Shih Wei Navigation Co., Ltd. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors Report
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED 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) $ 996,065 3 $ 1,981,114 8 Short-term bank loans (Notes 10 and 19) $ 295,555 1 $ 557,745 2 Financial assets at fair value through profit or loss - current Notes and accounts payable 168,561 1 131,185 1 (Notes 2 and 5) 156,929 1 89,650 - Income tax payable (Notes 2 and 15) 37,959-132,145 1 Held-to-maturity financial assets - current (Notes 2 and 6) - - 15,138 - Accrued expenses 138,775-123,593 1 Accounts receivable (Note 2) 29,360-20,022 - Financial liabilities at fair value through profit or loss - Inventories (Note 2) 258,086 1 163,659 1 current (Notes 2 and 5) 30,440-159,020 1 Noncurrent assets classified as held for sale (Notes 2 and 8) 16,103-848,813 3 Receipts in advance (Note 8) 67,355-352,370 1 Restricted assets - current (Notes 10 and 19) - - 623,514 3 Current portion of convertible bonds payable (Notes 2, 5 and 11) 429,738 2 - - Other current assets (Notes 15 and 18) 258,585 1 223,398 1 Current portion of long-term bank loans (Notes 12 and 19) 2,166,922 8 1,579,131 6 Other current liabilities (Notes 2 and 15) 257,529 1 50,821 - Total current assets 1,715,128 6 3,965,308 16 Total current liabilities 3,592,834 13 3,086,010 13 INVESTMENTS Financial assets carried at cost - noncurrent (Notes 2 and 7) 28,388-28,421 - LONG-TERM LIABILITIES Financial liabilities at fair value through profit or loss - PROPERTY AND EQUIPMENT (Notes 2, 9, 12, 19 and 20) noncurrent (Notes 2, 5 and 11) - - 26,730 - Cost Convertible bonds payable (Notes 2, 5 and 11) - - 420,118 2 Land 579,422 2 79,937 1 Long-term bank loans (Notes 12 and 19) 17,689,532 61 12,874,898 52 Buildings 30,906-30,906 - Transportation equipment 1,160-1,160 - Total long-term liabilities 17,689,532 61 13,321,746 54 Vessel equipment 30,158,043 104 21,559,860 88 Office equipment 2,602-2,522 - OTHER LIABILITIES Leasehold improvements - - 5,675 - Accrued pension cost (Notes 2 and 13) 13,521-14,458 - Total cost 30,772,133 106 21,680,060 89 Guarantee deposits received 288-297 - Less: Accumulated depreciation 4,944,825 17 3,969,149 16 Deferred income tax liabilities - noncurrent (Notes 2 and 15) 79,596-129,577 1 25,827,308 89 17,710,911 73 Prepayments for equipment 324,478 1 2,058,910 8 Total other liabilities 93,405-144,332 1 Net property and equipment 26,151,786 90 19,769,821 81 Total liabilities 21,375,771 74 16,552,088 68 OTHER ASSETS STOCKHOLDERS' EQUITY Refundable deposits - noncurrent 38,571-32,071 - Capital stock - par value NT$10.00, authorized - 500,000 thousand Deferred charges (Note 2) 105,595 1 78,578 1 shares; issued and outstanding 366,350 thousand shares 3,663,500 13 3,663,500 15 Restricted assets - noncurrent (Notes 12 and 19) 921,455 3 556,856 2 Capital surplus Additional paid-in capital from share issuance in excess of par 689,413 3 689,413 3 Total other assets 1,065,621 4 667,505 3 Convertible bonds converted at a price in excess of the common stock's par value 371,904 1 371,904 2 Equity component of convertible bonds 42,864-42,864 - Others 7,123-7,123 - Total capital surplus 1,111,304 4 1,111,304 5 Retained earnings Legal reserve 1,356,253 5 1,265,404 5 Special reserve 667,497 2 1,017,521 4 Unappropriated earnings 1,855,463 6 1,488,735 6 Total retained earnings 3,879,213 13 3,771,660 15 Other equity Cumulative translation adjustments (1,061,045) (4) (659,789) (3) Net loss not recognized as pension cost (7,820) - (7,708) - Total other equity (1,068,865) (4) (667,497) (3) Total stockholders' equity 7,585,152 26 7,878,967 32 TOTAL $ 28,960,923 100 $ 24,431,055 100 TOTAL $ 28,960,923 100 $ 24,431,055 100 The accompanying notes are an integral part of the consolidated financial statements. - 2 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED 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 2 and 18) $ 4,045,636 100 $ 4,061,861 100 OPERATING COSTS (Notes 16 and 18) 3,618,581 89 2,640,639 65 GROSS PROFIT 427,055 11 1,421,222 35 OPERATING EXPENSES (Notes 14, 16 and 18) 200,622 5 188,310 5 OPERATING INCOME 226,433 6 1,232,912 30 NONOPERATING INCOME AND GAINS Interest income 15,979-24,368 1 Dividend income 198-12,846 - Gain on disposal of property and equipment (Notes 2 and 8) 212,533 5 133,359 3 Gain on sale of investments, net (Notes 2, 5 and 7) 419-52,014 1 Exchange gains, net (Notes 2 and 5) 283,093 7 - - Gain on valuation of financial assets, net (Notes 2 and 5) 9,749-16,406 1 Gain on valuation of financial liabilities, net (Notes 2 and 5) 62,059 2 - - Miscellaneous income (Note 18) 200,930 5 91,251 2 Total nonoperating income and gains 784,960 19 330,244 8 NONOPERATING EXPENSES AND LOSSES Interest expense (Notes 2, 9, 10, 11 and 12) 226,952 6 163,739 4 Loss on disposal of property and equipment (Notes 2 and 8) 27,365 1 - - Exchange loss, net (Notes 2 and 5) - - 229,826 6 Loss on valuation of financial liabilities, net (Notes 2 and 5) - - 60,663 1 Miscellaneous expense 6,118-7,006 - Total nonoperating expenses and losses 260,435 7 461,234 11 INCOME BEFORE INCOME TAX 750,958 18 1,101,922 27 INCOME TAX (Notes 2 and 15) 93,880 2 193,427 5 CONSOLIDATED NET INCOME $ 657,078 16 $ 908,495 22 ATTRIBUTABLE TO: (Continued) - 3 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % Stockholders of the parent $ 657,078 16 $ 908,495 22 Minority interest - - - - $ 657,078 16 $ 908,495 22 Before Income Tax After Before Income Income Tax Tax After Income Tax EARNINGS PER SHARE (Note 17) Basic $ 2.05 $ 1.79 $ 3.01 $ 2.48 Diluted $ 2.01 $ 1.76 $ 2.98 $ 2.47 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) - 4 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Cash and Stock Dividends Per Share) Capital Stock Issued and Other Equity (Notes 2, 13 and 14) Outstanding (Note 14) Capital Surplus Retained Earnings (Note 14) Cumulative Net Loss Not Total Shares (Notes 2, 11 Unappropriated Translation Recognized as Stockholders' (Thousands) Amount and 14) Legal Reserve Special Reserve Earnings Adjustments Pension Cost Equity BALANCE, JANUARY 1, 2011 366,350 $ 3,663,500 $ 1,111,304 $ 1,151,902 $ 70,431 $ 2,739,882 $ (1,011,559) $ (5,962) $ 7,719,498 Appropriation of the 2010 earnings Legal reserve - - - 113,502 - (113,502) - - - Special reserve - - - - 947,090 (947,090) - - - Cash dividends - $3 per share - - - - - (1,099,050) - - (1,099,050) Consolidated net income for the year ended December 31, 2011 - - - - - 908,495 - - 908,495 Translation adjustments on long-term equity method investments - - - - - - 351,770-351,770 Change in net loss not recognized as pension cost - - - - - - - (1,746) (1,746) BALANCE, DECEMBER 31, 2011 366,350 3,663,500 1,111,304 1,265,404 1,017,521 1,488,735 (659,789) (7,708) 7,878,967 Appropriation of the 2011 earnings Legal reserve - - - 90,849 - (90,849) - - - Special reserve - - - - (350,024) 350,024 - - - Cash dividends - $1.5 per share - - - - - (549,525) - - (549,525) Consolidated net income for the year ended December 31, 2012 - - - - - 657,078 - - 657,078 Translation adjustments on long-term equity method investments - - - - - - (401,256) - (401,256) Change in net loss not recognized as pension cost - - - - - - - (112) (112) BALANCE, DECEMBER 31, 2012 366,350 $ 3,663,500 $ 1,111,304 $ 1,356,253 $ 667,497 $ 1,855,463 $ (1,061,045) $ (7,820) $ 7,585,152 The accompanying notes are an integral part of the consolidated financial statements. - 5 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income $ 657,078 $ 908,495 Adjustments to reconcile consolidated net income to net cash provided by operating activities Depreciation 1,170,088 899,387 Amortization 89,920 61,737 Amortization of deferred charges classified as interest expense 3,750 2,250 Gain on disposal of property and equipment, net (185,168) (133,359) Gain on sale of investments, net (419) (52,014) Deferred income tax (53,980) (25,577) Loss (gain) on valuation of financial assets, net (7,375) 2,261 Loss (gain) on valuation of financial liabilities, net (153,356) 62,498 Amortization of discounts on convertible bonds payable 9,620 9,405 Net changes in operating assets and liabilities Financial assets at fair value through profit or loss (63,506) 42,318 Accounts receivable (10,341) 196 Inventories (102,691) (70,576) Other current assets (107,342) (14,388) Notes and accounts payable 39,177 62,934 Income tax payable (94,186) 106,995 Accrued expenses 18,513 10,628 Other current liabilities (23,548) 32,112 Accrued pension cost (1,049) (1,065) Receipts in advance (26,845) (11,457) Net cash provided by operating activities 1,158,340 1,892,780 CASH FLOWS FROM INVESTING ACTIVITIES Increase in advance real estate receipts 573,405 57,947 Increase in deferred marketing expenses (29,199) - Proceeds of the disposal of financial assets carried at cost - 70,607 Proceed of the disposal of held-to-maturity financial assets 14,787 - Acquisition of investment accounted for by the equity method (99,956) - Acquisition of property and equipment (7,956,960) (4,524,764) Proceeds of the disposal of property and equipment, and deferred charges 263,966 293,910 Decrease (increase) in refundable deposits (6,500) 400 Increase in deferred charges (123,675) (44,868) Decrease in restricted assets 226,908 222,848 Net cash used in investing activities (7,137,224) (3,923,920) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term bank loans (247,503) (628,035) Increase in long-term bank loans 5,822,584 3,183,181 (Continued) - 6 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) Decrease in guarantee deposits received (4) (44,910) Cash dividends (549,525) (1,099,050) Net cash provided by financing activities 5,025,552 1,411,186 EFFECT OF EXCHANGE RATE CHANGES (31,717) 52,365 NET DECREASE IN CASH (985,049) (567,589) CASH, BEGINNING OF YEAR 1,981,114 2,548,703 CASH, END OF YEAR $ 996,065 $ 1,981,114 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid (excluding capitalized interest) $ 209,315 $ 141,409 Income tax paid $ 242,046 $ 112,009 NONCASH INVESTING AND FINANCING ACTIVITIES Current portion of long-term bank loans $ 2,166,922 $ 1,579,131 Property and equipment reclassified to noncurrent assets classified as held for sale $ - $ 848,813 Decrease in advance real estate receipts (classified under other current liabilities) $ 828,462 $ - Decrease in noncurrent assets classified as held for sale $ 832,710 $ - Decrease in deferred marketing expenses (classified under other current assets) $ 74,550 $ - INVESTING ACTIVITIES AFFECTING BOTH CASH AND NONCASH ITEMS Acquisition of fixed assets Acquisition of property, plant and equipment $ 7,960,848 $ 4,524,764 Increase in payable for equipment purchased (classified under accounts payable) (3,888) - Cash paid $ 7,956,960 $ 4,524,764 (Continued) - 7 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) The Corporation acquired 100% equity interest in the Gueishan Island Marine Biology Development Co., Ltd. in December 2012. The fair values of the acquired assets and liabilities are summarized as follows: Cash $ 44 Other current assets 827 Property and equipment 578,053 Accrued expenses (443) Current portion of long-term bank loans (160,000) Net assets 418,481 Percentage of ownership acquired 100% 418,481 Fair value of the net identifiable assets acquired in excess of the acquisition cost (78,481) 340,000 Payable on the equity investment (240,000) Cash paid $ 100,000 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) - 8 -
SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Shih Wei Navigation Co., Ltd. (the Corporation ) was incorporated in March 1985 under the Company Act of the Republic of China. The Corporation mainly provides cargo shipping services, shipping agency, and sells and leases ships. The Corporation s shares began to be traded on the Taiwan GreTai Securities Market in July 2001 and then became listed on the Taiwan Stock Exchange in August 2003. The Corporation and its subsidiaries investment relationships and percentages of ownership as of December 31, 2012 were as follows. 四維航業股份有限公司 Shih Wei Navigation Co., Ltd. 100% 龜山島海洋生物開發股份有限公司 Gueishan Island Marine Biology Development ( 龜山島公司 Co., Ltd. (Gueishan ) Island) 100% Dong Lien Maritime S.A. Panama (Dong Lien) 100% 100% Fortunate Maritime S.A. Panama (Fortunate) Grand Ocean Navigation (Panama) S.A. Leader Pescadores S.A. Panama Elegant Pescadores S.A. (Panama) Beacon Pescadores S.A. Panama Blossom Pescadores S.A. (Panama) Well Pescadores S.A. Panama Royal Pescadores S.A. (Panama) Glaring Pescadores S.A. Panama Brave Pescadores S.A. Vigor Pescadores S.A. Panama Brilliant Pescadores S.A. Trump Pescadores S.A. Panama Shining Pescadores S.A. (Panama) Fourseas Pescadores S.A. Panama Moon Bright Shipping Corporation Fair Pescadores S.A. Panama Genius Pescadores S.A. (Panama) Huge Pescadores S.A. Panama Gallant Pescadores S.A. Forever Pescadores S.A. Panama Grand Pescadores S.A. (Panama) Eternity Pescadores S.A. Panama Jackson Steamship S.A. Federal Pescadores S.A. Panama Sunny Pescadores S.A. (Panama) Patriot Pescadores S.A. Panama Excellent Pescadores S.A. (Panama) Wise Pescadores S.A. Panama Bright Pescadores S.A. Panama Penghu Pescadores S.A. Panama Honor Pescadores S.A. Panama Modest Pescadores S.A. Panama Grand Overseas S.A. Panama Skyhigh Pescadores S.A. Panama Superior Pescadores S.A. Panama Dancewood Pescadores S.A. Panama Valor Pescadores S.A. Panama Danceflora Pescadores S.A. Panama Unicorn Brilliant S.A. Panama Stamina Pescadores S.A. Panama Poseidon Pescadores S.A. Panama Spinnaker Pescadores S.A. Panama (incorporated ( 一 一年四月成立 in April 2012) ) Pharos Pescadores S.A. Panama Endurance Pescadores S.A. Panama (incorporated ( 一 一年十一月成立 in November ) 2012) Dong Lien, Fortunate and Dong Lion s subsidiaries mainly provide cargo shipping services, serve as shipping agents, and sell, lease and build ships and their spare parts. Gueishan Island mainly provides resort hotels service. As of December 31, 2012 and 2011, the Corporation and its subsidiaries had 1,083 and 873 employees, respectively. - 9 -
2. SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. For the convenience of readers, the accompanying consolidated 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 consolidated financial statements shall prevail. However, the accompanying consolidated 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 significant accounting policies of the Corporation and its subsidiaries are summarized as follows: Basis of Consolidation The consolidated companies are the Corporation s direct or indirect subsidiaries of which the Corporation holds more than 50% of their respective common shares and all other direct or indirect investees over which the Corporation has substantive control. All significant intercompany transactions or balances were eliminated during the consolidation. The Corporation acquired 100% of the stock of Gueishan Island Marine Biology Development Co., Ltd. ( Gueishan Island ) in December 2012. Thus, Gueishan Island was included in the consolidated financial statement as of and for the year ended December 31, 2012. Foreign-currency Transactions The subsidiaries financial statements expressed in foreign currencies have been translated into New Taiwan dollars at the following exchange rates: Assets and liabilities - year-end spot rate; stockholders equity - historical exchange rate; and income statement accounts - current year s average rate. Differences resulting from the above translation are recorded as cumulative translation adjustments under the stockholders equity. 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 that are carried at cost continue to be stated at exchange rates at trade dates. Accounting Estimates Under the above guidelines and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts; allowance for loss on inventories; depreciation of property and equipment; deferred charges amortized; impairment of assets; income tax; pension cost; bonuses to employees, directors and supervisors; etc. Actual results may differ from these estimates. - 10 -
Current and Noncurrent Assets and Liabilities Current assets include cash and those 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 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. Financial Instruments 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. The Corporation and its subsidiaries recognize a financial asset or a financial liability on its balance sheet when the Corporation and its subsidiaries become parties to the contractual provisions of the financial instrument. A financial asset is derecognized when the Corporation and its subsidiaries lose control of their contractual rights over 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. 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. 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; financial assets and financial liabilities without quoted prices in an active market - at values determined using valuation techniques; and derivatives - at values calculated using bank-quoted prices. Noncurrent Assets Classified as Held for Sale Noncurrent assets that meet the held-for-sale criteria are measured at the lower of carrying amount and fair value. If the carrying amount exceeds the asset's fair value less costs to sell, an impairment loss is recognized. 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. 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. - 11 -
Impairment of Assets If the recoverable amount of an asset (mainly property and equipment 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. A reversal of an impairment loss is recognized in earnings. Inventories Inventory is vessel fuel, which is stated at the lower of cost or net realizable value. Inventory write-downs are made by item. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Borrowing costs directly attributable to the acquisition or construction of property and equipment are capitalized as part of the cost of those assets. Major additions, replacements and betterments are capitalized, while maintenance and repairs are expensed currently. Depreciation is provided on a straight-line basis over the estimated useful lives, as follows: buildings, 50 years; transportation equipment, 5 years; vessel equipment, 3 to 25 years; office equipment, 3 to 8 years; leasehold improvements, lease terms. Property and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. The related cost and accumulated depreciation of property 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. Deferred Charges Deferred charges, mainly the costs of vessel overhaul, golf club memberships and syndicated loan fees, are initially recorded at cost and amortized using the straight-line method over 2 to 3 years, over 20 years and over loan terms, respectively. Convertible Bonds The Corporation first determines the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an associated equity component, then determines the carrying amount of the equity component, representing the equity conversion option, by deducting the fair value of the liability component from the fair value of the convertible bonds as a whole. The liability component (excluding embedded derivatives) is measured at amortized cost using the effective interest method, while the embedded non-equity derivatives are measured at fair value. Upon bond conversion, the Corporation uses the aggregate carrying amount of the liability and equity components of the bonds at the time of conversion as a basis to record the common shares issued. Pension Under the defined benefit pension plan, pension cost is recognized on the basis of actuarial calculations. Unrecognized net transition obligation and the unrecognized net actuarial gain or loss are amortized using the straight-line method over the average remaining service years of employees. - 12 -
Under the defined benefit pension plan, the minimum amount of pension liability should be recognized in the balance sheet. If the accrued pension liability already shown in the book is less than the minimum amount, the difference should be recognized as additional pension liability. If the additional liability does not exceed the sum of unrecognized prior service cost and unrecognized transitional net benefit obligation, the deferred pension cost account should be charged. Deferred pension cost is classified as an intangible asset. If the additional liability exceeds this 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, the required monthly contributions to employees individual pension accounts are recognized as pension cost. Income Tax The Corporation applies the inter-year allocation method to its income tax, whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences. 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 income 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 current or noncurrent on the basis of the expected length of time before it is realized or settled. 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 stockholders approve the retention of earnings. Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts Revenue is recognized when the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. The revenues from vessel leases are recognized over the contract periods. Cargo revenues are recognized when the cargos are transported to the port of discharge. Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Corporation and its subsidiaries and the customers for service rendered 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. An allowance for doubtful accounts is provided on the basis of a review of the collectability of accounts receivable. The Corporation and its subsidiaries make this review by an aging analysis of the outstanding receivables and assessing prior years collectability of receivables and economic situation. Reclassifications Certain accounts in the financial statements as of and for the year ended December 31, 2011 have been reclassified to conform to the presentation of the financial statements as of and for the year ended December 31, 2012. - 13 -
3. ACCOUNTING CHANGE Operating Segments On January 1, 2011, the Corporation and its subsidiaries adopted the newly issued Statement of Financial Accounting Standards (SFAS) No. 41 - Operating Segments. The statement requires that segment information be disclosed on the basis of the information about the components of the Corporation 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 Corporation's chief operating decision maker in order to allocate resources to the segments and assess their performance. This statement supersedes SFAS No. 20 - Segment Reporting. For this accounting change, the Corporation and its subsidiaries only changed the presentation of segment information. 4. CASH December 31 Cash on hand $ 303 $ 142 Checking accounts and demand deposits 789,289 464,748 Time deposits 206,473 1,516,224 $ 996,065 $ 1,981,114 5. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS December 31 Financial assets held for trading - current Mutual funds $ 150,662 $ 83,376 Domestic quoted stocks 4,875 5,212 Forward exchange contracts 1,392 1,062 $ 156,929 $ 89,650 Financial liabilities held for trading - current Liability component of convertible bonds (Note 11) $ 28,980 $ - Currency option contracts 1,460 1,171 Forward exchange contracts - 157,849 $ 30,440 $ 159,020 Financial liabilities held for trading - noncurrent Liability component of convertible bonds (Note 11) $ - $ 26,730 The Corporation and its subsidiaries used forward exchange and currency option contracts in 2012 and 2011 for trading purposes. These contracts were classified as financial instruments held for trading and were measured at fair value because the hedge accounting requirement does not apply to them. - 14 -
Outstanding forward exchange contracts as of December 31, 2012 and 2011 were as follows: December 31, 2012 Contract Amount Currency Maturity Date (In Thousands) Buy Yen/USD 2013.12.30 JPY516,300/USD6,000 Buy Yen/USD 2013.12.30 JPY512,880/USD6,000 Buy Yen/USD 2013.12.30 JPY42,740/USD500 December 31, 2011 Sell Yen/USD 2012.02.02 JPY150,000/USD1,899 Buy Yen/USD 2012.10.31 JPY2,003,320/USD23,200 Buy Yen/USD 2012.10.31 JPY500,888/USD5,800 Buy Yen/USD 2013.12.30 JPY516,300/USD6,000 Buy Yen/USD 2013.12.30 JPY512,880/USD6,000 Buy Yen/USD 2013.12.30 JPY42,740/USD500 Outstanding currency option contracts as of December 31, 2012 and 2011 were as follows: December 31, 2012 Contract Amount (In Thousands) Exercise Price Maturity Date Sell USD put option USD 1,000 JPY81/USD1 2013.01.07 Sell USD call option USD 1,000 USD1.28/EUR1 2013.01.07 Sell USD put option USD 1,000 JPY80.8/USD1 2013.01.09 Sell USD call option USD 1,000 JPY86.25/USD1 2013.01.16 Sell JPY call option JPY 300,000 JPY83/USD1 2013.01.21 Sell USD call option USD 1,000 USD1.025/AUD1 2013.01.22 Sell USD put option USD 2,000 JPY83.15/USD1 2013.01.24 Sell USD put option USD 1,500 JPY83.15/USD1 2013.01.24 Sell JPY call option JPY 63,000 JPY80.5/USD1 2013.02.06 Sell JPY call option JPY 81,000 JPY81/USD1 2013.02.18 Sell USD put option USD 1,000 JPY81/USD1 2013.02.18 December 31, 2011 Sell USD call option USD 1,000 NTD30.6/USD1 2012.01.13 Sell USD put option USD 1,000 NTD30/USD1 2012.01.13 Sell USD call option USD 1,000 JPY79.5/USD1 2012.01.17 Sell USD call option USD 1,000 NTD30.7/USD1 2012.01.19 Sell USD call option USD 1,000 USD1.28/EUR1 2012.01.19 Sell USD put option USD 1,000 NTD29.95/USD1 2012.01.30 Sell USD put option USD 1,000 NTD29.95/USD1 2012.01.30 Sell USD put option USD 1,000 NTD29.95/USD1 2012.01.30 Sell USD call option USD 2,000 NTD30.7/USD1 2012.01.30 Sell USD put option USD 1,500 JPY77.2/USD1 2012.01.30 Net gains on financial assets held for trading were $10,168 thousand in 2012 and $17,568 thousand in 2011, respectively. Net gains and net losses on financial liabilities held for trading were $66,352 thousand in 2012 and $61,683 thousand in 2011, respectively. - 15 -
6. HELD-TO-MATURITY FINANCIAL ASSETS December 31 Bond investments - Deutsche Bank Aktiengesellschaft $ - $ 15,138 The Corporation and its subsidiaries bought three-year corporate bonds issued by Deutsche Bank Aktiengesellschaft, with face values of US$500 thousand on June 4, 2009 and a coupon interest rate of 3%. Interest is calculated annually. The principal is fully repayable on the maturity date. 7. FINANCIAL ASSETS CARRIED AT COST December 31 Domestic unlisted common stocks Lustrous Technology Ltd. $ 10,888 $ 10,888 Overseas unlisted common stocks K/S Danred I (investment cost: US$519 thousand) 16,721 16,721 Lando Co., Ltd. (investment cost: 3,000 thousand) 779 812 $ 28,388 $ 28,421 The above equity investments, which had no quoted prices in an active market and of which fair values could not be reliably measured, were carried at cost. 8. NONCURRENT ASSETS CLASSIFIED AS HELD FOR SALE December 31 Land and building in the Chang-an section in Taipei City $ 16,103 $ 848,813 The Corporation entered into a joint construction contract with Wang Tai Construction Co., Ltd. ( Wang Tai ) on February 12, 2009. Under the contract, the Corporation provided land in the Chang-an section in Taipei City and Wang Tai provided the construction fund. After the completion of the construction, the Corporation and Wang Tai will own 61 percent and 39 percent of the entire land and building, respectively. Based on the joint construction contract, the land, the buildings and the buildings under construction, the financing fund, the proceeds of the sales of land and buildings, and the related interest income should be entrusted to Mega International Commercial Bank Co., Ltd. As of September 30, 2011, the land was classified as held for sale because the project was expected to be completed and sold within one year. In January 2012, the real estate title to the project was transferred, and the Corporation acquired the buildings ownership under the contract. The fair value of transferred-in assets, buildings, amounted to $320,304 thousand and the cost of transferred-out assets, land, amounted to $347,669 thousand. The loss of $27,365 thousand was recognized from the exchange of assets. - 16 -
In 2009, the Corporation entered into presale contracts with third parties and related parties for the third and higher floors of the buildings. The related land rights of the above joint construction project amounted to $1,567,550 thousand, including related-party transactions amounting to $135,800 thousand with Lan Jun-De, Lin Hui-Ling and Chen Huo-Tsai. Proceeds of the presales of the residential buildings (and related land rights) were split between the Corporation and Wang Tai at a ratio of 55.65% to 44.35%, and those from the presales of the parking spaces (and related land rights) were split at a ratio of 52.44% to 47.56%. As of December 31, 2011, the Corporation had collected $255,057 thousand of the proceeds of the project, including those from related-party transactions amounting to $26,315 thousand, which was classified as receipts in advance. In addition, the Corporation sold the first and second floors of the buildings from this project to related parties, Liang Yu Investment Co. and Chi Huan Investment Co., for $227,371 thousand. As of December 31, 2012, the real estate title to this project had been transferred to the counter-parties and the Corporation collected total proceeds of $1,092,428 thousand. The gain of $212,533 thousand on property disposal, including those from related-party transactions amounting to $69,926 thousand, is the total proceeds of the projects of $1,092,428 thousand net of (a) the carrying amounts of $805,345 thousand of the building and (b) marketing expenses and other expenses of $74,550 thousand. 9. PROPERTY AND EQUIPMENT Accumulated depreciation consisted of: December 31 Buildings $ 9,353 $ 8,267 Transportation equipment 1,080 886 Vessel equipment 4,932,676 3,953,829 Office equipment 1,716 1,309 Leasehold improvements - 4,858 Information on capitalized interest is as follows: $ 4,944,825 $ 3,969,149 Capitalized interest $ 4,169 $ 14,163 Capitalization rates 0.92%-1.944% 0.86%-1.72% 10. SHORT-TERM BANK LOANS December 31 Bank credit loans: Due in January 2013, 1.30% interest per annum in 2012 $ 200,000 $ - Bank credit loans: US$3,290 thousand, due in May 2013, 1.21% interest per annum in 2012; due in May 2012, 1.50% interest per annum in 2011 95,555 99,618 Secured bank loans: 993,000 thousand, due in January 2012, 0.87% interest per annum in 2012-387,814 Secured bank loans: US$2,322 thousand, due in February 2012, 1.42% interest per annum in 2012-70,313-17 -
U.S. certificates of deposit were used as collaterals for the above secured bank loans. $ 295,555 $ 557,745 11. CONVERTIBLE BONDS PAYABLE On January 14, 2010, the Corporation made a third issue of five-year unsecured convertible bonds, with a face value of $450,000 thousand and a coupon rate of 0%. The effective interest rate was 2.27%. On the third anniversary of issuance, the bondholders may require the Corporation to buy back their bonds at 103.03% of face value. The bondholders may request the Corporation to convert the bonds into the Corporation s common stock starting from one month after the issuance date to 10 days before the due date. The conversion price at the issuance of the bonds was set at $46.2 which is required to be adjusted in accordance with the bond agreement. The Corporation should redeem the remaining bonds at face value upon maturity. During the period from one month after the issuance date to 40 days before the due date, if the closing price of the Corporation s common stock at the Taiwan Stock Exchange reaches 130% of the conversion price for a period of 30 consecutive trading days, or the total amount of outstanding bonds is less than 10% of the total issued amount, the Corporation may redeem the remaining bonds at a price calculated using a predetermined formula. The Corporation had adjusted the conversion price for the capital increase by cash in accordance with bond conversion terms. As of December 31, 2012, the adjusted conversion price was $36.48. As of December 31, 2012, bondholders did not exercise convertible rights and the Corporation did not redeem any outstanding convertible bonds. Convertible bond information based on Statement of Financial Accounting Standards No. 36 - Financial Instruments: Disclosure and Presentation is as follows: December 31 Face value of convertible bonds $ 450,000 $ 450,000 Liability component (1,800) (1,800) Equity component (42,864) (42,864) 405,336 405,336 Transaction costs (3,500) (3,500) Carrying amount of convertible bonds payable 401,836 401,836 Amortized bond discount 27,902 18,282 Convertible bonds payable 429,738 420,118 Less: Current portion of convertible bonds payable (429,738) - $ - $ 420,118-18 -
12. LONG-TERM BANK LOANS December 31 a. Eight-year secured bank loans: US$526,730 thousand and 1,650,942 thousand in 2012 and US$228,618 thousand and 8,149,857 thousand in 2011, with interest rate from 0.80% to 2.06% and from 0.86% to 2.01%, respectively; repayable in 32 quarterly installments between August 2011 and November 2020 $ 15,851,575 $ 10,104,315 b. Three-year secured bank loans: Interest rate from 1.25% to 1.44% in 2012 and from 1.25% to 1.45% in 2011, respectively; the credit period revolved until August and October in 2014, one-time repayment in every end of credit period 700,000 200,000 c. Eighteen-month credit bank loans: Interest rate of 1.538%; one-time repayment in June 2014 600,000 - d. Three-year credit bank loans: Interest rate from 1.30% to 1.35%; one-time repayment in March 2015 400,000 - e. Ten-year secured bank loans: US$10,920 thousand in 2012 and US$11,990 thousand in 2011, with interest rate of 1.06% and 1.12%, respectively; repayable in 40 quarterly installments until December 2018 317,117 362,997 f. Three-year credit bank loans: Interest rate from 1.681% to 1.687%; repayable in monthly installments after 12 months from the drawdown date until August 2015 300,000 - g. Two-year credit bank loans: Interest rate from 1.04% to 1.08% in 2012 and from 0.95% to 1.10% in 2011, respectively; originally due in February 2013, with maturity extend to February 2014, with one-time repayment 250,000 250,000 h. Three-year secured bank loans: US$8,000 thousand in 2012, with interest rate from 0.82% to 0.84%; one-time repayment in November 2015 232,320 - i. Seven-year secured bank loans: US$7,583 thousand in 2012 and US$13,972 thousand in 2011, with interest rate from 1.095% to 1.712% and from 1.51% to 1.71%, respectively; repayable in 28 quarterly installments until June 2018 220,220 423,006 j. Three-year secured bank loans: Interest rate of 1.72%; repayable in 36 monthly installments until July 2015 187,198 - k. Eighteen-month credit bank loans: US$6,410 thousand, with interest rate from 1.355% to 1.498%; one-time repayment in January 2014 186,154 - l. Four-year secured bank loans: Interest rate of 2.805%; one-time repayment in September 2013 160,000 - m. Five-year secured bank loans: US$4,690 thousand in 2012 and US$5,530 thousand in 2011, with interest rate of 1.012% and 1.20% respectively; repayable in 20 quarterly installments until February 2015 136,198 167,421 n. Three-year secured bank loans: US$3,300 thousand, with interest rate of 1.03%; one-time repayment in November 2014 95,832 - o. Three-year secured bank loans: Interest rate of 1.5% in 2012 and from 1.20% to 1.50% in 2011; repayable in 36 monthly installments until December 2014 80,408 115,000 p. Two-year credit bank loans: Interest rate from 1.30% to 1.40%; one-time repayment in August 2013 80,000 80,000 (Continued) - 19 -
December 31 q. Three-year credit bank loans: Interest rate of 1.50% in 2012 and from 1.20% to 1.50% in 2011, respectively; repayable in 36 monthly installments until December 2014 $ 59,432 $ 85,000 r. Syndicated bank loan: Interest rate from 1.606% to 1.633% in 2012 and 1.359% to 1.693% in 2011-1,080,000 s. Eighteen-month credit bank loans: Interest rates of 1.13% in 2012 and 2011; one-time repayment in June 2013; early repayment was made in June 2012-600,000 t. Secured bank loans: US$10,663 thousand and 390,000 thousand, with interest from 1.00% to 1.51%; repayable in 32 quarterly installments from the date on which the final loan drawdown is made - 475,124 u. Three-year credit bank loans: Interest rate of 1.50% in 2012 and from 1.35% to 1.50% in 2011, respectively; the credit period originally due in December 2014, with one-time repayment; early repayment was made in March 2012-300,000 v. Four-year and seven-month secured bank loans: Interest rate from 1.50% to 1.72%; repayable in 19 quarterly installments and repay $120,000 thousand in last time until August 2015; early repayment was made in February 2012-211,166 Less: Current portion (2,166,922) (1,579,131) $ 17,689,532 $ 12,874,898 (Concluded) In July 2010, the Corporation entered into a syndicated secured facility agreement with Industrial Bank of Taiwan and seven other banks for loan (r), as follows: a. The credit line is $1.8 billion and the first loan drawdown should not be less than 60% of the credit line. The first repayment is due on the 18th month from the first loan drawdown date. The credit line will subsequently be decreased to zero over four periods semiannually. If the credit line drawdown exceeds the available credit line on the date the credit line is decreased, the Corporation should repay this excess immediately. b. The credit period is three years from the first loan drawdown date. c. Dong Lien Maritime S.A. Panama ( Dong Lien ) used its U.S. certificate of deposit as a collateral for a syndicated loan. Under the syndicated loan agreement, the Corporation directly own 100% of Dong Lien and Fortunate Maritime S.A. Panama ( Fortunate ). In addition, the Corporation should have the power to participate in the operating policy decisions of Dong Lien and Fortunate. Further, Dong Lien should directly own 100% of the 42 subsidiaries listed on the loan agreement. d. The Corporation should maintain the following financial ratios under the syndicated loan agreement: 1) Current ratio - the ratio of current assets to current liabilities should not be less than 100%; 2) Financial liabilities ratio - the ratio of financial liabilities plus contingent liabilities to tangible net assets should not exceed 200%; 3) Interest coverage ratio - the ratio of income before taxes, interest expense, depreciation and amortization to interest expense should not be less than 400%; and - 20 -
4) Tangible net assets (equities minus intangible assets) should not be less $6.5 billion. The above ratios should be calculated on the basis of the audited semiannual and annual consolidated financial statements accepted by the bank s documentary agent. However, the Corporation failed to meet the current ratio and the financial liability ratio specified in the syndicated loan agreement on June 30, 2012. As of June 30, 2011, the Corporation reclassified the syndicated loans over one year from the balance sheet date of NT$1,080,000 thousand to current portion of long-term bank loans. In September 2011, two thirds of the banking syndicate agreed to waive the examination of the required ratios as shown in the audited consolidated financial statements for the six months ended June 30, 2011. Early repayment of the syndicated bank loan was made in June 2012. New Taiwan dollar demand deposits and U.S. certificate of deposit were used as collaterals for the above loan (b); U.S. certificate of deposit for loan (h) and (n); land for loan (l); land and building for loan (o); and vessel equipment, for other secured bank loans. 13. PENSION PLANS The pension plan adopted by the Corporation under the Labor Pension Act (LPA) is a defined contribution plan. Under the LPA, the Corporation makes monthly contributions to employees individual pension accounts at 6% of monthly salaries and wages. Related pension costs were $3,942 thousand in 2012 and $3,503 thousand in 2011. Based on the defined benefit plan adopted by the Corporation under the Labor Standards Law, pension payments are calculated on the basis of the length of service and average basic pay of the six months before retirement. The employee earns two base units each year for the first 15 years of service, and one base unit for each additional year thereafter, but not more than 45 base units in total. The Corporation contributes amounts equal to 4.3% of total monthly salaries and wages to a pension fund administered by the pension fund monitoring committee. The pension fund is deposited in the Bank of Taiwan in the committee s name. Other information on the defined benefit plan of the Corporation is as follows: a. Changes in the pension funds: Balance, beginning of year $ 12,153 $ 10,045 Contributions 2,152 1,980 Interest income 127 128 Balance, end of year $ 14,432 $ 12,153 b. Components of net periodic pension cost Interest cost $ 602 $ 604 Projected return on plan assets (243) (226) Amortization 743 537 Net periodic pension cost $ 1,102 $ 915-21 -
c. Reconciliation of funded status of the plan and accrued pension cost as of December 31, 2012 and 2011 December 31 Benefit obligation Vested benefit obligation $ 16,417 $ 15,956 Non-vested benefit obligation 11,536 10,655 Accumulated benefit obligation 27,953 26,611 Additional benefit based on future salaries 3,497 3,482 Projected benefit obligation 31,450 30,093 Fair value of plan assets (14,432) (12,153) Funded status 17,018 17,940 Unrecognized net loss (11,317) (11,190) Additional liability 7,820 7,708 Accrued pension cost $ 13,521 $ 14,458 Vested benefit $ 16,417 $ 15,956 d. Actuarial assumptions as of December 31, 2012 and 2011 December 31 Discount rate used in determining present values 1.75% 2.00% Future salary increase rate 2.00% 2.00% Expected rate of return on plan assets 1.75% 2.00% 14. STOCKHOLDERS EQUITY Under the Company Law, the capital surplus from shares issued in excess of par (additional paid-in capital from issuance of common shares and conversion of bonds) may be used to offset a deficit; in addition, when the Corporation has no deficit, such capital surplus may be distributed as cash dividends or transferred to capital (limited to a certain percentage of the Corporation s paid-in capital and once a year). The capital surplus from employee stock options may not be used for any purpose. According to the Corporation s Articles of Incorporation, the legal reserve should be set aside at 10% of annual income less any deficit. Under Company Law, after a special reserve is appropriated or reversed, the remainder of income adding prior accumulated unappropriated retained earnings should be distributed at not less than 2% of employees bonus and at not higher than 5% of remuneration to directors and supervisors. And the above distributions should be approved by the board of directors at stockholders meeting. The Corporation s dividend policy is based on the prudence principle, under which the Corporation considers the long-term financing structure and operation. Thus, when earnings and funds become sufficient for operating and expanding, then cash dividends or stock dividends will be distributed. The most recent dividend policy provides for the distribution of stock dividends at up to 50% of earnings and cash dividends of at least 50%. - 22 -