that are not ROC persons are required to hold their common shares through a brokerage account in the ROC. As of March 31, 2011, 358,057,260 common shares were registered in the name of a nominee of Citibank, N.A., the depositary under our ADS deposit agreement. Citibank, N.A., has advised us that, as of March 31, 2011, 71,611,239 ADSs, representing 358,056,195 common shares, were held of record by Cede & Co., and 213 ADSs, representing 1,065 common shares, were held by seven other U.S. persons. The remaining 55 common shares held by Citibank, N.A. are a result of fractional shares distributed during stock distributions on the
common shares underlying the ADSs. We have no further information as to common shares held, or beneficially owned, by U.S. persons.
In recent years, we have awarded our common shares and/or cash bonuses to the employees of our subsidiaries as part of their compensation, based in part on our consolidated net income and the subsidiaries’ contribution to the consolidated income. We expect this practice to continue in the future.
In order to comply with Singapore law and ROC Company Law, trusts organized under ROC law have been established to hold and dispose of our common shares issued to ASE Test and ASE Test Taiwan in connection with the merger of ASE Chung Li and ASE Material into our company in August 2004. Under Section 76(1)(b)(ii) of the Companies Act, Chapter 50, of Singapore, ASE Test, a Singapore company, may not purport to acquire, directly or indirectly, shares or units of shares in our company, ASE Test’s parent company. Pursuant to the applicable trust agreements, the trustee under each trust is (1) the registered owner of the common shares, (2) authorized to exercise all of the rights as a shareholder of the common shares, (3) authorized to sell the common shares, subject to market conditions, when such common shares become available for resale under ROC law and in accordance with volume limitations under ROC law, at its sole discretion; provided such common shares are sold (i) in compliance with ROC laws and regulations, (ii) in an orderly manner in order to minimize the impact on the trading price of the common shares, and (iii) in a manner consistent with its fiduciary duties owed to ASE Test and (4) able to transfer and deliver to ASE Test or ASE Test Taiwan the proceeds from the sale of our common shares and any cash dividends distributed, as the case may be. In February 2010, to complete the tender offer to acquire Universal Scientific, ASE Test transferred 141,808,499 shares to the shareholders of Universal Scientific. Neither ASE Test nor ASE Test Taiwan have any rights with respect to the common shares held in trust pursuant to the applicable trust agreements other than the right to receive the proceeds from the sale of such common shares and cash dividends declared while the shares remain in trust. As of March 31, 2011, these trusts held 69,402,638 of our common shares issued to ASE Test and 7,554,162 of our common shares issued to ASE Test Taiwan.
On May 30, 2008, we acquired, by way of a scheme of arrangement under Singapore law, all the outstanding ordinary shares of ASE Test that we did not already directly or indirectly own, making ASE Test our wholly-owned subsidiary. See “Item 4. Information on the Company—History and Development of the Company—ASE Test Share Acquisition and Privatization.”
We have historically provided the promissory notes as guarantees to some of our subsidiaries. As of December 31, 2010, we had no such guarantees.
In 2008, we terminated a contract with Hung Ching in connection with the construction of a factory and office building in Kaohsiung, Taiwan. As a result of such termination, we paid Hung Ching NT$36 million for certain costs incurred during the construction.
On September 23, 2010, ASE Test Taiwan entered into a contract with Hung Ching in connection with the construction of a factory and office building in Kaohsiung, Taiwan. Pursuant to this contract, ASE Test Taiwan will have 10.1% ownership of these properties.
Not applicable.
Consolidated financial statements are set forth under “Item 18. Financial Statements.”
On February 1, 2006, Tessera, Inc., or Tessera, filed an amended complaint in the United States District Court for the Northern District of California adding Advanced Semiconductor Engineering, Inc. and ASE (U.S.) Inc., collectively referred to as ASE, and other companies to a suit alleging that ASE’s and the 13 other defendants’ manufacturing, use, importation, offer for sale, and sale of various packaged semiconductor products infringed five patents owned by Tessera relating to certain types of semiconductor chip packaging, and/or breached technology license agreements regarding certain types of semiconductor chip packages between Tessera and certain defendants, including ASE. Tessera sought, among other things, monetary damages and injunctive relief in the lawsuit. On March 27, 2006, ASE filed its answer and counterclaims with the court.
On May 15, 2007, at Tessera’s request, the United States International Trade Commission, or the ITC, instituted an investigation, or ITC Investigation No. 605, of certain of ASE’s co-defendants and other companies, including certain of ASE’s customers, but not ASE and the other contract chip packagers that were included as defendants in the California case. On May 20, 2009, the ITC issued its final determination in ITC Investigation No. 605, finding infringement of both asserted patents by the ITC Investigation No. 605 respondents’ accused semiconductor packages. The ITC also issued (1) a limited exclusion order prohibiting the unlicensed entry of semiconductor packages found to infringe, and products incorporating such chips, manufactured abroad by or on behalf of, or imported by or on behalf of, Spansion, Qualcomm, ATI, Motorola, ST-NV, and Freescale; and (2) cease and desist orders directed to Motorola, Qualcomm, Freescale, and Spansion. The ITC did not grant a general exclusion order as requested by Tessera. The exclusion and cease and desist orders expired on September 24, 2010, when the asserted patents expired. The ITC’s determination was affirmed by the Court of Appeals for the Federal Circuit on December 21, 2010.
On April 21, 2008, Tessera filed an ITC complaint against ASE and the other contract chip packagers that were included as defendants in the California case, and on May 21, 2008, the ITC instituted a new investigation against them, or ITC Investigation No. 649, which involved three patents also asserted in the original California case, as well as one newly-asserted patent. On August 4, 2008, ASE, Inc., ASE (U.S.) Inc. and ASE Test Limited filed an action in the United States District Court for the Northern District of California against Tessera, Inc. seeking a declaratory judgment of non-infringement and invalidity of the patent newly asserted by Tessera in the ITC. On December 19, 2008, the court stayed the declaratory judgment action in response to a joint motion of the parties. On August 7, 2009, the ITC terminated Investigation No. 649 in response to Tessera’s motion to terminate, and Investigation No. 649 was subsequently terminated without the issuance of an exclusion order or any other remedy.
The initial 2006 California case, and the 2008 declaratory judgment action filed by ASE in California, remain stayed. A status conference for these cases is scheduled for June 7, 2011.
The United States Patent and Trademark Office (“PTO”) also instituted reexamination proceedings on all the Tessera patents at issue in the two California cases and the ITC proceedings since 2007. Following expiration of five of the six patents in September 2010, the PTO confirmed the patentability of certain claims of three of the asserted patents. Reexamination proceedings are ongoing with respect to the three other patents.
It is not possible to predict the outcome of the California litigation, the ITC investigations, the reexamination proceedings, the total costs of resolving these disputes, or when the stay of the California litigation will be lifted.
We have historically paid dividends on our common shares with respect to the results of the preceding year following approval by our shareholders at the annual general meeting of shareholders. We have historically paid the large majority of our dividends in the form of stock. We have paid annual stock dividends on our common shares since 1989, except in 2002 and 2006 when we did not pay any dividend due to the losses we incurred in the 2001 and 2005 fiscal years, respectively, and in 2009 when we only distributed cash dividends. We also paid cash dividends of NT$1.71 per share in 2008, NT$0.50 per share in 2009 and NT$0.36 per share in 2010. Our directors have proposed to pay stock dividends of NT$1.15 and cash dividends of NT$0.65 per share based on the 6,049,875,312 shares registered as of March 21, 2011. This proposal is awaiting shareholders’ approval and the
actual cash dividends per share will be adjusted by any fluctuations in the number of our shares due to, for example, the exercise of share options.
The following table sets forth the stock dividends paid during each of the years indicated and related information.
| | | Stock Dividends Per Common Share(1) | | | Total Common Shares Issued as Stock Dividends | | | Outstanding Common Shares on Record Date(2) | | | Percentage of Outstanding Common Shares Represented by Stock Dividends | |
| | | | NT$ | | | | | | | | | | | | | |
| 1997 | | | 3.80 | | | | 277,020,000 | | | | 729,000,000 | | | | 38.0% | |
| 1998 | | | 7.20 | | | | 732,240,000 | | | | 1,017,000,000 | | | | 72.0% | |
| 1999 | | | 1.07 | | | | 190,460,000 | | | | 1,780,000,000 | | | | 10.7% | |
| 2000 | | | 3.15 | | | | 623,811,852 | | | | 1,980,355,086 | | | | 31.5% | |
| 2001 | | | 1.70 | | | | 467,840,000 | | | | 2,752,000,000 | | | | 17.0% | |
| 2002 | | | — | | | | — | | | | 3,254,800,000 | | | | — | |
| 2003 | | | 1.00 | | | | 325,480,000 | | | | 3,254,800,000 | | | | 10.0% | |
| 2004 | | | 0.57 | | | | 221,977,360 | | | | 3,862,595,437 | | | | 5.7% | |
| 2005 | | | 1.00 | | | | 411,221,140 | | | | 4,113,744,200 | | | | 10.0% | |
| 2006 | | | — | | | | — | | | | 4,592,508,620 | | | | — | |
| 2007 | | | 1.48 | | | | 694,101,071 | | | | 4,645,295,431 | | | | 14.9% | |
| 2008 | | | 0.29 | | | | 158,766,146 | | | | 5,484,848,118 | | | | 2.9% | |
| 2009 | | | — | | | | — | | | | 5,474,320,814 | | | | — | |
| 2010 | | | 0.84 | | | | 461,577,546 | | | | 5,500,216,994 | | | | 8.4% | |
| (1) | Holders of common shares receive as a stock dividend the number of common shares equal to the NT dollar value per common share of the dividend declared multiplied by the number of common shares owned and divided by the par value of NT$10 per share. Fractional shares are not issued but are paid in cash. |
| (2) | Aggregate number of common shares outstanding on the record date applicable to the dividend payment. Includes common shares issued in the previous year under our employee bonus plan. |
In order to meet the needs of our present and future capital expenditures, we anticipate paying both stock and cash dividends in the future. The form, frequency and amount of future cash or stock dividends on our common shares will depend upon our net income, cash flow, financial condition, shareholders’ requirement for cash inflow and other factors. According to our Articles of Incorporation amended in 2009, we have a general policy that cash dividend distribution should not be lower than 30% of the total dividend amount and the remainder be distributed as stock dividends. See “Item 10. Additional information––Articles of Incorporation––Dividends and Distributions.”
In general, we are not permitted to distribute dividends or make other distributions to shareholders for any year where we did not record net income or retained earnings (excluding reserves). The ROC Company Law also requires that 10% of annual net income (less prior years’ losses, if any) be set aside as a legal reserve until the accumulated legal reserve equals our paid-in capital. In addition, our Articles of Incorporation require that before a dividend is paid pro rata out of our annual net income:
| | · | up to 2% of our annual net income (less prior years’ losses and legal and special reserves, if any) should be paid to our directors and supervisors as compensation; and |
| | · | between 7% and 10% of the annual net income (less prior years’ losses and legal and special reserves, if any) should be paid to our employees as bonuses; the 7% portion is to be distributed to all employees in accordance with our employee bonus distribution rules, while any portion exceeding 7% is to be distributed in accordance with rules established by our board of directors to individual employees who have been recognized as having made special contributions to our company. Such employees include those of our subsidiaries. |
| | · | holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, to the same extent as the holders of the common shares. Cash dividends will be paid to the depositary in NT dollars and, except as otherwise provided in the deposit agreement, will be converted by the depositary into U.S. dollars and paid to holders of ADSs according to the terms of the deposit agreement. Stock dividends |
| | | will be distributed to the depositary and, except as otherwise provided in the deposit agreement, will be distributed by the depositary, in the form of additional ADSs, to holders of ADSs according to the terms of the deposit agreement. |
Holders of outstanding common shares on a dividend record date will be entitled to the full dividend declared without regard to any prior or subsequent transfer of common shares. Accordingly, holders of outstanding ADSs on the relevant dividend record date will, subject to the terms of the deposit agreement, be similarly entitled to the full amount of any dividend declared.
For information relating to ROC withholding taxes payable on dividends, see “Item 10. Additional Information—Taxation—ROC Taxation—Dividends.”
Other than as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of the annual financial statements.
Our common shares were first issued in March 1984 and have been listed on the Taiwan Stock Exchange since July 1989. The Taiwan Stock Exchange is an auction market where the securities traded are priced according to supply and demand through announced bid and ask prices. As of April 30, 2011, there were an aggregate of 6,052,219,212 of our common shares outstanding. The following table sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Taiwan Stock Exchange for the common shares and the high and low of the daily closing values of the Taiwan Stock Exchange Index. The closing price for our common shares on the Taiwan Stock Exchange on June 3, 2011 was NT$36.20 per share.
| | | | | | Adjusted Closing Price per Share(1) | | | Average Daily Trading Volume | | | Taiwan Stock Exchange Index | |
| | | | | | | | | | | | | | | | | | | | | | |
2006 | | | 38.30 | | | | 26.50 | | | | 32.04 | | | | 22.17 | | | | 53,789 | | | | 7,823.7 | | | | 6,257.8 | |
2007 | | | 48.80 | | | | 29.55 | | | | 40.82 | | | | 25.86 | | | | 28,931 | | | | 9,809.9 | | | | 7,344.6 | |
| 2008 | | | 34.25 | | | | 9.85 | | | | 29.97 | | | | 9.49 | | | | 24,392 | | | | 9,295.2 | | | | 4,089.9 | |
| 2009 | | | 29.10 | | | | 10.75 | | | | 28.72 | | | | 10.36 | | | | 33,646 | | | | 8,188.1 | | | | 4,242.6 | |
First Quarter | | | 18.50 | | | | 10.75 | | | | 17.83 | | | | 10.36 | | | | 35,485 | | | | 5,390.7 | | | | 4,242.6 | |
Second Quarter | | | 20.95 | | | | 16.20 | | | | 20.19 | | | | 15.61 | | | | 44,990 | | | | 6,954.1 | | | | 5,314.5 | |
Third Quarter | | | 27.10 | | | | 18.95 | | | | 26.75 | | | | 18.26 | | | | 28,863 | | | | 7,526.6 | | | | 6,530.8 | |
Fourth Quarter | | | 29.10 | | | | 25.00 | | | | 28.72 | | | | 24.67 | | | | 26,052 | | | | 8,188.1 | | | | 7,322.9 | |
| 2010 | | | 35.50 | | | | 21.95 | | | | 35.50 | | | | 21.95 | | | | 32,137 | | | | 8,972.5 | | | | 7,071.7 | |
First Quarter | | | 31.60 | | | | 24.05 | | | | 31.19 | | | | 23.74 | | | | 34,103 | | | | 8,356.9 | | | | 7,212.9 | |
Second Quarter | | | 32.00 | | | | 25.10 | | | | 31.58 | | | | 24.77 | | | | 29,055 | | | | 8,171.9 | | | | 7,071.7 | |
Third Quarter | | | 27.60 | | | | 21.95 | | | | 27.24 | | | | 21.95 | | | | 31,005 | | | | 8,240.9 | | | | 7,254.1 | |
Fourth Quarter | | | 35.50 | | | | 23.95 | | | | 35.50 | | | | 23.95 | | | | 34,496 | | | | 8,972.5 | | | | 8,046.2 | |
December | | | 35.50 | | | | 31.45 | | | | 35.50 | | | | 31.45 | | | | 34,246 | | | | 8,972.5 | | | | 8,520.1 | |
| 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 37.60 | | | | 30.25 | | | | 37.60 | | | | 30.25 | | | | 38,948 | | | | 9,145.4 | | | | 8,234.8 | |
January | | | 37.60 | | | | 31.95 | | | | 37.60 | | | | 31.95 | | | | 36,318 | | | | 9,145.4 | | | | 8,782.7 | |
February | | | 35.70 | | | | 33.10 | | | | 35.70 | | | | 33.10 | | | | 38,144 | | | | 9,111.5 | | | | 8,528.9 | |
March | | | 34.70 | | | | 30.25 | | | | 34.70 | | | | 30.25 | | | | 41,725 | | | | 8,784.4 | | | | 8,234.8 | |
| Second Quarter | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
April | | | 33.70 | | | | 28.75 | | | | 33.70 | | | | 28.75 | | | | 30,461 | | | | 9,049.3 | | | | 8,638.6 | |
May | | | 35.40 | | | | 32.80 | | | | 35.40 | | | | 32.80 | | | | 24,742 | | | | 9,035.5 | | | | 8,727.1 | |
| June (through June 3) | | | 36.20 | | | | 35.50 | | | | 36.20 | | | | 35.50 | | | | 27,033 | | | | 9,062.4 | | | | 8,991.4 | |
| (1) | As adjusted retroactively by the Taiwan Stock Exchange to give effect to stock dividends and cash dividends paid in the periods indicated. See “Item 8. Financial Information—Dividends and Dividend Policy.” |
The performance of the Taiwan Stock Exchange has in recent years been characterized by extreme price volatility. There are currently limits on the range of daily price movements on the Taiwan Stock Exchange. In the case of equity securities traded on the Taiwan Stock Exchange, such as our common shares, fluctuations in the price of a particular security may not exceed a 7% change either above or below the previous day’s closing price of such security.
Our ADSs have been listed on the New York Stock Exchange under the symbol “ASX” since September 26, 2000. The outstanding ADSs are identified by the CUSIP number 00756M404. As of April 30, 2011, a total of 75,843,459 ADSs were outstanding. The following table sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs and the highest and lowest of the daily closing values of the New York Stock Exchange Index. The closing price for our ADSs on the New York Stock Exchange on June 3, 2011 was US$6.27 per ADS.
| | | | | | Adjusted Closing Price per ADS(1) | | | Average Daily Trading Volume | | | New York Stock Exchange Index | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | US$ | | | US$ | | | US$ | | | US$ | | | | | | | | | | |
2006 | | | 6.12 | | | | 4.00 | | | | 4.49 | | | | 2.93 | | | | 404 | | | | 9,179.40 | | | | 7,719.78 | |
2007 | | | 7.45 | | | | 4.59 | | | | 5.46 | | | | 4.01 | | | | 658 | | | | 10,311.61 | | | | 8,837.97 | |
2008 | | | 5.57 | | | | 1.42 | | | | 4.88 | | | | 1.37 | | | | 622 | | | | 9,656.00 | | | | 4,651.21 | |
2009 | | | 4.63 | | | | 1.49 | | | | 4.57 | | | | 1.44 | | | | 1,188 | | | | 7,261.24 | | | | 4,226.31 | |
First Quarter | | | 2.89 | | | | 1.49 | | | | 2.79 | | | | 1.44 | | | | 673 | | | | 5,968.84 | | | | 4,226.31 | |
Second Quarter | | | 3.38 | | | | 2.36 | | | | 3.26 | | | | 2.28 | | | | 1,584 | | | | 6,182.87 | | | | 5,085.76 | |
Third Quarter | | | 4.13 | | | | 2.96 | | | | 4.08 | | | | 2.86 | | | | 1,480 | | | | 7,047.13 | | | | 5,624.57 | |
Fourth Quarter | | | 4.63 | | | | 3.87 | | | | 4.57 | | | | 3.82 | | | | 998 | | | | 7,261.24 | | | | 6,674.57 | |
2010 | | | 5.82 | | | | 3.39 | | | | 5.82 | | | | 3.39 | | | | 867 | | | | 7,964.02 | | | | 6,434.81 | |
First Quarter | | | 5.07 | | | | 3.84 | | | | 5.01 | | | | 3.79 | | | | 1,179 | | | | 7,478.86 | | | | 6,713.87 | |
Second Quarter | | | 5.12 | | | | 3.89 | | | | 5.06 | | | | 3.84 | | | | 934 | | | | 7,728.96 | | | | 6,469.65 | |
Third Quarter | | | 4.23 | | | | 3.39 | | | | 4.18 | | | | 3.39 | | | | 677 | | | | 7,310.32 | | | | 6,434.81 | |
Fourth Quarter | | | 5.82 | | | | 3.95 | | | | 5.82 | | | | 3.95 | | | | 692 | | | | 7,964.02 | | | | 7,272.53 | |
December | | | 5.82 | | | | 5.25 | | | | 5.82 | | | | 5.25 | | | | 870 | | | | 7,964.02 | | | | 7,603.73 | |
| 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | | 6.55 | | | | 5.22 | | | | 6.55 | | | | 5.22 | | | | 1,454 | | | | 8,507.90 | | | | 7,929.87 | |
January | | | 6.45 | | | | 5.49 | | | | 6.45 | | | | 5.49 | | | | 772 | | | | 8,207.06 | | | | 7,966.09 | |
February | | | 6.55 | | | | 5.71 | | | | 6.55 | | | | 5.71 | | | | 1,567 | | | | 8,507.90 | | | | 8,272.57 | |
March | | | 6.00 | | | | 5.22 | | | | 6.00 | | | | 5.22 | | | | 1,954 | | | | 8,465.45 | | | | 7,929.87 | |
| Second Quarter | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
April | | | 5.90 | | | | 5.04 | | | | 5.90 | | | | 5.04 | | | | 1,105 | | | | 8,671.41 | | | | 8,277.11 | |
May | | | 6.15 | | | | 5.64 | | | | 6.15 | | | | 5.64 | | | | 1,547 | | | | 8,649.61 | | | | 8,236.55 | |
June (through June 3) | | | 6.27 | | | | 6.12 | | | | 6.27 | | | | 6.12 | | | | 1,481 | | | | 8,281.59 | | | | 8,222.15 | |
| (1) | As adjusted retroactively to give effect to stock dividends paid in the periods indicated. |
Not applicable.
The principal trading market for our common shares is the Taiwan Stock Exchange and the principal trading market for ADSs representing our common shares is the New York Stock Exchange.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
General
We are a company limited by shares organized under the laws of the ROC. Our organizational document is our Articles of Incorporation. We have no by-laws.
Our Articles of Incorporation provide, in Article 2, that we may engage in the following types of business:
| | · | the manufacture, assembly, processing, testing and export of various types of integrated circuitry; |
| | · | the research, development, design and manufacture, assembly, processing, testing and export of various computers, electronics, communications, information products and their peripheral products; |
| | · | general import and export trading (excluding businesses that require trading permits); |
| | · | the manufacture of electronic parts and components; |
| | · | the manufacture of mechanical and electronic devices and materials (including integrated circuit leadframes, BGA substrates and flip-chip substrates); |
| | · | wholesale and retail sales of electronic materials; |
| | · | technical support and consulting service for integrated circuit leadframes, BGA substrates and flip-chip substrates; |
| | · | except any business requiring a special permit, any business not prohibited or restricted by law or regulation. |
We were incorporated on March 23, 1984 as a company limited by shares under the ROC Company Law. Our authorized capital was NT$80,000,000,000, divided into 8,000,000,000 common shares, 6,052,219,212 of which were outstanding as of April 30, 2011. We do not have any equity in the form of preference shares or otherwise outstanding as of the date of this annual report.
With the approval of our board of directors and the ROC Financial Supervisory Commission, Executive Yuan, we may grant stock options to our employees, provided that NT$8,000,000,000 of our authorized capital is reserved for employee stock options and that the shares to be issued under any option plan shall not exceed 10% of our outstanding common shares and the total number of shares to be issued under all option plans shall not exceed 15%
of our outstanding common shares. The exercise price of an option shall not be less than the closing price of our common shares on the Taiwan Stock Exchange on the grant date of the option. As of March 31, 2011, we had granted 673,410,500 options pursuant to employee stock option plans established on August 28, 2002, May 27, 2004, November 22, 2007 and April 20, 2010 to our full-time employees as well as to full-time employees of our domestic and foreign subsidiaries. See “Item 6. Directors, Senior Management and Employees—Compensation—ASE Inc. Employee Bonus and Stock Option Plans.” We have 800,000,000 common shares reserved for issuance under our employee stock option plans.
Directors
Our Articles of Incorporation provide that we are to have from seven to nine directors with tenures of three years who are elected at a shareholders’ meeting. With effect from our 2009 annual general meeting of shareholders, two of our directors will be required to be independent directors. There is no minimum amount of shares necessary to stand for election to a directorship. Many of our directors are representatives appointed by corporate shareholders which appoint individual representatives. Re-elections are allowed. The directors have certain powers and duties, including devising operations strategy, proposing to distribute dividends or make up losses, proposing to increase or decrease capital, reviewing material internal rules and contracts, hiring and discharging the general manager, establishing and dissolving branch offices, reviewing budgets and audited financial statements and other duties and powers granted by or in accordance with the ROC Company Law, our Articles of Incorporation or shareholders resolutions.
The board of directors is constituted by the directors, who elect a chairman from among the directors to preside over the meeting of the board. Meetings of the board may be held in the ROC or by teleconference. A director may appoint another director to attend a meeting and vote by proxy, but a director may accept only one proxy.
Dividends and Distributions
In general, we are not permitted to distribute dividends or make other distributions to shareholders in any year in which we did not record net income or retained earnings (excluding reserves). The ROC Company Law also requires that 10% of annual net income (less prior years’ losses, if any) be set aside as a legal reserve until the accumulated legal reserve equals our paid-in capital. In addition, our Articles of Incorporation require that before a dividend is paid out of our annual net income:
| | · | up to 2% of our annual net income (less prior years’ losses and legal and special reserves, if any) should be paid to our directors and supervisors as compensation; and |
| | · | between 7% and 10% of the annual net income (less prior years’ losses and legal and special reserves, if any) should be paid to our employees as bonuses. The 7% portion is to be distributed to all employees in accordance with our employee bonus distribution rules, while any portion exceeding 7% is to be distributed in accordance with rules established by our board of directors to individual employees who have been recognized as having made special contributions to our company. Such employees include those of our subsidiaries. |
At the annual general shareholders’ meeting, our board of directors submits to the shareholders for their approval any proposal for the distribution of dividends or the making of any other distribution to shareholders from our net income for the preceding fiscal year. All common shares outstanding and fully paid as of the relevant record date are entitled to share equally in any dividend or other distribution so approved. Dividends may be distributed in cash, in the form of common shares or a combination of the two, as determined by the shareholders at the meeting. According to our Articles of Incorporation amended in 2009, we have a general policy that cash dividend distribution should not be lower than 30% of the total dividend amount and the remainder be distributed as stock dividends. See “Item 8. Financial Information—Dividends and Dividend Policy.”
We are also permitted to make distributions to our shareholders of additional common shares by capitalizing reserves. However, the capitalized portion payable out of our legal reserve is limited to 50% of the total accumulated legal reserve and the capitalization can only be effected when the accumulated legal reserve exceeds 50% of our paid-in capital.
For information on the dividends we paid in recent years, see “Item 8. Financial Information—Dividends and Dividend Policy.” For information as to ROC taxes on dividends and distributions, see “—Taxation—ROC Taxation—Dividends.”
Changes in Share Capital
Under ROC Company Law, any change in the authorized share capital of a company limited by shares requires an amendment to its Articles of Incorporation. In the case of a public company such as ourselves, the approval of the ROC Financial Supervisory Commission, Executive Yuan and the ROC Ministry of Economic Affairs is also required. Authorized but unissued common shares may be issued, subject to applicable ROC law, upon terms as our board of directors may determine.
Preemptive Rights
Under the ROC Company Law, when an ROC company issues new shares for cash, existing shareholders who are listed on the shareholders’ register as of the record date have preemptive rights to subscribe for the new issue in proportion to their existing shareholdings, while a company’s employees, whether or not they are shareholders of the company, have rights to subscribe for 10% to 15% of the new issue. Any new shares that remain unsubscribed at the expiration of the subscription period may be offered by us to the public or privately placed.
In addition, in accordance with the ROC Securities and Exchange Law, a public company that intends to offer new shares for cash must offer to the public at least 10% of the shares to be sold, except under certain circumstances or when exempted by the ROC Financial Supervisory Commission, Executive Yuan. This percentage can be increased by a resolution passed at a shareholders’ meeting, which would diminish the number of new shares subject to the preemptive rights of existing shareholders.
These preemptive rights provisions do not apply to offerings of new shares through a private placement approved at a shareholders’ meeting.
Meetings of Shareholders
We are required to hold an ordinary meeting of our shareholders within six months following the end of each fiscal year. These meetings are generally held in Kaohsiung, Taiwan. Any shareholder who holds 1% or more of our issued and outstanding shares may submit one written proposal for discussion at our annual shareholders’ meeting. Extraordinary shareholders’ meetings may be convened by resolution of the board of directors or by the board of directors upon the written request of any shareholder or shareholders who have held 3% or more of the outstanding common shares for more than one year. Shareholders’ meetings may also be convened by a supervisor. Notice in writing of general meetings of shareholders, stating the place, time and purpose, must be dispatched to each shareholder at least 30 days, in the case of ordinary meetings, and 15 days, in the case of extraordinary meetings, before the date set for each meeting. A majority of the holders of all issued and outstanding common shares present at a shareholders’ meeting constitutes a quorum for meetings of shareholders.
Voting Rights
Under the ROC Company Law, shareholders have one vote for each common share held, except that there are no voting rights for those shares held by us or directly or indirectly held by controlled companies or affiliates. Under the ROC Company Law, our directors and supervisors are elected at a shareholders’ meeting through cumulative voting, unless our Articles of Incorporation provide otherwise.
In general, a resolution can be adopted by the holders of at least a majority of the common shares represented at a shareholders’ meeting at which the holders of a majority of all issued and outstanding common shares are present. Under ROC Company Law, the approval by at least a majority of the common shares represented at a shareholders’ meeting in which a quorum of at least two-thirds of all issued and outstanding common shares are represented is required for major corporate actions, including:
| | · | amendment to the Articles of Incorporation, including increase of authorized share capital and any changes of the rights of different classes of shares; |
| | · | execution, amendment or termination of any contract through which the company leases its entire business to others, or the company appoints others to operate its business or the company operates its business with others on a continuous basis; |
| | · | transfer of entire business or assets or a substantial part of its business or assets; |
| | · | acquisition of the entire business or assets of any other company, which would have a significant impact on the company’s operations; |
| | · | distribution of any stock dividend; |
| | · | dissolution, merger or spin-off of the company; and |
| | · | removal of the directors or supervisors. |
A shareholder may be represented at an ordinary or extraordinary meeting by proxy if a valid proxy form is delivered to us five days before the commencement of the ordinary or extraordinary shareholders’ meeting.
Holders of ADSs do not have the right to exercise voting rights with respect to the underlying common shares, except as described in the deposit agreement.
Other Rights of Shareholders
Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in certain major corporate actions such as a proposed amalgamation by the company. If agreement with the company cannot be reached, dissenting shareholders may seek a court order for the company to redeem all of their shares. Shareholders may exercise their appraisal rights by serving written notice on the company prior to or at the related shareholders’ meeting and/or by raising and registering an objection at the shareholders’ meeting. In addition to appraisal rights, shareholders have the right to sue for the annulment of any resolution adopted at a shareholders’ meeting where the procedures were legally defective within 30 days after the date of the shareholders’ meeting. One or more shareholders who have held more than 3% of the issued and outstanding shares of a company for more than one year may require a supervisor to bring a derivative action on behalf of the company against a director as a result of the director's unlawful actions or failure to act.
Rights of Holders of Deposited Securities
Except as described below, holders of ADSs generally have no right under the deposit agreement to instruct the depositary to exercise the voting rights for the common shares represented by the ADSs. Instead, by accepting ADSs or any beneficial interest in ADSs, holders of ADSs are deemed to have authorized and directed the depositary to appoint our chairman or his designee to represent them at our shareholders’ meetings and to vote the common shares deposited with the custodian according to the terms of the deposit agreement.
The depositary will mail to holders of ADSs any notice of shareholders’ meeting received from us together with information explaining how to instruct the depositary to exercise the voting rights of the securities represented by ADSs.
If we fail to timely provide the depositary with an English language translation of our notice of meeting or other materials related to any meeting of owners of common shares, the depositary will endeavor to cause all the deposited securities represented by ADSs to be present at the applicable meeting, insofar as practicable and permitted under applicable law, but will not cause those securities to be voted.
If the depositary timely receives voting instructions from owners of at least 51.0% of the outstanding ADSs to vote in the same direction regarding one or more resolutions to be proposed at the meeting, including election of directors and supervisors, the depositary will notify our chairman or his designee to attend the meeting and vote all the securities represented by the holders’ ADSs in accordance with the direction received from owners of at least 51.0% of the outstanding ADSs.
If we have timely provided the depositary with the materials described in the deposit agreement and the depositary has not timely received instructions from holders of at least 51.0% of the outstanding ADSs to vote in the same direction regarding any resolution to be considered at the meeting, then, holders of ADSs will be deemed to have authorized and directed the depositary bank to give a discretionary proxy to our chairman or his designee to attend and vote at the meeting the common shares represented by the ADSs in any manner, our chairman or his designee may wish, which may not be in the interests of holders.
The ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure ADS holders that they will receive voting materials in time to enable them to return voting instructions to the depositary in a timely manner.
While shareholders who own 1% or more of our outstanding shares are entitled to submit one proposal to be considered at our annual general meetings, only holders representing at least 51% of our ADSs outstanding at the relevant record date are entitled to submit one proposal to be considered at our annual general meetings. Hence, only one proposal may be submitted on behalf of all ADS holders.
Register of Shareholders and Record Dates
Our share registrar, President Securities Corp., maintains our register of shareholders at its offices in Taipei, Taiwan, enters transfers of common shares in our register upon presentation of, among other documents, certificates representing the common shares transferred and acts as paying agent for any dividends or distributions with respect to our common shares. Under the ROC Company Law and our Articles of Incorporation, we may, by giving advance public notice, set a record date and close the register of shareholders for a specified period in order for us to determine the shareholders or pledgees that are entitled to rights pertaining to the common shares. The specified period required is as follows:
| | · | ordinary shareholders’ meeting—60 days; |
| | · | extraordinary shareholders’ meeting—30 days; and |
| | · | relevant record date—five days. |
Annual Financial Statements
At least ten days before the annual ordinary shareholders’ meeting, our annual financial statements must be available at our principal executive office in Kaohsiung, Taiwan for inspection by the shareholders.
Transfer of Common Shares
The transfer of common shares in registered form is effected by endorsement and delivery of the related share certificates but, in order to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. Shareholders are required to file their respective specimen seals, also known as chops, with us. Chops are official stamps widely used in Taiwan by individuals and other entities to authenticate the execution of official and commercial documents.
Acquisition of Common Shares by ASE Inc.
Under the ROC Securities and Exchange Law, we may purchase our own common shares for treasury stock in limited circumstances, including:
| | · | to transfer shares to our employees; |
| | · | to deliver shares upon the conversion or exercise of bonds with warrants, preferred shares with warrants, convertible notes, convertible preferred shares or warrants issued by us; and |
| | · | to maintain our credit and our shareholders’ equity, provided that the shares so purchased shall be canceled. |
We may purchase our common shares on the Taiwan Stock Exchange or by means of a public tender offer. These transactions require the approval of a majority of our board of directors at a meeting in which at least two-thirds of the directors are in attendance. The total amount of common shares purchased for treasury stock may not exceed 10% of the total outstanding shares. In addition, the total cost of the purchased shares shall not exceed the aggregate amount of our retained earnings, any premium from share issuances and the realized portion of our capital reserve.
We may not pledge or hypothecate any of our shares purchased by us. In addition, we may not exercise any shareholders’ right attaching to such shares. In the event that we purchase our shares on the Taiwan Securities Exchange, our affiliates, directors, supervisors, managers, and their respective spouses and minor children and/or nominees are prohibited from selling any of our shares during the period in which we are purchasing our shares.
Pursuant to the amended ROC Company Law, effective from November 14, 2001, our subsidiaries are not permitted to acquire our common shares. This restriction does not affect any acquisition of our common shares made by our subsidiaries prior to November 14, 2001.
Liquidation Rights
In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed pro rata to the shareholders in accordance with the relevant provisions of the ROC Company Law and our Articles of Incorporation.
Transfer Restrictions
Substantial Shareholders
The ROC Securities and Exchange Law currently requires:
| | · | each director, supervisor, manager, or substantial shareholder (that is, a shareholder who holds 10% or more shares of a company), and their respective spouses, minor children or nominees, to report any change in that person’s shareholding to the issuer of the shares and the ROC Financial Supervisory Commission, Executive Yuan; and |
| | · | each director, supervisor, manager, or substantial shareholder, and their respective spouses, minor children or nominees, after acquiring the status of director, supervisor, manager, or substantial shareholder for a period of six months, to report his or her intent to transfer any shares on the Taiwan Stock Exchange to the ROC Financial Supervisory Commission, Executive Yuan at least three days before the intended transfer, unless the number of shares to be transferred is less than 10,000 shares. |
In addition, the number of shares that can be sold or transferred on the Taiwan Stock Exchange by any person subject to the restrictions described above on any given day may not exceed:
| | · | 0.2% of the outstanding shares of the company in the case of a company with no more than 30 million outstanding shares; or |
| | · | 0.2% of 30 million shares plus 0.1% of the outstanding shares exceeding 30 million shares in the case of a company with more than 30 million outstanding shares; or |
| | · | in any case, 5% of the average trading volume (number of shares) on the Taiwan Stock Exchange for the ten consecutive trading days preceding the reporting day on which the director, supervisor, manager or substantial shareholder reports the intended share transfer to the ROC Financial Supervisory Commission, Executive Yuan. |
These restrictions do not apply to sales or transfers of our ADSs.
Common Shares Issued in Connection with a Merger
The rules and regulations of the Taiwan Stock Exchange impose certain transfer restrictions on common shares of a Taiwan Stock Exchange listed company issued to a director, supervisor or substantial shareholder (as defined under the ROC Securities and Exchange Law and described under “Substantial Shareholders”) of an unlisted company to be merged with and into the acquiror. A director, supervisor or substantial shareholder of an unlisted company to be merged with and into a Taiwan Stock Exchange listed company is restricted from selling or transferring common shares received in connection with such merger for a period of six months after such shares are listed on the Taiwan Stock Exchange. After the initial six-month lock-up period, such holder is permitted to sell or transfer 50% of its holdings of the common shares received in the merger. After one year from the date of the listing of the common shares, the holder is permitted to sell or transfer all the remaining common shares received in the merger.
Syndicated Loan Agreements between Advanced Semiconductor Engineering, Inc. and banking syndicates led by Citibank, N.A., Taipei Branch
On March 3, 2008, we entered into a syndicated loan agreement with a banking syndicate led by Citibank, N.A., Taipei Branch for a NT$24,750.0 million term loan facility, which we and the lenders subsequently agreed to reduce to NT$17,500.0 million, for the purposes of financing our acquisition of all the outstanding ordinary shares of ASE Test pursuant to the Scheme. On May 29, 2008, we entered into an additional syndicated loan agreement with a banking syndicate led by Citibank, N.A., Taipei Branch for a US$200.0 million term loan facility, also in connection with the Scheme. For more information on the Scheme, see “Item 4. Information on the Company—History and Development of the Company—ASE Test Share Acquisition and Privatization.”
Equity Purchase Agreement between Aimhigh Global Corp., TCC Steel and J&R Holding Limited in respect of Weihai Aimhigh Electronic Co. Ltd.
On March 17, 2008, we, through our subsidiary J&R Holding Limited, entered into an equity purchase agreement with Aimhigh Global Corp. and TCC Steel in connection with the acquisition of 100.0% of ASE (Weihai), Inc., formerly known as Weihai Aimhigh Electronic Co. Ltd., for a purchase price of US$7.0 million.
Historically, foreign investment in the ROC securities market has been restricted. Since 1983, the ROC government has periodically enacted legislation and adopted regulations to permit foreign investment in the ROC securities market.
On September 30, 2003, the Executive Yuan approved an amendment to Regulations Governing Investment in Securities by Overseas Chinese and Foreign National, or the Regulations, which took effect on October 2, 2003. According to the Regulations, the ROC Financial Supervisory Commission, Executive Yuan, abolished the mechanism of the “qualified foreign institutional investors” and “general foreign investors” as stipulated in the Regulations before the amendment.
Under the Regulations, foreign investors (other than PRC persons) are classified as either “onshore foreign investors” or “offshore foreign investors” according to their respective geographical location. Both onshore and offshore foreign investors are allowed to invest in ROC securities after they register with the Taiwan Stock Exchange. The Regulations further classify foreign investors into foreign institutional investors and foreign individual investors. “Foreign institutional
investors” refer to those investors incorporated and registered in accordance with foreign laws outside of the ROC (i.e., offshore foreign institutional investors) or their branches set up and recognized within the ROC (i.e., onshore foreign institutional investors). Offshore overseas Chinese and foreign individual investors may be subject to a maximum investment ceiling that will be separately determined by the ROC Financial Supervisory Commission, Executive Yuan, after consultation with the Central Bank of the Republic of China (Taiwan). Currently, there is no maximum investment ceiling for offshore overseas Chinese and foreign individual investors. On the other hand, foreign institutional investors are not subject to any ceiling for investment in the ROC securities market.
Except for certain specified industries, such as telecommunications, investments in ROC-listed companies by foreign investors are not subject to individual or aggregate foreign ownership limits. Custodians for foreign investors are required to submit to the Central Bank of the Republic of China (Taiwan) and the Taiwan Stock Exchange a monthly report of trading activities and status of assets under custody and other matters. Capital remitted to the ROC under these guidelines may be remitted out of the ROC at any time after the date the capital is remitted to the ROC. Capital gains and income on investments may be remitted out of the ROC at any time.
Foreign investors (other than PRC persons) who wish to make (i) direct investments in the shares of ROC private companies or (ii) investment in 10% or more of the equity interest of an ROC company listed on the Taiwan Stock Exchange or the Over-the-Counter (Gretai) Securities Market in any single transaction, are required to submit a foreign investment approval application to the Investment Commission of the Ministry of Economic Affairs of the ROC or other applicable government authority. The Investment Commission or such other government authority reviews each foreign investment approval application and approves or disapproves each application after consultation with other governmental agencies (such as the Central Bank of the Republic of China (Taiwan) and the ROC Financial Supervisory Commission, Executive Yuan).
Under current ROC law, any non-ROC person possessing a foreign investment approval may remit capital for the approved investment and is entitled to repatriate annual net profits, interest and cash dividends attributable to the approved investment. Dividends attributable to such investment may be repatriated upon submitting certain required documents to the remitting bank, and investment capital and capital gains attributable to such investment may be repatriated after approvals of the Investment Commission or other government authorities have been obtained.
In addition to the general restriction against direct investment by foreign investors in securities of ROC companies, foreign investors (except in certain limited cases) are currently prohibited from investing in certain industries in the ROC pursuant to a “negative list,” as amended by the Executive Yuan. The prohibition on foreign investment in the prohibited industries specified in the negative list is absolute in the absence of a specific exemption from the application of the negative list. Pursuant to the negative list, certain other industries are restricted so that foreign investors (except in limited cases) may invest in these industries only up to a specified level and with the special approval of the relevant competent authority that is responsible for enforcing the relevant legislation that the negative list is intended to implement.
The ROC Financial Supervisory Commission, Executive Yuan, announced on April 30, 2009 the Regulations Governing Mainland Chinese Investors’ Securities Investments ("PRC Regulations"). According to the PRC Regulations, a PRC qualified domestic institutional investor ("QDII") is allowed to invest in ROC securities (including less than 10% shareholding of an ROC company listed on Taiwan Stock Exchange or Over-the-Counter (GreTai) Securities Market). Nevertheless, the total investment amount of QDIIs cannot exceed US$500 million. The custodians of QDIIs must apply with the Taiwan Stock Exchange for the remittance amount for each QDII, which cannot exceed US$100 million, and QDII can only invest in the ROC securities market with the amount approved by the Taiwan Stock Exchange. In addition, QDIIs are currently prohibited from investing in certain industries, and their investment of certain other industries in a given company is restricted to a certain percentage pursuant to a list promulgated by the ROC Financial Supervisory Commission, Executive Yuan and amended from time to time. PRC investors other than QDII are prohibited from making investments in an ROC company listed on the Taiwan Stock Exchange or the Over-the-Counter (GreTai) Securities Market if the investment is less than 10% of the equity interest of such ROC company.
In addition to investments permitted under the PRC Regulations, PRC investors who wish to make (i) direct investment in the shares of ROC private companies or (ii) investments, individually or aggregately, in 10% or more of the equity interest of an ROC company listed on the Taiwan Stock Exchange or Over-the-Counter (GreTai) Securities Market are required to submit an investment approval application to the Investment Commission of the Ministry of Economic Affairs or other government authority. The Investment Commission or such other government authority reviews each investment approval application and approves or disapproves each application after consultation with other governmental agencies.
In addition to the general restriction against direct investment by PRC investors in securities of ROC companies, PRC investors may only invest in certain industries in the "positive list", as promulgated by the Executive Yuan. Furthermore, a PRC investor who wishes to be elected as an ROC company’s director or supervisor shall also submit an investment approval application to the Investment Commission of the ROC Ministry of Economic Affairs or other government authority for approval.
ROC Exchange Controls
The ROC Foreign Exchange Control Law and regulations provide that all foreign exchange transactions must be executed by banks designated by the ROC Financial Supervisory Commission, Executive Yuan and by the Central Bank of the Republic of China (Taiwan) to engage in such transactions. Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters, and all foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.
Apart from trade-related foreign exchange transactions, ROC companies and individual residents of the ROC may, without foreign exchange approval, remit to and from the ROC foreign currency of up to US$50 million (or its equivalent) and US$5 million (or its equivalent) respectively in each calendar year. The above limits apply to remittances involving a conversion of NT dollars to a foreign currency and vice versa. In addition, a requirement is also imposed on all enterprises to register medium- and long-term foreign debt with the Central Bank of the Republic of China (Taiwan).
In addition, foreign persons may, subject to specified requirements but without foreign exchange approval of the Central Bank of the Republic of China (Taiwan), remit to and from the ROC foreign currencies of up to US$100,000 (or its equivalent) per remittance if the required documentation is provided to the ROC authorities. The above limit applies to remittances involving a conversion of NT dollars to a foreign currency and vice versa. The above limit does not, however, apply to the conversion of NT dollars into other currencies, including U.S. dollars, from the proceeds of sale of any underlying shares withdrawn from a depositary receipt facility.
ROC Taxation
The following discussion describes the material ROC tax consequences of the ownership and disposition of common shares or ADSs to a non-resident individual or non-resident entity that holds common shares or ADSs (referred to here as a “non-ROC holder”). As used in the preceding sentence, a “non-resident individual” is a non-ROC national who owns common shares or ADSs and is not physically present in the ROC for 183 days or more during any calendar year and a “non-resident entity” is a corporation or a non-corporate body that owns common shares or ADSs, is organized under the laws of a jurisdiction other than the ROC and has no fixed place of business or business agent in the ROC.
Dividends
Dividends (whether in cash or common shares) declared by us out of retained earnings and distributed to a non-ROC holder in respect of common shares or ADSs are subject to ROC withholding tax, currently at the rate of 20% on the amount of the distribution (in the case of cash dividends) or on the par value of the distributed common shares (in the case of stock dividends). A 10% undistributed earnings tax is imposed on a ROC company for its after-tax earnings generated after January 1, 1998 which are not distributed in the following year. The undistributed earnings tax so paid will further reduce the retained earnings available for future distribution. When we declare a dividend out of those retained earnings, an amount in respect of the undistributed earnings tax, up to a maximum amount of 10% of the dividend to be distributed, will be credited against the 20% withholding tax imposed on the non-ROC holders.
Distributions of stock dividends out of capital reserves will not be subject to withholding tax.
Capital Gains
Under current ROC law, capital gain realized upon the sale or other disposition of securities is exempt from ROC income tax. This exemption currently applies to capital gains derived from the sale of common shares.
Sales of ADSs by non-ROC holders are not regarded as sales of ROC securities and thus any gains derived from transfers of ADSs are not currently subject to ROC income tax.
Securities Transaction Tax
Securities transaction tax will be imposed on the seller at the rate of 0.3% of the transaction price upon a sale of common shares. Transfers of ADSs are not subject to ROC securities transaction tax.
Subscription Rights
Distributions of statutory subscription rights for the common shares in compliance with the ROC Company Act are currently not subject to ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are currently exempted from income tax but are subject to securities transaction tax, currently at the rate of 0.3% of the gross amount received. Income derived from sales of statutory subscription rights which are not evidenced by securities are treated as income generated from property transactions and are subject to income tax at a fixed rate of 20% of the income if the seller is a non-ROC holder. Subject to compliance with ROC law, we, in our sole discretion, may determine whether statutory subscription rights are evidenced by securities.
Estate and Gift Tax
ROC estate tax is payable on any property within the ROC of a deceased non-resident individual, and ROC gift tax is payable on any property within the ROC donated by a non-resident individual. Estate tax and gift tax are currently imposed at the rate of 10%. Under the ROC Estate and Gift Act, shares and bonds issued by ROC companies are deemed located in the ROC without regard to the location of the owner. It is unclear whether a holder of ADSs will be considered to own common shares for this purpose.
Tax Treaty
At present, the ROC has income tax treaties with Indonesia, Singapore, New Zealand, Australia, the United Kingdom, South Africa, Gambia, Swaziland, Malaysia, Macedonia, the Netherlands, Senegal, Sweden, Belgium, Denmark, Israel, Vietnam, Paraguay, Hungary and France. These tax treaties may limit the rate of ROC withholding tax on dividends paid with respect to common shares in ROC companies. A non-ROC holder of ADSs will be considered as the beneficial owner of common shares for the purposes of such treaties. Accordingly, holders of ADSs who wish to apply a reduced withholding tax rate that is provided under a tax treaty should consult their own tax advisers concerning such application. The United States does not have an income tax treaty with the ROC.
United States Federal Income Taxation
The following discussion describes the material U.S. federal income tax consequences of the ownership and disposition of common shares or ADSs to those U.S. holders described below who hold such common shares or ADSs as capital assets for U.S. federal income tax purposes. As used herein, a “U.S. Holder” is a beneficial owner of common shares or ADSs that is for U.S. federal income tax purposes:
| | · | a citizen or resident of the United States; |
| | · | a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States or of any political subdivision of the United States; or |
| | · | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. |
This discussion assumes that we are not a passive foreign investment company, as discussed below.
This discussion does not address all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances. In particular, it does not address all of the tax consequences that may be relevant to holders subject to special rules, including:
| | · | persons subject to the alternative minimum tax; |
| | · | tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”; |
| | · | dealers or traders in securities who use a mark-to-market method of accounting for U.S. federal income tax purposes; |
| | · | certain financial institutions; |
| | · | partnerships or other entities classified as partnerships for U.S. federal income tax purposes; |
| | · | persons carrying on a trade or business outside the U.S.; |
| | · | persons who hold or will hold common shares or ADSs as part of a straddle, hedge, conversion transaction, integrated transaction or similar transaction; |
| | · | persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; |
| | · | persons who own or are deemed to own 10% or more of our voting stock; or |
| | · | persons who acquired our common shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation. |
If an entity that is classified as a partnership for U.S. federal income tax purposes holds common shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding common shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the common shares or ADSs.
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), final, temporary and proposed Treasury regulations, administrative announcements and judicial decisions, all as of the date hereof. These laws and regulations are subject to change, possibly with retroactive effect. This discussion is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms.
In general, for U.S. federal income tax purposes, a U.S. holder who owns ADSs should be treated as the owner of the common shares represented by the ADSs. Accordingly, no gain or loss should be recognized if a U.S. holder exchanges ADSs for the common shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (“pre-release”), or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain noncorporate U.S. holders. Accordingly, the analysis of the creditability of ROC taxes and the availability of the reduced tax rate for dividends received by certain noncorporate U.S. holders, both described below, could be affected by actions that may be taken by such parties or intermediaries.
U.S. Holders should consult their tax advisers with regard to the application of the U.S. federal income tax laws to their common shares or ADSs as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
Dividends
Distributions paid on common shares or ADSs (other than certain pro rata distributions of common shares to all shareholders, including holders of ADSs), including the amount of any ROC taxes withheld thereon, reduced by any credit against the withholding tax on account of the 10% retained earnings tax imposed on us, generally will constitute foreign source dividend income to the extent paid out of our current or accumulated earnings and profits as determined in accordance with U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, we expect that distributions generally will be reported to U.S. holders as dividends. The amount a U.S. Holder will be required to include in income for any dividend paid in NT dollars will be equal to the U.S. dollar value of the NT dollars paid, calculated by reference to the exchange rate in effect on the date the payment is received by the depositary (in the case of ADSs) or by a U.S. Holder (in the case of common shares), regardless of whether the payment is in fact converted into U.S. dollars on the date of receipt. If a U.S. Holder does not convert the amount of any dividend income received into U.S. dollars on the date of receipt and subsequently realizes gain or loss on a sale or other disposition of NT dollars, it generally will be U.S. source ordinary income or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. The amount of any dividend will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code.
Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, under current law, certain dividends paid by qualified foreign corporations to certain noncorporate U.S. holders in taxable years beginning before January 1, 2013 are taxable at a maximum rate of 15%. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange, where our ADSs are traded. U.S. Holders should consult their tax advisers to determine whether the favorable rates may apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at this favorable rate.
Subject to applicable limitations and restrictions and the discussion above regarding concerns expressed by the U.S. Treasury, the ROC taxes withheld from dividend distributions, reduced by any credit against the withholding tax which is paid by the Company on account of the 10% retained earnings tax, will be eligible for credit against the U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex and, therefore, U.S. Holders should consult their tax advisers regarding the availability of foreign tax credits in their particular circumstances. Instead of claiming a credit, U.S. Holders may, at their election, deduct such otherwise creditable ROC taxes in computing their taxable income, subject to generally applicable limitations under U.S. law.
Certain pro rata distributions of common shares by a company to its shareholders, including holders of ADSs, will not be subject to U.S. federal income tax. Accordingly, these distributions will not give rise to U.S. federal income against which the ROC tax imposed on these distributions may be credited. U.S. Holders should consult their tax advisers as to whether any ROC tax imposed on these pro rata distributions of common shares may be creditable against their foreign source income from other sources.
Capital Gains
U.S. Holders generally will recognize U.S.-source capital gain or loss for U.S. federal income tax purposes on the sale or exchange of common shares or ADSs, which will be long-term capital gain or loss if the common shares or ADSs were held for more than one year. The amount of gain or loss will be equal to the difference between their tax basis in the common shares or ADSs disposed of and the amount realized on disposition, in each case as determined in U.S. dollars. A U.S. Holder’s basis in its common shares or ADSs will generally equal the U.S. Holder’s cost of such ADSs or common shares. If a U.S. Holder receives common stock or ADSs in a non-taxable pro rata distribution with respect to its ADSs or common shares (“new securities”), the basis of such new securities must be determined by allocating the basis of the ADS or common shares with respect to which the new securities were issued (“old securities”) between the old securities and new securities in proportion to their fair market values on the date of distribution. U.S. Holders should consult their tax advisers about the treatment of capital gains, which may be taxed at lower rates than ordinary income for non-corporate taxpayers, and capital losses, the deductibility of which may be limited.
Passive Foreign Investment Company Rules
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our 2010 taxable year. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25 percent owned equity investments) from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a U.S. Holder held a common share or an ADS, certain adverse consequences could apply to the U.S. Holder.
If we are a PFIC in any taxable year, a U.S. Holder may be required to file an annual report with the Internal Revenue Service, or the IRS, containing such information as the U.S. Treasury may require.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
For taxable years beginning after March 18, 2010, new legislation requires certain U.S. Holders who are individuals to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this legislation on their ownership and disposition of common shares or ADSs.
Not applicable.
Not applicable.
We file annual reports on Form 20-F and periodic reports on Form 6-K with the SEC. You can read and copy these reports and other information at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can also request copies of the documents, upon payment of a duplicating fee, by writing to the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The reports and other information we file electronically with the SEC are also available to the public from the SEC’s website at http://www.sec.gov.
Not applicable.
Market Risk
Our exposure to financial market risks relates primarily to changes in interest rates and foreign currency exchange rates. To mitigate these risks we utilize derivative financial instruments, the application of which is primarily to manage these exposures and not for speculative purposes.
Interest Rate Risk. Our exposure to interest rate risks relates primarily to our long-term floating rate loans, which is normally incurred to support our corporate activities and capital expenditures.
We entered into several interest rate swap contracts to mitigate the interest rate risk on our long-term loans. In August 2008, we entered into a set of contracts in the amount of NT$12,000.0 million, all of which expires in March 2013. In February 2009, we entered into another set of contracts in the amount of NT$5,500.0 million, all of which expire in March 2013. We also entered into a set of contracts in April 2009 in the amount of US$200.0 million, all of which expired in May 2011. The notional amounts as of December 31, 2010 are NT$8,700.0 million, NT$3,987.5 million and US$200.0 million, respectively. Interest receipt and payment were based on a floating rate of 0.261%~0.625% and fixed rates of 0.96%~2.48% as of December 31, 2010. See note 26(h) to our consolidated financial statements for details of these contracts.
The fair value of these contracts as of December 31, 2010 was negative NT$189.5 million (US$6.5 million) and we recognized them as hedging derivative liabilities-current of NT$30.2 million (US$1.0 million) and hedging derivative liabilities-noncurrent of NT$159.3 million (US$5.5 million) with an adjustment to shareholders’ equity.
The tables below set forth information relating to our significant obligations, including interest rate swap, short-term borrowings, long-term bank loans and capital lease obligations, that are sensitive to interest rate fluctuations as of December 31, 2010.
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentage) | |
| Interest Rate Swaps | | | | | | | | | | | | | | | | | | | | | | | | |
| Variable to Fixed (US$) | | | 200.0 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 200.0 | | | | (1.0 | ) |
Average pay rate | | | 1.52 | % | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.52 | % | | | | |
| Average receive rate | | | 0.26 | % | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.26 | % | | | | |
| Variable to Fixed (NT$) | | | 5,075.0 | | | | 5,075.0 | | | | 2,537.5 | | | | – | | | | – | | | | – | | | | 12,687.5 | | | | (159.3 | ) |
Average pay rate | | | 2.00 | % | | | 2.00 | % | | | 2.00 | % | | | – | | | | – | | | | – | | | | 2.00 | % | | | | |
| Average receive rate | | | 0.83 | % | | | 1.31 | % | | | 1.60 | % | | | – | | | | – | | | | – | | | | 1.25 | % | | | | |
| | | Expected Maturity Date | |
| | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | Thereafter | | | Total | | | Fair Value | |
| | | (in millions, except percentages) | |
| Short-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | |
Variable rate (NT$) | | | 300.0 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 300.0 | | | | 300.0 | |
| Average interest rate | | | 0.98 | % | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.98 | % | | | | |
Variable rate (US$) | | | 399.9 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 399.9 | | | | 399.9 | |
| Average interest rate | | | 2.82 | % | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.82 | % | | | | |
Variable rate (CNY) | | | 500.3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 500.3 | | | | 500.3 | |
| Average interest rate | | | 4.76 | % | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4.76 | % | | | | |
| Long-term bank loans and capital lease obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variable rate (NT$) | | | 8,746.1 | | | | 17,730.4 | | | | 7,542.9 | | | | 2,475.4 | | | | 357.1 | | | | – | | | | 36,851.9 | | | | 36,851.9 | |
| Average interest rate | | | 1.92 | % | | | 1.83 | % | | | 2.43 | % | | | 2.55 | % | | | 2.47 | % | | | – | | | | 2.03 | % | | | | |
Fixed rate (NT$) | | | 2.1 | | | | 0.3 | | | | – | | | | – | | | | – | | | | – | | | | 2.4 | | | | 2.4 | |
| Average interest rate | | | 5.72 | % | | | 0.3 | % | | | – | | | | – | | | | – | | | | – | | | | 6.01 | % | | | | |
Variable rate (US$) | | | 294.3 | | | | 259.8 | | | | 54.1 | | | | 20.0 | | | | 10.0 | | | | – | | | | 638.2 | | | | 638.2 | |
| Average interest rate | | | 1.72 | % | | | 2.56 | % | | | 3.91 | % | | | 4.49 | % | | | 5.05 | % | | | – | | | | 2.39 | % | | | | |
Fixed rate (US$) | | | 0.9 | | | | 0.4 | | | | – | | | | – | | | | – | | | | – | | | | 1.3 | | | | 1.3 | |
| Average interest rate | | | 2.75 | % | | | 2.16 | % | | | – | | | | – | | | | – | | | | – | | | | 2.58 | % | | | | |
Foreign Currency Exchange Rate Risk. Our foreign currency exposure gives rise to market risk associated with exchange rate movements against the NT dollar, our functional currency. Currently, the majority of our revenues are denominated in U.S. dollars, with a portion denominated in NT dollars and Japanese yen. Our costs of revenues and operating expenses are incurred in several currencies, primarily in NT dollars, U.S. dollars and Chinese yuan, as well as, to a lesser extent, Japanese yen, Korean won and Malaysian ringgit. In addition, a
substantial portion of our capital expenditures, primarily for the purchase of packaging and testing equipment, has been, and is expected to continue to be, denominated primarily in U.S. dollars with the remainder in Japanese yen. The majority of our borrowings are denominated in NT dollars and U.S. dollars, as well as, to a lesser extent, Chinese yuan. Fluctuations in exchange rates, primarily among the U.S. dollar, the NT dollar, the Chinese yuan and the Japanese yen, will affect our costs and operating margins and could result in exchange losses and increased costs in NT dollar and other local currency terms.
Despite hedging and mitigating techniques implemented by us, fluctuations in exchange rates have affected, and may continue to affect, our financial condition and results of operations. We recorded net foreign exchange gains of NT$282.0 million, NT$4.2 million and NT$317.6 million (US$10.9 million) in 2008, 2009 and 2010, respectively. In 2008, 2009 and 2010, the average exchange rate of the NT dollar to the U.S. dollar was 31.52, 33.02 and 31.50, respectively, calculated based on the statistical release by the Federal Reserve Board. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign currency exchange rates, we utilize currency forward contracts, swap contracts and cross currency swap contracts from time to time to reduce the impact of foreign currency fluctuations on our results of operations. Our policy is to account for these contracts on a mark-to-market rate basis.
The table below sets forth the outstanding cross currency swap contracts as of December 31, 2010, which will expire in 2011.
| | NT$ Interest Rate Paid (Received) % | | US$ Interest Rate Received % | | |
| | | | | | | |
| NT$5,292.9 million/US$166.0 million | | (0.60)-(0.22) | | 0.261-0.265 | | Negative US$17.418 million |
| US$65.0 million/NT$2,054.3 million | | - | | 0.35-0.83 | | US$5.617 million |
The table below sets forth our outstanding forward exchange contracts and swap contracts, for which the expected maturity dates are in 2011, in aggregate terms by type of contract as of December 31, 2010.
Forward Exchange Contracts and Swap Contracts
| | Forward Exchange Contracts | | |
| Sell US$ against NT$ | | | |
Notional Amount | US$58.3 million | | US$151.1 million |
Weighted Average Strike Price | US$/NT$29.448 | | US$/NT$30.074 |
Fair Value | US$0.623 million | | US$4.603 million |
| | | | |
| Buy US$ against NT$ | | | |
Notional Amount | US$24.0 million | | US$363.0 million |
Weighted Average Strike Price | US$/NT$29.792 | | US$/NT$29.997 |
Fair Value | Negative US$0.404 million | | Negative US$13.515 million |
| | | | |
| Sell US$ against JP¥ | | | |
Notional Amount | US$23.6 million | | US$49.3 million |
Weighted Average Strike Price | US$/JP¥83.162 | | US$/JP¥83.225 |
Fair Value | US$0.543 million | | US$1.315 million |
| | | | |
| Sell US$ against CNY | | | |
Notional Amount | US$13.0 million | | - |
Weighted Average Strike Price | US$/CNY6.653 | | - |
Fair Value | US$0.101 million | | - |
| | Forward Exchange Contracts | | |
| Sell US$ against MYR | | | |
Notional Amount | US$13.0 million | | - |
Weighted Average Strike Price | US$/MYR3.131 | | - |
Fair Value | US$0.168 million | | - |
| | | | |
| Sell US$ against SGD | | | |
Notional Amount | US$4.3 million | | - |
Weighted Average Strike Price | US$/SGD1.310 | | - |
Fair Value | US$0.079 million | | - |
| | | | |
| Sell US$ against EUR | | | |
Notional Amount | US$1.3 million | | - |
Weighted Average Strike Price | EUR/US$1.325 | | - |
Fair Value | US$0.011 million | | - |
| | | | |
| Buy US$ against EUR | | | |
Notional Amount | US$3.9 million | | - |
Weighted Average Strike Price | EUR/US$1.349 | | - |
Fair Value | US$0.074 million | | - |
Other Market Risk. Our exposure to other market risk relates primarily to our investments in publicly-traded stock, financial notes, private-placement shares and open-end mutual funds. The value of these investments may fluctuate based on various factors including prevailing market conditions. Moreover, the fair value of investments in unlisted securities may be significantly different from their carrying value. Of our investments in publicly-traded stocks, government and financial notes and open-end mutual funds held as of December 31, 2010, NT$973.3 million (US$33.4 million) were classified as financial assets held for trading and NT$648.5 million (US$22.3 million) were classified as available-for-sale financial assets. If the fair values of these investments fluctuate by 1%, our profit will increase or decrease by approximately NT$16.0 million (US$0.5 million) for the same period. In addition, fluctuations in gold prices may also affect the price at which we have been able to purchase gold wire. How this will impact the results of our operations depends on whether such costs can be transferred onto our customers.
None.
None.
Not applicable.
Depositary Fees and Charges
Under the terms of the amended and restated deposit agreement dated September 29, 2000 among Citibank, N.A., as depositary, holders and beneficial owners of ADSs and us, which was filed as an exhibit to our registration statement on Form F-6 on September 16, 2003, and its two amendments, which were filed as an exhibit to our registration statement on post-effective amendment No. 1 to Form F-6 on April 3, 2006 and our registration statement on post-effective amendment No. 2 to Form F-6 on October 25, 2006, respectively, (collectively, the
“Deposit Agreement”) for our ADSs, an ADS holder may have to pay the following service fees to the depositary bank:
| Service | Fees |
| Issuance of ADSs | Up to US$5.00 per 100 ADSs (or fraction thereof) issued |
| Delivery of deposited securities against surrender of ADSs | Up to US$5.00 per 100 ADSs (or fraction thereof) surrendered |
| Distribution of cash dividends or other cash distributions | Up to US$5.00 per 100 ADSs (or fraction thereof) held, unless prohibited by the exchange upon which the ADSs are listed |
| Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercises of rights to purchase additional ADSs | Up to US$5.00 per 100 ADSs (or fraction thereof) held, unless prohibited by the exchange upon which the ADSs are listed |
| Distribution of securities other than ADSs or rights to purchase additional ADSs | Up to US$5.00 per 100 ADSs (or fraction thereof) held |
| Depositary Services | Up to US$5.00 per 100 ADSs (or fraction thereof) held, unless prohibited by the exchange upon which the ADSs are listed |
| Transfer of ADRs | US$1.50 per certificate presented for transfer |
An ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:
| | · | taxes (including applicable interest and penalties) and other governmental charges; |
| | · | such registration fees as may from time to time be in effect for the registration of shares or other deposited securities on the share register and applicable to transfers of shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively; |
| | · | such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing shares or holders and beneficial owners of ADSs; |
| | · | the expenses and charges incurred by the depositary in the conversion of foreign currency; |
| | · | such fees and expenses as arc incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to shares, deposited securities, ADSs and ADRs; and |
| | · | the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities. |
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly-issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these transaction fees to their clients.
Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date. Depositary fees payable for cash distributions are generally deducted from the cash being distributed. In case of distributions other than cash (i.e., stock dividends, rights offerings), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or un-certificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In case of ADSs held in brokerage and custodian accounts via the central clearing and settlement system, The Depository Trust Company (DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay depositary fees, the depositary bank may, under the terms of the Deposit Agreement, refuse the requested service until payment is received or may set- off the amount of the depositary fees from any distribution to be made to the ADS holder. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary bank. You will receive prior notice of such changes.
Depositary Payments
In 2010, we did not receive any payments from Citibank, N.A, the depositary bank for our ADR programs.
Not applicable.
Not applicable.
Disclosure Controls and Procedures
As of December 31, 2010, we, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Our management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, information required to be disclosed in the reports we file or submit under the Exchange Act, and for accumulating and communicating such information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on this assessment, management concluded that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche, independently assessed the effectiveness of our internal control over financial reporting. Deloitte & Touche has issued an attestation report, which is included below.
Report of the Independent Registered Public Accounting Firm
To: the Board of Directors and Shareholders of
Advanced Semiconductor Engineering, Inc.
We have audited the internal control over financial reporting of Advanced Semiconductor Engineering, Inc. and its subsidiaries (the “Company”) as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with auditing standards generally accepted in the Republic of China and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated April 28, 2011 expressed an unqualified opinion on those financial statements and included explanatory paragraphs regarding (i) the completion of tender offerings for the common shares of Universal Scientific Industrial Co., Ltd. in February and August 2010, respectively; (ii) the reconciliation to accounting principles generally accepted in the United States of America; and (iii) the convenience translation of New Taiwan dollar amounts into U.S. dollar amounts.
/s/ Deloitte & Touche
Taipei, Taiwan
The Republic of China
April 28, 2011
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our board of directors determined that Shen-Fu Yu and Ta-Lin Hsu are audit committee financial experts as defined under the applicable rules of the SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002 and is independent for the purposes of Rule 10A-3 of the Exchange Act.
We have adopted a code of ethics that satisfies the requirements of Item 16B of Form 20-F and applies to all employees, officers, supervisors and directors of our company and our subsidiaries, including our Chief Executive Officer and Chief Financial Officer. We have posted our code of ethics on our website at http://www.aseglobal.com.
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm
Our audit committee, which was established on July 22, 2005, pre-approves all audit and non-audit services provided by our independent registered public accounting firm, including audit services, audit-related services, tax services and other services, on a case-by-case basis. Accordingly, we have not established any pre-approval policies and procedures.
Independent Registered Public Accounting Firm’s Fees
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte & Touche. We did not pay any other fees to our independent registered public accounting firm during the periods indicated below.
| | | For the Year Ended December 31, | |
| | | | | | | |
| | | NT$ | | | NT$ | | | US$ | |
| | | (in thousands) | |
Audit fees(1) | | | 95,204.8 | | | | 147,430.7 | | | | 5,059.4 | |
Tax fees(2) | | | 7,830.0 | | | | 10,767.1 | | | | 369.5 | |
All other fees(3) | | | 10,411.9 | | | | 34,186.2 | | | | 1,173.2 | |
| Total | | | 113,446.7 | | | | 192,384.0 | | | | 6,602.1 | |
| (1) | Audit fees are defined as the standard audit and review work that needs to be performed each year in order to issue an opinion on our consolidated financial statements and to issue reports on the local statutory financial statements. It also includes services that can only be provided by our auditor such as statutory audits required by the Tax Bureau of the ROC and the Customs Bureau of the ROC, auditing of non-recurring transactions and application of new accounting policies, pre-issuance reviews of quarterly financial results, consents and comfort letters and any other audit services required for SEC or other regulatory filings. |
| (2) | Tax fees consist of professional services rendered by Deloitte & Touche for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. |
| (3) | Other fees primarily consist of fees for assistance with IFRS implementation and agreed-upon procedures as required by the ROC government for capital investments in the PRC. |
Not applicable.
On November 29, 2010, we announced a share repurchase program to repurchase up to 37.0 million of our common shares at prices between NT$25.0 to NT$41.0 per share during the period from November 30, 2010 to January 28, 2011. This share repurchase program concluded on December 6, 2010, when a total of 37.0 million of our common shares had been repurchased pursuant to this program. As of January 19, 2011, all of these common shares we repurchased had been cancelled. The table below sets forth certain information about the repurchase of our common shares under this share repurchase program.
| | (a) Total Number of Common Shares Purchased | | | (b) Average Price Paid Per Common Share | | | (c) Total Number of Common Shares Purchased as Part of Publicly Announced Programs | | | (d) Maximum Number (or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Programs | |
November 2010 (November 30, 2010) | | | 7,300,000 | | | | 31.48 | | | | 7,300,000 | | | | 29,700,000 | |
| December 2010 (December 1, 2010 – December 6, 2010) | | | 29,700,000 | | | | 32.17 | | | | 29,700,000 | | | | - | |
Total | | | 37,000,000 | | | | 32.03 | | | | 37,000,000 | | | | - | |
Not applicable.
As a company listed on the New York Stock Exchange, or the NYSE, we are subject to certain corporate governance rules of the NYSE. The application of the NYSE’s corporate governance rules is limited for foreign private issuers, recognizing that they have to comply with domestic requirements. As a foreign private issuer, we must comply with the following NYSE corporate governance rules: 1) satisfy the audit committee requirements of the SEC; 2) chief executive officer must promptly notify the NYSE in writing upon becoming aware of any material non-compliance with applicable NYSE corporate governance rules; 3) submit annual and interim affirmations to the NYSE regarding compliance with applicable NYSE corporate governance requirements; and 4) provide a brief description of any significant differences between our corporate governance practices and those required of U.S.
companies under the NYSE listing standards. The table below sets forth the significant differences between our corporate governance practices and those required of U.S. companies under the NYSE listing standards.
| New York Stock Exchange Corporate Governance Rules Applicable to U.S. Companies | Description of Significant Differences between Our Governance Practices and the NYSE Corporate Governance Rules Applicable to U.S. Companies |
| Director independence |
| Listed companies must have a majority of independent directors, as defined under the NYSE listing standards. | Two members of our board of directors are independent as defined in Rule 10A-3 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). We do not assess the independence of our directors under the independence requirements of the NYSE listing standards. Pursuant to relevant laws and regulations of the Republic of China (the “ROC”), we have two independent directors on our board of directors that were elected through the candidate nomination system at our annual general shareholders meeting on June 25, 2009. |
| To empower non-management directors to serve as a more effective check on management, the non-management directors of each company must meet at regularly scheduled executive sessions without management. | All of our directors attend the meetings of the board of directors. Our non-management directors do not meet at regularly scheduled executive sessions without management. The ROC Company Law does not require companies incorporated in the ROC to have their non-management directors meet at regularly scheduled executive sessions without management. |
| Nominating/Corporate governance committee |
| Listed companies must have a nominating/corporate governance committee composed entirely of independent directors and governed by a written charter that provides for certain responsibilities of the committee set out in the NYSE listing standards. | We do not have a nominating/corporate governance committee. The ROC Company Law does not require companies incorporated in the ROC to have a nominating/corporate governance committee. Currently, our board of directors performs the duties of a corporate governance committee and regularly reviews our corporate governance principles and practices. The ROC Company Law requires that directors be elected by shareholders. Under ROC law and regulations, companies that have independent directors are required to adopt a candidate nomination system for the election of independent directors. Our two independent directors were elected through the candidate nomination system provided in our articles of incorporation. All of our non-independent directors were elected directly by our shareholders at our shareholders meetings without a nomination process. |
| Compensation committee | |
| Listed companies must have a compensation committee composed entirely of independent directors and governed by a written charter that | We do not have a compensation committee but are required by the new regulations promulgated by the Financial Supervisory Commission (the “FSC”) in March 2011 to establish a compensation |
| provides for certain responsibilities of the committee set out in the NYSE listing standards. | committee by September 30, 2011. We plan to establish a compensation committee by September 30, 2011 and the charter of such committee will contain similar responsibilities as those provided under NYSE listing standards. |
| Audit committee |
| Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act. | We have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act. Pursuant to the ROC Securities and Exchange Law, beginning January 1, 2007, public companies shall either establish an audit committee satisfying specified requirements or install supervisors. Under certain circumstances, public companies may be required by the FSC to establish an audit committee. In addition to our Rule 10A-3 audit committee, we currently have supervisors pursuant to the ROC Securities and Exchange Law. |
| The audit committee must have a minimum of three members. | We currently have two members on our audit committee. Our audit committee members satisfy the independence requirements of Rule 10A-3 under the Exchange Act. We do not assess the independence of our audit committee member under the independence requirements of the NYSE listing standards. |
| In addition to any requirement of Rule 10A-3(b)(1), all audit committee members must satisfy the independence requirements for independent directors set out in the NYSE listing standards. |
| The audit committee must have a written charter that provides for the duties and responsibilities set out in Rule 10A-3 and addresses certain other matters required by the NYSE listing standards. | Our audit committee charter provides for the audit committee to assist our board of directors in its oversight of (i) the integrity of our financial statements, (ii) the qualifications, independence and performance of our independent auditor and (iii) our compliance with legal and regulatory requirements and provides for the duties and responsibilities set out in Rule 10A-3. Our audit committee charter does not address all the matters required by the NYSE listing standards beyond the requirements of Rule 10A-3. Because the appointment and retention of our independent auditor are the responsibility of our entire board of directors under ROC law and regulations, our audit committee charter provides that the audit committee shall make recommendations to the board of directors with respect to these matters. |
| Each listed company must have an internal audit function. | We have an internal audit function. Under the ROC Regulations for the Establishment of Internal Control Systems by Public Companies, a public company is required to set out its internal control systems in writing, including internal audit implementation rules, which must be approved by the board of directors. Our entire board of directors and the Chief Executive Officer are responsible for the establishment of the internal audit functions, compliance with the internal audit implementation rules and oversight of our internal control systems, including the appointment and |
| | retention of our independent auditor. |
| Equity compensation plans |
| Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans. | We comply with the corresponding requirements of the ROC Company Law, the ROC Securities and Exchange Law, and the ROC Criteria Governing the Offering and Issuance of Securities by Securities Issuers, which require shareholders’ approval for the distribution of employee bonuses, while the board of directors has authority to approve employee stock option plans by a majority vote of the board of directors at a meeting where at least two-thirds of all directors are present and to grant options to employees pursuant to such plans, subject to the approval of the Securities and Futures Bureau of the FSC, and to approve treasury stock programs and the transfer of shares to employees under such programs by a majority vote of the board of directors in a meeting where at least two-thirds of all directors are present. |
| Corporate governance guidelines |
| Listed companies must adopt and disclose corporate governance guidelines. | We currently comply with the domestic non-binding Corporate Governance Best-Practice Principles for Taiwan Stock Exchange and GreTai Stock Market Listed Companies promulgated by the Taiwan Stock Exchange and the GreTai Stock Market, and we provide an explanation of differences between our practice and the principles, if any, in our ROC annual report. |
| Code of ethics for directors, officers and employees |
| Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. | We have adopted a code of ethics that satisfies the requirements of Item 16B of Form 20-F and applies to all employees, officers, supervisors and directors of our company and our subsidiaries and will disclose any waivers of the code as required by Item 16B of Form 20-F. We have posted our code of ethics on our website. |
| Description of significant differences |
| Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards. | This table contains the significant differences between our corporate governance practices and those required of U.S. companies under the NYSE listing standards. |
| CEO certification |
| Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards, qualifying the certification to the extent necessary. | As a foreign private issuer, we are not required to comply with this rule; however, our Chief Executive Officer provides certifications under Sections 302 and 906 of the Sarbanes-Oxley Act. |
| Each listed company CEO must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of Section 303A. | We intend to comply with this requirement. |
| Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation each time a change occurs to the board or any of the committees subject to Section 303A. The annual and interim Written Affirmations must be in the form specified by the NYSE. | We have complied with this requirement to date and intend to continue to comply going forward. |
| Website |
| Listed companies must have and maintain a publicly accessible website | We have and maintain a publicly accessible website. |
The Company has elected to provide financial statements for fiscal year 2010 and the related information pursuant to Item 18.
Reference is made to pages F-1 to F-85 of this annual report.
The consolidated financial statements of the Company and the report thereon by its independent registered public accounting firm listed below are attached hereto as follows:
| | (a) | Report of Independent Registered Public Accounting Firm of the Company dated April 28, 2011 (page F-1 to F-2). |
| | (b) | Consolidated Balance Sheets of the Company and subsidiaries as of December 31, 2009 and 2010 (page F-3). |
| | (c) | Consolidated Statements of Income of the Company and subsidiaries for the years ended December 31, 2008, 2009 and 2010 (page F-4 to F-5). |
| | (d) | Consolidated Statements of Changes in Shareholders’ Equity of the Company and subsidiaries for the years ended December 31, 2008, 2009 and 2010 (page F-6). |
| | (e) | Consolidated Statements of Cash Flows of the Company and subsidiaries for the years ended December 31, 2008, 2009 and 2010 (pages F-7 to F-10). |
| | (f) | Notes to Consolidated Financial Statements of the Company and subsidiaries (pages F-11 to F-85). |
| 1. | Articles of Incorporation of the Registrant (English translation of Chinese). |
| 2. | (a) | Amended and Restated Deposit Agreement dated as of September 29, 2000 among ASE Inc., Citibank N.A., as depositary, and Holders and Beneficial Holders of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt (incorporated by reference to Exhibit (a) to our registration statement on Form F-6 (File No. 333-108834) filed on September 16, 2003). |
| | (b) | Letter Agreement dated as of February 1, 2001 by and between ASE Inc. and Citibank N.A., as depositary for the sole purpose of accommodating the surrender of ASE Inc’s Rule 144A Global Depositary Shares, the issuance of American Depositary Shares and the delivery of American Depositary Receipts in the context of the termination of ASE Inc.’s Rule 144A Depositary Receipts Facility (incorporated by reference to Exhibit (b)(i) to our registration statement on Post-Effective Amendment No. 1 to Form F-6 (File No. 333-108834) filed on April 3, 2006). |
| | (c) | Letter Agreement dated as of September 25, 2003 by and between ASE Inc. and Citibank N.A., as depositary for the sole purpose of accommodating the issuance of American Depositary Shares upon ASE Inc.’s deposit of its shares with the depositary following the conversion of certain bonds issued by ASE Inc. in accordance with, and subject to, the terms and conditions of the indenture governing such bonds (incorporated by reference to Exhibit (b)(ii) to our registration statement on Post-Effective Amendment No. 1 to Form F-6 (File No. 333-108834) filed on April 3, 2006). |
| | (d) | Amendment No. 1 to Amended and Restated Deposit Agreement dated as of April 6, 2006 among ASE Inc., Citibank N.A., as depositary, and Holders and Beneficial Holders of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt (incorporated by reference to Exhibit (a)(ii) to our registration statement on Post-Effective Amendment No. 2 to Form F-6 (File No. 333-108834) filed on October 25, 2006). |
| | (e) | Form of Amendment No. 2 to Amended and Restated Deposit Agreement among ASE Inc., Citibank N.A., as depositary, and Holders and Beneficial Holders of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt (incorporated by reference to Exhibit (a)(iii) to our registration statement on Post-Effective Amendment No. 2 to Form F-6 (File No. 333-108834) filed on October 25, 2006). |
| 4. | (a) | Asset Purchase Agreement dated as of July 3, 1999 among ASE (Chung Li) Inc., ASE Inc., Motorola Electronics Taiwan, Ltd. and Motorola, Inc. (incorporated by reference to Exhibit 10.2 to ASE Test’s registration statement on Form F-3 (File No. 333-10892) filed on September 27, 1999 (the “ASE Test 1999 Form-3”)). |
| | (b) | Agreement dated as of June 5, 2002 among ASE (Chung Li) Inc., ASE Inc., Motorola Electronics Taiwan, Ltd. and Motorola, Inc. amending certain earn-out arrangements provided for in Section 2.09(b)(ii)(D) of the Asset Purchase Agreement dated as of July 3, 1999 among the same parties (incorporated by reference to Exhibit 4(b) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2002 filed on June 30, 2003). |
| | (c) | Stock Purchase Agreement dated as of July 3, 1999 among ASE Investment (Labuan) Inc., ASE Inc., Motorola Asia Ltd. and Motorola, Inc. relating to the purchase and sale of 100.0% of the common stock of Motorola Korea Ltd. (incorporated by reference to Exhibit 10.3 to the ASE Test 1999 Form F-3). |
| | (d)† | BGA Immunity Agreement dated as of January 25, 1994 between ASE Inc. and Motorola, Inc. (incorporated by reference to Exhibit 10.6 to the Form F-1). |
| | (e)† | Amendment dated March 18, 2003 renewing the BGA Immunity Agreement dated as of January 25, 1994 between ASE Inc. and Motorola, Inc. (incorporated by reference to Exhibit 4(g) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2003 filed on June 30, 2004). |
| | (f) | Consent dated June 10, 2004 to the Assignment of the BGA Immunity Agreement between ASE Inc. and Motorola, Inc. dated January 25, 1994 (incorporated by reference to Exhibit 4(h) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2003 filed on June 30, 2004). |
| | (g) | Asset Purchase Agreement by and among Flextronics Manufacturing (M) Sdn Bhd, as Buyer, ASE Electronics (M) Sdn. Bhd. as Company, dated as of October 3, 2005 (incorporated by reference to Exhibit 4(g) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2005 filed on June 19, 2006). |
| | (h) | Joint Venture Agreement dated as of July 14, 2006 among Advanced Semiconductor Engineering, Inc. and Powerchip Semiconductor Corp. relating to the establishment of, and our investment of 60.0% in, PowerASE (incorporated by reference to Exhibit 4(r) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2006 filed on June 25, 2007, as amended). |
| | (i) | Sale and Purchase Agreement dated January 11, 2007 among J&R Holding Limited and Seacoast Profits Limited relating to our acquisition of 100% of GAPT (incorporated by reference to Exhibit 4(s) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2006 filed on June 25, 2007, as amended). |
| | (j) | Equity Interests Transfer Agreement dated August 6, 2007 by and among NXP B.V., NXP Semiconductors Suzhou Ltd. and J&R Holding Limited relating to our acquisition of 60% of ASEN, our joint venture with NXP Semiconductors (incorporated by reference to Exhibit 4(j) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2008 filed on June 24, 2009). |
| | (k) | Scheme Implementation Agreement dated September 4, 2007 between Advanced Semiconductor Engineering, Inc. and ASE Test Limited relating to our acquisition of all the outstanding ordinary shares of, and the privatization of, ASE Test (incorporated by reference to Appendix A to Exhibit (a)(1) to Schedule 13E-3 (File No. 005-55723) filed by ASE Test on January 4, 2008). |
| | (l) | Syndicated Loan Agreement in the amount of NT$24,750 million dated March 3, 2008 among Advanced Semiconductor Engineering, Inc., Citibank, N.A., Taipei Branch and the banks and banking institutions listed on Schedule I thereto relating to our acquisition of all the outstanding ordinary shares of, and the privatization of, ASE Test (incorporated by reference to Exhibit 4(l) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2008 filed on June 24, 2009). |
| | (m) | Equity Purchase Agreement dated March 17, 2008 between Aimhigh Global Corp., TCC Steel and J&R Holding Limited in respect of Weihai Aimhigh Electronic Co. Ltd. relating to our acquisition of 100% of ASE (Weihai), Inc. (incorporated by reference to Exhibit 4(m) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2008 filed on June 24, 2009). |
| | (n) | Syndicated Loan Agreement in the amount of US$200 million dated May 29, 2008 among Advanced Semiconductor Engineering, Inc., Citibank, N.A., Taipei Branch and the banks and banking institutions listed on Schedule I thereto relating to our acquisition of all the outstanding ordinary shares of, and the privatization of, ASE Test (incorporated by reference to Exhibit 4(n) to our annual report on Form 20-F (File No. 001-16125) for the year ended December 31, 2008 filed on June 24, 2009). |
| 12. | (a) | Certification of Jason C.S. Chang, required by Rule 13a-14(a) of the Exchange Act. |
| | (b) | Certification of Joseph Tung, required by Rule 13a-14(a) of the Exchange Act. |
| 13. | Certification of the Chief Executive Officer and the Chief Financial Officer of Advanced Semiconductor Engineering, Inc. required by Rule 13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
____________________
| † | Does not contain portions for which confidential treatment has been granted. |
The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument which defines the rights of holders of long-term debt of the Company and its consolidated subsidiaries.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| ADVANCED SEMICONDUCTOR ENGINEERING, INC. | |
| | |
| | |
| By: | /s/ Joseph Tung | |
| | Joseph Tung | |
| | Chief Financial Officer | |
Date: June 17, 2011
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| Consolidated Financial Statements of Advanced Semiconductor Engineering, Inc. and Subsidiaries | |
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