PHIHONG - Audit Report / Information 2012

Phihong Technology Co., Ltd. and Subsidiaries

Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders Phihong Technology Co., Ltd.

We have audited the accompanying consolidated balance sheets of Phihong Technology Co., Ltd. and subsidiaries (collectively, the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Phihong Technology Co., Ltd. and subsidiaries as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China.

March 22, 2013

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China.

For the convenience of readers, the auditors’ report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors’ report and consolidated financial statements shall prevail. Also, as stated in Note 2 to the consolidated financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English.

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars, Except Par Value)

ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Accounts receivable (Notes 2 and 5) Other financial assets - current Inventories (Notes 2 and 6) Deferred income tax asset - current (Notes 2 and 18) Other current assets Total current assets FUNDS AND LONG-TERM INVESTMENTS Available-for-sale financial assets - noncurrent (Notes 2 and 7) Financial assets carried at cost - noncurrent (Notes 2 and 8) Long-term equity investments at accounted for by the equity method (Notes 2 and 9) Total funds and long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 10) Cost Less accumulated depreciation Prepayments for purchase of equipment Property, plant and equipment, net INTANGIBLE ASSETS (Note 2) Computer software cost Land use rights Total intangible assets OTHER ASSETS Refundable deposits Others Total other assets		2012 Amount % $ 1,543,288 16 1,907,482 20 54,641 1 1,680,224 17 37,880 - 154,722 2 5,378,237 56 30,620 - 90,945 1 339,761 4 461,326 5 5,670,841 60 (2,461,494) (26) 307,662 3 3,517,009 37 42,760 1 131,847 1 174,607 2 28,133 - 3,924 - 32,057 -		2011 Amount % $ 2,119,386 20 1,936,108 18 81,406 1 2,080,000 20 55,860 - 219,118 2 6,491,878 61 33,357 - 93,254 1 355,603 4 482,214 5 5,512,773 52 (2,133,757) (20) 93,314 1 3,472,330 33 19,729 - 117,778 1 137,507 1 32,438 - 18,306 - 50,744 -

TOTAL $ 9,563,236 100 $ 10,634,673 100

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable Accounts payable to related parties (Note 21) Income tax payable (Notes 2 and 18) Other payables (Note 11) Other current liabilities Total current liabilities LONG-TERM LIABILITIES Long-term debts (Note 12) OTHER LIABILITIES Accrued pension cost (Notes 2 and 13) Advance deposits received Deferred income tax liabilities, noncurrent (Notes 2 and 18) Others Total other liabilities Total liabilities STOCKHOLDERS’ EQUITY OF PARENT COMPANY Capital stock, NT$10 par value (Note 14) Authorized - 600,000 thousand shares as of December 31, 2012 and 2011 Issued and outstanding - 277,164 thousand shares and 274,933 thousand shares as of December 31, 2012 and 2011 Advanced collections for common stock Capital surplus Additional paid-in capital in excess of par Additional paid-in capital - bond conversion Treasury stock transactions Long-term equity investments Interest payable from bond conversion Retained earnings (Note 16) Legal reserve Unappropriated earnings Other equity Cumulative translation adjustments (Note 2) Unrealized loss on financial instruments Unrealized revaluation increment Total stockholders' equity of parent company MINORITY INTEREST Total stockholders' equity TOTAL		2012 Amount % $ 2,088,302 22 48,320 1 93,017 1 1,026,344 11 45,078 - 3,301,061 35 200,000 2 65,270 1 985 - 69,552 1 50,326 - 186,133 2 3,687,194 39 2,771,639 29 - - 226,556 2 661,582 7 48,234 1 11,305 - 13,243 - 1,052,192 11 999,381 10 101,935 1 (15,603) - 10,968 - 5,881,432 61 (5,390) - 5,876,042 61 $ 9,563,236 100		2011
				Amount % $ 2,028,697 19 35,939 - 204,632 2 1,224,745 11 66,325 1 3,560,338 33 200,000 2 64,648 1 1,128 - 69,662 1 49,052 - 184,490 2 3,944,828 37 2,749,329 26 16,154 - 203,406 2 661,582 6 48,234 1 11,305 - 13,243 - 909,627 9 1,828,362 17 250,296 2 (22,304) - 10,968 - 6,680,202 63 9,643 - 6,689,845 63 $ 10,634,673 100

The accompanying notes are an integral part of the consolidated financial statements.

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

GROSS SALES AND REVENUES COST OF GOODS SOLD GROSS PROFIT OPERATING EXPENSES Sales and marketing General and administrative Research and development Total operating expenses INCOME FROM OPERATIONS NONOPERATING INCOME AND GAINS Interest income Investment income recognized under equity method, net (Note 9) Dividend income Gain on disposal of investment (Note 7) Foreign exchange gain, net Gain on reversal of bad debts Others Total nonoperating income and gains NONOPERATING EXPENSES AND LOSSES Interest expense Loss on disposal of property, plant and equipment Foreign exchange loss, net Impairment loss (Note 8) Others Total nonoperating expenses and losses INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX (Notes 2 and 18) CONSOLIDATED NET INCOME ATTRIBUTED TO		2012 Amount % $ 11,882,539 100 9,580,840 81 2,301,699 19 776,550 6 576,018 5 477,023 4 1,829,591 15 472,108 4 15,965 - 11,156 - 4,927 - - - - - 15,954 - 96,505 1 144,507 1 4,532 - 18,591 - 92,840 1 - - 19,790 - 135,753 1 480,862 4 (186,117) (2) $ 294,745 2		2011
				Amount % $ 14,385,481 100 10,795,920 75 3,589,561 25 975,988 7 586,700 4 572,560 4 2,135,248 15 1,454,313 10 14,128 - 14,934 - 4,776 - 215,231 1 76,598 1 - - 256,448 2 582,115 4 3,968 - 25,831 - - - 54,969 1 32,121 - 116,889 1 1,919,539 13 (514,686) (3) $ 1,404,853 10

(Continued)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

Parent company's stockholders Minority interest BASIC EARNINGS PER SHARE (Notes 2 and 19) Included income for minority interest Attributed to stockholders of the parent company DILUTED EARNINGS PER SHARE (Notes 2 and 19) Included income for minority interest Attributed to stockholders of the parent company		2012 Amount % $ 309,553 2 (14,808) - $ 294,745 2 2012 Before Income Tax After Income Tax $ 1.74 $ 1.06 $ 1.12 $ 1.71 $ 1.05 $ 1.10		2011	2011
				Amount % $ 1,425,653 10 (20,800) - $ 1,404,853 10 2011
		Before Income Tax $ 1.74 $ 1.71		Before Income Tax $ 6.99 $ 6.73	After Income Tax $ 5.11 $ 5.19 $ 4.93 $ 5.00

The accompanying notes are an integral part of the consolidated financial statements.

(Concluded)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

BALANCE, JANUARY 1, 2011 Appropriation of the 2010 net income (Note 16) Legal reserve Cash dividends Adjustment brought by changes in percentage of ownership in investees Recognized unrealized loss on investee's financial instruments Translation adjustments on long-term equity investments Unrealized loss on available-for-sale financial assets Advanced collections for common stock transferred to capital stock (Note 14) Employee stock options (Note 15) Changes in minority interest Net income for 2011 BALANCE, DECEMBER 31, 2011 Appropriation of the 2011 net income (Note 16) Legal reserve Cash dividends Recognized unrealized gain on investee's financial instruments Translation adjustments on long-term equity investments Unrealized gain on available-for-sale financial assets Advanced collections for common stock transferred to capital stock (Note 14) Employee stock options (Note 15) Changes in minority interest Net income for 2012 BALANCE, DECEMBER 31, 2012		Issued and Outstanding CapitalStock Advanced Collections for Capital Stock Common Stocks $ 2,725,939 $ 17,520 - - - - - - - - - - - - 8,000 (17,520 ) 15,390 16,154 - - - - 2,749,329 16,154 - - - - - - - - - - 7,880 (16,154 ) 14,430 - - - - - $ 2,771,639 $ -	CapitalSurplus	From Long-term Interest Payable Equity from Bond Investments Conversion $ 11,132 $ 13,243 - - - - 173 - - - - - - - - - - - - - - - 11,305 13,243 - - - - - - - - - - - - - - - - - - $ 11,305 $ 13,243	Retained Earnings Unappropriated Legal Reserve Earnings $ 748,423 $ 1,621,692 161,204 (161,204 ) - (1,057,779 ) - - - - - - - - - - - - - - - 1,425,653 909,627 1,828,362 142,565 (142,565 ) - (995,969 ) - - - - - - - - - - - - - 309,553 $ 1,052,192 $ 999,381		Other Equity	Unrealized Revaluation Increment Minority Interest $ 10,968 $ 29,898 - - - - - - - - - - - - - - - - - 545 - (20,800) 10,968 9,643 - - - - - - - - - - - - - - - (225 ) - (14,808) $ 10,968 $ (5,390)	Total $ 6,222,812 - (1,057,779 ) 173 (177,412 ) 277,326 (30,444 ) - 49,771 545 1,404,853 6,689,845 - (995,969 ) 243 (148,361 ) 6,458 - 29,306 (225 ) 294,745 $ 5,876,042
			Additional Additional Paid-in Capital - Paid-in Capital Bond Treasury Stock Common Stock Conversion Transactions $ 175,659 $ 661,582 $ 48,234 - - - - - - - - - - - - - - - - - - 9,520 - - 18,227 - - - - - - - - 203,406 661,582 48,234 - - - - - - - - - - - - - - - 8,274 - - 14,876 - - - - - - - - $ 226,556 $ 661,582 $ 48,234				Unrealized Cumulative Gain (Loss) on Translation Financial Adjustments Instruments $ (27,030 ) $ 185,552 - - - - - - - (177,412 ) 277,326 - - (30,444 ) - - - - - - - - 250,296 (22,304 ) - - - - - 243 (148,361 ) - - 6,458 - - - - - - - - $ 101,935 $ (15,603)

The accompanying notes are an integral part of the consolidated financial statements.

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income Adjustments to reconcile consolidated net income to net cash provided by operating activities Depreciation and amortization (Reversal of provision) provision for loss on doubtful accounts Investment income recognized under the equity method Cash dividend received from equity-method investees Impairment loss Net gain on disposal of investments Net loss on disposal of property, plant and equipment Net changes in operating assets and liabilities Accounts receivable Other financial assets - current Inventories Deferred income tax asset - current Other current assets Other assets Notes payable Accounts payable Accounts payable to related parties Income tax payable Other payables Other current liabilities Reserve for retirement plan Deferred income tax liability Other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Increase in available-for-sale financial assets Proceeds of the disposal of available-for-sale financial assets Acquisition of investments accounted for by the equity-method Decrease in and return of capital from investees Acquisition of property, plant and equipment Acquisition of land use rights Proceeds of the disposal of property, plant and equipment Decrease (increase) in refundable deposits Increase in deferred charges Increase in intangible asset - computer software Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES	2012 $ 294,745 466,221 (15,954) (11,156) 16,262 - - 18,591 44,580 29,329 399,776 17,980 63,771 14,382 - 59,605 12,381 (111,615) (211,304) (21,247) 622 (110) 1,274 1,068,133 - - - 22,483 (621,004) (21,523) 3,956 4,305 - (35,073) (646,856)	2011 $ 1,404,853 410,731 4,923 (14,934) 23,254 54,969 (215,231) 25,831 (129,363) 129,505 409,148 60,290 (66,986) (17,603) (23) (363,136) 11,890 (168,264) (134,858) 24,533 1,763 (280) 15,000 1,466,012 (37,939) 522,258 (150,000) 41,128 (630,310) - 12,415 (3,582) (27,766) (11,400) (285,196)

(Continued)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

Employee stock options Cash dividends Decrease in advanced deposits received Changes in minority interest Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year Interest Income tax NONCASH INVESTING AND FINANCING ACTIVITIES Translation adjustments on long-term equity investments Recognized unrealized (gain) loss on investees' financial instruments Change in unrealized (gain) loss on available-for-sale financial instruments Adjustment brought by changes in percentage of ownership in investees ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT Increase in property, plant and equipment acquired Add payables for acquisition of property, plant and equipment, beginning of year Less payables for acquisition of property, plant and equipment, end of year Cash paid for the acquisition of property, plant and equipment	2012 29,306 (995,969) (143) (225) (967,031) (30,344) (576,098) 2,119,386 $ 1,543,288 $ 3,947 $ 279,825 $ (148,361) $ (243) $ (6,458) $ - $ 633,907 256 (13,159) $ 621,004	2011 49,771 (1,057,779) (319) 545 (1,007,782) 56,108 229,142 1,890,244 $ 2,119,386 $ 3,032 $ 622,956 $ 277,326 $ 177,412 $ 30,444 $ 173 $ 629,214 1,352 (256) $ 630,310

The accompanying notes are an integral part of the consolidated financial statements.

(Concluded)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars [Except Per Share Data], Unless Stated Otherwise)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

1. ORGANIZATION AND OPERATIONS

Phihong Technology Co., Ltd. (“Phihong”), which was formerly known as Phihong Enterprise Co., Ltd. was incorporated on December 12, 1972 under the laws of the Republic of China (ROC). Under a resolution approved in the stockholders’ meeting in June 2003, Phihong changed its name to Phihong Technology Co., Ltd. Phihong primarily manufactures and sells AC/DC power adapters, charger bases, power supply modules, UPS (uninterruptible power supply) for computers, ballasts, etc.

In February 2000, Phihong was authorized to have its stocks traded on the over-the-counter (OTC) securities exchange in Taiwan. In September 2001, Phihong’s stocks ceased to be OTC traded and Phihong later obtained authorization to have its stocks listed on the Taiwan Stock Exchange.

In addition to Phihong, the consolidated financial statements included the following companies:

		Phihong and its
		Subsidiaries’
		Ownership
Name	Place of Incorporation	Percentage
Phihong International Corp.	British Virgin Islands	100.00
Phitek International Co., Ltd.	British Virgin Islands	100.00
Ascent Alliance Ltd.	British Virgin Islands	100.00
Phihong USA Corp.	USA	100.00
American Ballast Corp.	USA	100.00
Guang-Lai Investment Co., Ltd.	Republic of China	100.00
Phihong Technology Japan Co., Ltd.	Japan	100.00

Phihong International Corp. (PHI), a 100% subsidiary of Phihong incorporated in the British Virgin Islands in 1996, sells power supplies as well as invests in its subsidiaries in China to manufacture various power supplies.

PHI’s subsidiaries were as follows:

		Direct
	Place of	Ownership
Name	Incorporation	Percentage	Primary Operations
Phihong (Dongguan) Electronics Co.,	Mainland China	100.00	Manufactures various power
Ltd.			supplies
Phitek (Tianjin) Electronics Co., Ltd.	Mainland China	100.00	Manufactures various power
			supplies
Phihong Electronics (Suzhou) Co., Ltd.	Mainland China	100.00	Manufactures various power
			supplies and ballasts
Value Dynamic Investment Ltd.	British Virgin	100.00	Makes investments
	Islands
N-Lighten Technologies, Inc.	USA	58.45	Makes investments

Phihong acquired 78.23% ownership of N-Lighten Technologies, Inc. through the PHI and Guang-Lai investment Co., Ltd. as of December 31, 2012.

Value Dynamic’s subsidiary was as follows:

		Direct
	Place of	Ownership
Name	Incorporation	Percentage	Primary Operations
Yanghong Lighting Trade Co., Ltd.	Mainland China	100.00	Sells various lighting supplies

Phitek International Co., Ltd. (PHK), a 100% subsidiary of Phihong incorporated in the British Virgin Islands in 1999, is an agent for selling power supplies as well as an investor in its subsidiary in China which manufactures various power supplies.

PHK’s subsidiary was as follows:

		Direct
	Place of	Ownership
Name	Incorporation	Percentage	Primary Operations
Dongguan Phitek Electronics Co., Ltd.	Mainland China	100.00	Manufactures various power
			supplies
Suzhou Xin Phihong Electronics Co.,	Mainland China	10.12	Manufactures and sells
Ltd.			lighting supplies

Suzhou Xin Phihong Electronics Co., Ltd., a subsidiary of PHK and Phihong Electronics (Suzhou) Co., Ltd. in China, manufactures and sells lighting supplies. PHK and Phihong Electronics (Suzhou) Co., Ltd. acquired 10.12% and 89.88% ownership of Suzhou Xin Phihong Electronics Co., Ltd., respectively.

Ascent Alliance Ltd. (PHQ), a 100% subsidiary of Phihong incorporated in the British Virgin Islands in 2004, is an agent for selling electronic materials as well as an investor in its subsidiary in China which manufactures various electronic materials.

PHQ’s subsidiaries were as follows:

		Direct
	Place of	Ownership
Name	Incorporation	Percentage	Primary Operations
Dongguan Shuang-Ying Electronics Co.,	Mainland China	100.00	Manufactures and sells
Ltd.			electronic materials
Jin-Sheng-Hong (Jiangxi) Electronics	Mainland China	100.00	Manufactures and sells the
Co., Ltd.			electronic materials and
			transformers

Phihong USA Corp. (PHA), a 100% subsidiary of Phihong incorporated in the USA in 1997, sells various power supplies.

American Ballast Corp. (PHAB), a 100% subsidiary of Phihong incorporated in the USA in 2004, sells various ballasts.

Guang-Lai Investment Co., Ltd. (“Guang-Lai”), was incorporated in Taiwan in October 2011, primarily engages in investments.

N-Lighten Technologies’ Inc., a subsidiary of PHI and Guang-Lai incorporated in the USA, invests in its subsidiary in China.

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N-Lighten Technologies’ subsidiary was as follows:

Direct Place of Ownership Name Incorporation Percentage Primary Operations N-Lighten (Shanghai) Trading Inc. Mainland China 100.00 Develops, manufactures and sells various equipment and monitors

Phihong Technology Japan Co., Ltd. (PHJ) was incorporated in Japan in April 2010. It primarily sells of power components.

Phihong and its subsidiaries (collectively, the “Company”) had 9,416 and 8,394 employees as of December 31, 2012 and 2011, respectively.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the ROC.

For readers’ convenience, the accompanying consolidated 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 Chinese version or if differences arise in the interpretations between the two versions, the Chinese version of the financial statements shall prevail. However, the accompanying financial statements do not include the English translation of the additional footnote disclosures that are not required under generally accepted accounting principles but are required by the Securities and Futures Bureau (SFB, formerly the “Securities and Futures Commission” before July 1, 2004) for their oversight purposes.

The Company’s significant accounting principles are summarized as follows:

Consolidation

The accompanying consolidated financial statements include the accounts of Phihong and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.

Foreign-currency Transactions and Translation of Foreign-currency Financial Statements

Equity-method investees’ assets and liabilities denominated in foreign currencies are translated at the balance sheet date exchange rates. Stockholders’ equity accounts are translated at the historical rate, except for the beginning balance of the retained earnings, which is carried at the translated amount of the preceding period. Dividends are translated at the spot rate at the declaration date. Income statement accounts are translated at the current rate or weighted-average rate of the current period.

Foreign-currency transactions (except derivative transactions) are recorded in New Taiwan dollars at the exchange rates prevailing on the transaction date. Gains or losses resulting from the application of prevailing exchange rates when foreign-currency receivables and payables are settled are credited or charged to income. Assets and liabilities denominated in foreign currencies (except those foreign long-term investments) are translated at the balance sheet date exchange rates, and resulting gains or losses are credited or charged to current income.

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At the balance sheet date, foreign-currency nonmonetary assets (such as equity instruments) and liabilities that are measured at fair value are revalued using prevailing exchange rates, with the exchange differences which recognized in stockholders’ equity if the changes in fair value are recognized in stockholders’ equity and recognized in profit and loss if the changes in fair value is recognized in profit or loss.

Foreign-currency nonmonetary assets and liabilities that are carried at cost continue to be stated at exchange rates at trade dates.

Accounting Estimates

Under the above guidelines, law and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts, allowance for loss on inventories, depreciation of property, plant and equipment, asset impairment loss, income tax, pension cost, bonuses to employees, directors and supervisors, etc. Actual results may differ from these estimates.

Current/Noncurrent Assets and Liabilities

Cash or cash equivalents, assets held for trading purposes and assets expected to be converted into cash or consumed within one year from balance sheet date are recorded as current assets. Property, plant and equipment, intangible assets and other assets not being recorded as current assets are recorded as noncurrent assets. Liabilities incurred for trading purposes and expected to be liquidated within one year from balance sheet date are recorded as current liabilities. Liabilities not being recorded as current liabilities are recorded as noncurrent liabilities.

Cash and Cash Equivalents

Cash includes unrestricted cash and bank deposits. Cash equivalents refer to short-term commercial paper, with carrying values that approximate fair values.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are remeasured at fair value, with changes in fair value recognized in equity until the financial assets are disposed of, at which time, the cumulative gain or loss previously recognized in equity is included in profit or loss for the year. All regular purchases or sales of financial assets are recognized and derecognized on a trade date basis.

The fair value of listed and over-the-counter stocks, open-end fund, and bonds are determined at their closing prices, net asset values, and reference prices from the over-the-counter securities exchange in Taiwan at the balance sheet date, respectively.

Cash dividends are recognized as income at the ex-dividend date but cash dividends resulting from net income before the investment date should be recorded as a decrease in the investment cost. Stock dividends received are not recognized as income; they are instead reflected as an increase in the number of shares held.

An impairment loss is recognized when there is objective evidence that the financial asset is impaired. Any subsequent decrease in impairment loss for an equity instrument classified as available-for-sale is recognized directly in equity. If the fair value of a debt instrument classified as available-for-sale subsequently increases as a result of an event which occurred after the impairment loss was recognized, the decrease in impairment loss is reversed to profit.

12 -

Financial Assets Carried at Cost

Equity investments without reliable fair value are carried at their original cost. The accounting process for dividend income is similar with available-for-sale financial assets. If there is objective evidence showing that the asset is impaired, the impairment loss shall be recognized and not allowed to be reversed.

Impairment of Accounts Receivable

On January 1, 2011, the Company adopted the third-time revised Statement of Financial Accounting Standards (SFAS) No. 34 - “Financial Instruments: Recognition and Measurement.” One of the main revisions is that impairment of receivables originated by the Company should be covered by SFAS No. 34. Accounts receivable are assessed for impairment at the end of each reporting period and considered impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the accounts receivable, the estimated future cash flows of the asset have been affected.

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 item by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.

Long-term Investments Accounted for by the Equity Method

Investments in which the Company holds 20 percent or more of the investees’ voting shares or exercises significant influence over the investees’ operating and financial policy decisions are accounted for by the equity method.

The investment cost is allocated to the assets and liabilities of the investee (proportionate to the percentage of ownership) on the basis of their fair values at the date of investment, and the investment cost in excess of the fair value of the identifiable net assets of the investee is recognized as goodwill. Goodwill is not amortized. The fair value of the net identifiable assets of the investee in excess of the investment cost is used to reduce the fair value of each of the noncurrent assets of the investee in proportion to the respective fair values of the noncurrent assets, with any excess recognized as an extraordinary gain.

When the Company subscribes for its investee’s newly issued shares at a percentage different from its percentage of ownership in the investee, the Company records the change in its equity in the investee’s net assets as an adjustment to investments, with a corresponding amount credited or charged to capital surplus. When the adjustment should be debited to capital surplus, but the capital surplus from long-term investments is insufficient, the shortage is debited to retained earnings.

When the Company’s share in losses of an investee over which the Company has significant influence equals its investment in that investee plus any advances made to the investee, the Company discontinues applying the equity method. The Company continues to recognize its share in losses of the investee if (a) the Company commits to provide further financial support to the investee or (b) the losses of the investee are considered to be temporary and sufficient evidence shows imminent return to profitability.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets. Major additions and improvements to property, plant and equipment are capitalized, while costs of repairs and maintenance are expensed currently.

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Depreciation is provided on a straight-line basis over estimated useful lives as follows:

Items Buildings and improvements Machinery and equipment Furniture, fixtures and office equipment Other equipment	Estimated Useful Lives
	5-50 years 3-9 years 3-8 years 3-10 years

Property, plant and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. Depreciation of revaluated assets is provided on a straight-line basis over their remaining estimated useful lives determined at the time of revaluation.

The related cost (including revaluation increment), accumulated depreciation, accumulated impairment losses and any unrealized revaluation increment of an item of property, plant and equipment are derecognized from the balance sheet upon its disposal. Any gain or loss on disposal of the asset is included in nonoperating gains or losses in the year of disposal.

Land Use Rights

Royalties paid in Mainland China for land use rights are amortized on a straight-line basis over 50 years.

Computer Software

Computer software acquired are initially recorded at cost and amortized on a straight-line basis over their estimated useful life.

Impairment of Assets

If the recoverable amount of an asset (mainly property, plant and equipment, deferred charges, intangible assets and investments accounted for by the equity method) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is charged to earnings unless the asset is carried at a revalued amount, in which case the impairment loss is first treated as a deduction to the unrealized revaluation increment and any remaining loss is charged to earnings.

If an impairment loss subsequently reverses, the carrying amount of the asset is increased accordingly, but the increased carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized in earnings, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is first recognized as gains to the extent that an impairment loss on the same revalued asset was previously charged to earnings. Any excess amount is treated as an increase in the unrealized revaluation increment.

For the purpose of impairment testing, goodwill is allocated to each of the relevant cash-generating units (CGUs) that are expected to benefit from the synergies of the acquisition. A CGU to which goodwill has been allocated is tested for impairment annually or whenever there is an indication that the CGU may be impaired. If the recoverable amount of the CGU becomes less than its carrying amount, the impairment is allocated to first reduce the carrying amount of the goodwill allocated to the CGU and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. A reversal of an impairment loss on goodwill is disallowed.

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For long term equity investments in which the Company has significant influence but with no control, the carrying amount (including goodwill) of each investment is compared with its own recoverable amount for the purpose of impairment testing.

Pension Plan

The Company has two types of pension plans: defined benefit and defined contribution.

Under the defined benefit plan, the net pension cost is recognized according to actuarial calculations. Under the defined contribution plan, the amounts contributed are recognized as current expense throughout the employees’ service periods.

PHA, a 100% subsidiary of Phihong, subscribed pension plans. It participates in the qualification as the formal staff on the job and allots the pension fund according to 3% of total wages every month.

The subsidiaries located in the People’s Republic of China have defined contribution pension plans based on their local regulations. The amounts contributed are recognized as current expense every month.

Income Tax

The Company adopted Statement of Financial Accounting Standards No. 22 - “Income Taxes,” which requires an asset and liability approach to account for income tax. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowance is provided for deferred tax assets with uncertain realization.

Tax credits of Phihong for research and development expenditures are recognized using the flow-through method.

Income tax on Phihong’s and Guang-Lai’s unappropriated earnings at a rate of 10% is expensed in the year of stockholders’ approval to retain the earnings which is the year subsequent to the year the earnings are generated.

Under the related income tax laws in the USA, PHA’s, PHAB’s and N-Lighten Technologies’ state income taxes are computed at 8.84% of taxable income. Federal income taxes are computed at 15% to 38% of taxable income.

Under the laws and regulations of the British Virgin Islands (BVI), PHI, PHK, PHQ and Value Dynamic Investment Ltd. are exempt from BVI income tax.

Under the Income Tax Law of the People’s Republic of China for foreign enterprises and enterprises with foreign investments, Phihong (Dongguan) Electronics Co., Ltd., Phitek (Tianjin) Electronics Co., Ltd., Phihong Electronics (Suzhou) Co., Ltd., Dongguan Phitek Electronics Ltd., Dongguan Shuang-Ying Electronics Co., Ltd., Jin-Sheng-Hong (Jiangxi) Electronics Co., Ltd., Yanghong Lighting Trade Co., Ltd., N-Lighten (Shanghai) Trading, Inc. and Suzhou Xin Phihong Electronic Co., Ltd.

Under the related income tax laws in Japan, PHJ’s income tax is computed at 18% of taxable income if the taxable income is lower than (or equal to) JPY8,000 thousand and the taxable income in excess of JPY8,000 is taxed at 30% of taxable income.

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Stock-based Compensation

Employee stock options granted on or after January 1, 2008 are accounted for under Statement of Financial Accounting Standards (SFAS) No. 39 - “Share-based Payment.” Under SFAS No. 39, the value of the stock options granted, which is equal to the best available estimate of the number of stock options expected to vest multiplied by the grant-date fair value, is expensed on a straight-line basis over the vesting period, with a corresponding adjustment to capital surplus - employee stock options. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates.

Employee stock options granted between January 1, 2004 and December 31, 2007 were accounted for under the interpretations issued by the Accounting Research and Development Foundation (ARDF). The Company adopted the intrinsic value method, under which compensation cost was recognized on a straight-line basis over the vesting period.

Sales Recognition

Revenue from sales of goods is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, primarily upon shipment, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. Sales returns and allowances are subtracted from sales as these are incurred and the related costs of goods sold are eliminated..

Sales are measured at the fair value agreed by the Company and the buyers. However, if the accounts receivables are due in a year, they are not recorded at discounted value as the fair value approximates the carrying amount.

Reserve for Sale Warranties

Reserve for sale warranties is accrued based on the proper percentage of the current sales.

Earnings Per Share

The amount of basic earnings per common share is calculated by dividing net earnings by the weighted average number of common shares outstanding. On a diluted basis, net earnings and shares outstanding are adjusted to assume the conversion of employee stock options from the date of issuance. The treasury stock method is used to calculate the stock warrants’ dilutive potential common shares. However, employee stock options with anti-dilutive effect are excluded from the calculation.

Nonderivative Financial Instruments

The recognition, valuation, and measurement of nonderivative financial assets and liabilities are made in accordance with the above accounting policies and accounting principles generally accepted in the ROC.

3. CHANGES IN ACCOUNTING PRINCIPLES

Accounting Treatment for Financial Instruments

On January 1, 2011, the Company adopted the newly revised Statement of Financial Accounting Standards (SFAS) No. 34 - “Financial Instruments: Recognition and Measurement.” The main revisions included the loans and receivables originated by the Company being required to be accounted for under SFAS No. 34. This accounting change did not have a significant effect on the Company’s financial statements as of and for the year ended December 31, 2011.

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Operating Segments

On January 1, 2011, the Company adopted the newly issued SFAS No. 41 - “Operating Segments.” The statement requires the identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. The adoption of this statement, which supersedes SFAS No. 20 - “Segment Reporting,” resulted in a change in the manner of disclosure of segment reporting information.

4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents as of December 31, 2012 and 2011 were as follows:

Cash on hand Checking accounts Savings accounts Foreign-currency accounts Time deposits Short-term notes	2012 $ 1,727 1,241 213,307 1,206,047 57,000 63,966 $ 1,543,288	2011 $ 2,073 6,470 79,022 1,528,524 164,060 339,237 $ 2,119,386

5. ACCOUNTS RECEIVABLE

Accounts receivable as of December 31, 2012 and 2011 were as follows:

Accounts receivable Less allowance for doubtful accounts	2012 $ 1,937,679 (30,197) $ 1,907,482	2011 $ 1,987,812 (51,704) $ 1,936,108

As of December 31, 2012 and 2011, accounts receivable of PHA amounted to $435,683 thousand and $522,793 thousand, respectively, had been pledged to secure short-term debts (the amount was not used as of December 31, 2012 and 2011, respectively). See Note 22 to the consolidated financial statements.

6. INVENTORIES

Inventories as of December 31, 2012 and 2011 were as follows:

Raw materials Work-in-process Finished goods Merchandise	2012 $ 527,235 148,214 351,712 653,063 $ 1,680,224	2011 $ 617,296 181,425 427,637 853,642 $ 2,080,000

As of December 31, 2012 and 2011, allowances for inventory devaluation were $291,012 thousand and $266,370 thousand, respectively.

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The costs of inventories recognized as costs of goods sold for the years ended December 31, 2012 and 2011 were $9,580,840 thousand and $10,795,920 thousand, respectively, which included inventory devaluation amounting to $33,056 thousand and $150,879 thousand, respectively.

As of December 31, 2011, inventories of PHA amounting to $448,725 thousand, had been pledged to secure short-term debts (the amount was not used as of December 31, 2011). See Note 22 to the consolidated financial statements.

7. AVAILABLE-FOR-SALE FINANCIAL ASSETS - NONCURRENT

Available-for-sale financial asset - noncurrent as of December 31, 2012 and 2011 were as follows:

Marketable equity securities Hua Jung Component Co., Ltd.	2012 $ 30,620	2011 $ 33,357

Hua Jung Component Co., Ltd. decreased its paid-in capital by cash at the ratio of 18% in September 2012. Phihong has received amount $9,195 thousand. For the years ended December 31, 2012 and 2011, The Company thus recognized an unrealized gain of $6,458 thousand for 2012 and an unrealized loss of $30,444 thousand for 2011. These amounts were recorded as “stockholders’ equity-unrealized gain (loss) on financial instruments” as of December 31, 2012 and 2011.

PHI sold all of its own shares of JK Yaming International Holdings Ltd. in May 2011. As a result, the gain on such disposal of investment in the amount of $189,319 thousand was recorded as gain on disposal of investment for the year ended December 31, 2011.

8. FINANCIAL ASSETS CARRIED AT COST - NONCURRENT

Financial assets carried at cost - noncurrent as of December 31, 2012 and 2011 were as follows:

Bao-Dian Venture Capital Co., Ltd. Yuan-Jing Venture Capital Co., Ltd. Asiatech Taiwan Venture Fund NeoPac Lighting Limited Yong-Li Investment Ltd. TC-1 Culture Fund Hui-Cheng Electronic Co., Ltd. Less accumulated impairment	2012 $ 30,000 33,500 12,748 32,224 50,000 30,000 15,248 (112,775) $ 90,945	2011 $ 30,000 33,500 15,057 32,224 50,000 30,000 15,248 (112,775) $ 93,254

The stocks and other investments mentioned above do not have open pricing and reliable fair values, thus they are carried at cost. Phihong performed impairment testing on them periodically.

Bao-Dian Venture Capital Co., Ltd., Yong-Li Investment Ltd., TC-1 Culture Fund, and NeoPac Lighting Limited have experienced continuous operating loss; thus, the Company recognized $54,969 thousand impairment loss for the year ended December 31, 2011.

Bao-Dian Venture Capital Co., Ltd. decreased its paid-in capital to write-off its accumulated deficits for year ended December 31, 2012, at the ratio of 55%. As a result, its paid-in capital was $128,700 thousand as of December 31, 2012.

Yuan-Jing Venture Capital Co., Ltd had paid-in capital of $925,000 thousand as of January 1, 2011. It

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decreased its paid-in capital by cash in the amount of $305,250 thousand at a ratio of 33% for the year ended December 31, 2011 and the Company received $16,500 thousand as capital return. As a result, its paid-in capital was $619,750 thousand as of December 31, 2012.

9. LONG-TERM EQUITY INVESTMENTS

Long-term equity investments accounted for by the equity method as of December 31, 2012 and 2011 were as follows:

Hao-Xuan Venture Capital Co., Ltd. H&P Venture Capital Investment Corp. Phihong PWM Brasil Ltda. First International Computer Do Brasil Ltda. Han-Yu Venture Capital C., Ltd. Spring City Resort Co., Ltd. (formerly named Ai-Hon Investment Co., Ltd.)		2012 Carrying Value Ownership Percentage $ 55,052 24.67 152,762 32.26 - 60.00 - 33.85 99,243 22.22 32,704 25.33 $ 339,761		2011
	Original Cost $ 59,851 150,000 8,258 67,618 100,000 190,000 $ 575,727			Carrying Value Ownership Percentage $ 67,350 24.67 147,560 32.26 - 60.00 - 33.85 109,986 22.22 30,707 25.33 $ 355,603

Long-term equity investment income (loss) for the years ended December 31, 2012 and 2011 is summarized as follows:

Hao-Xuan Venture Capital Co., Ltd. H&P Venture Capital Investment Han-Yu Venture Capital Co., Ltd. Spring City Resort Co., Ltd.	2012 $ 108 5,829 3,222 1,997 $ 11,156	2011 $ 3,099 (1,898) 14,920 (1,187) $ 14,934

Hao-Xuan Venture Capital Co., Ltd. (“Hao-Xuan”) was incorporated in May 2004 to engage in investing activities. The Company had paid-in capital of $387,000 thousand as of January 1, 2011. It decreased its paid-in capital by cash amounted to $44,509 thousand and $99,846 thousand for the years ended December 31, 2012 and 2011, respectively. The Company had received the amount of $10,979 thousand and $24,628 thousand, respectively. As a result, its paid-in capital was $242,645 thousand as of December 31, 2012.

Han-Yu Venture Capital Co., Ltd. (“Han-Yu”) was incorporated in June 2004 to engage in investments. Its paid-in capital was $450,000 thousand as of December 31, 2012.

Ai-Hon, which was invested by Phihong, was primarily engaged in investment business. Spring City Resort, which was a wholly-owned subsidiary of Ai-Hon, was founded in 1975 and is primarily engaged in hotel, restaurant and bathroom services. Spring City Resort merged with Ai-Hon on December 31, 2011; Spring City Resort is the surviving company. Its paid-in capital was $112,000 thousand as of December 31, 2012.

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Phihong’s investments in Brazil include 60% ownership interest of Phihong PWM Brasil Ltda. and 33.85% ownership interest of First International Computer Do Brasil Ltda. Additionally, Phihong PWM Brasil Ltda. also holds 21.15% ownership interest of First International Computer Do Brasil Ltda. The other 40% ownership interest of Phihong PWM Brasil Ltda. is held by the local management team. According to a cooperation mode between the Company and the local management team and Brazilian local laws, the Company has no controlling power over Phihong PWM Brasil Ltda. Because the recoverability of the investments in Phihong PWM Brasil Ltda. and First International Computer Do Brasil Ltda. is considered remote, the Company reduced the carrying value of both investments to zero.

H&P Venture Capital Investment Corp. was incorporated in May 2011. It primarily engages in investing activities. Its paid-in capital was $465,000 thousand as of December 31, 2012.

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2012 and 2011 were as follows:

Land Buildings and improvements Machinery and equipment Transportation equipment Furniture, fixtures and office equipment Other equipment Prepayments for purchase of equipment		2012	Carrying Value $ 254,350 1,609,159 1,179,165 6,786 50,091 109,796 307,662 $ 3,517,009		2011
		Cost Accumulated Depreciation $ 254,350 $ - 2,446,205 837,046 2,365,881 1,186,716 35,981 29,195 279,616 229,525 288,808 179,012 307,662 - $ 5,978,503 $ 2,461,494			Carrying Value $ 256,353 1,765,101 1,158,881 13,430 68,979 116,272 93,314 $ 3,472,330

In March 2011, Phihong bought a parcel of land for $85,136 thousand in Yongkang District in Tainan City for factory construction.

Under a long-term loan agreement, the Company has mortgaged the following property, plant and equipment as collaterals.

Land Buildings and improvements	2012 $ 112,450 159,579 $ 272,029	2011 $ 112,450 170,068 $ 282,518

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11. OTHER PAYABLES

Accrued expenses Bonus payable Salaries payable Others	2012 $ 646,680 55,720 284,044 39,900 $ 1,026,344	2011 $ 716,615 256,618 165,914 85,598 $ 1,224,745

12. LONG-TERM DEBTS

Long-term debts as of December 31, 2012 and 2011 were as follows:

Hua Nan Bank Medium-term secured loan. The loan term was from September 27, 2012 to September 27, 2014. Interest rate was 1.37% on December 31, 2012. Interest is payable monthly. The principal of $200,000 will be repaid on September 27, 2014. Medium-term secured loan. The loan term was from December 29, 2011 to December 29, 2013. Interest rate was 1.37% on December 31, 2012. Interest is payable monthly, with principal repayable on December 29, 2013. The principle was fully repaid in September 2012.	2012 $ 200,000 - $ 200,000	2011 $ - 200,000 $ 200,000

For pledged properties and endorsements/guarantees as collaterals for bank loans, please see Notes 10, 21 and 22 to the financial statements.

13. PENSION PLAN

Based on the defined contribution plan under the Labor Pension Act, the rate of the Company’s monthly contribution to the employees’ individual pension accounts is at 6% of the employees’ monthly wages. Thus, the Company recognized pension costs of $15,681 thousand for 2012 and $13,926 thousand for 2011.

Under the defined benefit pension plan of the Labor Standards Law, benefits are based primarily on an employee’s years of service and average gross compensation of the six months before retirement.

Net pension costs of the defined benefit plan in 2012 and 2011 were as follows:

Service cost Interest cost Expected return on plan assets Amortization of net transition obligation Net pension cost	2012 $ 1,876 2,553 (1,193) - $ 3,236	2011 $ 2,101 2,448 (1,181) 1,059 $ 4,427

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The following were the actuarial assumptions and defined benefit plan status as of December 31, 2012 and 2011:

Actuarial present value of benefit obligation Vested benefits Non-vested benefits Accumulated benefit obligation Additional benefits on future salaries Projected benefit obligation Plan assets at fair value Projected benefit obligation in excess of plan assets Net pension gain not yet recognized Accrued pension cost Weighted-average discount rate Assumed rate of increase in salary Expected rate of return on plan assets	2012 $ (34,342) (41,470) (75,812) (33,907) (109,719) 46,389 (63,330) (1,940) $ (65,270) 2012 1.875% 3.250% 1.875%	2011 $ (39,198) (50,066) (89,264) (38,387) (127,651) 58,290 (69,361) 4,713 $ (64,648) 2011 2.00% 3.25% 2.00%

14. CAPITAL STOCK

Authorized capital Shares (in thousands) Par value (in dollars) Capital Issued capital Shares (in thousands) Par value (in dollars) Capital		December 31	December 31
		2012 600,000 $ 10 $ 6,000,000 277,164 $ 10 $ 2,771,639	2011 600,000 $ 10 $ 6,000,000 274,933 $ 10 $ 2,749,329

Phihong’s outstanding capital amounted to $2,725,939 thousand on January 1, 2011. The employee stock warrant holders exercised 1,477 thousand common shares and 62 thousand common shares at an exercise price of $21.90 and $20.50, respectively, and exercised 800 thousand common shares for advanced collections for capital stock transferred to capital stock between January 1, 2011 to December 31, 2011. As of December 31, 2011, Phihong’s outstanding capital amounted to $2,749,329 thousand, divided into 274,933 thousand common shares with a par value of NT$10.

As of January 1, 2012, Phihong’s outstanding capital amounted to $2,749,329 thousand. The employee stock warrant holders exercised 1,323 thousand common shares and 120 thousand common shares at an exercise price of $20.50 and $18.20, respectively, and exercised 788 thousand common shares for advanced collections for capital stock transferred to capital stock between January 1, 2012 to December 31, 2012. As of December 31, 2012, Phihong’s outstanding capital amounted to $2,771,639 thousand, divided into 277,164 thousand common shares with a par value of NT$10.

As the registration procedures were still in process, the amounts of $16,154 thousand were recorded as “advance collections for capital stock” as of December 31, 2011.

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15. EMPLOYEE STOCK OPTION PLANS

At the November 23, 2007 meeting, the Board of Directors of Phihong resolved to issue employee stock warrants in accordance with Securities and Exchange Law Article 28-3 within the quantity of 15,000 units. Each individual employee stock warrant is granted the right to purchase 1,000 new issued common shares. The exercise price is the closing price of Phihong’s common shares at the employee stock warrants’ issuance date. The warrant holders can exercise the right up to half of the granted warrant units no earlier than two years from the granted date. After three years from the granted date, the warrants holders are eligible to exercise the right up to three-fourths of the granted warrant units. After four years from the granted date, the warrants holders are eligible to exercise all the warrants owned. The options granted are valid for six years and the warrant holders can not exercise the right after six years from the granted date. As of December 28, 2007, Phihong issued stock warrants of 15,000 units at an exercise price of $21.30 per share. The exercise price will be adjusted according to a calculation formula when there are stock and cash dividends and issuance (decrease) of capital stock. As a result, the exercise price was $18.20 per share as of December 31, 2012.

Information about employee stock option plans was as follows:

Balance, beginning of year Options exercised Invalid Balance, end of year Options exercisable, end of year	2012 Number of Options (In Thousand Shares) Weighted- average Exercise Price (NT$) 6,867 $20.50 (1,323) 20.50 (120) 18.20 (909) 4,515 18.20 4,515	2011
		Number of Options (In Thousand Shares) Weighted- average Exercise Price (NT$) 9,194 $21.90 (1,477) 21.90 (850) (Note) 20.50 - 6,867 20.50 6,867

Note: Included options exercised but not outstanding in the amount of 788 thousand shares recognized as “Advance collections for capital stock.”

Information about outstanding and exercisable options as of December 31, 2012 and 2011 is as follows:

Range of Exercise Price (NT$) 2012 $18.20 2011 $20.50	Options Outstanding Number of Options (In Thousand Shares) Weighted- average Remaining Life (Years) Weighted- average Exercisable Price (NT$) 4,515 1 $ 18.20 6,867 2 $ 20.50	Options Exercisable
		Number of Options (In Thousand Shares) Weighted- average Exercisable Price (NT$) 4,515 $ 18.20 6,867 $ 20.50

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Had the Company recognized the compensation cost under the fair value method using the Black-Scholes pricing model, the assumptions and pro forma results of the Company for the year ended December 31, 2011 would have been as follows:

	2011
Assumptions
Risk-free interest rate	2.41%
Expected life	6 years
Expected volatility	48.59%
Expected dividend yield	-
Net income
As reported (attributed to stockholders of the parent company)	$ 1,425,653
Pro forma (attributed to stockholders of the parent company)	$ 1,416,586
Basic earnings per share after income tax (NT$)
As reported (attributed to stockholders of the parent company)	$5.19
Pro forma (attributed to stockholders of the parent company)	$5.16

No more employee stock option information needs to be disclosed for the year ended December 31, 2012, because the service years of the employees was expired on December 28, 2011.

16. RETAINED EARNINGS

Under the Company Law of the ROC and Phihong’s Articles of Incorporation, 10% of Phihong’s annual earnings, net of tax and any deficit, should first be appropriated as legal reserve until such reserve equals to the amount of the Phihong’s capital, and then a special reserve should be appropriated as required by laws or domestic authorities.

Any remaining earnings plus unappropriated earnings accumulated by prior years, unless to be retained partially by Phihong or resolved otherwise by the stockholders, and plan to assign proposal, draw stockholders to recognize and should be appropriated as follows:

a. Not greater than 2% as remuneration to directors and supervisors;
b. Not less than 10% as bonuses to employees; and
c. The remaining as dividends, of which at least 10% should be cash dividends.

Under the Company Law, capital surplus can only be used to offset a deficit. However, the capital surplus from shares issued in excess of par may be capitalized, which however is limited to a certain percentage of the Company’s paid-in capital. Under the revised Company Law issued on January 4, 2012, the aforementioned capital surplus also may be distributed in cash. Legal reserve shall be appropriated until it has reached the Company’s paid-in capital. This reserve may be used to offset a deficit. Under the aforesaid revised Company Law, when the legal reserve has exceeded 25% of the Company’s paid-in capital, the excess may be transferred to capital or distributed in cash.

For the years ended December 31, 2012 and 2011, the bonuses to employees were estimated at $50,148 thousand and $236,998 thousand, respectively, and the remunerations to directors and supervisors were estimated at $5,572 thousand and $19,620 thousand, respectively. The bonus to employees and remuneration to directors and supervisors represented 20% of net income (net of the bonus and remuneration). Material differences between such estimated amounts and the amounts proposed by the Board of Directors in the following year are adjusted for in the current year. If the actual amounts subsequently resolved by the stockholders differ from the proposed amounts, the differences are recorded in the year of stockholders’ resolution as a change in accounting estimate. If a share bonus is resolved to be distributed to employees, the number of shares is determined by dividing the amount of the share bonus by the closing price (after considering the effect of cash and stock dividends) of the shares of the day immediately preceding the stockholders’ meeting.

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The appropriations of earnings for 2011 and 2010 had been approved in the stockholders’ meetings on June 19, 2012 and June 15, 2011, respectively. The appropriations and dividends per share were as follows:

Legal reserve Cash dividends		Appropriation of Earnings For For Year 2011 Year 2010 $ 142,565 $ 161,204 995,969 1,057,779 $ 1,138,534 $ 1,218,983	Dividends Per Share (NT$)
		For Year 2011 $ 142,565 995,969 $ 1,138,534	For For Year 2011 Year 2010 $ - $ - 3.59 3.85

The stockholders’ meeting approved the following appropriations of the 2011 and 2010 earnings: $236,988 thousand and $267,167 thousand, respectively, as employees’ bonuses and $19,620 thousand and $23,000 thousand, respectively, as remunerations to directors and supervisors. The approved amounts of the bonus to employees and the remuneration to directors and supervisors have no difference from the accrual amounts.

Information about the bonus to employees, directors and supervisors is available on the Market Observation Post System website of the Taiwan Stock Exchange.

The appropriations from the 2012 earnings were proposed by the board of directors on March 22, 2013. The appropriations and dividends per share were as follows:

Legal reserve Cash dividends	For Year 2012
	Appropriation of Earnings Dividends Per Share (NT$) $ 30,955 - 277,164 $1.00

The appropriation of 2012 earnings, bonus to employees and the remuneration to directors and supervisors will be presented to the stockholders for their approval in their meeting on June 14, 2013.

17. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES

Personnel expenses, depreciation and amortization for the years ended December 31, 2012 and 2011 are summarized as follows:

	2012	2012	2012		2011	2011
	Operating Costs	Operating Expenses	Total	Operating Costs	Operating Expenses	Total
Personnel expenses
Salaries	$1,104,735	$ 786,431	$1,891,166	$1,072,723	$ 847,169	$1,919,892
Labor insurance and health insurance	6,133	34,193	40,326	1,852	22,588	24,440
Pension cost	2,484	22,754	25,238	2,384	21,638	24,022
Others	77,952	69,451	147,403	83,045	68,031	151,076
Depreciation expenses	278,805	172,893	451,698	190,740	118,669	309,409
Amortization expenses	2,980	11,543	14,523	21,980	79,342	101,322

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18. INCOME TAX

The income tax expenses for 2012 and 2011 were as follows:

Income tax expense - current period Additional tax at 10% of unappropriated earnings Adjustments to prior year’s income tax expense Income tax expense, net	2012 $ 158,328 28,712 (923) $ 186,117	2011 $ 442,575 39,306 32,805 $ 514,686

The components of deferred tax asset (liability) as of December 31, 2012 and 2011 were as follows:

Deferred tax assets (liabilities) Unrealized exchange (gains) losses Unrealized inventory devaluation losses Unrealized bad-debt losses Unrealized gross profit Unrealized export trading losses Unrealized pension expense Long-term equity investment income Deferred tax liability, net Deferred tax assets - current Deferred tax liabilities - noncurrent	2012 $ (790) 9,070 10,160 11,100 8,340 10,280 (79,832) (31,672) (37,880) $ (69,552)	2011 $ 1,370 9,070 10,060 27,020 8,340 10,170 (79,832) (13,802) (55,860) $ (69,662)

Current income tax expense and income tax payable as of December 31, 2012 and 2011 were reconciled as follows:

Income tax expense at statutory rate of 17% Loss on long-term equity investments accounted for by the equity-method Impairment loss on financial assets carried at cost Gain on disposal of investments Others Current income tax expense Reversal of provision for deferred income tax assets (liabilities) Unrealized exchange gains Unrealized export trading losses Unrealized bad-debt expense Unrealized gross profit Others Add prior years’ income tax payable Add 10% income tax on unappropriated earnings Deduct current year’s withholding income tax Income tax payable as of December 31, 2012 and 2011	2012 $ 138,325 20,777 - - (774) 158,328 (2,160) - 100 (15,920) 110 140,458 6,088 28,712 (82,241) $ 93,017	2011 $ 432,389 9,540 5,430 (4,050) (734) 442,575 (12,880) 2,550 (1,270) (48,675) 280 382,580 108,745 39,306 (325,999) $ 204,632

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The income tax returns examined and cleared by the tax authorities are summarized as follows:

Phihong Guang-Lai	Year
	2010 2010

Information on the integrated income tax system of Phihong as of December 31, 2012 is as follows:

Balance of imputation credit account Undistributed earnings generated until 1997 Undistributed earnings generated since 1998 Expected imputation credit (IC) ratio for earnings distribution in 2013 (included income tax payable) Actual IC ratio for earnings distribution in 2012	$ 222,734 $ - $ 999,381 29.27% 23.28%

In the balance of imputation credit account as of December 31, 2012, the income tax payable for 2012 had been taken into account.

19. EARNINGS PER SHARE

Earnings per share (EPS) before and after income tax for the years ended December 31, 2012 and 2011 were as follows:

	2012
Before Income Tax $ 480,862 $ 480,862	Weighted Average Number of After Income Tax After Income Tax (Attributed to Parent’s Stockholders) Common Shares (Outstanding in Thousands) $ 294,745 $ 309,553 276,929 1,856 2,026 $ 294,745 $ 309,553 280,811 2011	Earnings Per Share (NT$)
		Before Income Tax $ 1.74 $ 1.71	After Income Tax After Income Tax (Attributed to Parent’s Stockholders) $ 1.06 $ 1.12 $ 1.05 $ 1.10
Before Income Tax $ 1,919,539 $ 1,919,539	Weighted Average Number of After Income Tax After Income Tax (Attributed to Parent’s Stockholders) Common Shares (Outstanding in Thousands) $ 1,404,853 $ 1,425,653 274,773 3,925 6,430 $ 1,404,853 $ 1,425,653 285,128	Earnings Per Share(NT$)
		Before Income Tax $ 6.99 $ 6.73	After Income Tax After Income Tax (Attributed to Parent’s Stockholders) $ 5.11 $ 5.19 $ 4.93 $ 5.00

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The Company should presume that the entire amount of the employees’ bonus will be settled in shares and the resulting potential shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of bonus to employees by the closing price of the common shares on the balance sheet date. The dilutive effect of the potential shares needs to be considered until the shares of employee bonus are resolved in the stockholders’ meeting in the following year.

20. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The fair values of nonderivative financial instruments as of December 31, 2012 and 2011 are summarized as follows:

Nonderivative Financial Instruments Assets Cash and cash equivalents Accounts receivable Other financial assets - current Available-for-sale financial assets - noncurrent Financial assets carried at cost - noncurrent Long-term equity investments accounted for by the equity method Refundable deposits Liabilities Accounts payable Accounts payable to related parties Other payables Long-term debts Advance deposits received	2012 Carrying Value Fair Value $ 1,543,288 $ 1,543,288 1,907,482 1,907,482 54,641 54,641 30,620 30,620 90,945 - 339,761 339,761 28,133 28,133 2,088,302 2,088,302 48,320 48,320 1,026,344 1,026,344 200,000 200,000 985 985	2011
		Carrying Value Fair Value $ 2,119,386 $ 2,119,386 1,936,108 1,936,108 81,406 81,406 33,357 33,357 93,254 - 355,603 355,603 32,438 32,438 2,028,697 2,028,697 35,939 35,939 1,224,745 1,224,745 200,000 200,000 1,128 1,128

Reporting of Derivative Instruments in the Financial Statements

Approaches and assumptions used to assess the fair value of financial instruments are summarized as follows:

a. Fair values of current assets and liabilities, cash and cash equivalents, accounts receivable, other financial assets - current, refundable deposits, accounts payable, accounts payable to related parties, other payable, advanced deposits received, etc. are based on their carrying values because of their short maturities.
b. Fair values of financial instruments measured at fair value through profit or loss and available-for-sale financial assets are determined using the market value in the open market or estimated by evaluation method according to the open information in the market.
c. Fair values of long-term equity investments are estimated based on the audited net value of investees as of December 31, 2012 and 2011.
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d. Financial assets carried at cost are investments in unquoted shares, which have no quoted price in an active market and entail an unreasonably high cost to obtain verifiable fair value. Therefore, no fair value is presented.
e. Fair values of long-term borrowings are determined using the present value of future cash flows discounted at interest rates of similar long-term debts.

The amounts of financial assets determined by market value in the open market or estimated by valuation method as of December 31, 2012 and 2011 are summarized as follows:

Available-for-sale financial assets, noncurrent	Market Value in the Open Market 2012 2011 $ 30,620 $ 33,357	By Valuation Method
		2012 2011 $ - $ -

For the year ended December 31, 2011, the net foreign exchange gain on forward contracts was $2,435 thousand, which was recorded as nonoperating income and gains.

The information of financial risk was summarized as follows:

Market Risk

The Company is exposed to investing risk because it invests in the listed companies; therefore, the fair value of the stock are fluctuated due to changes in market value. One percent decline in market rate will cause the fair value of financial instruments to decline by $306 thousand.

Credit Risk

Financial instruments are evaluated for credit risk which represents the potential loss that would be incurred by the Company if the counterparties or third parties breached the contracts. The risk factors include centralization of credit, components, contract term, and accounts receivable. The Company requires significant clients to provide guarantees or other rights of guarantee to reduce credit risk of the Company effectively.

Liquidity Risk

The Company has the ability to meet its financial obligations; thus, liquidity risks virtually do not exist.

Cash Flow Interest Rate Risk

The Company’s long-term borrowings had floating interest rate. Therefore, cash flows are expected to fluctuate due to changes in market interest rates. One percent increase in market rate will cause the Company to increase its cash-out by $2,000 thousand.

Hedge of fair value, hedge of cash flow, and hedge of a net investment in a foreign operation: None.

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21. RELATED-PARTY TRANSACTIONS

The Company’s related parties were as follows:

Related Party Relationship with the Company Xu Sheng Technology Co., Ltd. (“Xu Sheng”) The chairman of Xu Sheng is a director of Phihong Shine Tech Ltd. (“Shine Tech”) The chairman of Shine Tech is the spouse of Phihong’s director Peter Lin Phihong’s chairman

The Company’s major transactions with the related parties are summarized as follows:

Cost of Sales - Purchases

Purchases from related parties for the years ended December 31, 2012 and 2011 are summarized as follows:

Shine Tech Ltd.		2012 Amount Percentage to Total Purchases $ 133,851 1		2011
				Amount Percentage to Total Purchases $ 120,104 1

There is no significant difference between related parties and unrelated parties for purchase price.

Accounts Payable

Accounts payable to related parties as of December 31, 2012 and 2011 are summarized as follows:

Shine Tech Ltd. Xu Sheng		2012 Amount % $ 48,314 2 6 - $ 48,320 2		2011
				Amount % $ 35,926 2 13 - $ 35,939 2

Credit Guarantees

See Note 23 to the consolidated financial statements.

The related party who had guaranteed the payments of Phihong’s loans as of December 31, 2012 and 2011 was as follows:

Related Party Nature Peter Lin Long-term debts	2012 $ 200,000	2011 $ 200,000

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Compensation of directors, supervisors and management personnel:

Salaries Incentives Bonus Others	2012 $ 37,254 16,500 9,707 4,356 $ 67,817	2011 $ 21,850 22,624 53,918 3,981 $ 102,373

22. PLEDGED PROPERTIES

As of December 31, 2012 and 2011, Phihong offered property, plant and equipment amounting to $272,029 thousand and $282,518 thousand, respectively, as collateral for long-term loan.

As of December 31, 2012 and 2011, the following assets of Phihong USA Corp. had been pledged to secure its bank loans:

Accounts receivable Inventory	2012 $ 435,683 - $ 435,683	2011 $ 522,793 448,725 $ 971,518

23. COMMITMENTS AND CONTINGENCIES

Loan Guarantees

As of December 31, 2012, Phihong had guaranteed the US$6,000 thousand loan of Phihong USA Corp.

24. OTHERS

As of December 31, 2012 and 2011, significant foreign-currency financial assets and liabilities were as follows:

Financial assets Monetary items USD JPY HKD RMB Financial liabilities Monetary items USD JPY HKD RMB	2012 Foreign Currencies (In Thousands) Exchange Rate (Note) New Taiwan Dollars (In Thousands) $ 115,370 29.0400 $ 3,350,345 296,607 0.3354 99,482 3,554 3.7462 13,314 81,781 4.6172 377,599 90,092 29.0400 2,616,272 7,656 0.3354 2,568 3,123 3.7462 11,699 128,917 4.6172 595,236	2011
		Foreign Currencies (In Thousands) Exchange Rate (Note) New Taiwan Dollars (In Thousands) $ 107,850 30.2800 $ 3,265,698 286,008 0.3888 111,200 13,266 3.8940 51,658 77,482 4.7944 371,480 80,089 30.2800 2,425,095 16,754 0.3888 6,514 19,548 3.8940 76,120 74,877 4.7944 358,990

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Note: Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged.

25. OPERATING SEGMENTS

a. The Company’s power supply segment is the only reportable segment. The power supply segment mainly manufactures and sells AC/DC power adapters, charger bases, and power supply modules for computers. The Company’s other operating segments did not exceed the quantitative threshold so they are not disclosed as reportable segments. These segments mainly manufacture and sell lighting supply and develop, manufacture and sell monitors.

The Company took the operating profits as the measurement. There was no material inconsistency between the accounting policies of the operating segment and the accounting policies described in Note 2.

b. The Company’s operating segment information is as follows:
1) Segment income

Power supply Others Operating income Interest income Investment income recognized under the equity method Dividend income Gain on disposal of investment Gain on reversal of bad debts Loss on disposal of property, plant and equipment Foreign exchange (losses) gains, net Interest expense Impairment loss Income - others Expenses - others Income before income tax		Segment Revenues Years Ended December 31 2012 2011 $ 11,132,190 $ 13,638,743 750,349 746,738 $ 11,882,539 $ 14,385,481		Segment Profit	Segment Profit
				Years Ended December 31
		2012 $ 11,132,190 750,349 $ 11,882,539		2012 $ 634,064 (161,956) 472,108 15,965 11,156 4,927 - 15,954 (18,591 ) (92,840 ) (4,532 ) - 96,505 (19,790) $ 480,862	2011 $ 1,577,329 (123,016) 1,454,313 14,128 14,934 4,776 215,231 - (25,831 ) 76,598 (3,968 ) (54,969 ) 256,448 (32,121) $ 1,919,539

2) Segment assets and liabilities

Power supply assets Others Power supply assets Others	2012 $ 1,830,517 7,732,719 $ 9,563,236 2012 $ 2,050,412 1,636,782 $ 3,687,194	2011 $ 1,833,709 8,800,964 $ 10,634,673 2011 $ 1,955,440 1,989,388 $ 3,944,828

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c. Geographic information

2012 2011 Noncurrent Assets Net Sales Noncurrent Assets Net Sales China $ 3,018,601 $ 4,164,295 $ 2,941,333 $ 2,211,904 United States 137,010 2,110,335 162,811 3,729,165 Japan 4,158 614,383 6,011 572,112 Taiwan 535,771 1,626,253 517,988 1,169,244 Hungary - 1,009,545 - 2,815,376 India - 887,032 - 495,687 Canada - 100,525 - 1,057,448 Romania - 245,630 - 890,042 Others - 1,124,541 - 1,444,503 $ 3,695,540 $ 11,882,539 $ 3,628,143 $ 14,385,481 Major customers Customers accounting for at least 10% of net sales for the years ended December 31, 2012 and 2011 were as follows: 2012 2011 Sales Percentage % Sales Percentage % Customers A $ 2,666,297 22 $ 1,821,535 13 Customers B 633,593 5 1,490,595 10 Customers C 395,213 3 1,581,863 11 $ 3,695,103 30 $ 4,893,993 34		2011	2011	2011
				Sales Percentage % $ 1,821,535 13 1,490,595 10 1,581,863 11 $ 4,893,993 34

d. Major customers

Customers accounting for at least 10% of net sales for the years ended December 31, 2012 and 2011 were as follows:

26. PLAN FOR THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

According to Rule No. 0990004943 issued by the Financial Supervisory Commission (FSC) on February 2, 2010, the Company’s pre-disclosure information regarding the adoption of International Financial Reporting Standards (IFRSs) is as follows.

a. On May 14, 2009, the FSC announced the roadmap of IFRSs adoption for ROC companies. Starting from 2013, companies with shares listed on the TSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market should prepare consolidated financial statements in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, IFRSs, International Accounting Standards (IASs), interpretations and related guidance translated by Accounting Research and Development Foundation (ARDF) and issued by the FSC. The Company formed a task force to monitor and execute the IFRSs adoption plan. The important plan items, responsible divisions and plan progress are listed as follows.

Plan Item 1) Complete the identification of GAAP differences and impact	Responsible Division Accounting division and finance division	Plan Progress
		Completed (Continued)

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Plan Item 2) Complete the identification of consolidated entities under IFRSs 3) Assessment and selection of IFRSs 1 “First-time Adoption of International Financial Reporting Standards” optional exemptions 4) Complete evaluation and configuration of the IT systems 5) Complete the evaluation of resources and budget needed for IFRSs adoption 6) Determine IFRSs accounting policies 7) Selection of IFRSs 1 “First-time Adoption of International Financial Reporting Standards” optional exemptions 8) Complete the preparation of opening date balance sheet under IFRSs 9) Prepare comparative financial information under IFRSs for 2012 10) Complete modifications to the relevant internal controls	Responsible Division Accounting division and finance division Accounting division and finance division IT division Internal audit division Accounting division and finance division Accounting division and finance division Accounting division and finance division Accounting division and finance division Internal audit division	Plan Progress
		Completed Completed Completed Completed Completed Completed Completed In progress according to the plan Completed

(Concluded)

b. As of December 31, 2012, the significant differences between the Company’s current accounting policies under ROC GAAP and the accounting policies to be adopted under IFRSs are as follows:
1) Reconciliation of consolidated balance sheet as of January 1, 2012

R.O.C. GAAP	Amount $ 2,119,386 1,936,108 81,406 2,080,000 55,860 219,118 6,491,878 33,357 93,254 355,603 482,214	Effect of Transiti	on to IFRSs Presentation Difference $ - - - - (55,860 ) - (55,860) - - - -		IFRSs Amount Item Note Current assets $ 2,119,386 Cash and cash equivalents 1,936,108 Accounts receivable 81,406 Other financial assets, current 2,080,000 Inventories - - 6) a) 219,118 Other current assets 6,436,018 Total current assets Noncurrent assets 33,357 Available-for-sale financial assets, noncurrent 93,254 Financial assets carried at cost, noncurrent 355,603 Long-term equity investments accounted for by the equity method - (Continued)
		Recognition and Measurement Different $ - - - - - - - - - - -
Item Current assets Cash and cash equivalents Accounts receivable Other financial assets, current Inventories Deferred income tax assets, current Other current assets Total current assets Fund and investments Available-for-sale financial assets, noncurrent Financial assets carried at cost, noncurrent Long-term equity investments accounted for by the equity method Total fund and investments

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R.O.C. GAAP	Amount $ 3,472,330 19,729 117,778 137,507 - 32,438 - 18,306 50,744 - $ 10,634,673 $ 2,028,697 35,939 204,632 1,224,745 66,325 3,560,338 200,000 64,648 1,128 69,662 49,052 184,490 - 3,944,828 2,749,329 16,154 203,406 661,582 48,234 11,305 13,243 909,627 - 1,828,362 250,296 (22,304 ) 10,968 6,680,202 9,643 6,689,845 $ 10,634,673	Effect of Transiti	on to IFRSs Presentation Difference $ - - (117,778) (117,778) 66,030 - 117,778 - 183,808 - $ 10,170 $ - - - - - - - - - 10,170 - 10,170 - 10,170 - - - - - - - - - - - - - - - - $ 10,170		IFRSs Amount Item Note $ 3,472,330 Property, plant and equipment 19,729 Computer software cost - - 6) e) - 67,496 Deferred income tax assets, noncurrent 6) a), 6) c) 32,438 Refundable deposits 117,778 Long-term prepaid lease payment 6) e) 18,306 Others - - 4,210,291 Total noncurrent assets $ 10,646,309 Total Current liabilities $ 2,028,697 Accounts payable 35,939 Accounts payable - related party 204,632 Income tax payable 1,259,299 Other payables 6) b) 66,325 Other current liabilities 3,594,892 Total current liabilities Noncurrent liabilities 200,000 Long-term debts 73,270 Accrued pension liabilities 6) c) 1,128 Advance deposits received 79,832 Deferred income tax liabilities, noncurrent 6) a) 49,052 Others - - 403,282 Total noncurrent liabilities 3,998,174 Total liabilities Stockholders’ equity Capital stock 2,749,329 Common stock 16,154 Advanced collections for capital stock Capital surplus 203,406 Additional paid-in capital - common stock 661,582 Additional paid-in capital - bond conversion 48,234 Treasury stock transactions - Long-term equity investments 6) d) 13,243 Interest payable from bond conversion Retained earnings 909,627 Legal reserve 230,859 Special reserve 4) 1,828,362 Unappropriated earnings 4), 5) b), 5) d), 6) b), 6) c), 6) d) Other equity - Cumulative translation adjustments 5) d) (22,304 ) Unrealized loss on financial instruments - Unrealized revaluation increment 5) b) 6,638,492 Total stockholders’ equity of parent company 9,643 Noncontrolling interests 6,648,135 Total stockholders’ equity $ 10,646,309 Total (Concluded)
		Recognition and Measurement Different $ - - - - 1,466 - - - 1,466 - $ 1,466 $ - - - 34,554 - 34,554 - 8,622 - - - 8,622 - 43,176 - - - - - (11,305 ) - - 230,859 - (250,296 ) - (10,968 ) (41,710 ) - (41,710) $ 1,466
Item Property, plant and equipment Intangible assets Computer software cost Land use rights Total intangible assets Other assets Deferred income tax assets, noncurrent Refundable deposits - Others Total other assets - Total Current liabilities Accounts payable Accounts payable - related party Income tax payable Other payables Other current liabilities Total current liabilities Long-term liabilities Long-term debts Other liabilities Accrued pension liabilities Advance deposits received Deferred income tax liabilities, noncurrent Others Total other liabilities - Total liabilities Stockholders’ equity Capital stock Common stock Advanced collections for capital stock Capital surplus Additional paid-in capital - common stock Additional paid-in capital - bond conversion Treasury stock transactions Long-term equity investments Interest payable from bond conversion Retained earnings Legal reserve - Unappropriated earnings Other equity Cumulative translation adjustments Unrealized loss on financial instruments Unrealized revaluation increment Total stockholders’ equity of parent company Minority interest Total stockholders’ equity Total

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2) Reconciliation of consolidated balance sheet as of December 31, 2012

R.O.C. GAAP	Amount $ 1,543,288 1,907,482 54,641 1,680,224 37,880 154,722 5,378,237 30,620 90,945 339,761 461,326 3,517,009 42,760 131,847 174,607 - 28,133 - 3,924 32,057 $ 9,563,236 $ 2,088,302 48,320 93,017 1,026,344 45,078 3,301,061 200,000 65,270 985 69,552 50,326 186,133 - 3,687,194 2,771,639 226,556 661,582 48,234 11,305 13,243 1,052,192 - 999,381 101,935 (15,603 ) 10,968 5,881,432 (5,390) 5,876,042 $ 9,563,236	Effect of Transiti	on to IFRSs Presentation Difference $ - - - - (37,880 ) - (37,880) - - - - - - (131,847) (131,847) 48,160 - 131,847 - 180,007 - $ 10,280 $ - - - - - - - - - 10,280 - 10,280 - 10,280 - - - - - - - - - - - - - - - $ 10,280		IFRSs Amount Item Note Current assets $ 1,543,288 Cash and cash equivalents 1,907,482 Accounts receivable 54,641 Other financial assets - current 1,680,224 Inventories - - 6) a) 154,722 Other current assets 5,340,357 Total current assets Noncurrent assets 30,620 Available-for-sale financial assets - noncurrent 90,945 Financial assets carried at cost - noncurrent 339,761 Long-term equity investments accounted for by the equity method - 3,517,009 Property, plant and equipment 42,760 Computer software cost - - 6) e) - 48,419 Deferred income tax assets - noncurrent 6) a), 6) c) 28,133 Refundable deposits 131,847 Long-term prepaid lease payment 6) e) 3,924 Others - - 4,233,418 Total noncurrent assets $ 9,573,775 Total Current liabilities $ 2,088,302 Accounts payable 48,320 Accounts payable - related party 93,017 Income tax payable 1,058,420 Other payables 6) b) 45,078 Other current liabilities 3,333,137 Total current liabilities Noncurrent liabilities 200,000 Long-term debts 66,792 Accrued pension liabilities 6) c) 985 Advance deposits received 79,832 Deferred income tax liabilities, noncurrent 6) a) 50,326 Others - - 397,935 Total noncurrent liabilities 3,731,072 Total liabilities Stockholders’ equity Capital stock 2,771,639 Common stock Capital surplus 226,556 Additional paid-in capital - excess of par 661,582 Additional paid-in capital - bond conversion 48,234 Treasury stock transactions - Long-term equity investments 6) d) 13,243 Interest payable from bond conversion Retained earnings 1,052,192 Legal reserve 230,859 Special reserve 4) 1,007,752 Unappropriated earnings 4), 5) b), 5) d), 6) b), 6) c), 6) d) Other equity (148,361 ) Cumulative translation adjustments 5) d) (15,603 ) Unrealized loss on financial instruments - Unrealized revaluation increment 5) b) 5,848,093 Total stockholders’ equity of parent company (5,390 ) Noncontrolling interests 5,842,703 Total stockholders’ equity $ 9,573,775 Total
		Recognition and Measurement Different $ - - - - - - - - - - - - - - - 259 - - - 259 - $ 259 $ - - - 32,076 - 32,076 - 1,522 - - - 1,522 - 33,598 - - - - (11,305 ) - - 230,859 8,371 (250,296 ) - (10,968 ) (33,339 ) - (33,339) $ 259
Item Current assets Cash and cash equivalents Accounts receivable Other financial assets - current Inventories Deferred income tax assets - current Other current assets Total current assets Fund and investments Available-for-sale financial assets - noncurrent Financial assets carried at cost - noncurrent Long-term equity investments accounted for by the equity method Total fund and investments Property, plant and equipment Intangible assets Computer software cost Land use rights Total intangible assets Other assets Deferred income tax assets - noncurrent Refundable deposits - Others Total other assets - Total Current liabilities Accounts payable Accounts payable - related party Income tax payable Other payables Other current liabilities Total current liabilities Long-term liabilities Long-term debts Other liabilities Accrued pension liabilities Advance deposits received Deferred income tax liabilities, noncurrent Others Total other liabilities - Total liabilities Stockholders’ equity Capital stock Common stock Capital surplus Additional paid-in capital - excess of par Additional paid-in capital - bond conversion Treasury stock transactions Long-term equity investments Interest payable from bond conversion Retained earnings Legal reserve - Unappropriated earnings Other equity Cumulative translation adjustments Unrealized loss on financial instruments Unrealized revaluation increment Total stockholders’ equity of parent company Minority interest Total stockholders’ equity Total

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3) Reconciliation of consolidated statement of comprehensive income for the year ended December 31, 2012

R.O.C. GAAP	Amount $ 11,882,539 9,580,840 2,301,699 776,550 576,018 477,023 1,829,591 472,108 15,965 11,156 4,927 15,954 96,505 144,507 4,532 18,591 92,840 19,790 135,753 480,862 (186,117) $ 294,745	Effect of Transiti	on to IFRSs Presentation Difference $ 8,850 8,850 - - (15,954 ) - (15,954) 15,954 - - - (15,954 ) - (15,954) - - - - - - - $ -		IFRSs Amount Item Note $ 11,891,389 Net sales 9,588,528 Cost of goods sold 6) b), 6) c), 6) f) 2,302,861 Gross profit Operating expenses 776,570 Sales and marketing 6) b), 6) c) 560,162 General and administration 6) b), 6) c), 6) g) 475,369 Research and development 6) b), 6) c) 1,812,101 Total 490,760 Operating income Nonoperating income and gains 15,965 Interest income 11,156 Investment income recognized under the equity method, net 4,927 Dividend income - - 6) g) 96,505 Others 128,553 Total Nonoperating expenses and losses 4,532 Interest expense 18,591 Loss on disposal of property, plant and equipment 92,840 Foreign exchange loss, net 19,790 Others 135,753 Total 483,560 Income before income tax (186,154) Income tax expense 6) c) 297,406 Consolidated net income (148,361 ) Exchange differences on translating foreign operations 6,458 Unrealized gains on available-for-sale financial assets 243 Other comprehensive income recognized under the equity method, net 6,880 Defined benefit obligations’ actuarial gain and losses (1,170 ) Income tax relating to components of other comprehensive income (135,950 ) Other comprehensive income for the year, net of tax $ 161,456 Total comprehensive income for the year
		Recognition and Measurement Different $ - (1,162 ) 1,162 20 98 (1,654) (1,536) 2,698 - - - - - - - - - - - 2,698 (37) $ 2,661
Item Net sales Cost of goods sold Gross profit Operating expenses Sales and marketing General and administration Research and development Total Income from operations Nonoperating income and gains Interest income Investment income recognized under the equity method, net Dividend income Gain on reversal of bad debts Others Total Nonoperating expenses and losses Interest expense Loss on disposal of property, plant and equipment Foreign exchange loss, net Others Total Income before income tax Income tax expense Consolidated net income

4) Appropriation of special reserve

Under Rule No. 1010012865 issued by the FSC on April 6, 2012, on the first-time adoption of IFRSs, a company should appropriate to a special reserve an amount that is the same as these of unrealized revaluation increment and cumulative translation differences (gains) transferred to retained earnings as a result of the company’s use of exemptions under IFRS 1. However, at the date of transition to IFRSs, if the increase in retained earnings that resulted from all IFRSs adjustments is not enough for this appropriation, only the increase in retained earnings that resulted from all IFRSs adjustments will be appropriated to special reserve. The special reserve appropriated as above may be reversed to retained earnings in proportion to the usage, disposal or reclassification of the related assets and thereafter distributed. The amounts of unrealized revaluation increment and cumulative translation differences transferred to retained earnings were $10,968 thousand and $250,296 thousand, respectively. However, the increase in retained earnings that resulted from all IFRSs adjustments was not enough for this appropriation; thus, only the increase of $230,859 thousand in retained earnings that resulted from all IFRSs adjustments will be appropriated to special reserve.

5) Exemptions from IFRS 1

IFRS 1 “First-time Adoption of International Financial Reporting Standards” establishes the procedures for the preparation of the Company’s first consolidated financial statements prepared in accordance with IFRSs. Under IFRS 1, the Company is required to determine which IFRS accounting policies to use and retrospectively apply those accounting policies to its opening balance sheet at the date of transition to IFRSs (January 1, 2012), except for optional exemptions such

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retrospective application. The main optional exemptions the Company adopted are summarized as follows:

a) Business combinations

The Company elected not to apply IFRS 3 “Business Combinations” retrospectively to business combinations that occurred before the date of transition to IFRSs. Thus, in the opening balance sheet, the amounts of goodwill generated from past business combinations, related assets and liabilities acquired, and noncontrolling interests remain the same as those amounts shown in the ROC GAAP balance sheet as of December 31, 2011. This exemption also applies to investments in associates.

b) Fair value or revaluation amount as deemed cost

The Company revalued some of its landholdings in accordance with ROC GAAP and used the revalued amount as the deemed cost at the date of transition to IFRS, and other property, plant and equipment were valued at cost under IFRS. The amount of unrealized revaluation increment reclassified $10,968 thousand as of December 31, 2012 and January 1, 2012.

c) Employee benefits.

The Company elected to recognize all cumulative actuarial gains and losses in retained earnings as of January 1, 2012.

d) Cumulative translation difference.

The Company elected to reset to zero its cumulative translation adjustment in stockholders’ equity and to recognize this amount under retained earnings at the date of transition to IFRS. The amount of cumulative translation adjustments reclassified to retained earnings was both $250,296 thousand.

6) Notes to the reconciliation of the significant differences:

The Company-specific areas of possible material differences between the existing accounting policies and the accounting policies to be adopted under IFRSs were as follows:

a) Deferred income tax asset/liability

Under ROC GAAP, valuation allowance is provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. Under International Accounting Standards (IAS) 12 “Income Taxes,” deferred tax assets are only recognized to the extent that it is probable that there will be sufficient taxable profits; thus, valuation allowance account is not needed.

In addition, under ROC GAAP, a deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of the related asset or liability for financial reporting. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as current or noncurrent on the basis of the expected length of time before it is realized or settled. Under IFRSs, a deferred tax asset or liability is classified as noncurrent.

Under ROC GAAP, the current and noncurrent deferred tax liabilities and assets of the same taxable entity should be offset against each other and presented as a net amount. However, under IAS 12, an entity offset current tax assets and current tax liabilities against each other only if the entity has a legally enforceable right to make this offset and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on

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the same taxable entity.

As of December 31, 2012 and January 1, 2012, the amounts reclassified from deferred income tax assets to noncurrent assets were $37,880 thousand and $55,860 thousand, respectively. Under ROC GAAP, the Company also revised the deferred tax liabilities and assets that had been offset against each other and increased the deferred tax liabilities - noncurrent and assets - noncurrent simultaneously by $10,280 thousand and $ 10,170 thousand as of December 31, 2012 and January 1, 2012, respectively.

b) Short-term employee benefits

Under ROC GAAP, there is no specific policy on short-term employee benefits, specifically paid vacation leaves, and the expenses for these leaves are recognized when employees actually go on leave. On transition to IFRSs, an entity should recognize the expected cost of paid vacation leaves as employees render services that increase their entitlement to these leaves.

As of December 31, 2012 and January 1, 2012, the Company increased other payable by $32,076 thousand and $34,554 thousand, respectively, for short-term employee benefits. In addition, for 2012, the Company decreased “salary expenses” by $2,478 thousand.

c) Employee benefits - gain or loss on actuarial valuation on defined benefit plan

Under SFAS No. 18 - “Accounting for Pensions,” unrecognized net transition obligation should be amortized over the expected average remaining working lives of employees. On the date of transition to IFRSs, the retained earnings should be adjusted for unrecognized transition obligation.

Under ROC GAAP, when using the corridor approach, actuarial gains and losses should be amortized over the expected average remaining working lives of the participating employees. Under IAS No. 19 “Employee Benefits,” the Company elected to recognize immediately all actuarial gains and losses as other comprehensive income in the period in which they occur. The subsequent reclassification to earnings is not permitted.

As of December 31, 2012 and January 1, 2012, the Company performed the actuarial valuation under IAS No. 19 and recognized the valuation difference directly in retained earnings in accordance with IFRS 1; accrued pension liabilities were adjusted for increases of $1,522 thousand and $8,622 thousand, respectively; deferred income tax assets were adjusted for increases of $259 thousand and $1,466 thousand, respectively; pension cost was adjusted for a decrease of $220 thousand, and income tax expense was adjusted for an increase of $37 thousand, and also recognized “employee benefits - gain or loss on actuarial valuation on defined benefit plan” (as other comprehensive income) and its income tax expense of $6,880 thousand and $1,170 thousand, respectively.

d) Investments and capital surplus - long-term equity investments when associates/subsidiaries issue new shares and the parent does not subscribe for these shares at its percentage of shares of the investee.

Under ROC GAAP, if an entity’s investment percentage increases as a result of not subscribing for new shares issued by an investee at its current percentage of ownership of the investee, the increase or decrease in the investor company`s equity is used to adjust “capital surplus - long-term equity investments” and “long-term equity investment.”

Under IFRSs, changes in equity in associates in which significant influence on the associates is retained are regarded as acquisition or disposal of shares in associates; however, changes in equity in subsidiaries in which control over the subsidiaries is retained are regarded as equity transactions. In addition, based on the “Q&A for adopting IFRSs” issued by the Taiwan Stock Exchange, accounts that do not conform to IFRSs or not covered under the Company Law as

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well as capital surplus items required by the Ministry of Economics Affairs should be adjusted at the date of transition to IFRSs.

As of December 31, 2012 and January 1, 2012, the capital surplus - long-term equity investments of the Company reclassified to retained earnings was both $11,305 thousand.

e) Land use rights

Under ROC GAAP, land use rights are recognized as intangible assets. Under IAS 17 “Leases,” land use rights should be classified under lease prepayments.

As of December 31, 2012 and January 1, 2012, the amounts of land use rights reclassified to lease prepayments were $131,847 thousand and $117,778 thousand, respectively.

f) Allowance for sales returns and others

Under IFRSs, provisions for estimated sales returns and others should be recognized as cost of goods sold instead of a reduction in revenue in the period.

As of December 31, 2012, the Company recorded the amount that as mentioned above reclassified to cost of goods sold was $8,850 thousand.

g) Reversal of the provision for loss on doubtful accounts

Under ROC GAAP, reversal of the provision for loss on doubtful accounts is recognized under nonoperating income and gains, and it should be reclassified to operating expense - general and administrative under IFRSs.

As of December 31, 2012, the Company had reclassified $15,954 thousand to operating expense – general and administrative.

c. The Company’s aforementioned assessment is based on the 2010 version of IFRSs translated by the ARDF and on the Guidelines Governing the Preparation of Financial Reports by Securities Issuers issued by the FSC on December 22, 2011. However, these assessments may change as the International Accounting Statements Board continues to issue or amend standards and as the FSC may issue new rules governing the adoption of IFRSs. Actual accounting policies adopted under IFRSs in the future may differ from those contemplated during the assessments.
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AI assistant

PHIHONG — Audit Report / Information 2012

52096_rns_2013-06-10_3843bc88-8569-4acb-9178-4dcb8503180a.pdf

Phihong Technology Co., Ltd. and Subsidiaries

Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

Notice to Readers

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars, Except Par Value)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

PHIHONG TECHNOLOGY CO., LTD. AND SUBSIDIARIES

1. ORGANIZATION AND OPERATIONS

PHI’s subsidiaries were as follows:

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Consolidation

Foreign-currency Transactions and Translation of Foreign-currency Financial Statements

Accounting Estimates

Current/Noncurrent Assets and Liabilities

Cash and Cash Equivalents

Available-for-sale Financial Assets

Financial Assets Carried at Cost

Impairment of Accounts Receivable

Inventories

Long-term Investments Accounted for by the Equity Method

Property, Plant and Equipment

Land Use Rights

Computer Software

Impairment of Assets

Pension Plan

Income Tax

Stock-based Compensation

Sales Recognition

Reserve for Sale Warranties

Earnings Per Share

Nonderivative Financial Instruments

3. CHANGES IN ACCOUNTING PRINCIPLES

Accounting Treatment for Financial Instruments

Operating Segments

4. CASH AND CASH EQUIVALENTS

5. ACCOUNTS RECEIVABLE

6. INVENTORIES

7. AVAILABLE-FOR-SALE FINANCIAL ASSETS - NONCURRENT

8. FINANCIAL ASSETS CARRIED AT COST - NONCURRENT

9. LONG-TERM EQUITY INVESTMENTS

10. PROPERTY, PLANT AND EQUIPMENT

11. OTHER PAYABLES

12. LONG-TERM DEBTS

13. PENSION PLAN

14. CAPITAL STOCK

15. EMPLOYEE STOCK OPTION PLANS

16. RETAINED EARNINGS

17. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES

18. INCOME TAX

19. EARNINGS PER SHARE

20. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

Reporting of Derivative Instruments in the Financial Statements

Market Risk

Credit Risk

Liquidity Risk

Cash Flow Interest Rate Risk

21. RELATED-PARTY TRANSACTIONS

Cost of Sales - Purchases

Accounts Payable

Credit Guarantees

22. PLEDGED PROPERTIES

23. COMMITMENTS AND CONTINGENCIES

Loan Guarantees

24. OTHERS

PHIHONG Audit Report / Information 2012