SIMPSON THACHER & BARTLETT LLP
[CHINESE CHARACTERS]
AMERICAN LAWYERS
ICBC TOWER, 7(TH) FLOOR
3 GARDEN ROAD
HONG KONG
(852) 2514-7600
---
FACSIMILE: (852) 2869-7694
DIRECT DIAL NUMBER E-MAIL ADDRESS
(852) 2514-7650 clin@stblaw.com
March 30, 2006
Re: Siliconware Precision Industries Co., Ltd.
Form 20-F for the Year Ended December 31, 2004
File No. 000-30702
Ms. Michele Gohlke
Branch Chief
Ms. Tara Harkins
Staff Accountant
Mr. Kevin Vaughn
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Office 3536
Washington, D.C. 20549
Dear Ms. Gohlke, Ms. Harkins, and Mr. Vaughn:
On behalf of Siliconware Precision Industries Co., Ltd. (the "COMPANY"),
set forth below are the Company's responses to the follow-up comment letter of
the U.S. Securities and Exchange Commission (the "COMMISSION") dated January 9,
2006 (the "SECOND COMMENT LETTER"), as provided to us by fax on February 17,
2006, with respect to the above-referenced annual report on Form 20-F (the "FORM
20-F). The Second Comment Letter was made in response to the review by the
Commission's staff (the "STAFF") of the Company's first response letter, dated
November 23, 2005 (the "FIRST RESPONSE LETTER"), in response to the Staff's
original comment letter, dated September 23, 2005 (the "FIRST COMMENT LETTER")
on the Company's Form 20-F.
For your convenience, we have reproduced the comments from the Staff in the
order provided followed by the Company's corresponding response.
2
Form 20-F for the year ended December 31, 2004
Notes to Consolidated Financial Statements, F-11
Note 28: U.S. GAAP Reconciliation, page F-47
General
1. Please refer to prior comment 6. You state that you accounted for the
embedded put option and conversion option together as a compound derivative
that would be classified as a liability and subsequently measured at fair
value under EITF 00-19 and SFAS 133. We further note that you determined
the conversion features for these bonds were out-of-the-money at the
commitment dates under EITF 98-5 and EITF 00-27. Please tell us if you have
determined if these convertible bonds meet the definition of conventional
convertible debt in paragraph 4 of EITF 00-19 and the basis for your
conclusions. If you have determined that your bonds are not conventionally
convertible, you would be required to analyze the conversion feature under
paragraphs 12-32 of EITF 00-19 and would not account for the conversion
feature under EITF 98-5 and EITF 00-27. Please advise.
In responding to Comment 6 of the Staff's First Comment Letter, the Company
first evaluated whether the convertible bonds meet the criteria of a derivative
instrument by considering the scope exception provided in paragraph 11a of FAS
133: contracts issued or held that are both (i) indexed to its own stock and
(ii) classified in stockholders' equity.
The Company believes that EITF 00-19 addresses whether the embedded
conversion feature meets the standard set forth in 11(a) of FAS 133. If
convertible debt meets the definition of conventional convertible debt, then an
analysis of the requirements set forth in paragraphs 12-32 of EITF 00-19 do not
need to be tested. . The Company noted in the First Response Letter that its
convertible bonds issued on January 28, 2002 (the "2002 Bonds") contained a
premium put, and according to the Status of EITF 85-29, in situations where
convertible bonds are issued with a premium put, "from the issuer's standpoint,
the embedded feature with the combination of mutually exclusive choices does not
qualify for the scope exception in paragraph 11(a), which excludes contracts
that are both indexed only to the entity's own stock and classified in
stockholders' equity in the entity's statement of financial position." The
Status of EITF 85-29 explains that an embedded premium put and a conversion
option would warrant separate accounting as a derivative. Thus, for the 2002
Bonds, the Company believes that further analyses of EITF 00-19, EITF 98-5 and
EITF 00-27 are not necessary. Additionally, the terms of the 2002 Bonds allow
bondholders to convert into a fixed number of ADS or common shares which are
denominated in New Taiwan Dollars ("NTD") at a fixed exchange rate. This fixed
exchange rate arrangement would make the 2002 Bonds dual-index to both stock
price and foreign exchange rate. Accordingly, the 2002 Bonds do not meet the
scope exception in paragraph 11(a)
The Company's convertible bonds issued on February 5, 2004 (the "2004
Bonds"), would not be subject to EITF 85-29 as the embedded put option thereof
is exercisable
3
at par. The put is considered clearly and closely related to the 2004 Bonds
pursuant to paragraph 13 and 61d of FAS 133 because the 2004 Bonds were issued
at par (i.e., no substantial discount or premium is involved). Similar to the
2002 Bonds, the 2004 Bonds allow bondholders to convert such bonds into a fixed
number of ADS or common shares denominated in NTD at a fixed exchange rate. As a
result, the 2004 Bonds are also considered dual-indexed. Hence, they do not meet
the scope exception of paragraph 11(a)of FAS 133. Therefore, the conversion
option and the foreign exchange forward in relation to the 2004 Bonds would need
to be bifurcated from the host debt. Accordingly, further analyses of EITF
00-19, EITF 98-5 and EITF 00-27 are not necessary.
In the First Response Letter, the impact on the early extinguishment of the
2002 Bonds upon bondholders' exercise of conversion and buybacks by the Company
and the impact of bifurcation of the embedded derivatives in the 2004 Bonds were
not taken into consideration. Subsequently, the Company further analyzed the
impact of the early extinguishment of the 2002 Bonds upon bondholders' exercise
of conversion and the Company's buybacks, as well as the bifurcation of the
embedded derivatives in the 2004 Bonds upon the Company's income statement.
Together with the impact of bifurcation of the embedded derivatives in the 2002
Bonds, the impact on net income is summarized below:
<Table>
<Caption>
2002 2003 2004
-----------------------------------------------------
Cumulative impact of bifurcating derivatives (53,991,869) 96,568,910 286,358,236
-----------------------------------------------------
Impact of conversion / buyback of the 2002
convertible bonds 0 0 (193,683,511)
-----------------------------------------------------
Cumulative effect on net income (53,991,869) 96,568,910 92,674,725
=====================================================
Prior year balance 0 (53,991,869) 96,568,910
Current year (53,991,869) 150,560,779 (3,894,185)
-----------------------------------------------------
(53,991,869) 96,568,910 92,674,725
=====================================================
US GAAP net (loss) income before adjustment (222,963,000) 3,247,880,000 3,667,147,000
US GAAP net (loss) income after adjustment (168,971,131) 3,097,319,221 3,671,041,185
% impact on net income (loss) 24.22% 4.64% -0.11%
% impact on average net income from 2000 to
2004 (NT$1.38 billion) -3.91% 10.91% -0.28%
US GAAP net equity before adjustment 30,262,476,000 36,433,992,000 39,190,808,000
US GAAP net equity after adjustment 30,208,484,131 36,530,560,910 39,283,482,752
% impact on equity -0.18% 0.27% 0.24%
</Table>
Note: Upon conversion and buybacks, gain or loss on early extinguishment of
convertible debt should be recognized by the combined amount of the gain or loss
on the embedded derivatives' last mark to market on the conversion or buyback
date and the difference between the fair value of the Company's share or buyback
price and the carrying amount of the convertible debt on the conversion or
buyback date
Although the quantitative impact in 2002 represents 24% of US GAAP net
loss, the Company has determined that the impact is not material due to the
following factors:
4
o Year 2002 was a breakeven year and the high percentage was due to the thin
income margin in 2002 that existed irrespective of the loss attributable to
the impact of the 2002 Bonds. Moreover, the absolute dollar amount of the
impact was not material to the Company's overall operations.
o The Company's US GAAP net income (loss) from 2000 to 2004 were NT$1,982
million, NT$(1,790) million, NT$(223) million, NT$3,248 million and
NT$3,667 million, respectively. Average net income for the five years from
2000 to 2004 was approximately NT$1.38 billion. The impact in 2002
represents approximately 3.9% of average annual net income over the period
from 2000 to 2004.
o The impact in 2002 represents only 0.18% of US GAAP equity and 0.24% of net
operating revenue.
In addition to the above quantitative analysis, the Company also performed
the following qualitative analysis:
o The gain or loss arising from an embedded derivative in a convertible bond,
including the embedded derivative in the 2002 Bonds, is a non-cash item
which relates primarily to the market price of the Company's shares. In
addition, the gain or loss is reversed due to fluctuations of the Company's
share price, and upon conversion, the cumulative gain or loss is charged to
the capital reserve account and has no impact on the net equity.
o The impact of the embedded derivative does not affect operating income or
expenses. The Company is in a very cyclical business sector in which
operating revenue and income swings significantly in response to cyclical
trends in the semiconductor market. In such a market, it is operating
revenue and income that tend to bear the most relevance in investment
decision-making. Non-cash gains or losses arising from mark-to-market
adjustments of embedded derivatives are not expected to bear material
relevance to an investor's decision-making.
o The impact of the adjustment in 2002, 2003 and 2004 does not affect the
overall pattern of the Company's earning trend or change a loss into income
or vice versa.
o The adjustment has no effect on management's compensation or the Company's
compliance with any regulatory requirements, loan covenants or other
contractual requirements.
Based on the above analyses, the Company has determined the net impact on
the Company's results of operations was not material and the Company will record
the cumulative adjustment in its 2005 US GAAP reconciliation of net income. Such
cumulative adjustment is not likely to be material to US GAAP net income for
2005. The Company will revise its disclosure in future filings to reflect GAAP
difference.
(1) Compensated Balances, page F-50
-(ii) Employee Bonuses, page F.51
5
2. Please refer to prior comment 9. In your response, you state that your
accounting treatment for employee bonuses is based on the guidance of the
International Reporting and Disclosures Issues in the Division of Corporation
Finance. However, as indicated in that guidance, the SEC staff places
significant weight on shareholder approval. Accordingly, absent unusual facts
and circumstances, the fair value of the stock issued should be recorded at the
date of shareholder approval. Please explain to us how your accounting is
consistent with the guidance of Item 6 of Appendix A of the International
Reporting and Disclosures Issues in the Division of Corporation Finance dated
November 1, 2004, which can be found on our website at www.sec.gov.
In its response to the Staff's prior comment 9, the Company stated, in
relevant part, that "[t]his compensation, which is generally paid after its
fiscal year-end in cash or stock, or a combination of the two, is subject to
shareholders' approval." In accordance with the Company's article of
incorporation, a certain portion of the earnings distribution must be allocated
for employee bonus. Such bonus is earned by employees through the provision of
services as of the fiscal year-end. Distribution of the employee bonus in the
form of a combination of shares and cash (in each case, in an amount equal to
par value) is also contemplated under the Company's articles of association.
Regardless of the form of the bonus, however, the shareholders are required by
the articles of incorporation to approve an employee bonus whenever there is a
dividend distribution. Accordingly, the Company views the par value as a minimum
liability which accrues at year end. Upon receipt of shareholder approval of the
share distribution, the Company then records the excess of the fair value of the
shares over the par value in the period in which such approval is obtained. The
Company believes the accrual of this minimum liability is consistent with the
guidance for employee stock bonuses in the International Reporting and
Disclosures Issues in the Division of Corporate Finance dated November 1, 2004
("SEC staff paper"), that in turn was derived from the minutes of the
International Practices Task Force ("IPTF") meeting of April 18, 1996. At that
meeting, the IPTF discussed whether, at year end, it is appropriate to limit
accrual to the par value of the securities, rather than record the accrual at
the fair value of the shares at year end, with the difference between that par
value and the fair value at the date of shareholder approval charged to income
in a subsequent period. We note that the IPTF's concern appears to be whether
the accrual at par would understate the employee share bonus payable, and not
whether the par value should be accrued at the end of the fiscal year prior to
receipt of shareholder approval for the issuance of shares. At the 1996 IPTF
meeting, the SEC staff further indicated "they would place significant weight on
shareholder approval for the fair value." This conclusion was reaffirmed in the
SEC staff paper dated November 1, 2004. Based on the IPTF minutes of April 1996
and the SEC staff paper dated November 2004, the Company believes it is
appropriate to accrue employee share bonus at par at year end and to record the
difference between the fair value and par value of the stock issued as of the
date of shareholder approval.
***
As noted in the Company's first response letter of November 23, 2005, all
correspondence to the Company should be addressed to its new Chief Financial
Officer, Ms. Eva Chen, as the former Chief Financial Officer Wen Chung Lin has
retired from the Company.
6
If you have any questions or wish to discuss any matters with respect to
the responses set forth above, please do not hesitate to contact Chris Lin at
011-852-2514-7650 or Daniel Fertig at 011-852-2514-7660 or send either of us an
email at clin@stblaw.com or dfertig@stblaw.com.
Very truly yours,
/s/ Daniel Fertig
for Chris Lin
Chris Lin
Daniel Fertig
cc: Ms. Eva Chen
Ms. Yuling Chung
Siliconware Precision Industries Co., Ltd.