Elitegroup Computer Systems Co., Ltd.

Transcription

1 Elitegroup Computer Systems Co., Ltd. Nonconsolidated Financial Statements for the Years Ended December 31, 2010 and 2011 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders Elitegroup Computer Systems Co., Ltd. We have audited the accompanying nonconsolidated balance sheets of Elitegroup Computer Systems Co., Ltd. (the Company ) as of December 31, 2010 and 2011 and the related nonconsolidated statements of income, changes in shareholders' 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. However, we did not audit the financial statements of ECS Holding (America) Co.; Elitegroup Computer Systems (HK) Co., Ltd.; Elitegroup Computer Systems (Japan) Co., Ltd.; PC Chips Holding Ltd. (UK); Elitegroup Computer Systems EU B.V.; and Elitegroup Computer Systems (Korea) Co., Ltd. as of and for the year ended December 31, 2010 and the financial statements of ECS Holding (America) Co.; Elitegroup Computer Systems (HK) Co., Ltd.; Elitegroup Computer Systems (Japan) Co., Ltd.; Elitegroup Computer Systems EU B.V.; and Elitegroup Computer Systems (Korea) Co., Ltd. as of and for the year ended December 31, As of December 31, 2010 and 2011, these investments were 4.22% (NT$1,222,437 thousand, net of accounts receivable amounting to NT$15,501 thousand) and 4.63% (NT$1,425,607 thousand, net of accounts receivable amounting to NT$29,640 thousand), respectively, of the Company s total assets. The related net investment loss was 19.30% (NT$33,922 thousand) of the Company s pretax income in 2010, and net investment income was 7.65% (NT$44,924 thousand) of the Company s pretax income in These investees financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to these investees amounts included herein, is based solely on the reports of other auditors. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and 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 and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the accompanying nonconsolidated financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Elitegroup Computer Systems Co., Ltd. as of December 31, 2010 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, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China

3 We have also audited the consolidated financial statements of the Company and its subsidiaries as of and for the years ended December 31, 2010 and 2011 on which we have issued a modified unqualified opinion in our report (not presented herewith) dated March 29, Our audits also comprehended the translation of the 2011 New Taiwan dollar amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 3. Such U.S. dollar amounts are presented solely for the convenience of readers. March 29, 2012 Notice to Readers The accompanying nonconsolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such nonconsolidated financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the independent auditors report and the accompanying nonconsolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors report and nonconsolidated financial statements shall prevail. Also, as stated in Note 2 to the nonconsolidated financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English

4 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NONCONSOLIDATED BALANCE SHEETS DECEMBER 31, 2010 AND 2011 (In Thousands, Except Number of Shares and Par Value) ASSETS Notes LIABILITIES AND SHAREHOLDERS EQUITY Notes CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents 2, 5 $ 4,754,481 $ 5,955,451 $ 196,679 Short-term loans 15 $ 2,184,750 $ 1,877,360 $ 62,000 Financial assets at fair value through profit or loss - current 2, 6 402, ,385 20,257 Financial liabilities at fair value through profit or loss - Notes receivable 2, current 2, 6 17, Accounts receivable, net 2, 4, 7, 10, 25 Accounts payable 16, 25 Third parties 5,691,079 5,955, ,678 Third parties 1,605, ,548 30,566 Related parties 1,340, ,130 25,863 Related parties 2,928,843 3,010,718 99,429 Other receivables, net 7, 8, 10, 25 Income tax payable 2, 21-79,378 2,622 Third parties 70, ,379 10,845 Accrued expenses 25 1,102,370 1,055,481 34,858 Related parties 5,687 16, Other current liabilities 128, ,662 8,344 Inventories, net 2, 9 2,004,036 1,832,269 60,511 Prepayments 153, ,870 4,421 Total current liabilities 7,968,175 7,201, ,830 Deferred income tax assets - current 2, , ,101 5,155 Restricted assets - current 26 3,708 3, LONG-TERM LIABILITIES Other current assets 21,547 12, Long-term debt - 1,514,000 50,000 Total current assets 14,625,742 15,791, ,504 OTHER LIABILITIES Accrued pension cost 2, 18 7, INVESTMENTS 2, 7, 8, 10, 11 Guarantee deposits received 32,293 13, Investments accounted for by the equity method 9,389,103 10,302, ,226 Credit balance on carrying value of long-term investments 2, , Financial assets carried at cost - noncurrent 77,475 56,345 1,861 Deferred credits - gain on intercompany transactions 2, 29 13,099 37,318 1,232 Total investments 9,466,578 10,358, ,087 Total other liabilities 201,649 50,321 1,662 PROPERTY, PLANT, AND EQUIPMENT 2, 12, 25 Total liabilities 8,169,824 8,765, ,492 Cost Land 1,336,205 1,336,205 44,128 SHAREHOLDERS' EQUITY 2, 19, 20, 21 Buildings and improvements 1,959,141 2,067,268 68,272 Capital stock Machinery and equipment 67,744 65,667 2,169 Common stock at par value of NT$10.00 each; authorized - Transportation equipment ,750,000 thousand shares; issued and outstanding - Other equipment 252, ,373 6,980 1,233,194 thousand shares and 1,183,194 thousand shares as Total cost 3,616,198 3,681, ,573 of December 31, 2010 and 2011, respectively 12,331,937 11,831, ,751 Less: Accumulated depreciation 335, ,939 13,142 Capital surplus Construction in progress and prepayments for equipment Additional paid-in capital from share issuance in excess of par 9,620,914 9,230, ,849 Total property, plant, and equipment 3,281,276 3,283, ,431 Treasury stock transactions 104, ,663 7,155 Long-term investments 17,575 17, INTANGIBLE ASSETS 2, 13 Employee stock options 73,120 72,850 2,406 Trademarks Total capital surplus 9,815,835 9,537, ,990 Patents 81, Retained earnings Goodwill 386, ,205 12,755 Legal reserve 199, ,560 7,086 Special reserve 130, ,956 9,312 Total intangible assets 468, ,489 12,764 Unappropriated earnings 165, ,261 14,143 Total retained earnings 496, ,777 30,541 OTHER ASSETS Other equity Assets leased to others, net 2, , ,463 12,333 Cumulative translation adjustments (1,040,258) (376,552) (12,436) Idle assets, net 2, 14 2,258 2, Unrealized gain on financial instruments 1, ,216 4,433 Refundable deposits 5,377 4, Treasury stock - 50,000 thousand shares (777,644) - - Deferred charges 2 84,237 55,195 1,823 Total other equity (1,816,706) (242,336) (8,003) Deferred income tax assets - noncurrent 2, , ,042 17,637 Prepaid pension cost 2, 18-29, Total shareholders' equity 20,827,582 22,052, ,279 Total other assets 1,155, ,804 32,985 TOTAL $ 28,997,406 $ 30,818,111 $ 1,017,771 TOTAL $ 28,997,406 $ 30,818,111 $ 1,017,771 The accompanying notes are an integral part of the nonconsolidated financial statements. (With Deloitte & Touche audit report dated March 29, 2012) - 3 -

5 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NONCONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2010 AND 2011 (In Thousands, Except Earnings Per Share) Notes SALES 2 $ 54,214,587 $ 59,124,775 $ 1,952,601 SALES RETURNS AND ALLOWANCES 2 122, ,307 6,615 NET SALES 2, 25 54,091,960 58,924,468 1,945,986 COST OF GOODS SOLD 9, 25 51,630,131 56,031,131 1,850,433 REALIZED (UNREALIZED) INTERCOMPANY GAIN 2, 29 38,687 (24,219) (800) GROSS PROFIT 2,500,516 2,869,118 94,753 OPERATING EXPENSES 22, 25 Selling 1,373,903 1,145,039 37,815 General and administrative 645, ,644 24,988 Research and development 960, ,936 27,343 Total operating expenses 2,979,914 2,729,619 90,146 OPERATING (LOSS) INCOME (479,398) 139,499 4,607 NONOPERATING INCOME AND GAINS Interest income 32,606 44,656 1,475 Valuation gain on financial assets, net 2, 6 1, ,885 3,365 Investment income recognized under the equity method, net 2, , ,230 8,297 Dividend income 695 1, Gain on disposal of property, plant and equipment 2, Exchange gain, net 2 22, Rental income 23,963 22, Recovery of doubtful accounts 133, Miscellaneous income 99, ,079 4,461 Total nonoperating income and gains 704, ,601 18,415 NONOPERATING EXPENSES AND LOSSES Interest expense 22,481 26, Other investment loss Valuation loss on financial liabilities, net 2, 6 3, Loss on disposal of property, plant and equipment , Loss on sale of investments 2-1, Exchange loss, net 2-43,821 1,447 Financial expense 2,553 2, Impairment loss 2, 11, 14 10,771 21, Miscellaneous expenses 9,285 12, Total nonoperating expenses and losses 49, ,514 3,617 INCOME BEFORE INCOME TAX 175, ,586 19,405 INCOME TAX EXPENSE 2, 21 28, ,325 5,262 NET INCOME $ 147,753 $ 428,261 $ 14,143 (Continued) - 4 -

6 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NONCONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2010 AND 2011 (In Thousands, Except Earnings Per Share) 2010 (NT$) 2011 (NT$) 2011 (US$) Before Income After Income Before Income After Income Before Income After Income Notes Tax Tax Tax Tax Tax Tax EARNINGS PER SHARE 23 Basic $ 0.15 $ 0.12 $ 0.50 $ 0.36 $ 0.02 $ 0.01 Diluted $ 0.15 $ 0.12 $ 0.49 $ 0.36 $ 0.02 $ 0.01 The accompanying notes are an integral part of the nonconsolidated financial statements. (With Deloitte & Touche audit report dated March 29, 2012) (Concluded) - 5 -

7 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NONCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2010 AND 2011 (In Thousands, Except Number of Shares, Par Value and Dividend Per Share) Other Equity (Notes 2, 19 and 20) Capital Surplus (Notes 2, 19 and 20) Unrealized Gain Capital Stock, NT$10.00 Par Value (Note 19) From Share Retained Earnings (Notes 19 and 21) Cumulative (Loss) on Total Authorized Issued and Outstanding Issuance in Treasury Stock Long-term Employee Stock Unappropriated Translation Financial Shareholders' Shares Shares Amount Excess of Par Transactions Investments Options Legal Reserve Special Reserve Earnings Adjustments Instruments Treasury Stock Equity NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ BALANCE, JANUARY 1, ,750,000,000 1,233,193,691 $ 12,331,937 $ 9,620,914 $ 104,226 $ 17,575 $ 73,120 $ 117,926 $ - $ 822,434 $ (132,352 ) $ 1,523 $ (777,644 ) $ 22,179,659 Appropriation of the 2009 earnings Legal reserve ,858 - (81,858) Special reserve ,829 (130,829) Cash dividends - NT$0.50 per share (591,597) (591,597) Subtotal 1,750,000,000 1,233,193,691 12,331,937 9,620, ,226 17,575 73, , ,829 18,150 (132,352 ) 1,523 (777,644 ) 21,588,062 Change in translation adjustments (907,906 ) - - (907,906 ) Recognition in proportion of changes in shareholders' equity of investees (327) - (327) Net income for the year ended December 31, , ,753 BALANCE, DECEMBER 31, ,750,000,000 1,233,193,691 12,331,937 9,620, ,226 17,575 73, , , ,903 (1,040,258 ) 1,196 (777,644 ) 20,827,582 Appropriation of the 2010 earnings Legal reserve ,776 - (14,776) Special reserve ,127 (151,127) Subtotal 1,750,000,000 1,233,193,691 12,331,937 9,620, ,226 17,575 73, , ,956 - (1,040,258 ) 1,196 (777,644 ) 20,827,582 Expiration of employee stock options (270 ) (270 ) Change in translation adjustments , ,706 Recognition in proportion of changes in shareholders' equity of investees , ,020 Retirement of treasury stock - (50,000,000 ) (500,000 ) (390,081 ) 112, ,644 - Net income for the year ended December 31, , ,261 BALANCE, DECEMBER 31, ,750,000,000 1,183,193,691 $ 11,831,937 $ 9,230,833 $ 216,663 $ 17,575 $ 72,850 $ 214,560 $ 281,956 $ 428,261 $ (376,552 ) $ 134,216 $ - $ 22,052,299 BALANCE, DECEMBER 31, 2011 (US$) 1,750,000,000 1,183,193,691 $ 390,751 $ 304,849 $ 7,155 $ 580 $ 2,406 $ 7,086 $ 9,312 $ 14,143 $ (12,436 ) $ 4,433 $ - $ 728,279 The accompanying notes are an integral part of the nonconsolidated financial statements. (With Deloitte & Touche audit report dated March 29, 2012) - 6 -

8 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NONCONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2010 AND 2011 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 147,753 $ 428,261 $ 14,143 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation 103, ,250 3,311 Amortization 116, ,426 5,199 (Reversal of provision) provision for doubtful accounts (133,759) 58,289 1,925 Compensation cost of employee stock options - (270) (9) Provision for sales returns and discounts 156,749 97,171 3,209 Provision (reversal of provision) for loss on inventories 46,118 (55,307) (1,827) Miscellaneous expenses Investment income recognized under the equity method (390,312) (251,230) (8,297) Loss on sale of investments - 1, Other investment loss (Gain) loss on disposal of property, plant and equipment, net (473) 2, Valuation loss (gain) on financial instruments 10,677 (19,346) (639) Impairment loss 10,771 21, (Realized) unrealized gross profit (38,687) 24, Deferred income tax 17,798 75,520 2,494 Prepaid pension cost - (29,755) (983) Accrued pension cost (3,237) (7,836) (258) Net changes in operating assets and liabilities Notes receivable Accounts receivable 445, ,421 10,549 Other receivables 638,590 (269,257) (8,892) Inventories (6,280) 227,074 7,499 Prepayments and other current assets (18,649) 26, Overdue receivables (109) (142,342) (4,701) Accounts payable (1,063,776) (598,529) (19,766) Income tax payable (34,722) 79,378 2,622 Accrued expenses 50,653 (46,889) (1,549) Other current liabilities (321,069) 123,755 4,087 Other liabilities (12,417) - - Net cash (used in) provided by operating activities (279,279) 321,111 10,605 (Continued) - 7 -

9 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NONCONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2010 AND 2011 (In Thousands) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of financial assets designated as at fair value through profit or loss $ (2,497,000) $ (1,225,000) $ (40,456) Proceeds of the disposal of financial assets designated as at fair value through profit or loss 3,191,661 1,016,884 33,583 Increase in restricted assets - current (1,508) (26) (1) Acquisition of investments accounted for by the equity method (1,234,799) (58,920) (1,946) Return of capital on investments accounted for by the equity method 1,631,043 5, Acquisition of property, plant and equipment (39,273) (12,556) (415) Proceeds of the disposal of property, plant and equipment 3,618 9, Increase in assets leased to others - (380) (12) Increase in idle assets (495) - - (Increase) decrease in refundable deposits (2) 1, Increase in deferred charges (64,556) (43,582) (1,439) Net cash provided by (used in) investing activities 988,689 (307,461) (10,154) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term loans 823,475 (307,390) (10,152) Proceeds of long-term debt - 2,408,600 79,544 Repayment of long-term debt (1,729,620) (894,600) (29,544) Decrease in guarantee deposits received (2,341) (19,290) (637) Cash dividends (591,597) - - Net cash (used in) provided by financing activities (1,500,083) 1,187,320 39,211 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (790,673) 1,200,970 39,662 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,545,154 4,754, ,017 CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,754,481 $ 5,955,451 $ 196,679 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 22,730 $ 25,694 $ 849 Income tax paid $ 40,569 $ 4,427 $ 146 NONCASH INVESTING AND FINANCING ACTIVITIES Retirement of treasury stock $ - $ 500,000 $ 16,513 The accompanying notes are an integral part of the nonconsolidated financial statements. (With Deloitte & Touche audit report dated March 29, 2012) (Concluded) - 8 -

10 ELITEGROUP COMPUTER SYSTEMS CO., LTD. NOTES TO NONCONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2010 AND 2011 (In Thousands, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Elitegroup Computer Systems Co., Ltd. (the Company ) was established in May 1987 and began operations in June It designs, develops and sells motherboards, desktop computers, notebook computers, barebone systems and add-on cards. The Company merged with ALPHA-TOP on December 15, 2001, with the Company as the survivor entity. Since acquiring the desktop computer business department of Tatung Company ( Tatung ) and merging with Uniwill Computer Corp. ( Uniwill ) by issuing new shares in 2006, the Company has become responsible for the development and sale of products described above, and its investees have become responsible for the manufacture of these products. The common stock of the Company is listed on the Taiwan Stock Exchange. As of December 31, 2010 and 2011, the Company had 1,215 and 1,048 employees, respectively. 2. SIGNIFICANT ACCOUNTING POLICIES For the readers convenience, the accompanying nonconsolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China (ROC). If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language nonconsolidated financial statements shall prevail. However, the accompanying nonconsolidated financial statements do not include the English translation of the additional footnote disclosures that are not required under generally accepted accounting principles but are required by the Securities and Futures Bureau (SFB) for their oversight purposes. The financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the Republic of China (ROC). Significant accounting policies are summarized as follows: Foreign Currencies Nonderivative foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange differences arising from the settlement of foreign-currency assets and liabilities are recognized in profit or loss. At the balance sheet date, foreign-currency monetary assets and liabilities are revalued using prevailing exchange rates and the exchange differences are recognized in profit or loss. At the balance sheet date, foreign-currency nonmonetary assets (such as equity instruments) and liabilities that are measured at fair value are revalued using prevailing exchange rates, with the exchange differences recognized in profit or loss if the change in fair value is recognized in profit or loss. Foreign-currency nonmonetary assets and liabilities that are carried at cost continue to be stated at exchange rates at trade dates

11 If the functional currency of an equity-method investee is a foreign currency, translation adjustments will result from the translation of the investee s financial statements into the reporting currency of the Company. These adjustments are accumulated and reported as a separate component of shareholders equity. Accounting Estimates Under the above guidelines, law and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts; allowance for sales returns and discounts; allowance for loss on inventories; depreciation of property, plant and equipment; depreciation of assets leased to others; depreciation of idle assets; income tax; impairment loss on assets; allowance for deferred income tax assets; amortization of deferred charges; pension cost; allowance for product warranties; loss on pending litigations, and bonuses paid to employees, directors and supervisors. Actual results may differ from these estimates. Current and Noncurrent Assets and Liabilities Current assets include cash, cash equivalents and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. All other assets such as property, plant and equipment and intangible assets are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent. Cash Equivalents Cash equivalents, consisting of commercial paper, bank acceptances and repurchase agreements collateralized by bonds, are highly liquid financial instruments with maturities of three months or less when acquired and with carrying amounts that approximate their fair values. Financial Assets and Liabilities at Fair Value through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (FVTPL) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Company recognizes a financial asset or a financial liability on its balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Company loses control of its contractual rights to the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, canceled or expired. Financial instruments at FVTPL are initially measured at fair value plus transaction costs. At each balance sheet date subsequent to initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. Cash dividends received subsequently (including those received in the year of investment) are recognized as income for the year. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in profit or loss. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability. Fair values of financial assets and financial liabilities at the balance sheet date are determined as follows: publicly traded stocks - at closing prices; open-end mutual funds - at net asset values; bonds - at prices quoted by the Taiwan GreTai Securities Market; and financial assets and financial liabilities without quoted prices in an active market - at values determined using valuation techniques

12 Financial Assets Carried at Cost Investments in equity instruments with no quoted prices in an active market and with fair values that cannot be reliably measured, such as non-publicly traded stocks and stocks traded in the Emerging Stock Market, are measured at their original cost. Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are not recognized as investment income but are recorded as an increase in the number of shares. The total number of shares subsequent to the increase is used for the recalculation of cost per share. An impairment loss is recognized when there is objective evidence that the asset is impaired. A reversal of this impairment loss is disallowed. Impairment of Accounts Receivable An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts receivable. The Company assesses the probability of collections of accounts receivable by an aging analysis of the outstanding receivables and assessing the values of the collaterals provided by customers. As stated in Note 4 to the financial statements, on January 1, 2011, the Company adopted the third-time revised Statement of Financial Accounting Standards (SFAS) No. 34 -, Financial Instruments: Recognition and Measurement. One of the main revisions is that the impairment of receivables originated by the Company should be covered by SFAS No. 34. Accounts receivable are assessed for impairment at the end of each reporting period and considered impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the accounts receivable, the estimated future cash flows of the asset have been affected. Objective evidence of impairment could include: Significant financial difficulty of the debtor; or Accounts receivable becoming overdue; or It becoming probable that the debtor will enter into bankruptcy or undergo financial reorganization. Accounts receivable that are assessed not impaired individually are further assessed for impairment on a collective basis. Objective evidence of impairment of a portfolio of accounts receivable could include the Company s past experience of collecting payments and an increase in the number of delayed payments, as well as observable changes in national or local economic conditions that correlate with defaults on receivables. The impairment loss recognized is the difference between the asset carrying amount and the present value of estimated future cash flows, after taking into account the related collaterals and guarantees, discounted at the receivable s original effective interest rate. The carrying amount of the accounts receivable is reduced through the use of an allowance account. When accounts receivable are considered uncollectible, they are written off against the allowance account. Recoveries of amounts previously written off are credited to the allowance account. Changes in the carrying amount of the allowance account are recognized as bad debt in profit or loss. Impairment of Assets If the recoverable amount of an asset (mainly investments accounted for by the equity method; property, plant and equipment; intangible assets; assets leased to others; idle assets; and deferred charges) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is charged to earnings. If an impairment loss reverses, the carrying amount of the asset is increased accordingly, but the increased carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years

13 For the purpose of impairment testing, goodwill is allocated to each of the relevant cash-generating units (CGUs) that are expected to benefit from the synergies of the acquisition. A CGU to which goodwill has been allocated is tested for impairment annually or whenever there is an indication that the CGU may be impaired. If the recoverable amount of the CGU becomes less than its carrying amount, the impairment is allocated to first reduce the carrying amount of the goodwill allocated to the CGU and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. A reversal of an impairment loss on goodwill is disallowed. For long-term equity investments on which the Company has significant influence but over which it has no control, the carrying amount (including goodwill) of each investment is compared with its own recoverable amount for the purpose of impairment testing. For long-term equity investments over which the Company has control, the impairment is evaluated according to the CGU which is based on the whole of consolidated financial statements. Allowances for Sales Returns and Others Allowances for sales returns and others are generally recorded in the year the related revenue is recognized on the basis of past experience, management s judgment, and relevant factors. Inventories Inventories consist of raw materials, supplies, finished goods and work-in-process and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at the weighted-average cost on the balance sheet date. Investments Accounted for by the Equity Method Investments in which the Company holds 20 percent or more of the investees voting shares or exercises significant influence over the investees operating and financial policy decisions are accounted for by the equity method. The acquisition cost is allocated to the assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition, and the acquisition cost in excess of the fair value of the identifiable net assets acquired is recognized as goodwill. Goodwill is not amortized. The fair value of the net identifiable assets acquired in excess of the acquisition cost is used to reduce the fair value of each of the noncurrent assets acquired (except for financial assets other than investments accounted for by the equity method, noncurrent assets held for sales, deferred income tax assets, prepaid pension or other postretirement benefit) in proportion to the respective fair values of the noncurrent assets, with any excess recognized as an extraordinary gain. Profits from downstream transactions with an equity-method investee are eliminated in proportion to the Company s percentage of ownership in the investee; however, if the Company has control over the investee, all the profits are eliminated. Profits from upstream transactions with an equity-method investee are eliminated in proportion to the Company s percentage of ownership in the investee. When the Company subscribes for its investee s newly issued shares at a percentage different from its percentage of ownership in the investee, the Company records the change in its equity in the investee s net assets as an adjustment to investments, with a corresponding amount credited or charged to capital surplus. When the adjustment should be debited to capital surplus, but the capital surplus arising from long-term investments is insufficient, the shortage is debited to retained earnings

14 When the Company s share in losses of an investee over which the Company has significant influence equals its investment in that investee plus any advances made to the investee, the Company discontinues applying the equity method. The Company continues to recognize its share in losses of the investee if (a) the Company commits to provide further financial support to the investee or (b) the losses of the investee are considered temporary and sufficient evidence shows imminent return to profitability. When the Company s share in losses of an investee over which the Company has control exceeds 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, such profits are first attributed to the Company to the extent of the excess losses previously borne by the Company. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets. Major additions and improvements to property, plant and equipment are capitalized, while costs of repairs and maintenance are expensed currently. Depreciation is provided on a straight-line basis over estimated useful lives as follows: buildings and improvements - 8 to 50 years; machinery and equipment - 3 to 8 years; transportation equipment - 5 years; and other equipment - 3 to 10 years. Property, plant and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. The related cost, accumulated depreciation and accumulated impairment losses of an item of property, plant and equipment are derecognized from the balance sheet upon its disposal. Any gain or loss on disposal of the asset is included in nonoperating gains or losses in the period of disposal. Intangible Assets Intangible assets acquired are initially recorded at cost and are amortized on a straight-line basis over their estimated useful lives. Patents are amortized over 5 years and trademarks are amortized over 10 years. Goodwill arising on acquisition of companies is tested for impairment annually. Assets Leased to Others and Idle Assets Assets leased to others and idle assets are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on a straight-line basis over 10 to 50 years. Deferred Charges Deferred charges acquired are initially recorded at cost and are amortized on a straight-line basis over two to six years. Pensions Cost Pension cost under a defined benefit plan is determined by actuarial valuations. Contributions made under a defined contribution plan are recognized as pension cost during the period in which employees render services. Curtailment or settlement gains or losses on the defined benefit plan are recognized as part of the net periodic pension cost for the year

15 Income Tax The Company applies the intra-year allocation method to its income tax, whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused loss carryforward and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of the related asset or liability for financial reporting. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as either current or noncurrent on the basis of the expected length of time before it is realized or settled. If the Company can control the timing of the reversal of a temporary difference arising from the difference between the book value and the tax basis of a long-term equity investment in a foreign subsidiary and if the temporary difference is not expected to reverse in the foreseeable future and will, in fact, exist indefinitely, then a deferred tax liability or asset is not recognized. Adjustments of prior years tax liabilities are added to or deducted from the current year s tax provision. According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings. Stock-based Compensation Employee stock options granted on or after January 1, 2008 are accounted for under Statement of Financial Accounting Standards No 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, with a corresponding adjustment to capital surplus - employee stock options. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates. Employee stock options granted between January 1, 2004 and December 31, 2007 were accounted for under the interpretations issued by the Accounting Research and Development Foundation. The Company adopted the intrinsic value method, under which compensation cost was recognized on a straight-line basis over the vesting period. Treasury Stock Treasury stock is stated at cost and shown as a deduction in shareholders equity. Revenue Recognition Revenue from sales of goods is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, primarily upon shipment, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. The Company does not recognize sales revenue on materials delivered to subcontractors because this delivery does not involve a transfer of risks and rewards of materials ownership. Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Company and the customers for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest

16 3. TRANSLATION INTO U.S. DOLLARS The nonconsolidated financial statements are stated in New Taiwan dollars. The translations of the 2011 New Taiwan dollar amounts into U.S. dollar amounts are included solely for the convenience of readers, using the rate of NT$30.28:US$1.00, the average of the buying and selling exchange rates quoted by the Bank of Taiwan on December 31, The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other exchange rate. 4. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Financial Instruments On January 1, 2011, the Company adopted the newly revised Statement of Financial Accounting Standards (SFAS) No Financial Instruments: Recognition and Measurement. The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost a debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change had no significant influence on the Company s nonconsolidated financial statements for the year ended December 31, Operating Segments On January 1, 2011, the Company adopted the newly issued SFAS No Operating Segments. The statement requires that segment information be disclosed on the basis of the information about the components of the Company that management uses to make operating decisions. SFAS No. 41 requires the identification of operating segments on the basis of internal reports that are regularly reviewed by the Company's chief operating decision maker in order to allocate resources to the segments and assess their performance. This statement supersedes SFAS No Segment Reporting. For this accounting change, the Company disclosed the segment information as of and for the year ended December 31, 2010 to conform to the disclosures as of and for the year ended December 31, Please see Note 29 in the Company and its subsidiaries consolidated financial statements for the years ended December 31, 2010 and CASH AND CASH EQUIVALENTS December 31 Petty cash and foreign cash $ 864 $ 1,815 $ 60 Checking accounts and demand deposits 136, ,436 4,770 Time deposits 4,617,000 5,744, ,703 Cash equivalents - 65,000 2,146 $ 4,754,481 $ 5,955,451 $ 196,679 As of December 31, 2010 and 2011, time deposit interest rates were from 0.59% to 1.04% and 0.87% to 1.65%, respectively

17 Cash equivalents were repurchase agreements collateralized by bonds with maturities of three months or less, and an interest rate of 0.81% as of December 31, FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (FVTPL) Financial assets at fair value through profit or loss - current December 31 Forward exchange contracts $ 3,034 $ 1,039 $ 34 Domestic stocks traded over the counter 7,217 7, Mutual funds 392, ,531 19,965 Financial liabilities at fair value through profit or loss - current $ 402,932 $ 613,385 $ 20,257 Forward exchange contracts $ 17,353 $ 344 $ 11 The Company used derivative contracts in 2010 and 2011 to manage exposures due to exchange rate fluctuations. The financial risk management objective of the Company is to minimize risks due to changes in fair value or cash flows. The fair value of the Company s derivative financial instruments is offered by financial institutions. Outstanding forward exchange contracts as of December 31, 2010 and 2011 were as follows: December 31, 2010 Contract Amount Currency Maturity Date (In Thousands) Forward exchange contracts - sell USD/NTD USD50,000/NTD1,462,580 Forward exchange contracts - buy USD/NTD USD50,000/NTD1,455,360 Forward exchange contracts - buy USD/KRW USD4,500/KRW5,172,900 December 31, 2011 Forward exchange contracts - buy KRW/USD KRW5,171,850/USD4,500 On the financial instruments designated as at FVTPL, net loss was NT$2,777 thousand in 2010 and net gain was NT$101,885 thousand (US$3,365 thousand)

18 7. ACCOUNTS RECEIVABLE, NET December 31 Third parties $ 5,988,827 $ 6,216,588 $ 205,303 Less: Allowance for doubtful accounts 151,650 14, Allowance for sales returns and discounts 146, ,873 8,153 5,691,079 5,955, ,678 Related parties 1,374, ,930 27,309 Less: Allowance for sales returns and discounts 17,764 14, Credit balance on carrying value of long-term investments (Note 10) 15,501 29, ,340, ,130 25,863 $ 7,031,926 $ 6,738,552 $ 222,541 Under Interpretation issued by the Accounting Research and Development Foundation, the Company reclassified the accounts receivable - related parties that were over 90 days outstanding to other receivables - related parties. After assessing its accounts receivable, the Company reclassified a portion of accounts receivable to overdue receivables (see Note 14). Movements of allowances for doubtful accounts for accounts receivable, other receivables and overdue receivables were as follows: Year Ended December 31 Accounts Receivable Other Receivables Overdue Receivables Accounts Receivable Other Receivables Overdue Receivables NT$ NT$ NT$ US$ NT$ US$ Balance, beginning of year $ 283,339 $ 16,936 $ 654,891 $ 151,650 $ 5,008 $ 16,927 $ 559 $ 487,021 $ 16,084 Provision (reversal of provision) for doubtful accounts (133,759) - - (137,357) (4,536) 53,304 1, ,342 4,701 Reversal of provision for miscellaneous expenses - (9) (25,419) Reversal of write-off (write off) of amounts of prior year 2,070 - (142,451) - - (53,304) (1,760 ) (304,023) (10,041) Balance, end of year $ 151,650 $ 16,927 $ 487,021 $ 14,293 $ 472 $ 16,927 $ 559 $ 325,340 $ 10,744 As of December 31, 2010, factored accounts receivable were as follows (December 31, 2011: None): Interest Advances Rates on Receivables Amounts Received at Advances Credit Counter-parties Sold Collected Year-end Received Line NT$ NT$ NT$ (%) NT$ Taishin International Business Bank $ 8,624 $ - $ - - $ 145,650 The above credit lines may be used on a revolving basis. The Company did not de-recognize the factored accounts receivable as this transfer did not qualify for de-recognition

19 8. OTHER RECEIVABLES, NET December 31 Third parties $ 75,422 $ 333,485 $ 11,014 Less: Allowance for doubtful accounts 5,106 5, , ,379 10,845 Related parties 70,812 28, Less: Allowance for doubtful accounts 11,821 11, Credit balance on carrying value of long-term investments (Note 10) 53, ,687 16, $ 76,003 $ 345,260 $ 11,403 The credit balance on the carrying value of long-term investments resulted from an investment loss recognized under the equity method, and a portion of this credit balance was classified as a reduction of other receivables - related parties. 9. INVENTORIES, NET December 31 Finished goods $ 1,424,262 $ 1,333,878 $ 44,052 Work in process , Raw materials and supplies 579, ,753 16,075 $ 2,004,036 $ 1,832,269 $ 60,511 As of December 31, 2010 and 2011, the allowances for inventory devaluation were NT$106,090 thousand and NT$50,783 thousand (US$1,677 thousand), respectively. The costs of inventories recognized as cost of goods sold for were NT$51,630,131 thousand for 2010 and NT$56,031,131 (US$1,850,433 thousand) for 2011, which included (a) provision of NT$46,118 thousand for loss on inventories, a loss of NT$1,419 thousand on obsolete inventories and a gain of NT$3 thousand on physical inventories for 2010, and (b) a recovery of provision of NT$55,307 thousand (US$1,827 thousand) for loss on inventories and a loss of NT$4,560 thousand (US$151 thousand) on obsolete inventories for The recovery of provision for loss on investments resulted from the disposal of depreciated inventories

20 10. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD December 31 Carrying Amount % of Ownership Carrying Amount % of Ownership Unlisted companies Elitegroup Computer Systems GmbH. $ (201,725) 100 $ 2,472 $ Elitegroup Computer Systems (HK) Co., Ltd. 101, ,602 7, Elitegroup Computer Systems (Japan) Co., Ltd. 19, , Elitegroup Computer Systems Holding Co., Ltd. (BVI) 996, ,069,974 35, ECS Holding (America) Co. (USA) 1,075, ,177,923 38, Elitegroup Computer Systems (Korea) Co., Ltd. 30, , Elitegroup Computer Systems EU B.V. (15,501) 100 (29,640) (979) 100 PC Chips Holding Ltd. (UK) 11, , Dragon Asia Trading Co., Ltd. (BVI) 5,704, ,035, , ECS DE Mexico S.A. DE C.V. 5, Unitop International Corp. 1,400, ,676,789 55, Unity Investments Limited 44, ,181 1, ,171,877 10,272, ,247 Add: Credit balance on carrying value of long-term investments reclassified to other liabilities 148, Credit balance on carrying value of long-term investments reclassified to deduction of accounts receivable 15,501 29, Credit balance on carrying value of long-term investments reclassified to deduction of other receivables 53, $ 9,389,103 $ 10,302,038 $ 340,226 Investment income (loss) recognized under the equity method for 2010 and 2011 were as follows: Year Ended December 31 Elitegroup Computer Systems GmbH. $ 9,862 Note 1 $ 224,362 $ 7,410 Note 1 Elitegroup Computer Systems (HK) Co., Ltd. (655) 7, Elitegroup Computer Systems (Japan) Co., Ltd. (6,559) Elitegroup Computer Systems Holding Co., Ltd. (108,707) (36,359) (1,201) (BVI) ECS Holding (America) Co. (USA) (6,263) 60,287 1,991 Elitegroup Computer Systems (Korea) Co., Ltd. 8,376 (11,002) (363) Elitegroup Computer Systems EU B.V. (25,916) (13,165) (435) PC Chips Holding Ltd. (UK) (2,905) Note 2 Dragon Asia Trading Co., Ltd. (BVI) 362,412 (123,202) (4,069) ECS DE Mexico S.A. DE C.V. (894) Note 2 (283) (9) Note 2 Unitop International Corp. 161, ,652 4,612 Unity Investments Limited 141 1, Note 1: The investee had ceased its operation. Note 2: The investee was undergoing liquidation. $ 390,312 $ 251,230 $ 8,