Chroma Ate Inc. Financial Statements for the Three Months Ended March 31, 2012 and 2011 and Independent Accountants Review Report
INDEPENDENT ACCOUNTANTS REVIEW REPORT The Board of Directors and Shareholders Chroma Ate Inc. We have reviewed the accompanying balance sheets of Chroma Ate Inc. (the Corporation ) as of March 31, 2012 and 2011, and the related statements of income and cash flows for the three months then ended. These financial statements are the responsibility of the Corporation s management. Our responsibility is to issue a report based on our reviews. Except as stated in the following paragraph, we conducted our reviews in accordance with Statement of Auditing Standards No. 36 - Review of Financial Statements of the Republic of China. A review consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the Republic of China, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As stated in Note 10 to the financial statements, the investments accounted for by the as of March 31, 2012 and 2011 amounted to NT$2,927,505 thousand and NT$2,744,743 thousand, respectively, and the investment gains for the three months ended March 31, 2012 and 2011 were NT$17,420 thousand and NT$33,125 thousand, respectively. These investment amounts and the related information of the investees in Note 23 to the nonconsolidated financial statements were based on unreviewed financial statements. Based on our reviews, except for the effects of any adjustments that might have been made had the financial statements of the investees mentioned in the preceding paragraph been reviewed, we are not aware of any material modifications that should be made to the nonconsolidated financial statements as of and for the three months ended March 31, 2012 and 2011 of Chroma Ate Inc. referred to in the first paragraph for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. April 24, 2012 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 review such nonconsolidated financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the accountants review 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 accountants review report and financial statements shall prevail. - 1 -
CHROMA ATE INC. BALANCE SHEETS MARCH 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Par Value) (Reviewed, Not Audited) ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash (Note 4) $ 234,685 2 $ 431,698 4 Short-term bills payable (Note 12) $ 100,000 1 $ - - Financial assets at fair value through profit or loss - current Notes payable 985-4,151 - (Notes 2 and 5) - - 506,171 5 Accounts payable - third parties 434,469 5 687,990 7 Available-for-sale financial assets - current (Notes 2 and 8) 260,146 3 - - Accounts payable - related parties (Note 18) 47,380 1 54,111 1 Notes receivable - third parties (Notes 2 and 3) 26,122-8,179 - Income tax payable (Notes 2 and 14) 134,205 1 121,566 1 Note receivable - related parties (Notes 2, 3 and 18) 4,266 - - - Accrued expenses (Note 13) 420,690 4 512,393 5 Accounts receivable, net - third parties (Notes 2, 3 and 6) 563,600 6 825,670 8 Other payables 90-112,403 1 Accounts receivable - related parties (Notes 2, 3 and 18) 1,068,257 11 955,138 10 Receipts in advance 303,269 3 143,035 2 Other receivable - related parties (Note 18) 189,444 2 81,219 1 Other current liabilities (Note 2) 14,060-21,548 - Inventories, net (Notes 2 and 7) 1,362,355 14 1,511,140 15 Prepayments (Note 18) 31,270-143,930 2 Total current liabilities 1,455,148 15 1,657,197 17 Deferred income tax assets - current (Notes 2 and 14) 38,253-31,213 - Other current assets (Notes 2, 5 and 18) 59,882 1 37,155 - OTHER LIABILITIES Accrued pension costs (Notes 2 and 16) 78,502 1 69,833 1 Total current assets 3,838,280 39 4,531,513 45 Guarantee deposits received 1,499-2,016 - Deferred income tax liabilities - noncurrent (Notes 2 and 14) 56,673-45,666 - LONG-TERM INVESTMENTS Deferred credits - unrealized intercompany gain (Note 2) 302,946 3 227,327 2 Available for sale financial assets - noncurrent (Notes 2 and 8) 331,115 4 307,964 3 Financial assets carried at cost - noncurrent (Notes 2 and 9) 133,757 1 138,038 1 Total other liabilities 439,620 4 344,842 3 Investments accounted for by the (Notes 2 and 10) 2,927,505 30 2,744,743 28 Prepayments for investment (Note 10) 22,590 - - - Total liabilities 1,894,768 19 2,002,039 20 Total long-term investments 3,414,967 35 3,190,745 32 SHAREHOLDERS EQUITY (Notes 2 and 13) Capital stock - NT$10.00 par value PROPERTY, PLANT AND EQUIPMENT (Notes 2, 11 and 19) Authorized: 450,000 thousand shares in 2012 and 2011 Cost Issued and outstanding: 376,760 thousand shares in 2012 and Land 425,071 4 425,071 4 362,269 thousand shares in 2011 3,767,599 38 3,622,691 36 Buildings 1,920,795 20 1,882,426 19 Capital surplus 925,158 10 918,122 9 Machinery and equipment 209,755 2 182,130 2 Retained earnings Miscellaneous equipment 716,468 7 675,629 7 Legal reserve 1,102,019 11 920,859 9 Total cost 3,272,089 33 3,165,256 32 Unappropriated earnings 1,938,206 20 2,349,806 24 Less: Accumulated depreciation 1,234,445 12 1,133,388 11 Other adjustment of shareholders' equity 2,037,644 21 2,031,868 21 Cumulative translation adjustments 57,828-9,463 - Prepayments for equipment 3,898-7,168 - Unrealized gain on financial instruments 202,424 2 179,126 2 Treasury stock - 1,926 thousand shares in 2012 and 1,852 thousand Net property, plant and equipment 2,041,542 21 2,039,036 21 shares in 2011 (30,238) - (30,238) - INTANGIBLE ASSETS (Notes 2, 10 and 16) 125,966 1 172,373 2 Total shareholders' equity 7,962,996 81 7,969,829 80 OTHER ASSETS Refundable deposits 358,680 3 8,905 - Deferred charges, net (Note 2) 68,767 1 20,082 - Other 9,562-9,214 - Total other assets 437,009 4 38,201 - TOTAL $ 9,857,764 100 $ 9,971,868 100 TOTAL $ 9,857,764 100 $ 9,971,868 100 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche review report dated April 24, 2012) - 2 -
CHROMA ATE INC. STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) Amount % Amount % OPERATING REVENUES $ 875,845 100 $ 1,467,224 100 LESS: SALES RETURNS 725-2,388 - SALES ALLOWANCES 7-149 - NET OPERATING REVENUES (Notes 2 and 18) 875,113 100 1,464,687 100 OPERATING COSTS (Notes 7, 17 and 18) 376,256 43 725,959 49 GROSS PROFIT 498,857 57 738,728 51 UNEARNED GROSS PROFIT (20,000) (2) (14,042) (1) EARNED OPERATING PROFIT 478,857 55 724,686 50 OPERATING EXPENSES (Notes 17 and 18) Selling 77,725 9 84,193 6 General administrative 92,949 11 117,571 8 Research and development 143,888 16 144,747 10 Total operating expenses 314,562 36 346,511 24 OPERATING INCOME 164,295 19 378,175 26 NONOPERATING INCOME AND GAINS Investment income recognized by the, net (Notes 2 and 10) 17,420 2 33,125 2 Rental income (Note 18) 8,731 1 9,035 1 Management service income (Note 18) 3,775-3,750 - Foreign exchange gain, net (Notes 2 and 5) - - 18,224 1 Other (Notes 2, 5 and 18) 6,648 1 1,751 - Total nonoperating income and gains 36,574 4 65,885 4 NONOPERATING EXPENSES AND LOSSES Foreign exchange loss, net (Notes 2 and 5) 12,261 1 - - Interest expenses 245-52 - Other (Note 2) 5,078 1 1,132 - Total nonoperating expenses and losses 17,584 2 1,184 - (Continued) - 3 -
CHROMA ATE INC. STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) Amount % Amount % INCOME BEFORE INCOME TAX $ 183,285 21 $ 442,876 30 INCOME TAX EXPENSE (Notes 2 and 14) 19,043 2 47,156 3 NET INCOME $ 164,242 19 $ 395,720 27 Before Income Tax After Before Income Income Tax Tax After Income Tax EARNINGS PER SHARE (IN NEW TAIWAN DOLLARS; Note 15) Basic $ 0.49 $ 0.43 $ 1.18 $ 1.06 Diluted $ 0.48 $ 0.43 $ 1.17 $ 1.05 Pro-forma information assuming the Corporation s shares held by its subsidiaries were accounted for as an investment instead of treasury stocks as follows: Before Income Tax 2011 2010 After Before Income Income Tax Tax After Income Tax INCOME $ 183,285 $ 164,242 $ 442,876 $ 395,720 BASIC EARNINGS PER SHARE (IN NEW TAIWAN DOLLARS) $ 0.49 $ 0.43 $ 1.18 $ 1.05 DILUTED EARNINGS PER SHARE (IN NEW TAIWAN DOLLARS) $ 0.48 $ 0.43 $ 1.17 $ 1.04 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche review report dated April 24, 2012) (Concluded) - 4 -
CHROMA ATE INC. STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 164,242 $ 395,720 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 36,820 26,913 Unrealized intercompany gain 20,000 14,042 Investment income recognized by the, net (17,420) (33,125) Amortization 11,744 16,202 Deferred income taxes (5,611) 11,892 Cash dividends received from investees 4,427 4,400 Loss on decline in inventory market value 4,000 6,000 Loss on disposal and retirement of property, plant and equipment, net 175 225 Gain on disposal of available-for-sale financial assets (90) - Allowance for bad debts - 5,000 Net changes in operating assets and liabilities Financial instruments held for trading - (497,216) Notes receivable (4,756) 9,479 Accounts receivable 47,654 120,348 Inventories (5,166) (151,634) Prepayments (11,900) (31,483) Other current assets (3,062) (1,265) Notes payable 925 (506) Accounts payable (16,194) 101,487 Income tax payable 22,540 35,262 Accrued expenses (39,112) 39,754 Receipts in advance 191,651 (65,494) Other current liabilities 3,219 6,827 Other payables (112,313) - Accrued pension costs (221) (107) Net cash provided by operating activities 291,552 12,721 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in refundable deposits (352,686) 72 Increase in available-for-sale financial assets (340,000) - Proceeds of the disposal of available-for-sale financial assets 220,090 - Increase in other receivable - related parties (108,225) - Increase in prepayments for investment (22,590) - Acquisition of property, plant and equipment (17,146) (31,015) Increase in other assets (20) (157) Proceeds of the disposal of property, plant and equipment 9 2,043 (Continued) - 5 -
CHROMA ATE INC. STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) Increase in deferred charges $ - $ (10,000) Proceeds of the capital reduction on available-for-sale financial assets - 1,030 Net cash used in investing activities (620,568) (38,027) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term bills payable 50,000 (150,000) (Decrease) increase in guarantee deposits (517) 495 Decrease in short-term borrowings - (50,000) Net cash used in financing activities 49,483 (199,505) NET DECREASE IN CASH (279,533) (224,811) CASH, BEGINNING OF PERIOD 514,218 656,509 CASH, END OF PERIOD $ 234,685 $ 431,698 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 214 $ - Income taxes paid $ 2,114 $ 2 CASH PAID FOR ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT Acquisition of property, plant and equipment $ 11,876 $ 23,566 Add: Accrued expenses, beginning of period 6,446 9,569 Deduct: Accrued expenses, end of period (1,176) (2,120) Cash paid $ 17,146 $ 31,015 The accompanying notes are an integral part of the financial statements (With Deloitte & Touche review report dated April 24, 2012) (Concluded) - 6 -
CHROMA ATE INC. NOTES TO FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) (Reviewed, Not Audited) 1. ORGANIZATION AND OPERATIONS Chroma Ate Inc. (the Corporation ) was incorporated in the Republic of China (ROC) in November 1984. The Corporation mainly designs, assembles, calibrates, manufactures, sells, repairs and maintains software/hardware for computers and peripherals, computerized automatic test systems, electronic test instruments, signal generators, power supplies, telecom power supplies, etc. as well as serves as an agent to sell these products. The Corporation s shares have been listed on the Taiwan Stock Exchange since December 21, 1996. As of March 31, 2012 and 2011, the Corporation had 1,258 and 1,252 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the ROC. The Significant accounting policies are summarized as follows: Foreign-currency Transactions 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. Monetary assets or liabilities denominated in foreign currencies are translated at the exchange rates prevailing on the balance sheet date, and the resulting exchange differences are included in profit or loss for the current period. For foreign equity-method investments in which the functional currency is a foreign currency, the financial statements are translated into the Corporation s reporting currency. The resulting translation adjustments are accumulated and reported as a separate component of shareholders equity. Accounting Estimates Under above guidelines and principles, the Corporation is required to make certain estimates and assumptions that could affect the amounts of allowance for doubtful accounts; loss on market value decline of inventories; depreciation of property; plant and equipment; income tax; deferred charges and amortization of intangible assets; pension; asset impairment loss; bonus to employees; remuneration to directors and supervisors, etc. Actual results may differ from these estimates. For readers convenience, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the ROC. If inconsistencies arise between the English version and the original Chinese version or if differences arise in the interpretations between the two versions, the Chinese-language version of the financial statements shall prevail. - 7 -
Current and Noncurrent Assets and Liabilities Current assets include cash, assets held for trading and those expected to be converted to cash, sold or consumed within one year from the balance sheet date. All other assets such as property, plant and equipment and intangible assets are non-current assets. Current liabilities are obligations held for trading and those expected to be due within one year from the balance sheet date. All other liabilities not classified as current liabilities are non-current liabilities. Financial Instruments at Fair Value through Profit or Loss Financial instruments at fair value through profit or loss (FVTPL) are financial assets held for trading. On initial recognition, the financial instruments are recognized at fair value plus transaction costs and are subsequently measured at fair value with fair value changes recognized in profit or loss. Cash dividends received subsequently (including those received in the year of investment) are recognized as income for the year. If a financial instrument is derecognized, the difference between the selling price or amount paid and the book value of the financial instrument is recognized as profit or loss. The regular purchase or sale of the financial instruments is recognized and derecognized using trade date accounting. Forward exchange contract, which are derivatives used for trading purposes, are used mainly to avoid risks on exchange rate fluctuations. Derivatives that are not designated as effective hedge instruments are classified as financial assets or financial liabilities designated as at FVTPL in financial assets or liabilities held for trading. If the fair value of the derivative is positive, the derivative is listed as a financial asset; otherwise, the derivative is listed as a financial liability. The fair values of FVTPL instruments are based on the following: (a) listed stocks - closing prices as of the balance sheet date; and (b) open-end beneficial certificates - net asset values as of the balance sheet date. Available-for-sale Financial Assets On initial recognition, available-for-sale financial assets are recognized at fair value plus transaction costs. When assets are subsequently measured at fair value, the fair value changes (net of tax) are recognized directly in shareholders equity. The cumulative gain or loss that was recognized in shareholders equity is recognized in profit or loss when an available-for-sale financial asset is derecognized from the balance sheet. The purchase or sale of the financial instruments is recognized and derecognized using trade date accounting. Cash dividends are recognized as dividend income on the ex-dividend date, but are accounted for as reductions to the original cost of investments if such dividends are attributable to periods prior to the purchase of investments. Stock dividends are not recognized as current income but are accounted for only as an increase in the number of shares held. The cost per share is re-calculated based on the new number of shares. The fair values of listed stocks are based on the closing prices on the balance sheet date and those of open-end beneficial certificates, on net asset values as of the balance sheet date. Financial Assets Carried at Cost If there is no active market for an equity instrument and a reliable fair value cannot be estimated, the equity instrument, including unlisted stocks and emerging stocks, etc., is measured at cost. Impairment losses are recognized if a decrease in the fair value of the instruments can be objectively related to an event. Reversal of impairment losses is not allowed. Dividend is accounted for as that of available-for-sale financial assets. - 8 -
Impairment of Accounts Receivable An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts receivable. The Corporation assesses the probability of collections of accounts receivable by examining the aging analysis of the outstanding receivables and assessing the value of the collateral provided by customers. As discussed in Note 3 to the financial statements, on January 1, 2011, the Corporation adopted the third-time revised Statement of Financial Accounting Standards (SFAS) No. 34 - Financial Instruments: Recognition and Measurement. One of the main revisions is that the impairment of receivables originated by the Corporation should be covered by SFAS No. 34. Accounts receivable are assessed for impairment at the end of each reporting period and considered to be 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 bankruptcy or financial re-organization. Accounts receivable that are assessed not to be impaired individually are further assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of accounts receivable could include the Corporation s past experience of collecting payments, 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 amount of the impairment loss recognized is the difference between the asset carrying amount and the present value of estimated future cash flows, after taking into account the related collateral and guarantees, discounted at the receivable s original effective interest rate. The carrying amount of the accounts receivable is reduced through the use of an allowance account. When accounts receivable are considered uncollectible, they are written off against the allowance account. Recoveries of amounts previously written off are credited to the allowance account. Changes in the carrying amount of the allowance account are recognized as bad debt in profit or loss. Asset Impairment If the recoverable amount of an asset (mainly property, plant and equipment, deferred charges, intangible assets and investments accounted for by the ) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. 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 on goodwill is disallowed. For the purpose of impairment testing, goodwill is allocated to each of the relevant cash-generating units (CGUs) that are expected to benefit from the synergies of the acquisition. A CGU to which goodwill has been allocated is tested for impairment annually or whenever there is an indication that the CGU may be impaired. If the recoverable amount of the CGU becomes less than its carrying amount, the impairment is allocated to first reduce the carrying amount of the goodwill allocated to the CGU and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. For long-term equity investments for which the Corporation 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. - 9 -
Inventories Inventories consist of raw materials, supplies, finished goods and work-in-process, and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at standard cost. Investments Accounted for by the Equity Method Long-term investments in which the Corporation exercises significant influence on the investees are accounted for by the. Equity-method investments are carried at cost on the acquisition date, and this cost is subsequently adjusted for the Corporation s proportionate share in the net income/loss and changes of equity of investees. Cash dividends are recorded as a reduction of the value of long-term investments. The Corporation will stop using the if the Corporation loses its significant influence on the investee because of a decrease in the Corporation s shareholding or other reasons and the prevailing carrying value should be used as the new investment cost. Under Statement of Financial Accounting Standards No. 5 - Accounting for Long-term Investments under the Equity Method, the difference between the cost of investment and the Corporation s equity in the investee s net assets should be analyzed and accounted for as follows: If the difference stems from depreciable, depletable or amortizable assets, it should be amortized over five years using the straight line method; otherwise, it should not be amortized and should instead be tested annually for impairment. When the Corporation subscribes for additional shares issued by an investee at a percentage different from its current equity interest, the resulting increase in the Corporation s equity in the investee s net assets is credited to capital surplus. Any decrease in the Corporation s equity in the investee s net assets is debited to capital surplus. Any remaining difference is debited to unappropriated retained earnings if capital surplus is not enough for debiting purposes. Stock dividends are not recognized as investment income but are accounted for only as an increase in the number of shares held. Costs of the investments sold are determined by the weighted-average method. When the Corporation s share in losses of an investee over which the Corporation has control exceeds its investment in the investee, unless the other shareholders of the investee have assumed legal or constructive obligations and have demonstrated the ability to make payments on behalf of the investee, the Corporation has to bear all of the losses in excess of the capital contributed by shareholders of the investee. If the investee subsequently reports profits, such profits are first attributed to the Corporation to the extent of the excess losses previously borne by the Corporation. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Significant additions, renewals and betterments are capitalized, while maintenance and repairs are expensed currently. Depreciation is calculated using the straight-line method over the estimated service lives of assets, which range as follows: buildings - 10 to 55 years; machinery and equipment - 2 to 12 years; and miscellaneous equipment - 3 to 15 years. If the property, plant and equipment are still in service beyond their original estimated service lives, they are further depreciated over their newly estimated service lives. Upon sale or retirement, the related cost and accumulated depreciation of property, plant and equipment are removed from the accounts, and any gain or loss is credited or charged to nonoperating gain or loss in the year of disposal. - 10 -
Intangible Assets Intangible assets acquired are initially recorded at cost and are amortized on a straight-line basis over their estimated useful lives. Core technologies and trademarks should be amortized over five years using the straight-line method. If the source of the intangible assets is unidentifiable, these assets are classified as goodwill, which should be tested annually instead for impairment. Deferred Charges Deferred charges, which mainly refer to royalties, are amortized by the straight-line method over contract periods. Pension Costs Pension cost under a defined benefit plan is determined by actuarial valuations. Contributions made under a defined contribution plan are recognized as pension cost during the employees service periods. Deferred Credits Gains from sales transactions with equity-method investees are deferred in the year of transaction and will be realized and recognized in the year when the gains are realized. Income Tax The inter-period allocation method is used for income tax, which means (1) deferred income tax liabilities are recognized for the tax effects of taxable temporary differences; and (2) deferred income tax assets are recognized for the tax effects of deductible temporary differences, and unused tax credits. Valuation allowances are provided for deferred tax assets that are not likely to be realized. Deferred tax assets or liabilities are classified as current or noncurrent according to the classification of related assets or liabilities for financial reports. However, if deferred tax assets or liabilities do not relate to assets or liabilities in the financial statements, they are classified as current or noncurrent on the basis of the expected realization period. Tax credits for research and development expenditures, personnel training expenditures, etc. are recognized using the flow-through method. Adjustments of prior years tax liabilities are added to or deducted from the current year s tax provision. According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings. Treasury Stock The Corporation s buyback of issued shares is accounted for by the cost method and is recorded as a reduction of the shareholders equity. If the proceeds on the disposal of treasury stock exceed the carrying value of treasury stock, the excess is credited to capital surplus from treasury stock. If the proceeds are less than the carrying value of treasury stock, the difference is debited to capital surplus from treasury stock. If the balance of capital surplus from treasury stock is not sufficient to absorb the difference, the rest is recorded as a reduction of retained earnings. On the Corporation s transfer of treasury shares to employees for compensation purposes, the grant-date fair value of the implicit stock options granted is estimated using a stock option pricing model and is expensed on a straight line basis over the vesting period. - 11 -
The Corporation s shares held by its subsidiaries are recorded as treasury stock. Cash dividends received from the Corporation and gain on disposal of the shares are recognized as capital surplus - treasury stock. Revenue Recognition Sales revenues are recognized when titles to products and risks of ownerships are transferred to customers, primarily upon shipment, and are stated at the fair values of settled prices (after taking into consideration of business discount and volume discount). However, receivable from sales maturing within one year or less may not be valued at fair value according to the imputed interest rate when the discrepancy between their fair value and value at maturity is small, and sales occur frequently. Government Subsidies Government subsidies given to the Corporation for the implementation of R&D Alliance Project for key technologies of the high-performance IM motor with 100-kw-class on electric vehicles are deferred and recognized as other income over the project period. 3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Financial Instruments The Corporation adopted the newly revised Statement of Financial Accounting Standards (SFAS) No. 34 - Financial Instruments: Recognition and Measurement on January 1, 2011. The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) inclusion of loans and receivables originated by the Corporation in the items now covered by SFAS No. 34; (4) the requirement to disclose additional guidelines on impairment testing of financial assets carried at amortized cost if the asset issuer or obligor has financial difficulties and the terms of obligations pertaining to these difficulties have been modified; and (5) the requirement to disclose a debtor s accounting treatment for the modifications in the terms of the obligations. This accounting change had no effect on net income and after income tax basic earnings per share for the three months ended March 31, 2011. Operating Segments The Corporation has adopted the newly issued SFAS No. 41 - Operating Segments on January 1, 2011. The requirements of the statement are based on the information on the components of the Corporation that management uses to make decisions on operating matters. 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. 4. CASH March 31 Checking accounts and demand deposits $ 203,858 $ 267,351 Foreign savings accounts 28,270 161,811 Cash on hand 1,587 1,656 Petty cash 970 880 $ 234,685 $ 431,698-12 -
5. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS - CURRENT Financial assets held for trading March 31 Open-end beneficial certificates $ - $ 498,206 Listed stocks - domestic - 7,965 Financial assets held for trading (other current assets) $ - $ 506,171 Forward exchange contracts $ 113 $ - The Corporation entered into forward exchange contracts for the three months ended March 31, 2012 and 2011 to hedge against exposures due to exchange rate fluctuations. The purpose of the hedge strategy was to reduce most of the risks arising from changes in market prices and cash flows. There were no forward exchange contracts outstanding as of March 31, 2012. March 31, 2012 Contract Amount Currency Maturity Date (In Thousands) Sell US$/NT$ 2012.4.13-2012.4.25 US$2,000/NT$59,099 For the three months ended March 31, 2012 and 2011, the Corporation recognized gains of $152 thousand and losses of $784 thousand, respectively, on financial assets held for trading. 6. ACCOUNTS RECEIVABLE - THIRD PARTIES March 31 Accounts receivable $ 585,391 $ 845,597 Less: Allowance for doubtful accounts 21,791 19,927 $ 563,600 $ 825,670 7. INVENTORIES, NET March 31 Raw materials $ 359,944 $ 488,060 Work in process 609,314 639,688 Semifinished products 160,959 163,324 Finished goods 232,138 220,068 $ 1,362,355 $ 1,511,140-13 -
As of March 31, 2012 and 2011, the allowance for loss on decline in inventory market value were $66,037 thousand and $49,037 thousand, respectively. The costs of inventories recognized as cost of goods sold for the three months ended March 31, 2012 and 2011 were $376,256 thousand and $725,959 thousand, respectively, which included $4,000 thousand and $6,000 thousand due to write-downs of inventories, respectively. 8. AVAILABLE-FOR-SALE FINANCIAL ASSETS Current March 31 Open-end beneficial certificates Hua Nan Phoenix Money Market Fund $ 100,040 $ - Yuanta Wan Tai Money Market Fund 80,073 - KGI Victory Money Market Fund 80,033 - Noncurrent $ 260,146 $ - Domestic stocks DynaColor, Inc. $ 293,630 $ 270,189 Chunghwa Telecom Co., Ltd. 37,485 37,775 $ 331,115 $ 307,964 9. FINANCIAL ASSETS CARRIED AT COST - NONCURRENT March 31 % of % of Carrying Owner Carrying Owner Value ship Value ship Domestic stocks WK Technology Fund IV Ltd. $ 40,000 1.9 $ 40,000 1.9 Twoway Catv Service Inc. 36,451 5.4 36,451 5.4 WK Technology Fund VI Ltd. 25,000 1.4 25,000 1.4 EVT Technology Co., Ltd. - 18.8 4,000 18.8 101,451 105,451 Foreign stocks and funds LasFocus Corporation 16,140 9.0 16,140 9.0 WI Harper INC Fund VII LP 10,152-10,152 - Chromatex S.A. 4,821 12.2 4,821 12.2 H&Q/Gai Incubation Fund, L.P. 1,193-1,474-32,306 32,587 $ 133,757 $ 138,038 The above investments were measured at cost because they had no quoted prices in an active market and their fair value could not be reliably measured. - 14 -
The Corporation recognized an impairment loss of NT$4,000 thousand in 2011 to reflect the other-than-temporary decline in value of the investment in EVT Technology Co., Ltd. 10. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD AND PREPAYMENTS March 31 % of % of Carrying Owner- Carrying Owner- Value ship Value ship Neworld Electronics Ltd. $ 688,732 100.0 $ 614,654 100.0 Chroma New Material Corp. 574,067 100.0 573,833 100.0 San Eagle Development Corp. 457,211 100.0 400,861 100.0 Adlink Technology Inc. (listed) 320,483 12.6 312,962 12.6 Wei Kuang Automatic Equipment Co., Ltd. 256,131 100.0 235,416 100.0 Chi Incorporation Ltd. 162,446 100.0 149,274 100.0 Chroma Ate Europe B.V. 100,163 100.0 94,552 100.0 Chroma Investment Co., Ltd. 78,864 100.0 72,850 100.0 Chroma Ate Inc. 70,779 100.0 61,219 100.0 Chroma System Solution Inc. 45,426 25.0 37,248 25.0 Sensational Holding Ltd. 43,091 100.0 41,413 100.0 Testar Electronic Corp. 35,070 45.5 62,474 45.5 DynaScan Technology Corp. 33,700 28.1 46,710 28.1 Chen Hwa Technology Inc. 32,785 100.0 31,283 100.0 Deep Red Holding Co., Ltd. 25,004 100.0 21,662 100.0 Nova Electronics Inc. 9,266 99.9 9,562 99.9 Chroma Japan Corp. (5,713) 100.0 (21,230) 100.0 2,927,505 2,744,743 Prepayment for investments Chih Ho Shun Development Co., Ltd. 17,500 - EVT Technology Co., Ltd. 5,090-22,590 - $ 2,950,095 $ 2,744,743 The Corporation s investment in Adlink Technology Inc. was accounted for by the because of the Corporation s significant influence over the investee s operating and financial policy decisions. The fair market values of Adlink Technology Inc., which were measured at closing prices as of March 31, 2012 and 2011, were as follows: March 31 Adlink Technology Inc. $ 743,945 $ 827,442 On October 27, 2006, the Corporation s board of directors resolved to incorporate a subsidiary, San Eagle Development Corp. ( San Eagle ), in the British Virgin Islands. Through San Eagle, the Corporation bought all of the issued shares of Wei Kuang Mech Eng Inc. from Scn Finance Corp. Wei Kuang Mech Eng Inc. had two 100% subsidiaries, Mou Kuan Technologies (Nanjin) Co., Ltd. ( Mou Kuan Nanjin ) and Wei Kuang Automatic Equipment (Nanjin) Co., Ltd. ( Wei Kuang Nanjin ). Mou Kuan Nanjin will assemble and sell factory conveyors and related systems and render after-sales services. Wei Kuang Nanjin will sell and maintain electronic equipment and factory conveyor systems. - 15 -
To enhance the Corporation s competitiveness, the Corporation paid $160,000 thousand in December 2006, $134,000 thousand in January 2007 and $239,000 thousand in January 2008 to acquire 100% equity interest in Silver Town Electronic Co., Ltd. ( Silver Town ) from Ever Growth Investment Holding Ltd., respectively. On February 29, 2008, the Corporation s board of directors resolved that the Corporation merge with Silver Town, with the Corporation as the survivor entity on the record date of March 21, 2008. Since Wei Kuang Automatic Equipment (Taiwan) Co., Ltd. was a 100% subsidiary of Silver Town before the merge, it became the Corporation s subsidiary after its merger with Silver Town. Wei Kuang Automatic Equipment (Taiwan) Co., Ltd. designs, manufactures, installs and tests automated factory conveyor systems. To strengthen its relationship with customers and enhance customer services, the Corporation s board of directors resolved on December 28, 2006 to establish Wei Kuang Automatic Equipment (Xiamen) Co., Ltd. ( Wei Kuang Xiamen ) through San Eagle and Wei Kuang Mech Eng Inc. The planned investment would amount to US$2,000 thousand. As of March 31, 2012, the Corporation had remitted out an investment amount of $50,763 thousand. Wei Kuang Xiamen will sell and maintain electronic equipment and factory conveyor systems. To expand its market and strengthen its sale channel in North America, the Corporation acquired 25% equity interest in Chroma Systems Solutions, Inc. for US$900 thousand on September 1, 2009. The Corporation s subsidiary, Chroma Ate Inc. (U.S.A.), held 50% equity interest in Chroma Systems Solutions, Inc., and thus the Corporation directly and indirectly held 75% equity interest in Chroma Systems Solutions, Inc. and controlled the investee. Chroma Systems Solutions, Inc. is mainly sells and maintains electronic test instruments, etc. Taiwan Wei Kuang, Mou Kuan Nanjin, Wei Kuang Nanjin and Chroma Systems Solutions, Inc. were acquired by the Corporation and were accounted for by the purchase method. The movements of the differences between investment costs and the above investees net asset values, which were regarded as amortizable assets were as follows: Amortizable assets Three Months Ended March 31 Beginning balance $ 37,347 $ 104,595 Additions - - Amortization (8,137) (16,812) Ending balance $ 29,210 $ 87,783 The movements of the difference between investment cost and net asset value regarded as goodwill were as follows: Cost Three Months Ended March 31 Beginning balance $ 143,451 $ 143,451 Acquisition of subsidiaries during the current period - - Ending balance $ 143,451 $ 143,451-16 -
To expand the Corporation s service scope, the Corporation s board of directors resolved on February 27, 2007 to invest jointly with Raster Opto-Mechatronics Co., Ltd. in Testar Electronic Corporation ( Testar ), which will test LED products. In July 2009, the Corporation increased its investment in Testar Electronic Corporation ( Testar ) by $26,250 thousand; thus, the Corporation equity interest in Tesar rose to 56.9%. However, when the Corporation did not subscribe for additional shares issued by Testar in March 2010 for an increase of its capital for a $50,000 thousand capital increase in March 2010, the Corporation s equity interest in Testar decreased to 45.5% after the capital increase. As of March 31, 2012, the Corporation s accumulated investment amount was $113,750 thousand; however, the Corporation s holding of Testar s share did not exceed 50% as of March 31, 2012, the Corporation determined that it still had substantive control over Testar and thus includes its accounts in the consolidated financial statements. On December 27, 2007, the Corporation s board of directors resolved to incorporate a subsidiary, Chroma Japan Corp., in Japan to expand its foreign market. Chroma Japan Corp. is mainly engaged in the sale and maintenance of electronic test instruments, etc. In April 2011, Chroma Japan Corp. reduced its capital by 95% to offset deficit while increasing its capital by 150,000 thousand. As of March 31, 2012, the full investment amount had been paid. The above investment income and loss recognized under the for the three months ended March 31, 2012 and 2011, which were calculated on the basis of the investees unreviewed financial statements for the same reporting periods as those of the Corporation, were as follows: March 31 Wei Kuang Automatic Equipment Co., Ltd. $ 25,314 2,096 San Eagle Development Corp. 9,867 3,491 Testar Electronic Corp. (9,631) (10,389) Chroma Japan Corp. (8,699) (10,563) Chroma Ate Inc. (7,844) 8,245 Adlink Technology Inc. 5,989 12,910 Chroma New Material Corp. 5,875 10,325 Neworld Electronics Ltd. (5,839) 8,162 Chroma Systems Solutions, Inc. 5,385 4,904 Dynascan Technology Corp. (4,625) (2,497) Chroma Investment Co., Ltd. 1,369 (167) Chroma Ate Europe B.V. 1,135 5,258 Chi Incorporation Ltd. (452) 1,519 Chen Hwa Technology Inc. (345) (411) Nova Electronics Inc. (268) (243) Sensational Holding Ltd. 245 149 Deep Red Holding Co., Ltd. (56) 336 $ 17,420 $ 33,125-17 -
11. PROPERTY, PLANT AND EQUIPMENT March 31 Accumulated depreciation Buildings $ 514,259 $ 470,609 Machinery and equipment 168,305 155,176 Miscellaneous equipment 551,881 507,603 $ 1,234,445 $ 1,133,388 Under one- to two-year operating lease contracts, the Corporation leased some floors of the office buildings to others (which included related parties; refer to Note 18). Rents were paid and collected monthly. 12. SHORT-TERM BILLS PAYABLE March 31 Commercial paper $ 100,000 $ - Interest rate (%) 0.72%-0.80% - Due date 2012.04.27-13. SHAREHOLDERS EQUITY a. Capital surplus Under the Company Law, capital surplus may only be used to offset a deficit. Capital surplus, generated from share issuance in excess of par value, including shares newly issued for new cash, the buyback of treasury stock, merger and donation, may be transferred to capital as stock dividends within a certain amount once a year. Under the revised Company Law issued on January 4, 2012, the aforementioned capital surplus also may be distributed in cash. The capital surplus generated from long-term investments accounted for by the may not be used for any purpose. March 31 Additional paid-in capital $ 622,746 $ 622,746 From merger 146,976 146,976 Treasury stock 106,614 99,578 From long-term investment 48,822 48,822 b. Appropriation of earnings and dividend policy $ 925,158 $ 918,122 The Corporation s Articles of Incorporation provide that a 10% legal reserve should be set aside from the annual net income less any accumulated deficit. The remainder, special reserve or reverse appropriation based on regulations or relevant laws, together with unappropriated earnings of prior years, should be distributed as follows: 1) Remuneration to directors and supervisors - 18 -
2) Bonus to employees - 5%-20% 3) Dividends The Corporation distributes both cash and stock dividends, taking into account future capital expenditure requirements and its cash position. However, the total of cash dividends paid in any given year may not be less than 20% of total dividends distributed in that year. The final amount, type and percentage of the dividends are subject to actual earnings and capital requirements of the Corporation in a particular year. For the three months ended March 31, 2012 and 2011, the bonuses to employees estimated on the basis of past experience were at 12.5% and 13.0%, respectively, of net income, or $20,000 thousand and $52,000 thousand, respectively. For the three months ended March 31, 2012 and 2011, the remuneration to directors and supervisors were $2,100 thousand cash. Material differences between these estimates and the amounts proposed by the Board of Directors in the following year are adjusted for in the year of the proposal. If the actual amounts subsequently resolved by the shareholders differ from the proposed amounts, the differences are recorded in the year of shareholders resolution as a change in accounting estimate. If bonus shares are resolved to be distributed to employees, the number of shares is determined by dividing the amount of bonus by the closing price (after considering the effect of cash and stock dividends) of the shares of the day preceding the shareholder s meeting. A regulation issued by the Securities and Futures Bureau requires the setting aside from the unappropriated earnings of a special reserve equal to any debit balance of an account under shareholders equity. The balance of this special reserve is adjusted on the basis of the debit balance of the shareholders equity account at year-end. Legal reserve should be appropriated until the reserve equals the Corporation s paid-in capital. The reserve can only be used to offset a deficit. Under the revised Company Law issued on January 4, 2012, when the legal reserve has exceeded 25% of the Corporation s paid-in capital, the excess may be transferred to capital or distributed in cash. Under the Integrated Income Tax System, ROC resident shareholders are allowed a tax credit for the income tax paid by the Corporation. An imputation credit account (ICA) is maintained by the Corporation for such income tax and the tax credit was allocated to each shareholder. The appropriations from the 2011 earnings proposed by Board of Directors on February 21, 2012 and those from the 2010 earnings resolved at the annual meeting of shareholders were as follows: Appropriation of Earnings For Fiscal For Fiscal Year 2011 Year 2010 Dividend Per Share (NT$) For Fiscal For Fiscal Year 2011 Year 2010 Legal reserve $ 152,257 $ 181,160 Cash dividends 941,900 1,376,623 $2.5 $3.8 Stock dividends - 144,908-0.4 As proposed by Board of Directors on February 21, 2012, the appropriation from the 2011 earning included bonus to employees of $215,000 thousand, and remuneration to directors and supervisors of $8,500 thousand from the year s earning. The approved amounts were the same as those accrued as of December 31, 2011. The appropriation of the 2010 earnings will be decided at the annual meeting of shareholders on June 6, 2012. As approved in the shareholders meetings on June 9, 2011, the appropriations from the 2010 earning included bonus to employees $252,500 thousand, and remuneration to directors and supervisors of $8,500 thousand from year s earnings. The approved amounts were the same as those accrued as of December 31, 2010. - 19 -
Information on the bonus to employees, directors and supervisors can be accessed on the Market Observation Post System website of the Taiwan Stock Exchange. c. Treasury stock (Shares in Thousands) Beginning Sale/ Ending Purpose of Buyback Shares Purchase Dividend Transfer Shares Three months ended March 31, 2012 The Corporation s shares held by subsidiaries 1,926 - - - 1,926 Three months ended March 31, 2011 The Corporation s shares held by subsidiaries 1,852 - - - 1,852 As of March 31, 2012 and 2011, the market values of the Corporation s outstanding shares held by its subsidiaries were $144,804 thousand and $175,894 thousand, respectively. These shares, which are held by the subsidiaries as investments are recorded as treasury stock, but the subsidiaries have the same rights as those of common shareholders for participation in the Corporation s raising of cash capital and voting rights. Under the Securities and Exchange Law, the buyback amount of treasury stock should not exceed 10% of total issued shares, and the buyback cost should not exceed the sum of the retained earnings, additional paid-in capital in excess of par value and realized capital surplus. In addition, the Corporation should not provide treasury stock as collateral and should not exercise shareholders rights on those shares before their transfer. 14. INCOME TAX a. The reconciliation between income tax expense based on income before income tax at statutory tax rate and current income tax expense was as follows: Three Months Ended March 31 Tax on income before income tax at statutory tax rate $ 31,158 $ 75,289 Add (deduct) tax effects of: Permanent differences Tax-exempt income (7,262) (14,419) Investment income - domestic (4,083) (2,046) Other (57) 134 Temporary differences 8,456 (8,581) Investment tax credits (3,558) (15,113) Current income tax expense $ 24,654 $ 35,264-20 -