KINPO ELECTRONICS, INC Financial Statements for the Years Ended December 31, 2012 an 2011 and Independent Auditors' Report

Transcription

1 KINPO ELECTRONICS, INC Financial Statements for the Years Ended December 31, 2012 an 2011 and Independent Auditors' Report Address: 10th Fl., 99 Nanking East Rd., Section 5, Taipei, Republic of China Telephone:

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders KINPO ELECTRONICS, INC. We have audited the accompanying balance sheets of KINPO ELECTRONICS, INC. as of December 31, 2012 and 2011, and the related statements of income, changes in stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and Generally Accepted Auditing Standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KINPO ELECTRONICS, INC. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and Generally Accepted Accounting Principles in the Republic of China. As described in Note 3 to the financial statements, effective January 1, 2011, KINPO ELECTRONICS, INC. adopted the third revision of Statement of Financial Accounting Standard(SFAS) No.34 Financial Instrument: Recognition and Measurement and SFAS No.41 Operating Segments for evaluating impairment of loans and receivables originated by the Company and conformed to the new reporting requirement of operating segments. KINPO ELECTRONICS, INC. had prepared its consolidated financial statements for the years ended December 31, 2012 and And we had issued a modified unqualified opinion report on it for your reference. BDO Taiwan March 25,

3 KINPO ELECTRONICS, INC. BALANCE SHEETS December 31, 2012 and 2011 (In Thousands of New Taiwan Dollars) ASSETS Footnote December 31,2012 % December 31,2011 % LIABILITIES AND STOCKHOLDERS' EQUITY Footnote December 31,2012 % December 31,2011 % Current Assets Current Liabilities Cash and cash equivalents 2,4(1) $544,326) 1.73) $631,449) 2.14) Shortterm borrowings 4(10) $1,637,461) 5.22) $1,673,850) 5.68) Availableforsale financial 2,4(3) 473,010) 1.51) 216,999) 0.74) Shortterm notes 4(11) 899,167) 2.86) 798,713) 2.71) assetscurrent Financial liabilities measured at fair 2,4(2) Hedging derivative assetscurrent 2,4(4) ) 0 value through profit and losscurrent ,599) 0.04) Notes receivable, net 80) 0 15) 0 Hedging derivative liabilitiescurrent 2,4(4) 13,060) 0.04) 0 0 Notes receivablerelated parties, net 37) 0 34) 0 Notes payable 1,969) 0.01) 674) 0 Accounts receivable, net 2,4(5) 6,482,787) 20.65) 2,346,119) 7.96) Accounts payable 57) 0 517) 0 Accounts receivablerelated parties, 5 1,811,994) 5.77) 1,075,431) 3.65) Accounts payablerelated parties 5 6,696,293) 21.33) 2,606,191) 8.84) net Income tax payable ,957) 0.07) Other receivables 30,877) 0.10) 46,182) 0.16) Accrued expenses 180,634) 0.58) 131,453) 0.45) Other receivablesrelated parties 5 27,124) 0.09) 9,449) 0.03) Other payablesrelated parties 5 63,483) 0.20) 66,043) 0.22) Prepayments 12,338) 0.04) 17,446) 0.06) Other payables 6,294) 0.02) 5,417) 0.02) Other current assets 2,541) 0.01) 1,940) 0 Advance receipts 19,325) 0.06) 73,810) 0.25) Subtotal 9,385,114) 29.90) 4,345,179) 14.74) Longterm liabilitiescurrent portion 4(12) ,000) 3.26) Other current liabilities 105,901) 0.34) 84,137) 0.28) Funds and Investments Subtotal 9,623,644) 30.66) 6,434,361) 21.82) Financial assets measured at fair 2,4(2) 27,267) 0.09) 50,436) 0.17) value through profit or lossnon current LongTerm Liabilities Availableforsale financial assetsnon 2,4(3) 3,081,048) 9.82) 4,714,449) 15.99) Longterm loans 4(12) 4,000,000) 12.74) 2,900,000) 9.84) current Other financial liabilitiesnon current 330) 0 320) ) Financial assets carried at cost non 2,4(6) 161,720) 0.52) 325,340) 1.10) Subtotal 4,000,330) 12.74) 2,900,320) 9.84) current Reserves Debt investments without active 2,4(7) 745,000) 2.37) 717,065) 2.43) Reserve for land revaluation 4(9) 209,505) 0.67) 209,505) 0.71) market non current increment tax Equity investments under equity 2,4(8),6 15,969,835) 50.88) 17,395,982) 59.00) Subtotal 209,505) 0.67) 209,505) 0.71) method Prepayments for longterm 4(8) 90,000) 0.29) 0 0 Other Liabilities investments Accrued pension liabilities 2,4(20) 393,513) 1.25) 403,365) 1.37) Other financial assetsnon current 302) (0.01) 252) 0 Longterm equity investments credits 2,4(8) 30,169) 0.10) 60,700) 0.20) Subtotal 20,075,172) 63.96) 23,203,524) 78.69) Others 4(13) 23,239) 0.07) 23,817) 0.07) Subtotal 446,921) 1.42) 487,882) 1.64) Property, Plant and Equipment 2,4(9) Total Liabilities 14,280,400) 45.49) 10,032,068) 34.01) Cost: Land 46,285) 0.15) 51,082) 0.17) Buildings and structures 254,139) 0.81) 313,784) 1.06) Stockholders' Equity Machinery 8,919) 0.03) 9,094) 0.03) Capital 4(14) Transportation equipment 11,178) 0.04) 5,005) 0.02) Common stock 14,582,332) 46.46) 14,582,332) 49.45) Rental assetsland 32,273) 0.10) 27,476) 0.09) Capital surplus 4(15) Rental assetsbuildings 560,082) 1.78) 480,161) 1.63) Additional paidin capital 1,527) 0 1,527) 0.01) Other facilities 186,049) 0.59) 183,353) 0.62) Treasury stock transactions 254,842) 0.81) 248,188) 0.84) Revaluation increment 701,742) 2.24) 701,742) 2.38) Longterm equity investments 102,546) 0.33) 91,687) 0.31) Total Cost 1,800,667) 5.74) 1,771,697) 6.00) Others 5,223) 0.02) 5,223) 0.02) Less: Accumulated depreciation (567,230) (1.81) (531,822) (1.80) Retained earnings 4(16) Construction in progress 82,273) 0.26) 3,499) 0.01) Legal reserve 1,553,485) 4.95) 1,550,432) 5.26) Prepayment for equipments 1,306) 0.01) 2,122) 0.01) Unappropriated retained earnings 501,262) 1.60) 525,126) 1.78) Property, Plant and Equipment, Net 1,317,016) 4.20) 1,245,496) 4.22) Other adjustments to stockholders equity Other Assets Unrealized gains (losses) on financial 1,157,868) 3.69) 2,573,960) 8.73) Deferred charges 2 10,920) 0.03) 12,746) 0.04) Instruments Deferred income tax assetsnon 2,4(21) 600,221) 1.91) 681,697) 2.31) Unrealized revaluation increments 4(9) 492,237) 1.57) 492,237) 1.67) current Cumulative translation adjustments 481,355) 1.53) 1,424,060) 4.83) Subtotal 611,141) 1.94) 694,443) 2.35) Net losses not recognized as pension (413,665) (1.32) (427,229) (1.45) cost Treasury stock 2,4(17) (1,610,969) (5.13) (1,610,969) (5.46) Total Stockholders' Equity 17,108,043) 54.51) 19,456,574) 65.99) TOTAL ASSETS $31,388,443) ) $29,488,642) ) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,388,443) ) $29,488,642) ) The accompanying notes are an integral part of financial statements 3

4 KINPO ELECTRONICS, INC. STATEMENTS OF INCOME For the Years Ended December 31, 2012 and 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Item Footnote 2012 % 2011 % Operating Revenues 2,5 Sales $31,423,862) 97.13) $23,523,169) 96.66) Sales returns 0 0 (16) 0 Sales discounts and allowance (2,306) (0.01) (4,723) (0.02) Service revenues 842,983) 2.61) 713,158) 2.93) Other operating revenues 86,983) 0.27) 103,383) 0.43) Net Operating Revenues 32,351,522) ) 24,334,971) ) Operating Costs 2,5 Cost of goods sold (30,368,313) (93.87) (22,959,907) (94.35) Service costs (783,614) (2.42) (644,234) (2.65) Other operating costs (34,994) (0.11) (54,892) (0.22) Operating Costs (31,186,921) (96.40) (23,659,033) (97.22) Gross Profits from Operations 1,164,601) 3.60) 675,938) 2.78) Operating Expenses 4(18) Marketing and selling expenses (192,496) (0.60) (163,029) (0.67) General and administrative expenses (258,352) (0.80) (225,812) (0.93) Research and development expenses (108,219) (0.33) (144,323) (0.59) Operating Income 605,534) 1.87) 142,774) 0.59) Nonoperating Income and Gains Interest income 81,507) 0.25) 69,421) 0.29) Valuation gains on financial assets ,978) 0.11) Other investment income 213,904) 0.66) 422,805) 1.74) Gains on disposal of investments ,458) 0.29) Foreign exchange gains, net ,166) 0.13) Reversal of provision for bad debts ,554) 0.11) Others 14,142) 0.05) 35,796) 0.14) Total Nonoperating Income and Gains 309,553) 0.96) 683,178) 2.81) Nonoperating Expenses and Losses Interest expenses (91,463) (0.28) (70,762) (0.29) Valuation losses on financial assets (23,170) (0.07) 0 0 Valuation losses on financial liabilities (12,501) (0.04) (1,439) (0.01) Investment losses accounted for using equity method 2,4(8) (630,715) (1.95) (537,633) (2.21) Losses on disposal of investments (863) Foreign exchange losses, net (1,765) (0.01) 0 0 Impairment losses 4(19) (48,555) (0.15) (174,009) (0.72) Others (6,369) (0.02) (4,848) (0.02) Total Nonoperating Expenses and Losses (815,401) (2.52) (788,691) (3.25) Income from Continuing Operation Before Tax 99,686) 0.31) 37,261) 0.15) Income Tax (Expenses) Benefits 2,4(21) 18,327) 0.05) (6,731) (0.02) Net Income from Continuing Operations 118,013) 0.36) 30,530) 0.13) Net Income $118,013) 0.36) $30,530) 0.13) Basic Earnings Per Share: 4(22) PreTax AfterTax PreTax AfterTax Income from Continuing Operations $0.08) $0.09) $0.03) $0.02) Net Income $0.08) $0.09) $0.03) $0.02) Diluted Earnings Per Share: 4(22) PreTax AfterTax PreTax AfterTax Income from Continuing Operations $0.08) $0.09) $0.03) $0.02) Net Income $0.08) $0.09) $0.03) $0.02) The pro forma net income and after income tax earnings per share are shown as follows, based on the assumption that the Company s stock held by it s subsidiary is treated as an investment instead of treasury stock: Income before Income Taxes $106,340) $44,045) Net Income $124,667) $37,314) PreTax AfterTax PreTax AfterTax Earnings Per Share $0.08) $0.09) $0.03) $0.03) The accompanying notes are an integral part of financial statements 4

5 Summary Common Stock Capital Surplus Legal Reserve Retained Earnings KINPO ELECTRONICS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 2012 and 2011 Retained Earnings Other Adjustments Unrealized Gains Unrealized Cumulative Net Losses not Unappropriated (Losses) on Revaluation Translation Recognized as Financial Instruments (In Thousands of New Taiwan Dollars) Increments Adjustments Pension Cost Treasury Stock Total Balance on January 1,2011 $14,582,332) $368,830) $1,479,275) $711,577) $4,553,469) $) $1,171,085) $(370,690) $(1,009,190) $21,486,688) Distribution of 2010 net Income Legal reserve ,158) (71,158) Cash dividends (145,823) (145,823) Changes in unrealized revaluation ,237) ,237) increment The parent company s dividends received 0 6,784) ,784) by subsidiaries Acquisitions of treasury stock (601,779) (601,779) Changes in unrealized gains or losses on (1,846,210) (1,846,210) availableforsale financial assets Net changes in shareholders equity from 0 11, (133,299) 0 0 (7,708) 0 (129,765) equity method investees Effect on equity investment not 0 (40,231) (40,231) recognized by shareholding percentage Cumulative translation adjustments ,975) ,975) Net income in ,530) ,530) Net losses not recognized as pension cost (48,831) 0 (48,831) Rounding 0 0 (1) (1) Balance on January 1,2012 $14,582,332) $346,625) $1,550,432) $525,126) $2,573,960) $492,237) $1,424,060) $(427,229) $(1,610,969) $19,456,574) Distribution of 2011 net Income Legal reserve 0 0 3,053) (3,053) Cash dividends (138,824) (138,824) The parent company s dividends received 0 6,654) ,654) by subsidiaries Changes in unrealized gains or losses on (1,434,656) (1,434,656) availableforsale financial assets Net changes in shareholders equity from 0 15, ,564) 0 0 (15,099) 0 18,471) equity method investees Effect on equity investment not 0 (4,147) (4,147) recognized by shareholding percentage Cumulative translation adjustments (942,705) 0 0 (942,705) Net income in ,013) ,013) Net losses not recognized as pension cost ,663) 0 28,663) Balance on December 31,2012 $14,582,332) $364,138) $1,553,485) $501,262) $1,157,868) $492,237) $481,355) $(413,665) $(1,610,969) $17,108,043) The accompanying notes are an integral part of financial statements 5

6 KINPO ELECTRONICS, INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 (In Thousands of New Taiwan Dollars) Items Cash Flows from Operating Activities Net income $118,013) $30,530) Adjustments: Reversal of provision for bad debt expenses 0 (25,554) Depreciation and amortization expenses 57,868) 50,548) Gains (losses) on disposal of investments 863) (69,458) Unrealized valuation losses (gains) on financial assets and liabilities 25,464) (55,006) Gains on recovery of decline in market value of inventories 0 (2,685) Investment losses recognized by the equity method in excess of cash 1,037,065) 947,935) dividends received Impairment losses 48,555) 174,009) Others (28,825) (60,359) Decrease (increase) in notes and accounts receivable (4,136,733) 2,050,921) Increase in notes and accounts receivablerelated parties (736,566) (1,051,194) Decrease in other receivables 15,305) 22,455) Decrease (increase) in other receivables related parties (17,675) 10,005) Decrease in other financial assetscurrent 0 85,467) Decrease in inventories 0 2,685) Decrease (increase) in prepayments 5,107) (12,800) Decrease (increase) in other current assets (600) 1,826) Increase in deferred income tax assetsnon current (2,704) (30,305) Decrease in financial liabilities measured at fair Value through profit or loss (718) (919) Increase (decrease) in notes and accounts payable 835) (21,300) Increase in accounts payablerelated parties 4,090,102) 262,950) Decrease in income tax payable (21,957) (149,837) Increase (decrease) in accrued expenses 49,180) (29,765) Increase (decrease) in other payablesrelated parties (2,560) 66,043) Increase in other payables 851) 3,621) Increase (decrease) in advance receipts (54,485) 31,177) Increase in other current liabilities 21,766) 5) Increase (decrease) in accrued pension liabilities 18,810) (4,584) Net cash provided by operating activities 486,961) 2,226,411) Cash Flows from Investing Activities Proceeds from capital decrease of financial assets carried at cost 1,351) 16,667) Acquisitions of financial assets carried at cost 0 (9,848) Proceeds from disposal of financial assets carried at cost 49,809) 4,307) Acquisitions of longterm investment under equity method (473,220) (1,788,645) Increase in prepayments for longterm investment (90,000) 0 Proceeds from disposal of longterm Investments under equity method 0 210,977) Increase in other financial assetsnon current (50) (10) Proceeds from disposal of property, plant and equipment 5,638) 21,258) Acquisitions of property, plant and equipment (119,782) (66,657) Increase in deferred charges (13,107) (17,252) Net cash used in investing activities (639,361) (1,629,203) Cash Flows from Financing Activities Decrease in shortterm borrowings (36,389) (540,030) Increase in shortterm notes 100,453) 798,713) Increase (decrease) in longterm loans 140,000) (810,000) Increase (decrease)in other financial liabilitiesnon current 10) (3,522) Cash dividend paid (138,797) (145,781) Acquisitions of treasury stock 0 (601,779) Net cash flows provided by (used in) financial activities 65,277) (1,302,399) Decrease in cash and cash equivalents (87,123) (705,191) Cash and cash equivalents at beginning of year 631,449) 1,336,640) Cash and cash equivalents at end of year $544,326) $631,449) Supplemental cash flows information Interest paid $89,799) $71,916) Interest paidexcluding capitalized interest $89,799) $71,916) Income tax paid $8,909) $185,485) Noncash investing and financing activities Current portion of longterm loans $0 $960,000) The accompanying notes are an integral part of financial statements 6

7 KINPO ELECTRONICS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Kinpo Electronics, Inc. (hereafter named the Company), was established on April 24, 1973 according to R.O.C.'s Company Law. On November 7, 1989, its shares were listed on the Taiwan Stock Exchange. The main operating business was engaged in trading consuming electronic products, computer and peripheral computer equipments, network communication equipments and image products, etc. The Company ran its business toward multiple and international direction in the future. As of December 31, 2012, the number of employees was SIGNIFICANT ACCOUNTING POLICIES AND MEASUREMENT BASIS The financial statements of the Company are prepared in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and Generally Accepted Accounting Principles in the Republic of China. The summary of significant accounting policies and measurement basis are described as follows: (1) Classification of Current and Non Current Assets and Liabilities Current assets are those expecting to be realized within 12 months from the balance sheet date or are realized, available for sale or consumed in the normal course of operating cycle. Current liabilities are obligations due on demand within 12 months from the balance sheet date or are expecting to be settled in the normal course of operating cycle. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. (2) Foreign Currency Transactions The Company s accounts are maintained in NTD. Foreign currency transactions for nonderivatives are recorded in New Taiwan Dollars at the rates of exchanges in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions are recognized in current income. 7

8 At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated into NTD using the exchange rates prevailing at that date. Exchange gains and losses are included in the statements of income. However, translation gains and losses derived from currency reimbursements for overseas operating units with longterm investment relationship are included as component of stockholders equity. At the balance sheet date, nonmonetary assets and liabilities denominated in foreign currencies and measured at fair value through profit or loss revalued at the spot rates on the balance sheet date, with the resulting gains or losses recognized in current income. Assets and liabilities measured at fair value through stockholders equity adjustments are revalued at the spot rates on the balance sheet date, with the resulting gains or losses recognized in stockholders equity adjustments. Assets and liabilities not measured at fair value are evaluated at the historical rates on the transaction date. (3) Use of Accounting Estimates The financial statements have been prepared in accordance with the GAAP and relevant regulations, certain estimates and assumptions have been adopted, and some of them may be different to the reality. (4) Cash Equivalents Cash equivalents are shortterm, highly liquid investments that are both: readily convertible to a known amount of cash. near to their maturity and where changes in interest rates shall have insignificant influence. 8

9 (5) Financial Assets/Liabilities Measured at Fair Value through Profit or Loss Financial assets/liabilities measured at fair value through profit or loss includes as either financial assets or liabilities that are held for trading, or any financial asset or liability that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss. Financial assets or liabilities are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. And they are subsequently measured at fair value and changes in fair value are recognized in profit and loss. Cash dividends are recognized in earnings if such dividends are attributable after investee or on the current year. All regular way purchases or sales of financial assets are recognized on the trade date. Derivatives that do not meet the criteria for hedge accounting are classified as financial assets or liabilities held for trading. Derivatives are recognized as assets when the fair value is positive and as liabilities when the fair value is negative. The fair value of investment is determined by reference to the closing price at the balance sheet date for publicly traded stocks, or the net asset value for openend funds and beneficiary certificates. (6) AvailableforSale Financial Assets For equity securities, investments designated as availableforsale financial assets are recognized on the trade date. For debt securities, such investments are applied for settlement date accounting. After initial recognition, availableforsale financial assets are measured at fair value with gains or losses being recognized as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. Cash dividends are recognized as investment income upon resolution of stockholders of an investee but are accounted for as reductions to the original cost of investment if such dividends are declared on the 9

10 earnings of the investees attributable to periods prior to the purchase of the investments. Stock dividends do not treat as investment income. Financial statements will disclose an increase in the number of shares held and recalculate cost per share based on the new total number of shares. If there is objective evidence in which indicates that a financial asset is impaired, a loss is recognized. If in a subsequent period, the amount of the impairment loss decreases, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to stockholders equity; for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized. (7) Derivatives The Company entered into derivative contracts to manage exposures due to fluctuations of foreign exchange rate and interest rate in the ordinary course of business, financing and investing activities. Derivatives that do not meet the criteria for hedge accounting; however, are classified as financial instruments for trading. Derivative contracts meet all criteria for hedge accounting, the changes in fair value of financial instrument will become an adjustment to the hedged items. (8) Loans and Receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables include those arising from businesses directly providing cash, goods, or services to debtors. Loans and receivables are measured at amortized cost. If there are objective evidences that impairment indicators exist, the difference between the carrying value of the financial asset and the estimated present value of expected future cash flows from the asset, using the original effective interest rate should be recognized as impairment loss. 10

11 (9) Inventories Inventories are recorded at costs when purchased, following the perpetual inventory system. The weightaverage method is used for determining costs of inventories. Inventories are stated at the lower of cost or net realizable value. Inventory writedowns are made on an itembyitem basis. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and necessary selling costs. When the cost of inventories exceeds the net realizable value, the amount of any writedown of inventories is recognized as cost of sales during the period; and the amount of any reversal of inventory writedown is recognized as a reduction in cost of sales. (10) Financial Assets Carried at Cost Investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are carried at their original costs, such as nonpublicly traded stocks,mutual funds, and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments. Cash dividends are recognized as investment income upon resolution of shareholders of an investee but are accounted for as reductions to the original cost of investment if such dividends are declared on the earnings of the investees attributable to periods prior to the purchase of the investments. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares. If there is objective evidence in which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed. (11) Debt Investments without Active Markets Nonderivative financial assets that do not have quoted market price in an active market but with fixed or determinable payments are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition and carried at amortized cost under the effective interest rate method. Also gains or losses of those financial assets are recognized in profit or loss at the time of derecognition, impairment or amortization. All regular way purchases or sales of financial assets are recognized on the trade date. 11

12 (12) Equity Investments Under Equity Method Longterm investments in which the Company holds an interest of 20% or more or under 20% but is able to exercise significant influence are equity investments under equity method. The difference, if any, between the cost of investment and the Company s proportionate share of the investee s equity shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized. In addition, goodwill should be assessed for impairment annually or whenever circumstances would result in goodwill reduction. If the fair value of identifiable net assets acquired exceeds their costs, the difference should be assigned to noncurrent assets acquired (except for financial assets other than investments accounted for using equity method, assets to be disposed of by sale, deferred tax assets, prepaid assets relating to pension or other postretirement benefit plans) proportionately to their respective fair values, with any excess recognized as an extraordinary gains. The unamortized differences of the investments acquired prior January 1, 2006 are treated in the same way as goodwill. The Company assesses indicators of impairment at each balance sheet date. If there is objective evidence in which indicates that the investments are impaired, a loss is recognized. If an investee issues additional shares and the Company subscribes for these shares at a percentage different from its current equity in the investee, the resulting difference in the investor s equity in the investee s net assets is recorded as an adjustment to capital surplus as well as to the longterm investment accounts. Any decrease in the investor s equity in the investee s net assets is debited to capital surplus. If capital surplus from longterm investments is not enough for debiting purposes, the debit is made against unappropriated retained earnings. When the Company s share in losses of an equitymethod investee equals its investment in the investee, plus any advances made to the investee, the Company discontinues to apply the equity method. The 12

13 Company continues to recognize its share in losses of the investee if the Company commits to provide further financial support to the investee. When the Company s share in losses of an investee over which the Company has control exceeding its investment in the investee, unless the other shareholders of the investee have assumed legal or constructive obligations and have demonstrated the ability to make payments on behalf of the investee, the Company has to bear all of the losses in excess of the capital contributed by shareholders of the investee. If the investee subsequently reports profits, the Company resumes recognizing its share of those profits only after its share of the profits equals the share of losses in excess of the capital contributed by shareholders of the investee recognized. Unrealized gains or losses from intercompany transactions with equity investees are eliminated in proportion to the Company s ownership percentage while those from transactions with majorityowned subsidiaries are eliminated entirely. If the transaction profits or losses come from depreciated or amortized assets, the recognition of such profits or losses shall be spread over the beneficial periods; otherwise, the recognition shall be in the year when profits or losses are realized. Exchange gains or losses resulting from the translation of the foreign operations financial statements should be recorded to cumulative translation adjustment, which is a separate component of stockholders equity. The Company prepares consolidated financial statements quarterly, including investments in which the Company holds an interest more than 50% or under 50% but has controlling interest over their operation and accounted for under the equity method. While selling stocks, the costs and the profit or loss of sales are accounted by the weightedaverage method. (13) Property, Plant, Equipment and Rental Assets Property, Plant, Equipment and rental assets are stated at cost when acquired. Land has been revaluated as adjustment to stockholders equityunrealized revaluation increments. Material improvements, additions, and renewals, which can extend an asset's economic life or increase its value, are capitalized when incurred. The expenditures relating to regular maintenance and repair are treated as an expense for the period. 13

14 When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a future period, the amount previously recognized as impairment would 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, as if no impairment loss had been recognized. The cost of property, plant, equipment and rental assets and accumulated depreciation is written off upon retirement or disposal. Any gain or loss from disposal of assets is recorded as a nonoperating income or losses when occurred. The Company uses the straightline method to depreciate property, plant, equipment and rental assets. The residual value, depreciation period and depreciation method are reviewed at least at each financial yearend. The change in the asset s residual value, depreciation period and depreciation method are accounted for as a change in an accounting estimate. The estimated useful life of property, plant, equipment and rental assets is as follows: Buildings and Structures Machinery Transportation Equipment Other Equipment 6~60 years 2~20 years 5~8 years 3~13 years (14) Interest Capitalization The accounting treatments of interest capitalization follow the Statements of Financial Accounting Standards No. 3, Capitalization of Interest Cost. (15) Deferred Charges It mainly consists of computer software which is amortized over the economic useful life by straightline method. 14

15 (16) Pension Plan The Company has a defined benefit plan under the Labor Standards Law for those employees who were subject to the Labor Standards Law prior to July 1, 2005 and still work for the same company after July 1, 2005 and have chosen to be subject to the pension plan under the Labor Standards Law. Employee Pension Fund contributed by the Company is 15% of monthly salary. Net pension costs are recorded based on actuarial calculations. Net pension costs included current service cost, interest cost, expected return on plan assets and amortization of unrecognized transitional net benefit obligations and profits/losses of pension fund assets. Unrecognized transitional net benefit obligations are amortized over average remaining service lives of employees. According to Labor Pension Act, effective on July 1, 2005, all domestic employees in the Company which adopts a defined contribution plan who subject to the Labor Standards Law shall be subject to this Act. The Company recorded the pension costs based on the actual contributions made to employees' individual pension accounts. The Company has followed the requirements prescribed in the Statements of Financial Accounting Standards No. 18, entitled Accounting for Pensions. Based on the actuarial report, the Company had recognized the net pension fund costs and accrued pension liabilities and disclosed the related information. (17) Treasury Stock Issued shares that have been redeemed by the Company are deemed as treasury stock and the cost on the disbursement shall be debited in the account of treasury stock. The book value of the treasury stock should be calculated separately with the weightedaverage method. As the Company writeoff the treasury stock, it should be credited treasury stock, and debited additional paidin capital in excess of par value and capital stock according to the percentage of 15

16 treasury stock in the equity. As the book value of treasury stock was over the amount of par value plus additional paidin capital in excess of par value, the difference shall be offset the additional paidin capital resulting from the same treasury stock, and the deficiency shall be debited retained earnings. Otherwise, if it was under the amount of par value and additional paidin capital in excess of par value, the difference shall be credited additional paidin capital resulting from the same treasury stock. The common stock of the Company that was held by its subsidiary is treated as treasury stock according to Statements of Financial Accounting Standards No. 30 Accounting for Treasury Stocks. (18) Income Tax Expenses The Company adopted the provision of the Statements of Financial Accounting Standards No. 22, Accounting for Income Taxes, for interperiod and intraperiod tax allocations. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, loss carry forwards and investment tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly. Income tax adjustments for prior years due to estimated changes are accounted for income tax expenses for the current period. An extra 10% of income tax that is imposed on undistributed retained earnings is accounted for as part of income tax expenses for the resolving period of Stockholders Meeting. The alternative minimum tax ("AMT") imposed under the AMT Act is payable if the income tax payable is below the minimum amount prescribed under the AMT Act. The Company has considered the impact of the AMT Act in the determination of its valuation of deferred income tax assets. 16

17 (19) Employee Bonuses and Remuneration of Directors and Supervisors The Company has estimated employee bonuses and remuneration of directors and supervisors as current year s expense. If the actual amounts subsequently resolved by the Stockholders Meeting differ from the estimated amounts, the difference shall be recognized in profit or loss of the year of shareholders resolution. (20) Recognition of Revenue and Expense Revenue is recognized at the time of all or most of the process completed, indicating that revenue has been realized or realizable, and the fair value is measured in accordance with what the reasonable assurance of collectible received or receivable sale. Costs incurred in a particular period should be matched with the revenues earned during the same period. Expense is recognized when it occurs based on accrual basis. (21) Capital Expenditure and Revenue Expenditure Expenditure is capitalized and amortized over its useful life if it can benefit more than one period and is material; otherwise, it is expensed immediately when occurred. (22) Operating Segments An operating segment is a component of an entity: That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), and Whose operating results are regularly reviewed by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and For which discrete financial information is available. 3. CHANGES IN ACCOUNTING PRINCIPLE AND ITS EFFECTS (1) Loans and Receivables Effective January 1, 2011, the Company adopted the newly revised SFAS No. 34 Financial Instruments: Recognition and Measurement. This change in accounting principle resulted in an increase of NTD 17

18 25,554 thousand and NTD 0.02 to net income and EPS of the Company respectively in (2) Reporting requirement of operating segments Effective January 1, 2011, the Company adopted the newly issued SFAS No.41, Operating Segments. The statement requires identification and disclosure of operating segments on the basis of how the Company s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. This statement supersedes SFAS No.20, Segment Reporting. The Company has provided the operating segments disclosure in the consolidated financial statements. 4. DETAILS OF SIGNIFICANT ACCOUNTS (1) Cash and Cash Equivalents December 31, 2012 December 31, 2011 Petty Cash $464 $345 Bank Deposit 28, ,841 Certificates of Deposit 515, ,263 Total $544,326 $631,449 (2) Financial Assets/ Liabilities Measured at Fair Value through Profit or Loss Current December 31, 2012 December 31, 2011 Financial Liabilities Held for Trading Interest Rate Swap Contract $ $11,599 NonCurrent December 31, 2012 December 31, 2011 Financial Assets Held for Trading Convertible BondsPut Option $27,267 $50,436 Financial Liabilities Held for Trading Interest Rate Swap Contract $ $11,599 Less: Current Portion (11,599) Total $ $ 18

19 A. The Company has entered into NT$1,100,000 thousand Interest Rate Swap Transaction Agreement with Mizuho Corporate Bank, the contract is for a period of 4 years plus 3 months, maturing in November 15, The Company is required to pay interest to the bank at a fixed rate of 2.46% and the bank is required to pay interest to the Company at a floating rate of 3month LIBOR which adjusts each quarter. The principal committed but not settled were NT$0 thousand and NT$440,000 thousand as of December 31, 2012 and 2011, respectively. B. The Company has entered into NT$1,300,000 thousand Interest Rate Swap Transaction Agreement with BNP DARIBAS, the contract is for a period of 5 years, maturing in November 15, The Company is required to pay interest to the bank at a fixed rate of 2.66% and the bank is required to pay interest to the Company at a floating rate of 3month LIBOR which adjusts each quarter. The principal committed but not settled were NT$0 thousand and NT$520,000 thousand as of December 31, 2012 and 2011, respectively. C. The Company entered into interest rate swap contract to manage exposures due to the fluctuations of interest rates from longterm loans. The interest rate swap contracts entered into by the Company did not meet the criteria for hedge accounting prescribed by SFAS No. 34. Therefore, the Company did not apply hedge accounting for the interest rate swap contracts. D. Net gains or losses on financial assets and liabilities measured at fair value though profit or loss for the years ended December 31, 2012 and 2011 were loss of NT$22,495 thousand and gain of NT$26,424 thousand, respectively. The evaluated fair value that the Company used is provided by bank based on the similar transaction of past experiences and related assumptions. (3) AvailableforSale Financial Assets Current Investee Companies December 31, 2012 December 31, 2011 Carrying Amount % of Ownership Carrying Amount % of Ownership Himax Technologies, Inc. $26, $11, Innolux Corp.(Chimei 262, , Innolux Corp. originally) Allied Circuit Co., 183, Net $473,010 $216,999 19

20 NonCurrent Investee Companies December 31, 2012 December 31, 2011 Carrying Amount % of Ownership Carrying Amount % of Ownership Compal Electronics, Inc. $2,964, $4,579, BAOTEK Industrial 116, , Materials Total $3,081,048 $4,714,449 A. On December 18, 2012, Allied Circuit Co., entered into overthecounter (OTC) market, measured under fair value method and reclassified from Financial Assets Carried at CostNon Current to AvailableforSale Financial AssetsCurrent. B. In response to the global financial crisis, the Company adopted the amended SFAS No. 34 on October 17, 2008, which allows the Company to reclassify the financial assets held for trading to availableforsale financial assets once the Company decides not to sell(himax Technologies, Inc.). The effects of reclassification of the fair value in profit or loss or equity are summarized as follows: December 21, 2012 not reclassified reclassified Original Cost $63,643 $63,643 Adjustments recognized in profit or loss of prior (52,126) (3,166) year Adjustments recognized in profit or loss of current 14,983 year Adjustments recognized in stockholders equity (33,977) Net $26,500 $26,500 C. In the year of 2012 and 2011, the Company received cash dividends from availableforsale financial assets in the amount of NT$213,904 thousand and NT$412,110 thousand, respectively. 20

21 D. The unrealized gain on the valuation based on fair value of availableforsale financial assets as adjustments to stockholder s equity amounted to NT$1,454,015 thousand and NT$2,888,672 thousand as of December 31, 2012 and 2011, respectively. (4) Hedging Derivative Assets/LiabilitiesCurrent December 31, 2012 December 31, 2011 Item Book Value Nominal Amount Book Value Nominal Amount Sell forward exchange contractusd/ntd Buy forward exchange contractusd/ntd $(1,481) USD 194,000 thousand $(11,579) USD 194,000 thousand $389 USD 3,000 thousand $(274) USD 3,000 thousand A. The Company held forward exchange contracts to hedge the risk of exchange rate fluctuation, were treated under fair value hedge accounting. The net gains or losses on the forward exchange contracts for the years ended December 31, 2012 and 2011 were loss of NT$13,176 thousand and gain of NT$115 thousand, respectively. B. As of December 31, 2012 of hedging derivative assets/liabilities were following : Fair value of assets (liabilities) Hedge Item Hedge Instrument December 21, 2012 December 31, 2011 Accounts receivableforeign currency Accounts payable foreign currency Forward exchange contract Forward exchange contract $5,633,760 $90,825 (5,633,760) (90,825) (5) Accounts Receivable December 31,2012 December 31,2011 Accounts Receivable $6,482,787 $2,346,119 21

22 (6) Financial Assets Carried at CostNon Current Investee Companies December 31, 2012 December 31, 2011 Carrying Amount % of Ownership Carrying Amount % of Ownership Global Strategic $48, $97, Investment Inc. Allied Circuit Co., 63, Others (individual 113, ,280 investment amounts not exceed 50 million) Total $161,720 $325,340 A. Investments that do not have a quoted market price in an activities market and whose fair value was not reliably measured are carried at their original costs. B. The Company invested additional 757,555 common shares of Allied Circuit Co., LTD., at an aggregate price of NT$9,848 thousand in the second quarter of In May 2011, Allied Circuit Co., sold 180,000 shares of common stock to accommodate with emerging market release with total transaction value in NT$4,307 thousand and gains on disposal in NT$1,799 thousand. On December 18, 2012, it entered into overthecounter (OTC) market and measured under fair value method and reclassified as AvailableforSale Financial AssetsCurrent. C. Nap Communication Corp. made capital reduction in the third quarter of 2012 with capital refund in NT$1,351 thousand and resulted in gains on disposal in NT$1,351 thousand. D. In the third quarter of 2012, Global Strategic Investment Inc. made capital reimbursement by purchasing back the stocks in the amount of NT$48,508 thousand. E. SWENC Technology Co., was terminated after merged with Henghao Techonology Co., in the third quarter of 2012, and Henghao Technology Co., acquired all of our shareholding by NT$4.5 per share or totaled NT$1,301 thousand and resulted in losses on disposal in NT$2,214 thousand. F. In the last quarter of 2011, the Company invested 9,172,000 common shares of Teleport Access Services, Inc., at an aggregate price of NT$210,956 thousand, share interest increased to 25.24%; therefore, the equity method is applied. 22

23 G. PK Venture Capital Corp. and Land Port Capital Investment Company returned their capital and the Company refund cash at NT$24,092 thousand. Yes Digital Multimedia Co., was filing for liquidation in the second quarter of 2011, NT$8 thousand is expected to be refund. H. Impairment losses of financial assets carried at cost were NT$48,555 thousand and NT$174,009 thousand in 2012 and 2011, respectively. I. In the year of 2012 and 2011, the Company received cash dividends from financial assets carried at costnoncurrent in the amount of NT$0 thousand and NT$10,695 thousand, respectively. (7) Debts Investments without Active MarketsNon Current December 31, 2012 December 31, 2011 Unsecured Convertible Bonds $745,000 $717,065 A. The Company acquired fiveyear unsecured convertible corporate bond of VIBO Telecom Inc. at par. The coupon rate is 3% and the interest will be paid on 14 February and 14 August each year. The maturity date of the bond is 14 August, According to the terms of the bond, the Company may covert into common share of VIBO Telecom Inc. at conversion price during any time of the conversion period, or sell back to VIBO Telecom Inc. at principal amount of the bond at maturity date. B. VIBO Telecom Inc. s convertible bond held by the Company was not issued in the public market. The convertible bond embedded a bond put option and its conversion right is fulfilled the definition of the derivatives. Moreover, the economic features and associated risks of the bond put option and its conversion right do not tightly linked to the economic features and risks of corporate bond. Thus, the embedded put option, conversion right and corporate bond should be recognized separately. C. The embedded put option in unsecured convertible bond of VIBO Telecom Inc. should be recognized as the financial assets carried at fair value through profit or loss. The fair value was NT$27,267 thousand as of December 31, Please refer to note 4(2). D. The value of conversion right of unsecured convertible bond of VIBO Telecom Inc. does not have a quoted market price in a public market, and thus, it should be recognized as the financial assets carried at cost noncurrent. The carrying amount was NT$0 thousand as of December 31,

24 (8) LongTerm Investments Equity Investment Under Equity Method December 31, 2012 December 31, 2011 Investee Companies Carrying Amount(Note) % of Ownership Carrying Amount(Note) % of Ownership CalComp Electronics $6,695, ,065, (Thailand) Public Company Limited VIBO Telecom Inc. 2,143, ,073, Kinpo International 3,865, ,565, Acbel Polytech Inc. 1,842, ,700, Kingbolt International 321, , (Singapore) Pte. Lipo Holding Co., 199, , Teleport Access Services, 341, , Inc. Ascendant Private Equity 436, Investment (Preferred Stock) Others (individual 125, ,487 investment amount not exceed 0.1 billion) Grand Total $15,969,835 $17,395,982 Prepayments for LongTerm Investments December 31, 2012 December 31, 2011 Investee Companies Carrying Amount Carrying Amount Kinpo Biotechnology Corp. $90,000 $ Equity Investments Credits December 31, 2012 December 31, 2011 Investee Companies Carrying Amount(Note) % of Ownership Carrying Amount(Note) % of Ownership Jipo Investment Co., $30,169) $60,700) Note: Net of accumulated impairment loss 24

25 A. Net investment losses under equity method were NT$630,715 thousand and NT$537,633 thousand in 2012 and 2011, respectively. B. In the last quarter of 2012, the investee QSAN Technology distributed stock dividends from retained earnings, the Company got 477,500 shares in total. C. The Company has acquired 3,125 private placement shares of common stock and 15,625,000 private placement shares of preferred stock of Ascendant Private Equity Investment for NT$95 thousand and NT$473,125 thousand, respectively, and the shareholding percentage was 34.72% totally. In addition, according to the contract, there is restriction on transfer of stocks before scheduling on second time exercise of warrant. D. The Company Prepaid 90,000 thousand to set up Kinpo Biotechnology Corp. in the last quarter of E. In the last quarter of 2011, the Company sold total shares of SaveCom International Inc. at NT$210,977 thousand, resulting in an investment disposal gain of NT$90,491 thousand, in which disposal gain of NTD$22,840 from downstream transaction was deferred until realized and accounted under deferred credits. F. The Company invested NT$1,577,689 thousand of CalComp Electronics Public Company Limited and VIBO Telecom Inc. Besides, the Company reclassified the shares of Teleport Access Services, Inc. to investment under equity method in 2011, due to holding interests increased to 25.24%. G. The reduction of longterm investments due to the cash dividends from the investee were NT$406,350 thousand and NT$410,302 thousand for the year ended 2012 and 2011, respectively. H. Longterm equity investments that have active market value are Calcomp Electronics (Thailand) Public Company Limited and Acbel Polytech Inc. As of December 31, 2012 and 2011, the total market value of these investments were NT$7,577,669 thousand and NT$6,084,827 thousand, respectively. 25