YFY Inc. (Formerly Yuen Foong Yu Paper Mfg. Co., Ltd.)

Transcription

1 YFY Inc. (Formerly Yuen Foong Yu Paper Mfg. ) Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and the Stockholders YFY Inc. We have audited the accompanying balance sheets of YFY Inc. (the Company, formerly Yuen Foong Yu Paper Mfg. ) 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. Among those investments reflected in the accompanying financial statements as accounted for by the equity method, we did not audit the financial statements as of and for the years ended December 31, 2012 and 2011 of (a) Lotus Ecoscings & Engineering ; Cupid Infotech ; and Taiwan Genome Science Co., Ltd., investees of the Company, (b) Guangdong Ding Feng Pulp & Paper Ltd.; Zhaoqing Ding Feng Forestry Ltd.; and Systax Communication (H.K.) Ltd.; investees of YFY International BVI Corp.; (c) Pek Crown Paper, investee of YFY Packaging Inc.; and (d) YFY Biotech Management Company, investee of YFY Investment Neither did we audit the financial statements as of and for the year ended December 31, 2011: Chung Hwa Pulp and YFY (H.K.) as of December 31, 2012 and 2011 were NT$3,427,778 and NT$3,004,953, respectively, or about 7.9% and 6.9%, respectively, of the Company s total assets, and the amounts of the Company s equity in their net income for 2012 and 2011 were 2.4% (NT$29,097 ) and 4.8% (NT$86,858 ), respectively. The financial statements of these investees were audited by other auditors whose reports have been furnished to us and, our opinion, insofar as it relates to the amounts included for these investees, is based solely on the reports of the 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 financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of YFY 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, 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 year ended December 31, 2012 and have expressed in our report dated March 28, 2013 a modified unqualified opinion on those statements. March 28, 2013 Notice to Readers The accompanying 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 financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying 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 auditors report and financial statements shall prevail

4 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) BALANCE SHEETS DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS Amount % Amount % LIABILITIES AND STOCKHOLDERS EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash (Note 4) $ 85,034 - $ 713,212 2 Short-term bank loans (Note 11) $ 2,032,600 5 $ 549,279 2 Financial assets at fair value through profit or loss (Notes 2 and 5) ,357 - Short-term bills payable (Note 12) 1,129, Notes and accounts receivable, net of allowance for doubtful accounts Financial liabilities at fair value through profit or loss (Notes 2 and 5) of $12,870 in 2011 () 410-1,351,964 3 Accounts payable ,408 2 (Notes 2 and 19) 139, ,202 1 Payables to (Note 19) 48,051-1,343,827 3 Inventories (Notes 2 and 6) 60,748-1,714,119 4 Accrued expenses 117, ,678 1 Prepayments 7, ,335 - Income tax payable (Notes 2 and 16) 62, Other current assets (Notes 2, 16 and 20) 27,592-49,944 - Current portion of long-term liabilities (Notes 13 and 20) 1,440, ,000 2 Other current liabilities (Notes 2 and 16) 36,869-64,367 - Total current assets 321, ,516, Total current liabilities 4,867, ,443, LONG-TERM INVESTMENTS Available-for-sale financial assets () 4,522, ,107,963 7 LONG-TERM LIABILITIES, NET OF CURRENT PORTION Financial assets carried at cost () 885, ,898 2 Bonds payable (Note 13) 2,497, ,496,927 5 Investments accounted for by the equity method (Notes 2 and 7) 35,277, ,417, Long-term bank loans (Notes 13 and 20) 6,935, ,620, Total long-term investments 40,685, ,396, Total long-term liabilities 9,432, ,116, PROPERTIES (Notes 2, 8 and 20) RESERVE FOR LAND VALUE INCREMENT TAX (Notes 2 and 8) 350, ,163 2 Cost Land 36, ,259 1 OTHER LIABILITIES Buildings and improvements 158,981-1,904,107 4 Accrued pension cost (Notes 2 and 17) 521, ,967 1 Machinery and equipment 145,107-12,060, Others (Notes 2 and 19) 26,523-32,168 - Power-generating equipment 24,617-1,613,664 4 Tools 159, ,251,011 3 Total other liabilities 548, ,135 1 Miscellaneous equipment 59, ,739 1 Total cost 584, ,798, Total liabilities 15,198, ,698, Revaluation increment 545, ,188,875 5 Total cost and revaluation increment 1,129, ,987, STOCKHOLDERS EQUITY Accumulated depreciation 516, ,492, Capital stock, NT$10.00 par value 613, ,494, Authorized - 2,200,000 shares Construction in progress and prepayments for equipment ,755 - Issued and outstanding - 1,660,372 shares 16,603, ,603, Capital surplus Net properties 613, ,707, Treasury stock transactions 14,947-14,947 - Long-term equity investments 4,213, ,229,322 5 OTHER ASSETS Merger 293, ,124 1 Properties leased to others, net (Notes 2, 9 and 21) 850, ,259 2 Total capital surplus 4,521, ,537,393 6 Nonoperating properties, net (Notes 2 and 10) 999, ,056,183 3 Retained earnings Deferred income tax assets (Notes 2 and 16) 22, ,254 - Legal reserve 2,962, ,762,915 6 Miscellaneous (Notes 2 and 19) 72, ,497 - Special reserve 198, ,853 1 Unappropriated earnings 1,881, ,332,470 5 Total other assets 1,945, ,130,193 5 Total retained earnings 5,043, ,294, Other adjustments Cumulative translation adjustments 333, ,102,804 3 Net loss not recognized as pension cost (559,500) (1) (290,495) (1) Unrealized loss on financial instruments (803,576) (2) (3,612,206) (8) Unrealized revaluation increment 3,227, ,416, Total other adjustments 2,197, ,616,889 4 Total stockholders equity 28,366, ,052, TOTAL $ 43,565, $ 43,750, TOTAL $ 43,565, $ 43,750, The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 28, 2013) - 3 -

5 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % OPERATING REVENUES (Notes 1, 2 and 19) Sales $ 12,345, $ 17,368, Sales returns and allowances 320, ,814 3 Net sales 12,025, ,922, Other operating revenues 876, ,006,756 6 Total operating revenues 12,901, ,929, OPERATING COSTS (Notes 6, 18 and 19) Cost of goods sold 10,630, ,513, Other operating costs 714, ,472 5 Total operating costs 11,344, ,370, GROSS PROFIT 1,556, ,558,864 9 OPERATING EXPENSES (Notes 18 and 19) Selling and marketing 681, ,619 5 General and administrative 405, ,254 3 Research and development 50, ,645 - Total operating expenses 1,137, ,337,518 8 OPERATING INCOME 419, ,346 1 NONOPERATING INCOME AND GAINS Dividend income 104, ,424 1 Investment income recognized under the equity method, net 779, ,613,562 9 Rental income (Notes 19 and 21) 41,310-40,009 - Gains on sale of investments, net 13, Gain on disposal of properties 10, Exchange gain, net ,617 - Valuation gain on financial liabilities (1) - - 3,095 - Others 41, ,007 - Total nonoperating income and gains 990, ,808, (Continued) - 4 -

6 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % NONOPERATING EXPENSES AND LOSSES Interest expense (Note 8) $ 219,190 2 $ 194,446 1 Valuation loss on financial assets (1) 426-1,641 - Valuation loss on financial liabilities Loss on sale of investments, net - - 7,832 - Others 473-1,131 - Total nonoperating expenses and losses 220, ,050 1 INCOME BEFORE INCOME TAX 1,189, ,825, INCOME TAX BENEFIT (EXPENSE) (Notes 2 and 16) (99,000) (1) 176,000 1 NET INCOME $ 1,090,929 8 $ 2,001, Before Income Tax After Before Income Income Tax Tax After Income Tax EARNINGS PER SHARE (NEW TAIWAN DOLLARS; Note 15) Earnings per share $ 0.72 $ 0.66 $ 1.10 $ 1.21 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 28, 2013) (Concluded) - 5 -

7 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Cash Dividends Per Share) Other Adjustments Unrealized Cumulative Net Loss Not Gain or Loss Capital Stock Capital Surplus (Notes 2 and 14) Translation Recognized as on Financial Unrealized Issued and Outstanding From Retained Earnings (Notes 2 and 14) Adjustments Pension Cost Instruments Revaluation Total Shares From Long-term Unappropriated (Notes 2 (Notes 2, 14 (Notes 2 Increment Stockholders (Thousands) Amount Treasury Stock Investments From Merger Total Legal Reserve Special Reserve Earnings Total and 14) and 17) and 14) (Notes 2 and 8) Equity BALANCE, JANUARY 1, ,635,834 $ 16,358,340 $ 14,947 $ 2,228,070 $ 293,124 $ 2,536,141 $ 2,618,674 $ 198,853 $ 1,622,519 $ 4,440,046 $ 57,485 $ (69,037 ) $ (1,479,763 ) $ 3,396,152 $ 25,239,364 Appropriation of the 2010 earnings: Legal reserve ,241 - (144,241) Stock dividends - 1.5% 24, , (245,375) (245,375) Cash dividends - NT$0.55 per share (899,709) (899,709) (899,709) Land revaluation increment , ,896 Net income for the year ended December 31, ,001,010 2,001, ,001,010 Adjustments for the changes in investees' equity ,252-1, (1,734 ) (1,734 ) (482 ) Adjustments for the changes in other items of the investees' equity ,045,319 1,422 (1,098,628) 386, ,851 Change in unrealized loss on financial instruments (1,033,815) - (1,033,815) Change in net loss not recognized as pension cost (222,880) - - (222,880) BALANCE, DECEMBER 31, ,660,372 16,603,715 14,947 2,229, ,124 2,537,393 2,762, ,853 2,332,470 5,294,238 1,102,804 (290,495 ) (3,612,206 ) 4,416,786 26,052,235 Appropriation of the 2011 earnings: Legal reserve ,928 - (199,928) Cash dividends - NT$0.8 per share (1,328,297) (1,328,297) (1,328,297) Net income for the year ended December 31, ,090,929 1,090, ,090,929 Transfer out of unrealized revaluation increment due to spin-off company's paper and cardboard unit (1,186,894) (1,186,894) Derecognition of unrealized revaluation increment due to disposal of properties (2,574) (2,574) Adjustments for the changes in investees' equity ,984,198-1,984, (13,333 ) (13,333 ) ,970,865 Adjustments for the changes in other items of the investees' equity (769,335) (35,079) 1,485,730 (5) 681,311 Change in unrealized gain on financial instruments ,322,900-1,322,900 Change in net loss not recognized as pension cost (233,926) - - (233,926) BALANCE, DECEMBER 31, ,660,372 $ 16,603,715 $ 14,947 $ 4,213,520 $ 293,124 $ 4,521,591 $ 2,962,843 $ 198,853 $ 1,881,841 $ 5,043,537 $ 333,469 $ (559,500 ) $ (803,576 ) $ 3,227,313 $ 28,366,549 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 28, 2013) - 6 -

8 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,090,929 $ 2,001,010 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation and amortization 379, ,881 Provision for doubtful accounts 1,840 2,000 Amortization of short-term bills payable Recovery of loss on inventories (1,615) (5,510) Loss (gain) on sale of investments, net (13,080) 7,832 Investment income recognized under the equity method (779,307) (1,613,562) Cash dividends received from investees under the equity method 580, ,946 Loss (gain) on disposal of properties, net (10,387) 1,120 Valuation loss (gain) on financial instruments, net 446 (1,454) Deferred income tax 58,668 (150,443) Amortization of discount and unrealized exchange loss on exchangeable eurobonds Net changes in operating assets and liabilities Notes and accounts receivable (375,986) (288,112) 137,455 62,758 Inventories 33,294 (15,981) Prepayments (107,331) 64,134 Other current assets 18,603 (21,416) Accounts payable 400,213 4,007 Payables to (1,295,776) (213,552) Accrued expenses (147,003) 89,706 Income tax payable 62,185 (49,300) Other current liabilities 86,844 (21,116) Accrued pension cost (32,000) - Net cash provided by operating activities 88, ,828 CASH FLOWS FROM INVESTING ACTIVITIES Decrease in financial instruments at fair value through profit or loss 165, ,733 Acquisition of available-for-sale financial assets (91,762) (233,375) Proceeds of the sale of available-for-sale financial assets Acquisition of financial assets carried at cost (67,408) (27,000) Proceeds of the return of capital upon investees' capital reduction of financial assets carried at cost - 12,449 Proceeds of the return of capital upon equity-method investees' capital reduction - 54,031 Proceeds of the sale of investments accounted for by the equity method (Continued) - 7 -

9 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) Acquisition of investments accounted for by the equity method $ (462,748) $ (1,001,606) Acquisition of properties (285,866) (893,772) Proceeds of the sale of properties 14, Decrease (increase) in other miscellaneous assets (19,968) 1,971 Net cash used in investing activities (746,795) (1,550,303) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term bank loans 1,626,434 (323,112) Increase (decrease) in long-term bank loans (1,365,000) 2,042,000 Increase in note issuance facility 1,128,775 - Increase in other liabilities 1,743 1,360 Cash dividends paid (1,328,297) (899,709) Net cash provided by activities 63, ,539 CASH OUTFLOWS DUE TO SPIN-OFF (33,574) - NET INCREASE (DECREASE) IN CASH (628,178) 47,064 CASH, BEGINNING OF YEAR 713, ,148 CASH, END OF YEAR $ 85,034 $ 713,212 SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION Interest paid (excluding amounts capitalized) $ 216,808 $ 191,818 Income tax paid $ 3,679 $ 49,185 NONCASH INVESTING AND FINANCING ACTIVITIES Current portion of long-term liabilities $ 1,440,000 $ 960,000 (Continued) - 8 -

10 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) As stated in Note 1, in their meeting on June 27, 2012, the Company s stockholders resolved to spin off the Company s business unit s paper and cardboard s assets, liabilities and operation to Chung Hwa Pulp (CHPC); the Company then acquired the 641,442 shares issued by CHPC on October 1, 2012 and became its parent company. The book values of the assets and liabilities acquired by the Company were as follows: Assets to be spun off Notes and accounts receivable, net $ 1,725,700 Inventories 1,621,692 Liabilities prepayments 353,009 Other current assets 2,819 Properties and nonoperating properties, net 6,002,770 Other assets 140,986 Liabilities to be spun off Short-term bank loans (143,113) Accounts payable (1,379,988) Accrued expenses (280,233) Other current liabilities (116,258) Long-term bank loans (840,000) Reserve for land value increment tax (436,044) Other liabilities (4,803) Subtotal 6,646,537 Unrealized revaluation increment to be spun off (1,186,894) Acquisition of CHPC s equity interest (5,493,217) Cash outflow due to spin-off $ (33,574) The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 28, 2013) (Concluded) - 9 -

11 YFY INC. (Formerly Yuen Foong Yu Paper Mfg. ) NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS YFY Inc. (the Company ) originally manufactured, packaged, tested and sold various integrated circuit products. To increase its competitiveness and sales through organization restructuring and specialization, the Company spun off the assets, liabilities, and operations of its consumer products and packaging segments to its subsidiaries, YFY Consumer Products in October 2007 and YFY Packaging Inc. in September The Company s stock is listed on the Taiwan Stock Exchange. To enhance the Company s operating strategy and to carry out vertical integration, approvals were given at the board of directors meeting on March 21, 2012 meeting and at the stockholders meeting on June 27, 2012 meeting of a spin-off of the Company s paper and cardboard business unit s assets, liabilities and operation to Chung Hwa Pulp (CHPC) and acquire the shares issued by CHPC on October 1, After this transaction, CHPC became a subsidiary of the Company, and the Company became an investment holding company, with investing as its main business. In order to coordinate the transformation, the Company had changed its name to YFY Inc. in October As of December 31, 2012 and 2011, the Company had 205 and 1,391 employees, respectively. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in conformity with Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the 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 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. 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. Such adjustments are accumulated and reported as a separate component of stockholders equity. Accounting Estimates Under the above guidelines, law and principles, certain estimates and assumptions have been used for the allowances for doubtful accounts, allowance for loss on inventories, depreciation and amortization of assets, pension cost, income tax, bonuses to employees, directors and supervisors, and impairment loss on financial instruments and other assets. Actual results may differ from these estimates

12 Current and Noncurrent Assets and Liabilities Current assets are cash and those assets held primarily for trading purpose or to be realized, sold or consumed within one year from the balance sheet date; properties and assets other than current assets are classified as noncurrent. Current liabilities are obligations incurred for trading purpose or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent. 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 has lost control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired. Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. 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 or settlement 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: Mutual funds - at net asset values; listed stocks - at closing prices; and financial assets and financial liabilities without quoted prices in an active market - at values determined using valuation techniques. Available-for-sale Financial Assets Available-for-sale financial assets are listed common stocks, which are initially measured at fair value plus transaction costs that are directly attributable to acquisition. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are remeasured at fair value, with changes in fair value recognized in equity until the financial assets are disposed of, at which time, the cumulative gain or loss previously recognized in equity is included in profit or loss for the year. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis The recognition, derecognition and the fair value bases of available-for-sale financial assets are the same with those of financial assets at FVTPL. 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 recalculation of cost per share. An impairment loss is recognized when there is objective evidence that the financial asset is impaired. Any subsequent decrease in impairment loss for an equity instrument classified as available-for-sale is recognized directly in equity

13 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, are measured at their original cost. The accounting treatment for dividends on financial assets carried at cost is the same as that for dividends on available-for-sale financial assets. 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 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; Accounts receivable becoming overdue; or It becoming probable that the debtor will enter into bankruptcy or undergo financial reorganization. Accounts receivable that are assessed as not impaired individually are further assessed for impairment on a collective basis. Objective evidence of impairment for 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 carrying amount of the accounts receivable is reduced through the use of an allowance account. Impairment of Assets If the recoverable amount of an asset (mainly properties, properties leased to others, nonoperating properties, and investments accounted for by the equity method) 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 unless the asset is carried at a revalued amount, in which case the impairment loss is first treated as a deduction to the unrealized revaluation increment, and any remaining loss is charged to earnings. If an impairment loss subsequently 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. A reversal of an impairment loss is recognized in earnings, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is first recognized as gains to the extent that an impairment loss on the same revalued asset was previously charged to earnings. Any excess amount is treated as an increase in the unrealized revaluation increment. For long-term equity investments in which the Company has significant influence but with no control, the carrying amount (including goodwill) of each investment is compared with its own recoverable amount for the purpose of impairment testing. Inventories Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are made item 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 weighted-average cost

14 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. Investments in shares of stock that are accounted for by the equity method are carried at cost on the acquisition date and subsequently adjusted for the Company s equity in the investees net income or net loss, changes in their capital surplus account, cumulative translation adjustments, net loss not recognized as pension cost, unrealized gain (loss) on financial instruments, or unrealized revaluation increment. Cash dividends received are recognized as a reduction of the carrying value of the investments. When the reporting date of the Company is different from that of the investees, adjustments are made for the effects of significant transactions or events that occur between that date and the date of the Company s financial statements. Any adjustments would be recognized as equity in the investee s net income or loss in proportion to the Company s ownership percentage in the investees. The acquisition cost is allocated to the assets acquired and liabilities assumed based 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 being 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, deferred pension cost or deferred income tax assets) in proportion to the respective fair values of the noncurrent assets, with any excess recognized as an extraordinary gain. 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. 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 stockholders 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 stockholders 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. Stock dividends received are not recorded as investment income. They are recognized only as increases in the number of shares held. Costs of investments sold are determined using the moving-average method. Properties Properties are stated at cost (or cost plus revaluation increment) less accumulated depreciation. Borrowing costs directly attributable to the acquisition or construction of properties are capitalized as part of the cost of those assets. Major additions and improvements to properties are capitalized, while repairs and maintenance are expensed currently

15 Depreciation expense - except for those acquired before 2004, to which the Company applied the fixed-percentage-of-declining-balance method - is computed using the straight-line method over service lives estimated as follows: buildings and improvements, 15 to 55 years; machinery and equipment, 5 to 15 years; power-generating equipment, 5 to 15 years; tools, 3 to 5 years; and miscellaneous equipment, 3 to 20 years. Properties that have reached their residual value but are still in use are further depreciated over their newly estimated service lives. As stated in Note 3, the Company changed in 2012 its depreciation policy for properties acquired before 2004 from fixed-percentage-of-declining-balance method to the straight-line method. If properties are revalued, the resulting increments or appreciation is recognized as part of the cost of the properties and credited to other adjustments in equity. Depreciation on revaluation increment is provided over the remaining service lives of the assets at the time of the revaluation. Upon disposal of properties, the related cost, revaluation increment and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to nonoperating income. Properties Leased to Others and Nonoperating Properties Properties leased to others are stated at cost less accumulated depreciation. Depreciation is computed using the fixed-percentage-of-declining-balance method over the following estimated service lives: building and improvements - 15 to 55 years; power-generating equipment - 5 to 15 years; and miscellaneous equipment - 3 to 20 years. As stated in Note 3, the Company changed in 2012 its depreciation policy for properties acquired before 2004 from the fixed-percentage-of-declining-balance method to the straight-line method. Nonoperating properties are stated at the lower of aggregate book value or net realizable value, and depreciation is computed using the fixed-percentage-of-declining-balance method over the following estimated service lives: Building and improvements - 15 to 55 years; machinery and equipment - 5 to 15 years; and miscellaneous equipment - 3 to 20 years. As stated in Note 3, the Company changed in 2012 its depreciation policy for properties acquired before 2004 from fixed-percentage-of-declining-balance method to the straight-line method. Pension Costs Under the defined benefit plan, pension costs are recognized on the basis of actuarial calculations. Minimum pension liability is the minimum amount of pension liability that is required to be recognized on the balance sheet. If the accrued pension liability already recognized in the book is less than the minimum amount, the difference should be recognized as additional pension liability. If the amount of additional liability does not exceed the sum of unrecognized prior service cost and unrecognized transitional net assets or net benefit obligation, then the deferred pension cost account should be charged. Deferred pension cost is classified as an intangible asset. If the amount of additional liability exceeds the sum, the excess should be charged to the net loss not yet recognized as net pension cost account which is classified as a reduction of stockholders equity. Under the defined contribution plan, contribution to employees individual pension accounts are recognized as pension cost in the year employees render services

16 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 carryforwards and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not deferred income tax assets will not be realized. Deferred income tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on 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 effect, exist indefinitely, then a deferred tax liability or asset is not recognized. Tax credits for certain purchases of equipment and technology, research and development expenditures, personnel training expenditures and expenditures for investments in shares through cash subscriptions are recognized in the current period. Adjustments of prior years tax liabilities are added to or deducted from the current period s income tax provision. An additional tax at 10% of unappropriated earnings is provided for on the stockholders approval to retain these earnings. Deferred Income Profits or losses 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. In addition, profits and losses from upstream transactions with an equity-method investee are eliminated in proportion to the Company s percentage of ownership in the investee. On transactions between two equity-method investee companies (a) over which the Company has control, unrealized gains or losses should be eliminated in proportion to the percentage of ownership of the investee company that generated such gains or losses; and (b) over which the Company has control only over one investee, unrealized gains or losses should be eliminated in proportion to the product of the percentage of ownership of one investee multiplied by the percentage of ownership of the other investee. Deferred incomes (losses) are accounted for as other liabilities (assets) or adjustments of long-term investments, and they are recognized as profits or losses when the transactions are realized. 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, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. 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. 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

17 3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Change in Depreciation Method On January 1, 2012, the Company changed its depreciation policy for properties acquired before 2004 from the fixed-percentage-of-declining-balance method to the straight-line method, this accounting change had no material impact on the net income in Recognition of Investment Income or Losses under Equity Method The Company originally used the equity method to account for its long-term investments; however, it did not use this method to calculate investment gains and losses in the preparation of its quarterly reports. Since January 1, 2011, the Company has recognized investment gains and losses every quarter. The cumulative effect of this change in accounting principle is zero; thus, this accounting change no impact on the net income in Financial Instruments On January 1, 2011, the Company adopted the newly revised SFAS No Financial Instruments: Recognition and Measurement. The main revisions include loans and receivables originated by the Company being now covered by SFAS No. 34. This accounting change had no material impact on the net income in CASH December Cash Cash on hand $ 474 $ 903 Checking and demand deposits 30, ,686 Foreign-currency demand deposits 54, ,623 $ 85,034 $ 713, FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS December Financial assets held for trading Mutual funds $ - $ 155,401 Forward exchange contracts $ 530 $ 156,357 Financial liabilities held for trading Forward exchange contracts $ 644 $ 624 The Company used forward exchange contracts to manage exposures due to exchange rate fluctuations. The hedging strategy was to manage most of the market price or cash flow exposures. 2 describes the derivative instruments

18 Outstanding forward exchange contracts as of December 31, 2012 and 2011 were as follows: December 31, 2012 Currency Maturity Period Amount Forward exchange contract (buy) USD/NTD USD20,000 December 31, 2011 Currency Maturity Period Amount Forward exchange contract (buy) USD/NTD USD4,000 Forward exchange contract (sell) JPY/NTD JPY230,000 USD/NTD USD19,000 On financial assets at fair value through profit or loss, there were net incomes of $37,806 in 2012 and $33,548 in On financial liabilities at fair value through profit or loss, there were net losses of $27,739 in 2012 and $39,979 in INVENTORIES December Finished goods $ 60,748 $ 874,410 Purchased goods - 134,413 Work-in-process - 391,126 Materials - 314,170 As of December 31, 2011, the allowance for inventory devaluation was $9,731. $ 60,748 $ 1,714,119 The cost of sales included reversal of write-downs of inventories $1,615 and loss on plant repairs shutdown and retirement $85,384 in 2012; the cost of sales included reversal of write-downs of inventories $5,510 and loss on plant repairs shutdown and retirement $82,278 in Previous write-downs had been reversed as a result of increased average margin per unit. 7. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD December % of % of Carrying Owner- Carrying Owner- Value ship Value ship Company listed on the TSE exchange Chung Hwa Pulp Corporation $ 8,362, $ 934, Company with shares traded on the OTC exchange E Ink Holdings Inc. 2,517, ,950, (Continued)

19 December % of % of Carrying Owner- Carrying Owner- Value ship Value ship Unlisted companies YFY International BVI Corp. $ 14,488, $ 14,524, YFY Global Investment BVI Corp. 3,037, ,281, YFY Consumer Products 2,318, ,207, Shin Foong Chemical Industry 964, , Taiwan Global BioFund 693, , China Color Printing 454, , YFY Venture Capital Investment 433, , Effion Enertech 322, , YFY Capital 274, , YFY Operation Management Consulting Co., Ltd. 249, Union Paper 231, , YFY Investment 211, , San Ying Enterprise 184, , Lotus Ecoscings & Engineering 135, , Eihoyo Shoji 118, , YFY Biotech 102, , Yuen Yan Paper Container 76, , Quan Hwa Venture Capital 59, Cupid Infotech 27, , Han Tang Management Services 5, , Taiwan Genome Sciences 4, , ,397,485 22,532,281 $ 35,277,435 $ 26,417,534 (Concluded) The investments in Union Paper, Taiwan Genome Sciences and Quan Hwa Venture Capital were accounted for by the equity method since the combined equity interest of the Company and its subsidiaries in these companies exceeded 20% of their outstanding common stock. The investment in E Ink Holdings Inc. was accounted for by the equity method since the Company had significant influence over E Ink Holdings Inc. even if the Company held less than 20% of the investee s voting shares. Except for YFY Operation Management Consulting, Eihoyo Shoji, and Han Tang Management Services, investments accounted for using the equity method were calculated based on the audited financial statements. Management believes there is no material impact from the financial statements of investees that have been audited. The Company s paper and cardboard business unit s assets, liabilities and operation were spin-off to Chung Hwa Pulp (CHPC) and acquire the shares issued by CHPC on October 1, After this transaction, CHPC became a subsidiary of the Company (please refer to Note 1). In 2009, the Company increased its investment in E Ink Holdings Inc. by buying 20,000 privately placed common shares of E Ink Holdings Inc. for $200,000. Under related regulations, privately placed common shares should not be transferred within three years since the date of acquisition. The other rights and obligations are the same as those of common stocks. The privately placed common shares acquired in 2009 were tradable in Jane, Based on the closing prices of December 31, 2012 and

20 2011, the market values of investments in publicly traded stocks accounted for by the equity method, i.e., except that of E Ink Holdings Inc. s privately placed common shares, were $2,513,425 and $3,692,180, respectively, and those of the investment in Chung Hwa Pulp Corporation s shares were $7,100,384 and $500,268, respectively. All of the subsidiaries financial statements were included in the 2012 and 2011 consolidated financial statements. 8. PROPERTIES December Revaluation increment Land $ 527,218 $ 2,077,851 Buildings and improvements 13,260 47,057 Machinery and equipment 3,117 48,527 Power-generating equipment 1,342 12,902 Tools - 47 Miscellaneous equipment 1,038 2,491 $ 545,975 $ 2,188,875 Accumulated depreciation Buildings and improvements $ 139,097 $ 1,453,634 Machinery and equipment 145,753 9,315,273 Power-generating equipment 24,147 1,252,996 Tools 150,143 1,102,142 Miscellaneous equipment 57, ,878 $ 516,762 $ 13,492,923 The Company revalued its properties in accordance with government regulations as follows: Land - in 1975, 2005, 2007 and 2011; and other properties such as buildings and improvements, machinery and equipment, power-generating equipment, tools, and miscellaneous equipment - in 1973, 1975 and Information on capitalized interest is as follows: Year Ended December Capitalized interest $ 580 $ 618 Capitalization rates 1.47%-1.54% 0.88%-1.52%

21 9. PROPERTIES FOR LEASE, NET December Cost Land $ 822,955 $ 768,381 Buildings and improvements 79,834 92,759 Power-generating equipment Miscellaneous equipment - 4, , ,450 Accumulated depreciation Buildings and improvements 52,003 61,889 Power-generating equipment Miscellaneous equipment - 4,076 52,003 66,191 $ 850,786 $ 799, NONOPERATING PROPERTIES, NET December Cost Land $ 988,930 $ 1,043,517 Buildings and improvements 51,416 58,523 Machinery and equipment - 75,200 Miscellaneous equipment - 8,200 1,040,346 1,185,440 Accumulated depreciation Buildings and improvements 40,975 46,808 Machinery and equipment - 74,249 Miscellaneous equipment - 8,200 40, ,257 $ 999,371 $ 1,056, SHORT-TERM BANK LOANS Short-term bank loans were letter of credit loans and bank credit loans. As of December 31, 2012 and 2011, letter of credit loans were totaling US$16,618 and US$18,143, respectively, with interest rates at 1.15% to 1.21% and 1.12% to 1.53%, respectively. As of December 31, 2012, the interest rate of bank credit loans was 1.08% to 1.40%. 12. SHORT-TERM BILLS PAYABLE Short-term bills payable are commercial papers due within one year. Interest rates was 1.038%-1.088%

22 13. LONG-TERM DEBTS Current Long-term Total December 31, 2012 Secured bonds payable $ - $ 2,497,807 $ 2,497,807 Long-term bank loans 1,440,000 6,935,000 8,375,000 December 31, 2011 $ 1,440,000 $ 9,432,807 $ 10,872,807 Secured bonds payable $ - $ 2,496,927 $ 2,496,927 Long-term bank loans 960,000 9,620,000 10,580,000 $ 960,000 $ 12,116,927 $ 13,076,927 Long-term bank loans included credit, secured and syndicated loans. Secured and credit loans are repayable in one lump-sum payment, with the latest payment due in December Interests on these loans were 1.09% to 1.69% and 1.00% to 1.50% as of December 31, 2012 and 2011, respectively; syndicated loan are repayable at a certain percentage from April 2011 to June Interest is payable monthly, with the discount rate as of December 31, 2012 between 1.55% and 1.62% and December 31, 2011 between 1.52% and 1.59%. The Company issued five-year secured bonds amounting to $2,500,000 in June 2010, with principal repayment at 50 percent each on the fourth and fifth years of the issue date. Interest is payable yearly, at a fixed rate of 1.4%. 14. STOCKHOLDERS EQUITY Under the related law, capital surplus may be used to offset a deficit. The capital surplus from shares issued in excess of par (including share premium from issuance of common shares for merger and treasury share transactions) may be capitalized within a certain percentage of the Company s paid-in capital. The foregoing capital surplus may also be distributed in cash. Capital surplus from long-term investments may not be used for any purpose. The Company s Articles of Incorporation provide that annual net income, less any prior years deficit, should be appropriated as follows: a. 10% as legal reserve; b. A portion as special reserve, if needed; c. Dividends, less than 1%; d. No more than 2% as remuneration to directors and supervisors; and no less than 1% as bonus to employees; and e. The remainder to be distributed to the stockholders