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Altek Interim / Quarterly Report 2012

Mar 20, 2013

52290_rns_2013-03-20_f2cf1bce-1f5a-4b93-9cb8-1148b140e4fc.pdf

Interim / Quarterly Report

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ALTEK CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS AND REVIEW REPORT OF INDEPENDENT ACCOUNTANTS

SEPTEMBER 30, 2012 AND 2011

---------------------------------------------------------------------------------------------------------------------- For the convenience of readers and for information purpose only, the auditors‟ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. In the event of any discrepancy between the English version and the original Chinese version or any differences in the interpretation of the two versions, the Chinese-language auditors‟ report and financial statements shall prevail.

REVIEW REPORT OF INDEPENDENT ACCOUNTANTS TRANSLATED FROM CHINESE

PWCR12000099

To the Board of Directors and Stockholders of Altek Corporation

We have reviewed the accompanying consolidated balance sheets of Altek Corporation and subsidiaries as of September 30, 2012 and 2011, and the related consolidated statements of income and of cash flows for the nine-month periods then ended. These consolidated financial statements are the responsibility of the Company‟s management. Our responsibility is to express a conclusion on these consolidated financial statements based on our reviews.

Except as discussed in the following paragraph, we conducted our reviews in accordance with the Statement of Auditing Standards No. 36 “Review of Financial Statements” in the Republic of China. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical procedures to financial data, and making inquiries of Company personnel responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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 described in Note 1, the financial statements of major subsidiaries-Altek International Investment Co., Ltd. and its subsidiary-Altek (Kunshan) Co., Ltd., were consolidated based on their reviewed on major accounts of financial statements as of and for the nine-month periods ended September 30, 2012 and 2011. Total assets of these subsidiaries amounted to $7,992,499 and $9,975,353, representing 43% and 44% of the consolidated total assets, as of September 30, 2012 and 2011, respectively. The financial statements of the other subsidiaries were consolidated based on their unreviewed financial statements as of and for the nine-month periods ended September 30, 2012 and 2011. Total assets of these subsidiaries amounted to $2,606,456 and $3,890,887, representing 14% and 17% of the consolidated total assets, as of September 30, 2012 and 2011, respectively, and total net operating revenues of these subsidiaries for the nine-month periods ended September 30, 2012 and 2011 representing less than 10% of the consolidated net operating revenues for the nine-month periods then ended. In addition, as described in Note 4(6) to the consolidated financial statements, the financial statements of long-term investments accounted for under the equity method were not reviewed by independent accountants. Long-term equity investments in these companies amounted to $368,628 and $373,110 as of September 30, 2012 and 2011, respectively, and the related investment (loss) income amounted to ($18,128) and $106 for the nine-month periods then ended. These amounts were based solely on their unreviewed financial statements.

Based on our reviews, except for the effect of such adjustments, if any, as might have been determined to be necessary had the financial statements of certain subsidiaries and investee companies been reviewed by independent accountants as described in the third paragraph, we are not aware of any material modifications that should be made to the consolidated financial statements referred to in the first paragraph in order for them to be in conformity with the

～ 1 ～

“Rules Governing the Preparation of Financial Statements by Securities Issuers”, Gin-Gwen-Jen (6) Letter No. 0960064020 issued by the Financial Supervisory Commission, Executive Yuan dated November 15, 2007, “Simplified Disclosure for the Notes to Third-Quarter Consolidated Financial Statements” and generally accepted accounting principles in the Republic of China.

Altek Corporation expects to adopt International Financial Reporting Standards, International Accounting Standards, and Interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee (collectively referred herein as the IFRSs) as recognized by the former Financial Supervisory Commission, Executive Yuan, R.O.C (FSC) and the “Rules Governing the Preparation of Financial Statements by Securities Issuers” that will be applied in 2013 in the preparation of consolidated financial statements of Altek Corporation and its subsidiaries starting from January 1, 2013. Information relating to the adoption of IFRSs by Altek Corporation is disclosed in Note 13 in accordance with Jin-Guan-Zheng-Shen-Zi Order No.0990004943 of the FSC, dated February 2, 2010. The IFRSs may be subject to changes during the time of transition; therefore, the actual impact of IFRSs adoption on Altek Corporation and its subsidiaries may also change.

PricewaterhouseCoopers, Taiwan Hsinchu, Taiwan Republic of China October 26, 2012

The accompanying consolidated financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying consolidated financial statements and review report of independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice.

As the financial statements are the responsibility of the management, PricewaterhouseCoopers cannot accept any liability for the use of, or reliance on, the English translation or for any errors or misunderstandings that may derive from the translation.

～ 2 ～

ALTEK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Expressed in thousands of NT dollars)

(Unaudited)




ASSETS
Current Assets
Cash and cash equivalents (Note 4 (1))

Financial assets at fair value through profit or loss - current
(Note 4 (2))
Accounts receivable, net (Note 4 (3))
Other receivables
Inventories, net (Note 4 (4))
Prepaid expenses
Deferred income tax assets - current
Other current assets


Funds and Investments

Financial assets carried at cost - non-current (Note 4 (5))
Long-term equity investments accounted for under the equity
method (Note 4 (6))


Property and Equipment
(Note 4 (7))
Cost
Buildings
Machinery and equipment
Test equipment
Transportation equipment
Furniture and fixtures
Leasehold improvements
Other equipment

Less: Accumulated depreciation
(
Construction in progress and prepayments for equipment


Intangible Asset
Other intangible assets

Other Assets
Assets leased to other (Note 4(8))
Deposits out
Deferred charges
Deferred income tax assets - non-current


TOTAL ASSETS
 September 30, September 30, %
28
3
26
-
15
1

-

-
73
1

2

3
13
7
1
-
1
-

1
23
(
6 )

-
17

-
7
-
-

-

7
100

2012

%

30

1
20

-
13

1

2

-

67


1

2


3

16

9

1

-

1

-

2

29
(
9 ) (

-

20


1


8

-

-

1


9

100
2011
Amount

$ 5,589,317
205,662
3,651,318
33,382
2,321,104
245,495
308,542
16,591

12,371,411

235,952
368,628
604,580

2,956,530
1,731,387
192,833
26,016
172,310
46,215
266,730

5,392,021

1,685,776 )
71,639

3,777,884

102,854

1,474,223
42,273
11,794
45,311

1,573,601

$ 18,430,330
 Amount
$ 6,217,627
677,711
5,946,561
32,260
3,293,016
160,867
120,123
51,083
16,499,248
236,164
373,110
609,274
3,027,721
1,462,730
168,138
23,893
150,950
34,605
232,287
5,100,324

1,430,672 )
46,885
3,716,537
107,898
1,485,518
46,320
77,983
-
1,609,821
$ 22,542,778

(Continued)

～ 3 ～

ALTEK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Expressed in thousands of NT dollars)

(Unaudited)




LIABILITIES AND STOCKHOLDERS‟EQUITY
Current Liabilities
Short-term loans

Notes payable
Accounts payable
Accounts payable–related parties (Note 5)
Income tax payable
Accrued expenses
Other payables (Note 4 (9))
Provision for product warranty
Other current liabilities


Other Liabilities
Accrued pension liabilities
Guarantee deposits received
Deferred income tax liabilities–non-current


Total Liabilities

Stockholders‟Equity
Capital (Note 4 (10))
Common stock
Stock dividends distributable
Capital reserve (Note 4 (13))
Paid-in capital in excess of par value
Capital reserve from conversion of convertible bonds
Additional paid-in capital - treasury stock transactions
Long-term investment
Capital reserve from employee stock options (Note 4 (11))
Retained earnings (Note 4 (14))
Legal reserve
Special reserve
Unappropriated earnings
Cumulative translation adjustments
(
Treasury stock (Note 4 (12))
(
Stockholders‟ equity of parent company

Total Stockholders‟Equity

Contingent liabilities (Note 7)
TOTAL LIABILITIES AND STOCKHOLDERS‟EQUITY
 September 30, September 30, %
-
-
32
-
-
3
6
2

3
46
-
-

3

3
49
17
1
6
4
-
-
-
6
2
17
1
(
3
)
51
51
100

2012

%

3

-
25
-
-
4
2
2

4

40

-
-

5


5

45

21
-
7
5
-
-
1
7
-
19
(
1 )
(
4
) (
55

55

100
2011
Amount
$ 520,000
129
4,530,372
95
63,712
806,474
343,039
407,855
731,383
7,403,059
2,624
8,362
805,878
816,864
8,219,923
3,961,013
-
1,371,589
894,836
6,841
13,187
104,921
1,291,466
-
3,469,709

166,394 )

736,761
)
10,210,407
10,210,407
$ 18,430,330		 Amount
$ -
40
7,330,189
30,736
92,673
582,945
1,317,231
351,002
568,287
10,273,103
1,633
22,530
744,800
768,963
11,042,066
3,892,841
132,144
1,289,357
894,836
6,841
13,187
90,198
1,272,282
488,347
3,881,130

190,671

651,122
)
11,500,712
11,500,712
$ 22,542,778

The accompanying notes are an integral part of these consolidated financial statements. See review report of independent accountants dated October 26, 2012.

～ 4 ～

ALTEK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME

(Expressed in thousands of NT dollars, except for earnings per share amount)

(Unaudited)




Operating revenues
Sales

Sales returns
(
Sales allowances
(
Net operating revenues

Operating costs
Cost of sales (Notes 4 (4) and 5)
(
Gross profit

Operating expenses
Selling expenses
(
Administrative and general expenses
(
Research and development expenses
(
(
Operating income

Non-operating gains and income
Interest income
Investment income accounted for under the equity
method (Note 4 (6))
Dividend income
Gain on disposal of property and equipment
Foreign currency exchange gain, net
Rent revenues
Gain on valuation of financial assets (Note 4 (2))
Other income


Non-operating expenses and losses
Interest expense
(
Investment loss accounted for under the equity
method (Note 4(6))
(
Loss on valuation of financial assets (Note 4(2))
Other expenses
(
(
Income before income tax
Income tax expense
(
Consolidated net income

Attributable to:
Equity holders of the Company

Minority interest


Basic and diluted earnings per share
(in NT dollars) (Note 4 (15))
Basic earnings per share
Net income
Diluted earnings per share
Net income		 For the nine-month periods ended September For the nine-month periods ended September
2012
Amount

$ 19,639,195

2,299)

6,186
)
19,630,710


18,220,272
)
1,410,438


90,174 )

215,060 )

935,411
)

1,240,645
)
169,793

96,532
-
477
389
23,944
22,753
2,581
5,756

152,432


434 )

18,128 )
-

74
)

18,636
)
303,589

46,703
)
$ 256,886

$ 256,886
-

$ 256,886

Before Tax
$ 0.66

$ 0.65

The accompanying notes are an integral part of these consolidated financial statements. See review report of independent accountants dated October 26, 2012.

～ 5 ～

ALTEK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in thousands of NT dollars)

(Unaudited)



Cash flows from operating activities:
Consolidated net income

Adjustments to reconcile consolidated net income to net cash (used in)
provided by operating activities:
Payroll expense - employee stock options
Depreciation (including depreciation of leased assets)
Amortization
(Gain) loss on valuation of financial assets
(
Provision for doubtful accounts
Provision for inventory obsolescence
Investment loss (income) accounted for under the equity method
Cash dividends on long-term equity investments accounted for
under the equity method
Write-off of property and equipment, net
Gain on disposal of property and equipment, net
(
Deferred income tax
(
Changes in assets and liabilities:
(Increase) decrease in assets:
Financial assets at fair value through profit or loss - current
Notes receivable
Accounts receivable
(
Other receivables
(
Prepaid expenses
Other current assets
(
Inventories
(
Increase (decrease) in liabilities:
Notes payable
(
Accounts payable
(
Accounts payable - related parties
(
Income tax payable
Accrued expenses
Other payables
Provision for product warranty
Other current liabilities
Accrued pension liabilities

Net cash (used in) provided by operating activities
(
Cash flows from investing activities:
Acquisition of financial assets carried at cost - non-current
Capital reduction of financial assets carried at cost - non-current
Acquisition of property and equipment
(
Proceeds from disposal of property and equipment
Decrease in deposits out, net
Increase in deferred charges
(
Net cash used in investing activities
(		 For the nine-month periods ended September 30,
2011
$ 764,504
25,215
262,072
13,226
9,086

-
45,331

106 )
5,056
165

-

68,825 )
141,175
4,434

1,037,083 )

14,001 )

12,206 )

46,566 )

997,872 )

3,426 )

2,302,668

19,424 )

41,189 )

297,098 )

21,553

237,453 )

80,343 )
345
739,238


5,337 )
21,120

843,110 )
-
13,778

28,695
)

842,244
)

2012

$ 256,886

15,620
210,627
10,518

2,581 )
17,061
38,771
18,128
(
13,955
520

389 )

40,671 ) (
294,571
9

253,022 ) (

14,187 ) (
51,358
(

608 ) (

311,998 ) (

828 ) (

656,126 )

14,731 ) (
9,082
(
16,754
(
44,709
121,047
(
117,020
(
992


57,513
)
-
(
-

378,663 ) (
7,908
733

3,116
) (

373,138
) (

(Continued)

～ 6 ～

ALTEK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Expressed in thousands of NT dollars)

(Unaudited)



Cash flows from financing activities:
Increase in short-term loans

Increase in guarantee deposits received
(
Proceeds from employee stock options exercised
Payment of cash dividends
(
Purchase of treasury stock
Proceeds from sales of treasury stock to employees

Net cash provided by (used in) financing activities
(
Effect of foreign exchange rate
(
Net increase (decrease) in cash and cash equivalents
(
Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures of cash flow information
Interest paid

Income tax paid

Investing and financing activities partially paid by cash
Increase in property and equipment

Add: property and equipment and construction billings
payable at beginning of period
Less: property and equipment and construction billings
payable at end of period
(
Cash paid

Declared cash dividends

Less: Other payables at end of period

Cash paid
 For the nine-month periods ended September 30,
2012
2011
$ 520,000
$ -

14,168 )
22,530
13,752
10,308

564,809 )
-
-
(
353,389 )
-

134,551

45,225
) (
186,000
)

238,653
)
405,995

714,529 )
116,989
6,303,846

6,100,638
$ 5,589,317
$ 6,217,627
$ 169
$ -
$ 78,292
$ 127,699
$ 288,858
$ 867,407
151,403
159,053

61,598
)
(
183,350
)
$ 378,663
$ 843,110
$ 564,809
$ 749,292
-
(
749,292
)
$ 564,809
$ -

2012

$ 520,000


14,168 )
13,752

564,809 )
-
(
-


45,225
) (

238,653
)

714,529 )
6,303,846

$ 5,589,317

$ 169

$ 78,292

$ 288,858

151,403

61,598
)
(
$ 378,663

$ 564,809

-
(
$ 564,809

The accompanying notes are an integral part of these consolidated financial statements. See review report of independent accountants dated October 26, 2012.

～ 7 ～

ALTEK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2012 AND 2011

(Expressed in thousands of NT dollars, unless stated otherwise)

(Unaudited)

1. ORGANIZATION

Names of consolidated subsidiaries, their main operating activities, the percentage owned by the Company and their changes in 2012 were as follows:

Name of the investor
Altek Corporation

"

"

"

Altek International
Investment Co., Ltd.

"

"

"

"

"

"

"

"

Leading Tech. Co., Ltd.
Toptek Investment
Cayman Co., Ltd.

Altek Imaging
Technology (Cayman)
Co., Ltd.

"
 Name of subsidiaries
Altek International
Investment Co., Ltd.

Altek Japan Corporation

Altek Investment Co., Ltd.

Altek Autotronics
Corporation

Altek Lab Inc.

Leading Tech. Co., Ltd.

Toptek Investment Cayman
Co., Ltd.
Altek Imaging Technology
(Cayman) Co., Ltd.
RICH-ALTEK U.S.A., INC.
Altek Optical (Cayman) Co.,
Ltd.

Altek Trading (Cayman) Co.,
Ltd.
Altek Semiconductor
(Cayman) Co., Ltd.
Altek Optical Technology
(Cayman) Co., Ltd.
Altek (Kunshan) Co., Ltd.

Altek EMS (Kunshan) Co.,
Ltd.

Altek Imaging Technology
(Shanghai) Limited

Altek Precision (Kunshan)
Co., Ltd.
 Main operatingactivities Percentage of ownership as of
September 30,		 Percentage of ownership as of
September 30,
2012 2011
Investments and general
business operations

Sales and design of digital
camera and its optical
instruments

Investments

Research design, manufacture
and sales of car electronic
components

Design and sales of
engineering and optical
components

Investment and general
business operations

"

"

Delivery and storage

Investments and general
business operations

"

"
"

Manufacture and sales of
digital still camera and its
accessories

SMT processing and related
engineering services

Manufacture and sales of
optical components

Design, manufacture and sales
of digital camera parts
100%

100%

100%

100%

100%

100%

100%

100%

Note 2

100%

100%
100%

100%

100%

100%

100%

100%
100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

Note1

100%

100%

100%

100%

～ 8 ～

Name of the investor
Altek Trading
(Cayman) Co., Ltd.

Altek Semiconductor
(Cayman) Co., Ltd.

Altek Trading
(Shanghai) Limited
Altek Optical
Technology (Cayman)
Co., Ltd.
 Name of subsidiaries
Altek Trading (Shanghai)
Limited

Altek Semiconductor
Corporation

Beijing Altek Image
Communication Technology
Co., Ltd.
Altek Optical Technology
(Kunshan) Co., Ltd.
 Main operatingactivities Percentage of ownership as of
September 30,		 Percentage of ownership as of
September 30,
2012 2011
Wholesale, import and export
of digital cameras, digital
video cameras and their
associated accessories

Research design and sales of
ASIC
Sales of digital camera,
handheld device and their
related accessories
Manufacture and sales of
digital camera and its
accessories and optical
components
100%
100%
100%

100%
100%

100%
100%

Note 1

Note 1: Became a new subsidiary during the fourth quarter of 2011.

Note 2: RICH-ALTEK U.S.A. INC. was merged by the Company for intergroup

consolidation on the base date of September 17, 2012.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements of the Company and its subsidiaries (collectively referred herein as the Group) are prepared in accordance with the “Rules Governing the Preparation of Financial Statements by Securities Issuers”, Gin-Gwen-Jen (6) Letter No. 0960064020 of the Financial Supervisory Commission, Executive Yuan, R.O.C., November 15, 2007 “Simplified Disclosure for the Notes to Third-Quarter Consolidated Financial Statements” and accounting principles generally accepted in the Republic of China.

Additions to the significant accounting policies are summarized below, and changes in accounting principles are in Note 3. Except for the additions, all the others remain the same as those disclosed in the notes to consolidated financial statements as of and for the six-month period ended June 30, 2012.

3. CHANGES IN ACCOUNTING PRINCIPLES

(1) NOTES RECEIVABLE /ACCOUNTS RECEIVABLE / OTHER RECEIVABLES

Effective January 1, 2011, the Group adopted the amended R.O.C. SFAS No. 34, “Financial Instruments: Recognition and Measurement”. This change in accounting principle had no effect on the Group‟s consolidated net income and earnings per share for the nine-month period ended September 30, 2011.

(2) OPERATING SEGMENTS

Effective January 1, 2011, the Group adopted R.O.C. SFAS No. 41, “Operating Segments” in place of R.O.C. SFAS No. 20, “Segment Reporting”. Segment information for prior years shall be restated when the Group applies this standard for the first time. This change in accounting principle had no effect on the Group‟s

～ 9 ～

consolidated net income and earnings per share for the nine-month period ended September 30, 2011.

4. DETAILS OF SIGNIFICANT ACCOUNTS

(1) CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS


Cash:
Petty cash

Savings accounts
Checking accounts
Time deposits

 September 30,
2012
2011
$ 1,211
$ 1,250
493,043
776,631
1
42
5,095,062

5,439,704
$ 5,589,317
$ 6,217,627

2012

$ 1,211

493,043
1
5,095,062

$ 5,589,317

(2) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS


Current items:
Financial assets held for trading

Adjustment of financial assets held for trading

 September 30,
2012
2011
$ 203,444
$ 685,435
2,218
(
7,724
)
$ 205,662
$ 677,711

2012

$ 203,444

2,218
(
$ 205,662

The Group recognized net gain (loss) on valuation of financial assets of $2,581 and ($9,086) for the nine-month periods ended September 30, 2012 and 2011, respectively.

(3) ACCOUNTS RECEIVABLE, NET

ACCOUNTS RECEIVABLE, NET


Accounts receivable – third parties

Less: Allowance for doubtful accounts
(
 September 30,
2012
2011
$ 4,303,993
$ 5,946,561
652,675
)
-
$ 3,651,318
$ 5,946,561

2012

$ 4,303,993

652,675
)
$ 3,651,318

(4) INVENTORIES



Raw materials

Work in process
Finished goods

Total
 September 30, 2012

Cost
$ 1,068,168

479,412

988,089

$ 2,535,669
Allowance

( $ 144,614 )

(
22,355 )
(
47,596
)

($ 214,565
)
 Net Book Value
$ 923,554
457,057
940,493
$ 2,321,104

～ 10 ～



Raw materials

Work in process
Finished goods

Total
 September 30, 2011 Net Book Value
$ 1,202,256
723,539

1,367,221
$ 3,293,016

Cost
$ 1,275,312
(
760,899
(
1,442,941
(
$ 3,479,152
(
Allowance

$ 73,056 )


37,360 )

75,720
)

$ 186,136
)

Cost and losses incurred related to inventories:


Cost of inventories sold

Loss for market price decline and
obsolescence of inventories

 For the nine-month periods ended September 30,

2012

$ 18,181,501

38,771

$ 18,220,272
2011
$ 19,238,633
45,935
$ 19,284,568

(5) FINANCIAL ASSETS CARRIED AT COST

FINANCIAL ASSETS CARRIED AT COST


Non-current items:
Unlisted stocks

Less: Accumulated impairment loss
(
 September 30,
2012
2011
$ 300,735 $ 300,947

64,783
) (
64,783
)
$ 235,952
$ 236,164

2012

$ 300,735

64,783
) (
$ 235,952

  • A. The investments were measured at cost since their fair value cannot be measured reliably.

  • B. The Group received proceeds from the capital reduction of Pac-line Opportunity Fund amounting to $21,120 as of July 1, 2011.

(6) LONG-TERM EQUITY INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD

  • A. Details of long-term equity investments accounted for under the equity method are set forth below:
set forth below:

Investee company

JinJing Optical Technology Co., Ltd.
Phoenix Optical (Shanghai) Co., Ltd.
Less: Accumulated impairment loss

 September 30, 2012

Amount
Percentage
of ownership

$ 52,035
23.33%

340,180

40.00%
392,215
(
23,587
)

$ 368,628

 September 30, 2011

Amount


$ 52,035

340,180

392,215
(
23,587
)
$ 368,628
Amount


$ 55,084

341,613
396,697
(
23,587
)
$ 373,110
Percentage
of ownership

23.33%
40.00%

～ 11 ～

  • B. Investment gain or loss accounted for under the equity method for the nine-month periods ended September 30, 2012 and 2011 which were based on the investees‟ unreviewed financial statements are set forth below:


JinJing Optical Technology Co., Ltd.
Phoenix Optical (Shanghai) Co., Ltd.

ROPERTY AND EQUIPMENT


Buildings
$ Machinery and equipment
Test equipment
Transportation equipment
Furniture and fixtures
Leasehold improvements
Other equipment
Construction in progress and
prepayments for equipment

$

JinJing Optical Technology Co., Ltd.
Phoenix Optical (Shanghai) Co., Ltd.

ROPERTY AND EQUIPMENT


Buildings
$ Machinery and equipment
Test equipment
Transportation equipment
Furniture and fixtures
Leasehold improvements
Other equipment
Construction in progress and
prepayments for equipment

$		 For the nine-month periods ended For the nine-month periods ended For the nine-month periods ended For the nine-month periods ended September 30,
2011
11,939)
12,045
106
Net
Book Value
$ 2,717,454
696,851
81,741
8,409
63,275
14,581
123,934
71,639
$ 3,777,884





2012

($ 3,452) ($ (
14,676
)
($ 18,128
) $ September 30, 2012

($
$


Cost


2,956,530
(
1,731,387
(
192,833
(
26,016
(
172,310
(
46,215
(
266,730
(
71,639

5,463,660
(
Accumulated
Depreciation

$ 239,076 )


1,034,536 )

111,092 )

17,607 )

109,035 )

31,634 )

142,796 )
-

$ 1,685,776
)
$

$

(7) PROPERTY AND EQUIPMENT



Buildings

Machinery and equipment
Test equipment
Transportation equipment
Furniture and fixtures
Leasehold improvements
Other equipment
Construction in progress and
prepayments for equipment

 September 30, 2011 September 30, 2011 Net
Book Value

Cost


$ 3,027,721
(
1,462,730
(
168,138
(
23,893
(
150,950
(
34,605
(
232,287
(
46,885

$ 5,147,209
(
Accumulated
Depreciation

$ 167,551 )


953,416 )

90,127 )

14,918 )

85,510 )

15,476 )

103,674 )
-

$ 1,430,672
)
$ 2,860,170
509,314
78,011
8,975
65,440
19,129
128,613
46,885
$ 3,716,537

No interest expense was capitalized for the nine-month periods ended September 30, 2012 and 2011.

～ 12 ～

(8) ASSETS LEASED TO OTHER

ASSETS LEASED TO OTHER


Buildings (including leased land)


Buildings (including leased land)
 September 30, 2012

Cost
$ 1,493,989
Allowance

($ 19,766
)

September 30, 2011		 Net Book Value
$ 1,474,223
Net Book Value

Cost
$ 1,493,989
Allowance

($ 8,471
)
$ 1,485,518

The Company acquired the Taipei building for operating use at the end of 2010. However, since this building is still under a certain unexpired lease agreement, the Company continuously leases the building to the lessee until the lease agreement is expired, and is currently recognized as “Assets leased to other”.

(9) OTHER PAYABLES

OTHER PAYABLES


Accrued dividends, employees‟ bonuses and
remuneration to directors and supervisors

Payables on equipment and construction
Others

 September 30,

2012

$ 149,511

61,598
131,930

$ 343,039
2011
$ 1,027,118
183,350
106,763
$ 1,317,231

(10) COMMON STOCK

  • A. As of September 30, 2012, the Company‟s authorized capital was $5,000,000 at $10 (in NT dollars) par value per share. As of September 30, 2012, the total issued and outstanding capital was $3,961,013.

  • B.The stockholders at their meeting on June 15, 2011 adopted a resolution to capitalize retained earnings of $37,465 and employees‟ bonus of $94,679 by issuing 6,237,361 shares of new common stocks (including 2,490,900 shares for employees‟ stock bonus ). In accordance with the resolution adopted by the Board of Directors on August 31, 2011, the Company set November 6, 2011 as the base date for this capital increase. The registration of this capital increase had been completed.

  • C.As of September 30, 2012, the Company‟s employees had exercised 7,642 units of employee stock options in accordance with the Option Plan, representing 7,642,000 shares of common stock. The exercise price was $10 ~ $29.5 (in NT dollars) per share. The registration of this capital increase had been completed.

～ 13 ～

(11) SHARE-BASED PAYMENT － EMPLOYEE COMPENSATION PLAN

  • A. As of September 30, 2012, the Company‟s share-based payment transactions are set forth below:
Type of
arrangement
Employee stock
options
Treasury stock
transferred to
employees		 Grant date



June 13, 2008、
October 31, 2008、
March 23, 2009、
October 28, 2011
and March 21, 2012
March 15, 2011 and
September 9, 2011		 Quantity
granted
(in thousand
shares)
18,000
2,264		 Contract
period
8.8 years~
9.6 years
-		 Vesting
conditions
Note
Vest
immediately		 Actual resignation
rate in the current
period
-
-		 Estimated future
resignation rate

10～20%
-

Note: 2 years‟ service vest 40%, 3 years‟ service vest 70%, 4 years‟ service vest 100%.

B. Details of the employee stock options are set forth below:





Outstanding at the
beginning of the period
Options granted
Distribution of stock dividends
or adjustments for number of
options
Options waived
Options exercised
(
Options forfeited

Outstanding at the end
of the period

Exercisable options at
the end of the period

Approved and not yet
issued options at the end of
the period
 For the nine-month period
ended September 30, 2012


In thousands of
shares
Weighted average
exercise price
(in NT dollars)


13,788
$ 25.8
3,000
25.4
-
-
-
-
(

580 )
23.7
(
-
-

16,208
24.0

9,062
23.6

-
 For the nine-month period
ended September 30, 2011
In thousands of
shares
Weighted average
exercise price
(in NT dollars)
11,530
$ 27.5
-
-
-
-

150 )
-

412 )
25.0
-
-
10,968
27.6
6,288
28.5
6,000

In thousands of
shares



13,788

3,000
-
-

580 )
-
16,208
9,062
-
In thousands of
shares



11,530

-
-

150 )

412 )
-
10,968
6,288
6,000
  • C. The weighted-average stock price of stock options at exercise date of the nine-month period ended September 30, 2012 was $21.93 (in dollars).

～ 14 ～

  • D. The exercise price and weighted-average remaining vesting periods of the employee stock options outstanding as of September 30, 2012 and 2011 are set forth below:
orth below:
Employee stock option September 30, 2012

Exercise price
(in NT dollars)
Weighted-average
remaining vesting
period

$24.6、$20.6
$19.4、$25.6
and $25.4
6.36 years		 September 30, 2011

Exercise price
(in NT dollars)



$29.5、$24.7
and $23.2
Weighted-average
remaining vesting
period
6.25 years
  • E. For the stock options granted of the nine-month period ended September 30, 2012 with the compensation cost accounted for using the fair value method, their fair value on the grant date is estimated using the Black-Scholes option-pricing model. The parameters used in the estimation of the fair value are as follows:
Type of
arrangement
Employee
stock options		 Grant date

March 21, 2012		 Stock price
(in NT dollars)
Exercise
price
(in NT dollars)
(Note)
$ 27.85
$ 27.85		 Expected
price
volatility
33.54%		 Expected
vesting
period
4.9 years		 Expected
dividend
yield rate
1.4%		 Risk-free
interest
rate

1.08%		 Fair value
per unit
(in NT dollars)

$ 7.35

Note: The exercise price of stock options was adjusted based on the cash dividends and stock dividends per share distributed.

  • F. Liabilities arising from share-based payment transactions are shown below:
Equity - settled
Cash - settled		 For the nine-month periods ended September 30,
2012
2011
$ 15,620
$ 25,215

-

-
$ 15,620
$ 25,215		 For the nine-month periods ended September 30,
2012
2011
$ 15,620
$ 25,215

-

-
$ 15,620
$ 25,215




2012

$ 15,620

-

$ 15,620

(12) TREASURY STOCK

A.

Reason of reacquisition

Transfer to Employees
Reason of reacquisition

Transfer to Employees		 For the nine-month period ended September 30, 2012 (in thousands of shares) For the nine-month period ended September 30, 2012 (in thousands of shares) For the nine-month period ended September 30, 2012 (in thousands of shares) For the nine-month period ended September 30, 2012 (in thousands of shares)

Beginning shares
Additions
Disposals
Ending shares
19,086

1,250

-

20,336
For the nine-month period ended September 30, 2011 (in thousands of shares)

Beginning shares

12,460
Additions

9,208
(
Disposals

4,764
)
Ending shares
16,904

As of September 30, 2012, the shares bought back as treasury stock amounted to $736,761.

  • B. Pursuant to the R.O.C. Securities and Exchange Law, the number of shares bought back as treasury stock should not exceed 10% of the number of the Company‟s issued and outstanding shares and the amount bought back should not exceed the sum of retained earnings, paid-in capital in excess of par value and realized capital reserve.

～ 15 ～

  • C. Pursuant to the R.O.C. Securities and Exchange Law, treasury stock should not be pledged as collateral and is not entitled to dividends before it is reissued to the employees.

  • D. The transfer price of treasury stock to employees was initially set at $47.51 (in NT 、 、

  • dollars) $44.05 (in NT dollars) $31.75 (in NT dollars) and $17.65 (in NT dollars) in 2010 for the first time 、 the second time 、 2011 and 2012, respectively, and the 、

  • transfer price was adjusted to $45.04 (in NT dollars) $43.32 (in NT dollars) and $31.22 (in NT dollars) per share in accordance with the earnings distribution for the 、

  • fiscal years of 2010 for the first time the second time and 2011, respectively.

(13) CAPITAL RESERVE

  • A. Pursuant to the R.O.C. Company Law, capital reserve arising from paid-in capital in excess of par value on issuance of common stocks and donations can be used to cover accumulated deficit or to issue new stocks or cash to shareholders in proportion to their share ownership, provided that the Company has no accumulated deficit. Further, the R.O.C. Securities and Exchange Law requires that the amount of capital reserve to be capitalized mentioned above should not exceed 10% of the paid-in capital each year. Capital reserve should not be used to cover accumulated deficit unless the legal reserve is insufficient.

B. Please see Note 4 (11) for details of capital reserve from employee stock options.

(14) RETAINED EARNINGS

  • A. According to the Company‟s Articles of Incorporation, the annual earnings, if any, shall first be used to pay all taxes and offset prior years‟ operating losses and then 10% of the remaining amount shall be set aside as legal reserve. Special reserve shall be set aside in accordance with the rules set forth in the Securities and Exchange Law, and remaining amount shall be distributed in the following order:

  • (a) allocating 10% to 20% as employees‟ bonus;

  • (b) allocating 2% as directors‟ and supervisors‟ remuneration; and

  • (c) distributing the remaining amount as common stockholders‟ dividends in accordance with the resolution adopted by the Board of Directors and approved at the stockholders‟ meeting.

  • B. Except for covering accumulated deficit or issuing new stocks or cash to shareholders in proportion to their share ownership, the legal reserve shall not be used for any other purpose. The use of legal reserve for the issuance of stocks or cash to shareholders in proportion to their share ownership is permitted, provided that the balance of the reserve exceeds 25% of the Company‟s paid-in capital.

  • C. In accordance with relevant laws or regulations of the Securities and Futures Bureau, the Company shall set aside special reserve at the same amount as the reduction in stockholders‟ equity, and is not entitled to dividends.

～ 16 ～

  • D. The amount of dividends appropriated is based on the Company‟s current year‟s net income and prior years‟ retained earnings, taking into account the Company‟s financial structure and future operating plans. The distribution ratio of cash dividends to stock dividends is based on the Company‟s funding status, diluted earnings per share and other factors. According to the dividend policy adopted by the Board of Directors, cash dividends shall account for at least 20% of the total dividends distributed. Dividends appropriation shall be resolved by the stockholders at the stockholders‟ meeting.

  • E. The appropriation of 2011 earnings had been resolved at the stockholders‟ meeting on June 13, 2012 and the appropriation of 2010 earnings had been resolved at the stockholders‟ meeting on June 15, 2011. Details are summarized below:

Legal reserve

Special reserve

Stock dividends
Cash dividends

 2011 earnings
Amount
Dividends per share
(in NT dollars)
$ 19,184
-


488,347 )
-
-
-
564,809
Around $1.5

$ 95,646
 2010 earnings
Amount
Dividends per share
(in NT dollars)
$ 132,767
-
488,347
-
37,465 Around $ 0.1
749,292
Around $ 2.0
$ 1,407,871


Amount
$ 19,184

488,347 )
-
564,809
$ 95,646

Amount
$ 132,767
488,347
37,465
749,292

$ 1,407,871

(

The appropriation of 2011 earnings was the same as that approved by the Board of Directors on March 21, 2012; the 2011 directors‟ and supervisors‟ remuneration and employees‟ cash bonus as appropriated during the stockholders‟ meeting on June 13, 2012 were $13,220 and $99,151, respectively. The 2010 directors‟ and supervisors‟ remuneration, employees‟ stock bonus and cash bonus as appropriated during the stockholders‟ meeting on June 15, 2011 were $14,131, $94,679 and $46,633, respectively.

  • F. The estimated amounts of employees‟ bonus were $34,680 and $137,611 and the estimated amounts of directors‟ and supervisors‟ remuneration were $4,624 and $13,761 for the nine-month periods ended September 30, 2012 and 2011, respectively, and were recognized as operating costs or operating expenses for 2012 and 2011, respectively. While, if the estimated amounts are different from the amounts approved by the stockholders subsequently, the difference is recognized as gain or loss in the next year. Information on the appropriation of the Company‟s earnings as resolved by the Board of Directors and approved by the stockholders will be posted in the “Market Observation Post System” at the website of the Taiwan Stock Exchange.

～ 17 ～

(15) EARNINGS PER SHARE

Consolidated net income
Basic earnings per share:
Net income attributable to
common stockholders of
parent company
Effects of potential diluted
earnings per share:
Employee stock options
Employees bonus
Diluted earnings per share:
Net income attributable to
common stockholders of
parent company plus effect
of dilutive share equivalent



For the nine-month period ended September 30, 2012 For the nine-month period ended September 30, 2012 For the nine-month period ended September 30, 2012 For the nine-month period ended September 30, 2012 For the nine-month period ended September 30, 2012 (in NT dollars)



Amount

Before tax
After tax

$ 303,589
$ 256,886
$ 246,816
$ 256,886
-
-
-
-

$ 246,816
$ 256,886
Weighted-average
outstanding
common shares
(Note)

376,809
122
1,987

378,918

Earnings per share
Before tax
$ 303,589
$ 246,816
-
-
$ 246,816






Before tax

$ 0.66


$ 0.65
After tax
$ 0.68
$ 0.68
Consolidated net income
Basic earnings per share:
Net income attributable to
common stockholders of
parent company
Effects of potential diluted
earnings per share:
Employee stock options
Employees bonus
Diluted earnings per share:
Net income attributable to
common stockholders of
parent company plus effect
of dilutive share equivalent		 For the nine-month period ended September 30, 2011 For the nine-month period ended September 30, 2011 For the nine-month period ended September 30, 2011 For the nine-month period ended September 30, 2011 For the nine-month period ended September 30, 2011 (in NT dollars)






Amount

Before tax
After tax

$ 782,190
$ 764,504
$ 715,192
$ 764,504
-
-
-
-

$ 715,192
$ 764,504
Weighted-average
outstanding
common shares
(Note)

379,029
3,432
6,018

388,479

Earnings per share
Before tax
$ 782,190
$ 715,192
-
-
$ 715,192






Before tax

$ 1.89


$ 1.84
After tax
$ 2.02
$ 1.97

Note: In thousands of shares.

  1. RELATED PARTY TRANSACTIONS A. Names of the related parties and their relationship with the Company

Names of related parties Relationship with the Company JinJing Optical Technology Co., Ltd. An investee company accounted for under the equity method by the Company‟s subsidiary Gianta Co., Ltd. A corporate director of Gianta Co., Ltd. Pac-link Opportunity Fund Co., Ltd. A corporate supervisor of Pac-link Opportunity Fund Co., Ltd. Phoenix Optical (Shanghai) Co., Ltd. An investee company accounted for under the equity method by the Company‟s subsidiary

～ 18 ～

B. Significant related party transactions and balances

(1) Purchases

For the nine-month periods ended September 30, 2012 and 2011, the net purchases from the related parties were $12,631 and $127,293, respectively, which were less than 10% of the total amount of net purchases.

Purchase price and payment terms from related parties are comparable with those from other suppliers. The payment term was approximately net 30 ~120 days.

(2) Accounts payable

As of September 30, 2012 and 2011, the total accounts payable from related parties were $95 and $30,736, respectively, which were less than 10% of the total amount of accounts payable.

6. ASSETS PLEDGED AS COLLATERAL

None.

7. CONTINGENT LIABILITIES

Kodak US has filed a civil lawsuit against the Company in the New York District Court on January 12, 2012 (herein referred to as the “Lawsuit”) due to a dispute in the calculation of royalty payment. The Lawsuit is not a patent infringement litigation. The Company is currently trying to negotiate with Kodak US to settle the Lawsuit out-of-court. The financial effect to the Company cannot be reasonably determined as of the report signing date of the report of independent accountants as the court proceeding is still under the initial process without any specific damage claim.

8. SIGNIFICANT CASUALTY LOSS

None.

9. SIGNIFICANT SUBSEQUENT EVENTS

None.

～ 19 ～

10. OTHERS

(1) FAIR VALUE OF FINANCIAL INSTRUMENTS

THERS
FAIR VALUE OF FINANCIAL INSTRUMENTS
September 30, 2012
September 30, 2011
Fair value

Fair value
Book value
Quotations
in an active
market
Estimated
using a
valuation
technique
Book value
Quotations
in an active
market
Estimated
using a
valuation
technique
Non-derivative financial instruments
Assets
Financial assets with fair value equal
to book value
$ 9,274,017 $ - $ 9,274,017 $ 12,196,448 $ - $ 12,196,448
Financial assets at fair value through
profit or loss
205,662
205,662
-
677,711
677,711
-
Financial assets carried at cost
235,952
-
-
236,164
-
-
Liabilities
Financial liabilities with fair value
equal to book value
6,607,964
-
6,607,964
9,611,912
-
9,611,912
Derivative financial instruments
: None.		 September 30, 2011

Fair value
Quotations
in an active
market




$ -

677,711

-

-		 Estimated
using a
valuation
technique
$ 12,196,448

-

-

9,611,912

The methods and assumptions used to estimate the fair values of the above financial instruments are summarized below:

For short-term instruments, the fair values were determined based on their carrying values because of the short maturities of the instruments. This method was applied to cash and cash equivalents, notes receivable, accounts receivable, short–term loans, notes payable and accounts payable.

(2) INFORMATION ON INTEREST RATE RISK POSITIONS

  • A. As of September 30, 2012 and 2011, the financial assets with fair value risk due to the change of interest amounted to $5,095,062 and $5,439,704, respectively. There were no financial liabilities with fair value risk; the financial assets with cash flow risk due to the change of interest amounted to $493,043 and $776,631, respectively. The financial liabilities with cash flow risk due to the change of interest amounted to $520,000 and $0, respectively.

  • B. For the nine-month periods ended September 30, 2012 and 2011, the interest income on financial assets or financial liabilities that are not at fair value through profit or loss amounted to $96,532 and $121,196, respectively, and interest expense amounted to $434 and $0, respectively.

(3) PROCEDURES OF FINANCIAL RISK CONTROL AND HEDGE

The Group‟s activities expose the Group to a variety of financial risks: market risk, credit risk, liquidity risk and cash flow interest rate risk. The Group‟s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group‟s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by a central treasury department (Group Treasury) in accordance with the policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close cooperation with the Group‟s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and the investment of excess liquidity.

～ 20 ～

(4) INFORMATION OF MATERIAL FINANCIAL RISK

A. Market risk

(A) Foreign exchange risk

The Group adopts the forward contract to hedge the currency exchange risk. As the amounts and period of the Group‟s foreign currency exposure and forward contracts are similar, the Group estimates no material risk would arise.

The foreign exchange risk largely arises from the Group‟s business that are not denominated in the functional currency (the Company‟s and some subsidiaries‟ functional currency is NTD, some subsidiaries‟ functional currency is RMB). Financial assets and financial liabilities which are significantly affected by foreign exchange rate fluctuations were as follows:

Financial Assets
Monetary item
USD:NTD
USD:RMB
Long-term equity
investment accounted for
under the equity method
USD:NTD
Financial Liabilities
Monetary item
USD:NTD
USD:RMB		 For the nine-month periods ended September 30, For the nine-month periods ended September 30, For the nine-month periods ended September 30,

2012
Foreign
Currency
Exchange
rate
(In thousands)
USD
163,154
1:29.295
USD
100,858
1:6.341
USD
12,583
1:29.295
USD
4,541
1:29.295
USD
143,155
1:6.341
2011
Foreign
Currency

(In thousands)
USD
163,154
USD
100,858
USD
12,583
USD
4,541
USD
143,155		 Foreign
Currency

(In thousands)
USD
177,438
USD
102,715
USD
12,241
USD
7,099
USD
222,245		 Exchange
rate
1:30.48
1:6.3549
1:30.48
1:30.48
1:6.3549
  • (B) Price risk

The Group is exposed to equity securities price risk because of investments held by the Group. The Group sets limits to control the transaction volume and stop-loss amount to reduce its market risk.

B. Credit risk

The Group has lower significant concentrations of credit risk. It has policies in place to ensure that wholesale sales of products are made to customers with an appropriate credit history. The maximum loss to the Group is the book value of accounts receivable.

C. Liquidity risk

The Group invests in financial assets which are traded in active market and can be readily converted into certain amount of cash approximate to their fair values. The liquidity risk exposure is low.

D. Interest risk: None.

～ 21 ～

11.ADDITIONAL DISCLOSURES REQUIRED BY THE SECURITIES AND FUTURES BUREAU

(1) RELATED INFORMATION OF SIGNIFICANT TRANSACTIONS:

Not required for the third-quarter consolidated financial statements in accordance with the Gin-Gwen-Jen (6) Letter No. 0960064020 issued by the Financial Supervisory Commission, Executive Yuan, R.O.C..

(2) INFORMATION OF INVESTEE COMPANIES:

Not required for the third-quarter consolidated financial statements in accordance with the Gin-Gwen-Jen (6) Letter No. 0960064020 issued by the Financial Supervisory Commission, Executive Yuan, R.O.C..

(3) RELEVANT INFORMATION REGARDING INVESTMENT IN MAINLAND CHINA:

Not required for the third-quarter consolidated financial statements in accordance with the Gin-Gwen-Jen (6) Letter No. 0960064020 issued by the Financial Supervisory Commission, Executive Yuan, R.O.C..

～ 22 ～

(4) THE RELATIONSHIP AND SIGNIFICANT TRANSACTIONS BETWEEN THE COMPANY AND ITS SUBSIDIARIES

For the nine-month period ended September 30, 2012:

Company Counterparty Counterparty Relationship with the
Company (Note 1)		 General transactions General transactions
General ledger account Amount Terms Percentage of revenue
or assets (Note 2)
(1)
(1)
(2)
(2)
(3)
(3)
Relationship with the
Company (Note 1)		 Purchases
Accounts Payable
Sales
Accounts Receivable
Purchases
Sales		 82%
27%
82%
27%
85%
85%
General ledger account Amount Terms Percentage of revenue
or assets (Note 2)
Altek International
Investment Co., Ltd.
″
Altek Corporation
″
Altek (Kunshan) Co., Ltd.
Altek International
Investment Co., Ltd.		 (1)
(1)
(2)
(2)

(3)
(3)		 Purchases
Accounts Payable
Sales
Accounts Receivable
Purchases
Sales		 $ 17,576,841
6,052,900
17,576,841
6,052,900
18,585,023
18,585,023		 Net 75 days
″
″
″
″
″		 83%
27%
83%
27%
88%
88%

Note 1: The relationship with the transaction parties are as follows: (1) The Company to the consolidated subsidiary.

(2) The consolidated subsidiary to the Company.

(3) The consolidated subsidiary to the consolidated subsidiary.

Note 2: Ratio of asset/liability accounts is divided by consolidated total assets, and ratio of profit/loss accounts is divided by consolidated sales revenue.

～ 23 ～

12. OPERATING SEGMENTS

(1) General Information

The Group mainly operates in one segment. The chief operating decision-maker reviews the Group‟s reporting to assess performance and allocate resources. The Group mainly has a single reportable segment.

(2) Measurement of segment information

The chief operating decision-maker assesses the segment performance through the consolidated financial statements which are prepared in accordance with the generally accepted accounting principles in the Republic of China.

(3) Information on segment profit (loss), assets and liabilities


Revenue from external customers

Inter-segment revenue

Total segment operating profit

Total segment assets
 For the nine-month periods ended September 30, For the nine-month periods ended September 30, For the nine-month periods ended September 30,





2012

$ 19,630,710

$ -

$ 256,886

$ 18,430,330
2011
$ 21,168,799
$ -
$ 764,504
$ 22,542,778

(4) Reconciliation for segment profit (loss), assets and liabilities

None.

13. DISCLOSURES RELATING TO THE ADOPTION OF IFRSs

Pursuant to the regulations of the former Financial Supervisory Commission, Executive Yuan, R.O.C., effective January 1, 2013, a public company whose stock is listed on the Taiwan Stock Exchange Corporation or traded in the GreTai Securities Market should prepare financial statements in accordance with the International Financial Reporting Standards (“IFRSs”), International Accounting Standards (“IASs”), and relevant interpretations and interpretative bulletins that are ratified by the Financial Supervisory Commission.

The Group discloses the following information in advance prior to the adoption of IFRSs under the requirements of Jin-Guan-Zheng-Shen-Zi Order No. 0990004943 of the Financial Supervisory Commission, dated February 2, 2010:

Major contents and status of execution of the Company‟s plan for IFRSs adoption:

  • A. The Company has formed an IFRSs group headed by the group leader, which is responsible for setting up a plan relative to the Company‟s transition to IFRSs. The major contents and status of execution of this plan are outlined below:
Working Items for IFRSs Adoption Status of
Execution
a. Formation of an IFRSsgroup Completed
b. Settingupaplan relative to the Company‟s transition to IFRSs Completed
c. Identification of the differences between current accounting policies
and IFRSs		 Completed
d. Identification of consolidated entities under the IFRSs framework Completed

～ 24 ～

Working Items for IFRSs Adoption Status of
Execution
e. Evaluation of the impact of each exemption and option of the
Company under IFRS 1 – First-time Adoption of International
Financial ReportingStandards		 Completed
f. Evaluation of needed information system adjustments Completed
g. Evaluation of needed internal control adjustments Completed
h. Establish IFRSs accounting policies Completed
i. Selection of exemptions and options available under IFRS 1 –
First-time Adoption of International Financial ReportingStandards		 Completed
j. Preparation of statement of financial position on the date of
transition to IFRSs		 Completed
k. Preparation of IFRSs comparative financial information for 2012 Inprocess
l. Completion of relevant internal control (including financial reporting
process and relevant information system)adjustments		 In process
  • B. Material differences that may arise between current accounting policies used in the preparation of financial statements and IFRSs and “Rules Governing the Preparation of Financial Statements by Securities Issuers” that will be used in the preparation of financial statements in the future:

The Group uses the IFRSs already ratified currently by the Financial Supervisory Commission and the “Rules Governing the Preparation of Financial Statements by Securities Issuers” that will be applied in 2013 as the basis for evaluation of material differences in accounting policies as mentioned above. However, the Group‟s current evaluation results may be different from the actual differences that may arise when new issuances of or amendments to IFRSs are subsequently ratified by the Financial Supervisory Commission or relevant interpretations or amendments to the “Rules Governing the Preparation of Financial Statements by Securities Issuers” come in the future.

Material differences identified by the Group that may arise between current accounting policies used in the preparation of financial statements and IFRSs and “Rules Governing the Preparation of Financial Statements by Securities Issuers” that will be used in the preparation of financial statements in the future. The Group has also elected to use certain exemptions under rules in IFRS 1, “First-time Adoption of International Financial Reporting Standards”, please refer to Note 13(c). The effects are outlined below:

  1. Material differences of adjustments on assets and liabilities on January 1, 2012.
R.O.C. SFAS Adjustments IFRSs Explanation
Deferred income tax
assets - current		 $ 235,716 ( $ 235,716 ) $ -
(i)
Deferred income tax
assets - non-current		 47,125 325,742 372,867
(i)
Others 18,715,707
-		 18,715,707
Total assets $ 18,998,548 $ 90,026 $ 19,088,574

～ 25 ～

R.O.C. SFAS Adjustments IFRSs Explanation
Accrued pension
liabilities		 $ 1,632 $ 14,718 $ 16,350 (ii)
Deferred income tax
liabilities - non-current		 839,109 90,026 929,135 (i)
Others 7,336,408
-		 7,336,408
Total liabilities $ 8,177,149 $ 104,744 $ 8,281,893
Capital reserve -
long-term investments		 $ 13,187 ( $ 13,187 ) $ - (iii)
Retained earnings 5,069,098
142,456		 5,211,554 ( v )
Cumulated translation
adjustments		 143,987 (
143,987 )		 - (iv)
Others 5,595,127
-		 5,595,127
Total stockholders‟
equity		 $ 10,821,399 ( $ 14,718 ) $ 10,806,681

Explanation for adjustments:

  • (i) In accordance with current accounting standards in the R.O.C., a deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. However, a deferred tax asset or liability that is not related to an asset or liability for financial reporting should be classified as current or noncurrent according to the expected time period to realize or settle a deferred tax asset or liability. However, under IAS 1, “Presentation of Financial Statements”, an entity should not classify a deferred tax asset or liability as current. Accordingly, the Company should reclassify the account “deferred income tax assets” from current to non-current on transition date.

  • (ii) The discount rate used to calculate pensions shall be determined with reference to the factors specified in R.O.C. SFAS 18, paragraph 23. However, IAS 19, “Employee Benefits”, requires an entity to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds that match the currency at the end day of the reporting period and duration of its pension plan; when there is no deep market in corporate bonds, an entity is required to use market yields on government bonds (at the end day of the reporting period) instead. Besides, in accordance with current accounting standards in the R.O.C., the unrecognized transitional net benefit obligation should be amortized on a straight-line basis over the average remaining service period of employees still in service and expected to receive benefits. However, in accordance with IAS 19, “Employee Benefits”, the unrecognized transitional net benefit obligation should be recognized as an expense immediately at the date of adoption. Due to the above differences and in order to eliminate the difference in employee benefits upon adoption of IFRS, the Company increased the accrued pension liabilities by $14,718 and simultaneously reduced retained earnings by $14,718 on transition date.

  • (iii) In accordance with current accounting standards in the R.O.C., if an investee company issues new shares and original shareholders do not purchase or acquire new shares proportionately, but the investor company does not lose its significant influence over the investee company, the investment percentage, and therefore the equity in net assets for the investment that an investor

～ 26 ～

company has invested, will be changed. Such difference shall be used to adjust the „Additional paid-in capital‟ and the „Long-term equity investments‟ accounts. However, in accordance with IAS 28, “Investments in Associates”, increases in investment percentage is accounted for as an acquisition of investment; conversely, decreases in investment percentage is accounted for as a disposal of investment and any related disposal gain or loss is recognized. Accordingly, the Company reduced the additional paid-in capital from investee under equity method by $13,187 and simultaneously increased the retained earnings by $13,187 on transition date.

  • (iv) The Group elected to use the exemption of the cumulative translation differences relating to the investment in a foreign operation. The subsequent changes in foreign exchange rate are treated in accordance with IAS 21, “Effects of Changes in Foreign Exchange Rates”. Therefore, the Group decreased the cumulative translation differences and increased retained earnings by $143,987, respectively.

  • (v) In accordance with Jin-Guan-Zheng-Fa-Zi Order No. 1010012865 of the FSC, dated April 6, 2012, the Group shall set aside special reserve by $142,456 for the net increases of retained earnings upon adoption of IFRS.

  • Material differences of adjustments on assets and liabilities on September 30, 2012.

R.O.C. SFAS Adjustments IFRSs Explanation
Deferred income tax
assets - current		 $ 308,542 ( $ 308,542 ) $ - (i)
Deferred income tax
assets - non-current		 45,311 342,623 387,934 (i)
Others 18,076,477 - 18,076,477
Total assets $ 18,430,330 $ 34,081 $ 18,464,411
Accrued pension
liabilities		 $ 2,624 $ 14,718 $ 17,342 (ii)
Deferred income tax
liabilities - non-current		 805,878 34,081 839,959
Others 7,411,421 - 7,411,421
Total liabilities $ 8,219,923 $ 48,799 $ 8,268,722
Capital reserve -
long-term investments		 $ 13,187 ( $ 13,187 ) $ - (iii)
Retained earnings 4,761,175 142,456 4,903,631 ( v )
Cumulated translation
adjustments		 (
166,394 )		 (
143,987 )		 (
310,381 )		 (iv)
Others 5,602,439 - 5,602,439
Total stockholders‟
equity		 $ 10,210,407 ( $ 14,718 ) $ 10,195,689

Explanation for adjustments:

  • (i) In accordance with current accounting standards in the R.O.C., a deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. However, a deferred tax asset or liability that is not related to an asset or liability for financial reporting should be classified as current or noncurrent according to the expected time period to realize or settle a deferred tax asset or liability. However, under IAS 1,

～ 27 ～

“Presentation of Financial Statements”, an entity should not classify a deferred tax asset or liability as current. Accordingly, the Company should reclassify the account “deferred income tax assets” from current to non-current on transition date.

  • (ii) The discount rate used to calculate pensions shall be determined with reference to the factors specified in R.O.C. SFAS 18, paragraph 23. However, IAS 19, “Employee Benefits”, requires an entity to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds that match the currency at the end day of the reporting period and duration of its pension plan; when there is no deep market in corporate bonds, an entity is required to use market yields on government bonds (at the end day of the reporting period) instead. Besides, in accordance with current accounting standards in the R.O.C., the unrecognized transitional net benefit obligation should be amortized on a straight-line basis over the average remaining service period of employees still in service and expected to receive benefits. However, in accordance with IAS 19, “Employee Benefits”, the unrecognized transitional net benefit obligation should be recognized as an expense immediately at the date of adoption. Due to the above differences and in order to eliminate the difference in employee benefits upon adoption of IFRS, the Company increased the accrued pension liabilities by $14,718 and simultaneously reduced retained earnings by $14,718 on transition date.

  • (iii) In accordance with current accounting standards in the R.O.C., if an investee company issues new shares and original shareholders do not purchase or acquire new shares proportionately, but the investor company does not lose its significant influence over the investee company, the investment percentage, and therefore the equity in net assets for the investment that an investor company has invested, will be changed. Such difference shall be used to adjust the „Additional paid-in capital‟ and the „Long-term equity investments‟ accounts. However, in accordance with IAS 28, “Investments in Associates”, increases in investment percentage is accounted for as an acquisition of investment; conversely, decreases in investment percentage is accounted for as a disposal of investment and any related disposal gain or loss is recognized. Accordingly, the Company reduced the additional paid-in capital from investee under equity method by $13,187 and simultaneously increased the retained earnings by $13,187 on transition date.

  • (iv) The Group elected to use the exemption of the cumulative translation differences relating to the investment in a foreign operation. The subsequent changes in foreign exchange rate are treated in accordance with IAS 21, “Effects of Changes in Foreign Exchange Rates”. Therefore, the Group decreased the cumulative translation differences and increased retained earnings by $143,987, respectively.

  • (v) In accordance with Jin-Guan-Zheng-Fa-Zi Order No. 1010012865 of the FSC, dated April 6, 2012, the Group shall set aside special reserve by $142,456 for the net increases of retained earnings upon adoption of IFRS.

～ 28 ～

  1. Material differences of adjustments on profit and loss for the nine-month period ended September 30, 2012.
R.O.C. SFAS Adjustments IFRSs Explanation
Operatingrevenues $ 19,630,710 $ - $ 19,630,710
Operatingcosts (
18,220,272 )		 - (
18,220,272 )
Grossprofit 1,410,438 - 1,410,438
Operatingexpenses (
1,240,645 )		 - (
1,240,645 )
Operatingincome 169,793 - 169,793
Non-operating
revenues and income		 152,432 - 152,432
Non-operating
expenses and loss		 (
18,636 )		 - (
18,636 )
Income before
income tax		 303,589 - 303,589
Income tax expense (
46,703 )		 - (
46,703 )
Consolidated net
income		 $ 256,886 $ - $ 256,886

Explanation for adjustments: No significant differences.

  • C. The Group elected to use the following exemptions in accordance with IFRS 1 “First-time adoption of International Financial Reporting Standards” and “Rules Governing the Preparation of Financial Statements by Securities Issuers” effective in 2013.

  • Business Combinations

For business combinations before the date of transition to IFRSs (transition date), the Group elects not to apply IFRS 3 “Business Combinations” retrospectively.

  1. Share-based payment transactions

For the vested equity instruments of share-based payment transactions before the transition date, the Group elects not to apply IFRS 2 “Share-base Payment” retrospectively.

  1. Employee benefits

The Group elects to recognize all actuarial gains or losses up to the transition date into retained earnings.

  1. Cumulative translation differences

The Group elects to use the exemption of the cumulative translation differences relating to the investment in a foreign operation. The subsequent changes in foreign exchange rate are treated in accordance with IAS 21, “Effects of Changes in Foreign Exchange Rates”.

  1. Compound financial instruments

For compound financial instruments which were not outstanding at the transition date, the Group elects the exemptions and does not have to split the financial instruments into separate liability and equity components.

Some of the above differences may not have a material effect on the Group in transition to IFRSs due to the exemption rules in IFRS 1, “First-time Adoption of International Financial Reporting Standards”, adopted by the Group.

～ 29 ～

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