Address: 8F, No.3-1, YuanQu St., Taipei 115, Taiwan, R.O.C. … · 2018-08-01 · December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) 2012 2011 Assets Notes

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SERCOMM CORPORATION AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

WITH REPORT OF INDEPENDENT AUDITORS

FOR THE YEARS ENDED

DECEMBER 31, 2012 AND 2011

Address: 8F, No.3-1, YuanQu St., Taipei 115, Taiwan, R.O.C. (NanKang Software Park) Telephone: 886-2-2655-3988

The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail.

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INDEX

Items Pages

Cover 1

Index 2

Report of Independent Auditors 3

Consolidated Balance Sheets 4

Consolidated Statements of Income 5

Consolidated Statements of Changes in Stockholders’ Equity 6

Consolidated Statements of Cash Flows 7

Notes to Consolidated Financial Statements 8-84

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REPORT OF INDEPENDENT AUDITORS

English Translation of a Report Originally Issued in Chinese

To Sercomm Corporation We have audited the accompanying consolidated balance sheets of Sercomm Corporation and subsidiaries (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 ended December 31, 2012 and 2011. 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 “Guidelines for Certified Public Accountants Examination and Reporting on Financial Statements” and generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 financial position of Sercomm Corporation and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with “Business Entity Accounting Act”, “Regulation on Business Entity Accounting Handling” with respect to financial accounting standards, “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, and generally accecpted accounting principles in the Republic of China. As described in Note 3 to the consolidated financial statements, effective from January 1, 2011, the Company has adopted the third revision of the Statement of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” of the Republic of China. March 19, 2013 Taipei, Taiwan Republic of China 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.

English Translation of Consolidated Financial Statements Originally Issued in Chinese

SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

December 31, 2012 and 2011(Expressed in Thousands of New Taiwan Dollars)

2012 2011Assets Notes Amount % Amount % Liabilities and Stockholders' Equity Notes Amount % Amount %

Current assets Current liabilitiesCash and cash equivalent 4 $4,660,206 36.12 $3,868,609 32.17 Short-term loans 3 and 28 $1,904,094 14.76 $2,819,707 23.45Financial assets at fair value through profit or loss-current 2 and 5 1,106 0.01 30,383 0.25 Notes payable 107,336 0.83 77,082 0.64Derivative financial assets for hedging 2 and 6 21,980 0.17 - - Accounts payable 3,959,260 30.68 3,277,137 27.25Notes receivable-net 2 and 7 301,612 2.34 732,669 6.09 Income tax payable 2 and 24 201,511 1.56 82,170 0.68Accounts receivable-net 2 and 7 1,513,829 11.73 1,890,915 15.73 Accrued expenses 27 826,884 6.41 654,121 5.44Other receivables 7 339,189 2.63 290,635 2.42 Financial liabilities at fair value through profit of loss-current 2 and 5 269 - 284 - Inventories-net 2 and 8 2,275,810 17.63 1,907,917 15.87 Derivative financial liability for hedging 2 and 6 30,752 0.24 - - Other current assets 157,378 1.22 216,461 1.80 Bond payable- current 2 and 14 - - 425,426 3.54Deferred income tax assets-current 2 and 24 32,450 0.25 27,473 0.23 Lease payables-current 2 and 15 19,272 0.15 18,864 0.16Restricted assets 28 26,599 0.21 11,557 0.10 Other current liabilities 29 387,342 3.00 417,159 3.47

Total current assets 9,330,159 72.31 8,976,619 74.66 Total current liabilities 7,436,720 57.63 7,771,950 64.63

Funds and investmentsFinancial assets as fair value through profit or loss-noncurrent 2 and 14 459 - - - Long-term liabilitiesOther financial assets-noncurrent 29 135,643 1.05 80,045 0.67 Bonds Payable 2 and 14 1,287,098 9.98 542,840 4.52Financial assets measured at cost-noncurrent 2 and 9 47,454 0.37 108,034 0.90 Lease payables-noncurrent 2 and 15 313,371 2.43 330,904 2.75

Total funds and investments 183,556 1.42 188,079 1.57 Total long-term liabilities 1,600,469 12.41 873,744 7.27

Property, plant and equipment 2, 12 and 28Land 213,405 1.66 43,230 0.36 Other liabilitiesBuildings 1,095,812 8.49 784,732 6.52 Accrued pension liabilities 2 and 16 7,095 0.06 5,687 0.05Machinery and equipment 1,476,414 11.44 1,268,127 10.54 Deferred income tax liabilities-noncurrent 2 and 24 8,180 0.06 100,127 0.83Research and development equipment 373,528 2.90 303,920 2.53 Total other liabilities 15,275 0.12 105,814 0.88Office and other equipment 147,343 1.14 141,151 1.17 Total liabilities 9,052,464 70.16 8,751,508 72.78Leased assets 457,030 3.54 457,030 3.80

Total cost 3,763,532 29.17 2,998,190 24.92Less: Accumulated depreciation (900,456) (6.98) (714,930) (5.94) Stockholders' equityConstruction in progress 16,617 0.13 101,911 0.85 Capital 17Prepayments for equipment 146,962 1.14 111,502 0.93 Common stock 1,956,095 15.16 1,826,337 15.19 Property, plant and equipment-net 3,026,655 23.46 2,496,673 20.76 Advance receipts for common stock 16,760 0.13 1,623 0.02

Capital reserve 19Intangible assets 2 and 11 Bonds conversion premiums 2 and 14 348,003 2.69 223,591 1.86

Computer software cost-net 64,996 0.50 61,734 0.51 Employee stock option 2 42,303 0.33 27,666 0.23Other intangible assets 77,570 0.60 70,073 0.58 Stock option 2 and 18 108,103 0.84 57,732 0.48Land use right 28 109,029 0.85 115,189 0.96 Retained earnings 20 and 21

Total intangible assets 251,595 1.95 246,996 2.05 Legal reserve 362,873 2.81 304,569 2.53Unappropriated earnings 896,760 6.95 668,912 5.56

Other assets Adjusting items in stockholders' equityProperty not used in operations 2 and 12 14,212 0.11 14,370 0.12 Cumulative translation adjustments 2 128,537 1.00 162,179 1.35Refundable deposits 28 29,431 0.23 45,047 0.37 Unrealized gain / loss on financial instrument 2 and 5 (8,772) (0.07) - - Deferred charges 2 51,972 0.40 56,333 0.47 Total stockholders' equity 3,850,662 29.84 3,272,609 27.22Deferred income tax asset-noncurrent 2 and 24 15,546 0.12 - -

Total other assets 111,161 0.86 115,750 0.96Total assets

$12,903,126 100.00 $12,024,117 100.00 Total liabilities and stockholders' equity $12,903,126 100.00 $12,024,117 100.00

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

2012 2011As of December 31, As of December 31,

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SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31, 2012 and 2011

(Expressed in Thousands of New Taiwan Dollars, Except for Per Share Data)

Notes Amount % Amount %Sales $19,441,596 100.90 $13,515,344 102.07Less : Sales returns and allowances 173,625 0.90 273,837 2.07

Net sales 2 19,267,971 100.00 13,241,507 100.00Cost of goods sold 8 and 23 16,282,234 84.50 11,261,997 85.05

Gross profit 2,985,737 15.50 1,979,510 14.95

Operating expenses 23 and 27Selling expenses 573,063 2.97 381,905 2.88General and administrative expenses 571,249 2.97 470,692 3.55Research and development expenses 808,768 4.20 564,959 4.27Subtotal 1,953,080 10.14 1,417,556 10.70

1,032,657 5.36 561,954 4.25

Non-operating incomeInterest income 32 34,031 0.18 23,881 0.18Dividend income 2 831 - 831 0.01Gain on disposal of investments 2 - - 12,094 0.09Foreign exchange gain-net 2 - - 124,485 0.94Gain on valuation of financial assets-net 2, 5, 14 and 32 8,767 0.05 19,079 0.14Other income 30,405 0.15 33,439 0.25 Total non-operating income 74,034 0.38 213,809 1.61

Non-operating expensesInterest expense 12, 14 and 32 84,179 0.44 65,797 0.50Loss on disposal of property, plant and equipment 2 3,405 0.02 4,728 0.04Foreign exchange loss-net 2 21,735 0.11 - - Impairment loss of financial asset 2 and 9 58,272 0.30 - - Other losses 4,384 0.02 3,782 0.03 Total non-operating expenses 171,975 0.89 74,307 0.57

Income from continuing operations before income tax 934,716 4.85 701,456 5.29Income tax expense 2 and 24 (179,880) (0.93) (118,415) (0.89)Net income $754,836 3.92 $583,041 4.40

Before tax After tax Before tax After taxBasic earnings per share (New Taiwan Dollars) 2 and 26

Net income $4.83 $3.90 $3.95 $3.29Minority interests - - - - Stockholders of the parent $4.83 $3.90 $3.95 $3.29

Diluted earnings per share (New Taiwan Dollars) 2 and 26Net income $4.25 $3.45 $3.38 $2.81Minority interests - - - - Stockholders of the parent $4.25 $3.45 $3.38 $2.81


2012 2011

Operating income

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the years ended December 31, 2012 and 2011

(Expressed in Thousands of New Taiwan Dollars)

Capital Cumulative Unrealized gain

Capital collected Capital Unappropriated Translation /loss on financial Treasury

Description Notes Common Stock in advance Reserve Legal Reserve Earnings Adjustments instrument Stock Total

Balance as of January 1, 2011 $1,747,405 $13,468 $196,598 $273,125 $385,131 $34,841 $- $(53,388) $2,597,180

Appropriation of 2010 retained earning 20 and 21

Legal reserve - - - 31,444 (31,444) - - - -

Cash dividends - - - - (267,816) - - - (267,816)

Change in cumulative translation adjustments of investees 2 - - - - - 127,338 - - 127,338

Exercise of employee stock options 2 and 18 13,060 - 1,306 - - - - - 14,366

Compensation costs for Treasury stock transfer to employees 2 - - 107 - - - - - 107

Treasury stock transfer to employees 2 and 22 - - - - - - - 53,388 53,388

Convertible bonds converted into common stock 2 and 14 65,872 (11,845) 59,192 - - - - - 113,219

Equity instrument from Convertible bonds 2 and 14 - - 51,786 - - - - - 51,786

Net income in 2011 - - - - 583,041 - - - 583,041

Balance as of December 31, 2011 1,826,337 1,623 308,989 304,569 668,912 162,179 - - 3,272,609

Appropriation of 2011 retained earning 20 and 21

Legal reserve - - - 58,304 (58,304) - - - -

Cash dividends - - - - (468,684) - - - (468,684)

Change in cumulative translation adjustments of investees 2 - - - - - (33,642) - - (33,642)

Exercise of employee stock options 2 and 18 6,350 16,760 14,637 - - - - - 37,747

Convertible bonds converted into common stock 2 and 14 123,408 (1,623) 124,412 - - - - - 246,197

Equity instrument from Convertible bonds 2 and 14 - - 50,371 - - - - - 50,371

Net change in unrealized gain/loss on hedging derivative financial instruments 2 and 5 - - - - - - (8,772) - (8,772)

Net income in 2012 - - - - 754,836 - - - 754,836

Balance as of December 31, 2012 $1,956,095 $16,760 $498,409 $362,873 $896,760 $128,537 $(8,772) $- $3,850,662

Retained Earnings


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SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2012 and 2011(Expressed in Thousands of New Taiwan Dollars)

2012 2011Cash flows from operating activities: Net income $754,836 $583,041 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 315,411 264,121 Amortization of discount on bonds payable 21,117 14,866 Gain on valuation of financial assets (8,767) (19,079) Loss on disposal of property, plant and equipment 3,405 4,728 Compensation costs for treasury stock transfer to employees - 107 Impairment loss of financial asset 58,272 - Changes in assets and liabilities: Financial assets at fair value through profit or loss-current 36,853 (7,609) Notes receivable-net 431,057 (732,669) Accounts receivable-net 377,086 (100,622) Inventories-net (367,893) (591,000) Other receivables (48,554) (157,029) Other current assets 69,735 (40,892) Deferred income tax assets (16,923) (28,651) Notes payable 30,254 34,596 Accounts payable 682,123 1,175,334 Income tax payable 119,412 (39,563) Accrued expenses 172,692 133,548 Financial liabilities at fair value through profit or loss-current - 5,058 Other current liabilities (84,751) 130,846 Accrued pension liabilities 1,408 14 Deferred income tax liabilities (95,547) 91,249 Net cash provided by operating activities 2,451,226 720,394Cash flows from investing activities: Increase in restricted assets-current (15,042) (2,903) Increase in other financial assets-noncurrent (664) - Acquisition of property, plant and equipment (825,451) (516,043) Proceeds from disposal of property, plant and equipment 6,487 6,075 Increase in computer software cost (25,911) (25,327) Increase in other intangible assets (28,369) (26,042) Increase in land use right - (7,004) Decrease (increase) in refundable deposits 15,616 (19,447) Increase in deferred charges (31,851) (37,812) Net cash used in investing activities (905,185) (628,503)Cash flows from financing activities: Increase (Decrease) in short-term loans (915,613) 1,336,904 Issuance of bonds payable 595,000 595,000 Decrease in lease payables (17,125) (15,628) Cash dividends (468,684) (267,816) Exercise of employee stock options 37,747 14,366 Treasury stock transfer to employees - 53,388 Net cash (Used in) provided by financing activities (768,675) 1,716,214 Effects from exchange rate changes 14,231 15,921Net increase in cash 791,597 1,824,026Cash at beginning of the year 3,868,609 2,044,583Cash at end of the year $4,660,206 $3,868,609Supplemental disclosures of cash flows information: Cash paid for income tax $124,401 $99,722 Cash paid for interest $80,435 $63,432Financing activities not affecting cash flows: Idle asset transfer in fixed assets $- $78,566 Lease payables-current $19,272 $18,864 Bond payable-current $- $425,426

The accompanying notes are an integral part of the consolidated financial statements.7

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English Translation of Financial Statements Originally Issued in Chinese SERCOMM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011

(Expressed in Thousands of New Taiwan Dollars unless Otherwise Stated) 1. Organization and Operations

Sercomm Corporation (“the Company”) was incorporated on July 29, 1992 under the laws of the Republic of China (R.O.C.). The Company primarily engages in the research, development, manufacturing and sale of access server (router), print server and network server. The Company’s common shares were traded on the GreTai (Over-the-counter) Securities Market of the R.O.C. in May 1999, and its shares were publicly listed and traded on the Taiwan Stock Exchange (TSE) in December 2007. The numbers of employees of the Company and its subsidiaries as of December 31, 2012 and 2011 were 4,172 and 3,977, respectively.

2. Summary of Significant Accounting Policies

The consolidated financial statements were prepared in conformity with requirements of the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (R.O.C.).

Summary of significant accounting policies is as follows:

(1) Summary of consolidation

The Company’s consolidated financial statements include the following subsidiaries:

Percentage of ownership

Name of the Name of As of December 31, investors subsidiaries Nature of Business 2012 2011

The Company Senslinq Inc. Sales of IT products 100.00% 100.00% The Company Sercomm

Investments Ltd. Investment holding, international trading

100.00% 100.00%

The Company Sercomm Trading Co. Ltd.

Investment holding, international trading

100.00% 100.00%


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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Percentage of ownership

Name of the Name of As of December 31, investors subsidiaries Nature of Business 2012 2011

The Company Shukuan Investment Ltd.

Investment activity 100.00% 100.00%

The Company Sercomm France SARL

Sales of IT products 100.00% 100.00%

The Company Sercomm Deutschland GmbH (Note A)

Sales of IT products 100.00% -

The Company Sercomm Japan Corp. (Note B)

Sales of IT products 100.00% 100.00%

Sercomm Trading Co. Ltd.

Zealous Investments Ltd.

Investment holding, international trading

100.00% 100.00%

Sercomm Trading Co. Ltd.

Smart Trade Inc. Investment holding, international trading

100.00% 100.00%

Zealous Investments Ltd.

Sernet Technology (Suzhou)

Manufacture of routers, communication products, Wlan products; sales and after-sales service

100.00% 100.00%

Smart Trade Inc. Dwnet Technology (Suzhou) Limited

Manufacture of routers, communication products, Wlan products; sales and after-sales service

100.00% 100.00%

Sercomm France SARL

Sercomm Italinan SRL (Note C)

Sales of IT products 100.00% -

Note A: Sercomm. Deutschland GmbH incorporated on June, 2012. Note B: On July, 2012, the Company acquired 100% shareholding in Sercomm Japan Corp.

from Shukuan Investment Ltd. The Company recorded net assets acquired from Shukuan Investment Ltd. on the basis of their carrying value. The acquisition was accounted for as an organization restructuring in accordance with ARDF Interpretation No. 92-047.

Note C: Sercomm Italian SRL was incorporated on February, 2012.



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(2) Principles for consolidation

Consolidated financial statements were prepared in accordance with the R.O.C. SFAS No.7. Transactions between consolidated entities are eliminated in the consolidated financial statements. Investees in which the Company and subsidiaries hold more than 50% of voting rights, including those that are exercisable or convertible, are consolidated, since the Company and subsidiaries are considered to possess control. Consolidation shall also be implemented if any of the following circumstances exists: i. the total amount of voting rights held in the investee exceeds 50% due to agreement with

other investors ii. as permitted by law, or by contract agreements, the Company controls an entity’s

finances, operations and personnel affairs iii. the Company has authority to appoint or discharge more than half members of board of

directors (or equivalents), by whom the investee is controlled iv. the Company leads and controls more than half of the members of the board of directors

(or equivalents), by whom the investee is controlled v. other indications of control possession

(3) Classification of current and noncurrent assets and liabilities

Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

(4) Foreign currency transactions and translation of foreign currency financial statements

The Company’s and subsidiaries’ accounts are maintained in NTD, USD and RMB. Transactions denominated in foreign currencies are converted into NTD, USD and RMB at exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into NTD using the exchange rates prevailing at the balance sheet date, with the related exchange gains or losses included in the consolidated statement of income.



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The long-term foreign investments of the Company and the subsidiaries are converted into NTD and USD at exchange rates prevailing at the dates of the transactions. While recording under equity method, the long-term foreign investments of the Company and the subsidiaries are converted into NTD and USD at the weighted-average exchange rate during the reporting period. The long-term foreign investments will be adjusted at the exchange rate prevailing at the balance sheet date. Adjusting differences are recorded as cumulative translation adjustments under stockholders’ equity. The Company prepares consolidated financial statement. Financial statements of foreign subsidiaries are translated into New Taiwan Dollars (“NTD”) at the exchange rates prevailing at the balance sheet date for assets and liabilities accounts, historical exchange rates for equity accounts, and weighted-average exchange rates during the reporting period for profit and loss accounts. Translation differences resulting from the translation of such financial statement into NTD are recorded as cumulative translation adjustments, a separate component of stockholders’ equity.

(5) Financial assets and financial liabilities

In accordance with the R.O.C. SFAS No. 34, “Accounting for Financial Instruments” and “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, financial assets are classified as either financial assets at fair value through profit or loss, derivative financial assets for hedging, financial assets measured at cost or available-for-sale financial assets. When financial assets are recognized initially, they are measured at fair value, plus transaction costs for all financial assets not measured at fair value through profit or loss. Financial liabilities are to be classified as either financial liabilities at fair value through profit or loss, derivative financial liabilities for hedging or financial liabilities measured at cost. The Company and its subsidiaries account for regular purchase or regular sale of financial assets as of the trade date, which is the date the Company and its subsidiaries commit to purchasing or selling the asset. Regular purchase or regular sale is that the delivery period of a transaction for a financial asset is in a regular period or required period by law.



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a. Financial assets and financial liabilities at fair value through profit or loss

Financial assets or financial liabilities at fair value through profit or loss are subsequently measured at fair value and changes in fair value are recognized in profit and loss. This category has two sub-categories: financial assets or liabilities held for trading and those designated at fair value through profit or loss at inception.

b. Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial instruments not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets, bond investments for which no active market exists. Investments designated as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in other items in stockholders’ equity until the investment is derecognized or until the investment is determined to be impaired at with time the cumulative gain or loss previously reported in equity is included in the statement of operations.

c. Derivative financial assets and liabilities for hedging

Derivative financial assets and liabilities for hedging that have been designated in hedge accounting relationships and are effective hedging instruments and reported at fair value.

d. Financial assets measured at cost

Equity investments without reliable market prices, or derivatives linked to and settled in are measured at cost.

The fair value of stock of listed companies or beneficiary certification is measured by closing price at balance sheet date. The fair value of open-end funds is measured at the unit price of the net assets at the balance sheet date.

(6) Assessment of impairment for account receivables

The Company first assesses as of balance sheet date whether objective evidence of impairment exists for notes, accounts and other receivables that are individually significant. If there is objective evidence that an impairment loss has occurred, the amount of impairment loss is assessed individually. For notes, accounts and other receivables other than those mentioned above, the Company groups those assets with similar credit risk characteristics and collectively assess them for impairment.



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(7) Inventories

Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and condition is accounted for as follows: Raw materials - purchase cost on a weighted average cost formula basis. Work in progress and finished goods

- cost of direct materials and labor and a proportion of manufacturing overheads based on normal operating capacity on a weighted average cost formula basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

(8) Long-term investments accounted for under the equity method

Investees wherein the Company exercises significant influence are accounted for by the equity method. According to the R.O.C. SFAS No. 23, “Interim Financial Reporting and Disclosures”, investment income or loss from investments in companies quarterly is accounted for under the equity method provided that the Company and subsidiaries owns at least 20% in its equity investee. The Company consolidates investee in which the Company owned, directly or indirectly, more than 50% of the voting shares of a company or less than 50% of voting shares but has a controlling financial interest in accordance with the R.O.C. SFAS No. 7, “Consolidation of Financial Statements”. Stock dividends are recognized only as an increase in the number of shares, and the cost per share has to be recalculated. Cost on disposal of stocks is determined by the weighted-average method.

(9) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss. Significant renewals and improvements are capitalized and depreciated over their estimated useful lives while ordinary repairs and maintenance are expensed as incurred.



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Property being leased to others is classified as other assets and stated at the book value. Property not in use is classified to other assets and stated at the lower of book value or net realizable value. Upon disposal or sale of an item of property, plant and equipment, the related cost, accumulated depreciation and accumulated impairment loss are written off. Gains or losses on disposal of property, plant and equipment are recorded as non-operating income or expense. Depreciation is recognized on a straight-line basis using the estimated economic life of the assets less salvage value, if any. If the main property, plant and equipment are fully depreciated and sub property, plant and equipment are still in use, the depreciation is based on the newly estimated remaining useful life. The estimated economic life of the property, plant and equipment is as follows: Buildings 40-55 Years Machinery and equipments 3-10 Years Molding equipments 3-5 Years Research and development equipments 3-5 Years Office and other equipments 2-5 Years Leased assets 35-50 Years Equipments leased under capital lease are carried at the lower of the market value or the present value of the minimum lease payments at the inception date of the lease. Depreciation of leased assets is calculated based on the economic useful lives of 35-50 years, and recognized as the lease payable. The Company recognizes the implicit interest of rental payments as interest expense in the period. Property leased to others under operating leases is classified as other assets and stated at book value. The value of the assets is depreciated using the straight-line method over the estimated useful lives.

(10) Land use right

Land use right is stated at cost and amortized over 50 years by using the straight-line method.



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(11) Intangible assets

All purchased and in-house developed computer software for manufacturing the Company’s products (servers) shall be capitalized.

Effective from January 1, 2007, the Company adopted R.O.C. SFAS No. 37 “Accounting for Intangible Assets”. In accordance with SFAS No. 37, an intangible asset should be measured initially at cost upon acquisition. After initial recognition, an intangible asset should be measured at its cost plus revaluation increment revalued in accordance with laws, less any accumulated amortization and any accumulated impairment losses. Intangible assets with finite useful lives should be amortized over its useful lives with impairment testing. The Company should assess, at each balance sheet date, whether there is any changes of the residual value, amortization period and amortization method of each intangible assets with finite useful lives. Such changes shall be accounted for as changes in accounting estimates. The Company’s research and development project needs to consider the research phase and the development phase. If is unable to distinguish, all regards as research phase. Expenditure on research shall be recognized as an expense when it is incurred. The cost of development activities should be capitalized as intangible assets if, and only if, the Company can demonstrate all of the following. Otherwise, the cost of development activities should be expensed as incurred. a) the technical feasibility of completing the intangible asset so that it will be available for

use or sale. b) its intention to complete the intangible asset and use or sell it. c) its ability to use or sell the intangible asset. d) how the intangible asset will generate probable future economic benefits. e) the availability of adequate technical, financial and other resources to complete the

development and to use or sell the intangible asset. f) its ability to measure reliably the expenditure attributable to the intangible asset during its

development.



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The Company’s policies for intangible assets are summarized at the table below:

Description Estimated economic life Amortization method

Computer software cost 2-5 years Straight-line method Development expenditures 5 years Straight-line method

(12) Deferred charges

Molding and product testing expenditures are amortized on a straight-line basis over their estimated economic lives, 2-5 years.

(13) Convertible bonds

The liability component of the convertible bonds is measured first, and the difference between the proceeds of the bond issued and the fair value of the liability is accounted for as the equity component. The embedded derivative is accounted for in accordance with the requirements under the R.O.C. SFAS No.34. The liability component is subsequently measured at amortized cost using effective interest rate method, and changes in fair value of the equity component are not recognized while changes in fair value of the embedded derivatives are reported to the income statement as valuation gains or losses on Financial Instruments. When the conversion option expires unexercised and at that time the market value of the common stock under conversion exceeds the put price, put premium should be credited to capital reserve, if the market value is otherwise lower than the put price, then it is recognized in profit or loss. When the bond holder exercises the conversion option before bond maturity, the adjusted carrying value of the liability components (including bonds and embedded derivatives) is credited to a capital stock account along with the carrying amount of the stocks converted. Bond issuance costs were allocated proportionately to the convertible bonds and embedded derivates based on their respective balances upon initial recognition.

(14) Derecognition of financial assets and liabilities

a. Financial assets

The Company and its subsidiaries derecognize their financial assets or part of the financial assets when losing control of the contractual rights from the financial assets or part of the financial assets. When the Company and its subsidiaries transfer all or part of their financial assets and relinquish control of the financial assets, this transaction is considered as a sale within the range of exchange with reward.



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When a transfer of a financial asset does not satisfy conditions required to be considered as lose of contro1, the Company and its subsidiaries treat the transfer as a guaranteed borrowing. The financial asset is not considered financial derivatives.

b. Financial liabilities

The Company and its subsidiaries derecognize their financial liabilities or part of the liabilities when extinguished by discharge, cancellation, or expiration of contractual obligation. When there has been an exchange of an existing financial liabilities between the Company and its subsidiaries and the creditor with substantially different terms, or there has been a substantial modification of the terms of the existing financial liabilities, and a simultaneous assumption of obligation from new financial liabilities, this transaction is accounted for as an extinguishment of the original financial liabilities and the recognition of new financial liabilities. A gain or loss from extinguishment of the original financial liability is recognized in the income statement.

(15) Impairment of financial assets

The Company assesses whether financial assets are impaired at each balance sheet date. Impairment of financial assets is measured by different methods as described below:

a. Financial assets measured at cost

If there is objective evidence that an impairment loss exists on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. The impairment loss is not allowed to reverse.

b. Available-for-sale financial assets

If available-for-sale assets are impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognized in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.



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(16) Assets impairment

Pursuant to the R.O.C. SFAS No. 35, “Accounting for Asset Impairment” the Company assesses indicators of impairment for all its assets within the scope of the standard at each balance sheet date. If impairment is indicated, the Company compares the carrying amount with the recoverable amount of the assets or the cash-generating unit (“CGU”) associated with the asset and writes down the carrying amount to the recoverable amount where applicable. Recoverable amount is defined as the higher of fair values less costs to sell and the values in use. For previously recognized losses, the Company shall assess, at each balance sheet date, whether there is any indication that the impairment loss may no longer exist or may have decreased. If there is any such indication, the Company has to recalculate the recoverable amount of the asset. If the recoverable amount increases as a result of the increase in the estimated service potential of the assets, the Company shall reverse the impairment loss to the extent that the carrying amount after the reversal would not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the assets in prior years. Impairment loss (reversal) is classified as non-operating losses (income).

(17) Pension plan

All regular employees are entitled to a defined benefit pension plan that is managed by an independently administered pension fund committee within the Company according to the Labor Standards Law of the R.O.C. Fund assets are deposited in the committee’s name in the Bank of Taiwan and hence, not associated with the Company. Therefore the fund assets are not be included in the Company’s financial statements. The Labor Pension Act of the R.O.C. (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. In accordance with the Act, employees may choose to elect either the Act, by retaining their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. For employees who elect the Act, the Company will make monthly contributions of no less than 6% of the employees’ monthly wages to the employees’ individual pension accounts.



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The accounting for pension is computed in accordance with the R.O.C. SFAS No.18, “Accounting for Pensions”. Net pension costs of the defined benefit plan are recorded based on an actuarial valuation. Pension cost components such as service cost, interest cost, expected return on plan assets, the amortization of net obligation at transition, pension gain or loss, and prior service cost, are all taken into consideration by the actuary. The Company recognizes expenses from the defined contribution pension plan in the period in which the contribution become due. The pension plan of foreign subsidiaries is estimated at local related regulation.

(18) Employee stock option plan

The Company uses intrinsic value method to recognize compensation cost for its employee stock options issued between January 1, 2004 and December 31, 2007, in accordance with Accounting Research and Development Foundation interpretation Nos.92-070~072. For stock options granted on or after January 1, 2008, the Company recognizes compensation cost using the fair value method in accordance with R.O.C. SFAS No. 39 “Accounting for Share-Based Payment.” In accordance with R.O.C. SFAS No. 39, share-based payment transaction is measured by reference to the fair value of the equity instruments at the date on which they are granted; the fair value is determined by an external expert using an appropriate pricing model. The Company only enters into equity-settled share-based payment transaction with its and its subsidiaries’ employees. Pursuant to R.O.C. SFAS No. 39, the goods or services received under such transaction, and the corresponding increase in equity, shall be measured by reference to the fair value of the equity instruments granted. If there is no vesting condition attached, then the equity instrument is vested immediately, with the employee compensation costs recognized as at the grant date, with a corresponding increase in equity. If the equity instrument is vested over a certain period, then the employee compensation costs are recognized over the period, with a corresponding increase in equity. In valuing the fair value of the equity instrument granted, no account is taken of any vesting conditions other than market conditions. Instead, non-market vesting conditions shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount, so that, ultimately, the amount recognized for goods or services received as consideration for the equity instruments granted shall be based on actual number of equity instruments that eventually vest. For grants of equity instruments with market conditions, the Company shall recognize the goods or services received from a counterparty that satisfies all other vesting conditions, irrespective of whether the market condition is satisfied.



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(19) Employee bonuses and remunerations paid to directors and supervisors

In accordance with Accounting Research and Development Foundation interpretation No. 96-052 effective January 1, 2008, employee bonuses and remunerations paid to directors and supervisors are charged to expense at fair value and are no longer accounted for as an appropriation of earnings.

(20) Treasury stock

The Company adopts the R.O.C. SFAS No. 30, “Accounting for Treasury Stocks”, which requires the treasury stock held by the Company to be accounted for under the cost method. The cost of treasury stock is shown as a deduction to stockholders’ equity, while any gain or loss from selling treasury stock is treated as an adjustment to capital reserve. If there is any deficiency, it is debited against retained earnings.

(21) Revenue recognition

The Company and its subsidiaries recognize revenue when the product or service has been delivered and significant risk has been transferred. The Company and its subsidiaries and their customers have agreed to use fair value in determining the sales prices, taking into account the related sales discounts. Since the receivables are collected within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.

(22) Capital expenditure versus operating expenditure

Expenditure exceeds a predetermined amount is capitalized when it is probable that the Company will receive future economic benefits associated with the expenditure. Otherwise, the expenditure is expensed as incurred.

(23) Unrealized gain (loss) on inter-affiliate accounts

Unrealized intercompany gains and losses arising from sales from the Company and its subsidiaries to equity method investees are eliminated in proportion to the Company’s year-end ownership percentage until realized through transactions with third parties. Intercompany gains and losses arising from transactions between the Company and majority-owned (above 50%) subsidiaries are eliminated entirely until realized through transactions with third parties.



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Unrealized intercompany gains and losses due to sales from equity method investees to the Company are eliminated in proportion to the Company’s weighted-average ownership percentage of the investee until realized through transactions with third parties.

(24) Income tax

The Company and its subsidiaries have adopted inter-period and intra-period income tax allocation according to the R.O.C. SFAS No. 22, “Accounting for Income Tax”. Tax effects on taxable temporary differences are recognized as deferred tax liabilities. Tax effects on deductible temporary differences, operating loss carryforward, and investment tax credits are recognized as deferred tax assets. Valuation allowance is provided on deferred tax assets when they are not certain to be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. However, if a deferred asset or liability is not directly related to an asset or liability, then the classification is based on the expected length of time before it is settled or recovered. According to the R.O.C. SFAS No. 12, “Accounting for Income Tax Credits”, the Company recognized the tax benefit from research and development expenditure, employee training by the flow through method. Income tax (10%) on unappropriated earnings is recorded as expense in the year in which the shareholders have resolved earnings to be retained. The R.O.C. government has made the Alternative Minimum Tax Act (“AMT Act”) effective since January 1, 2006. Pursuant to AMT Act, the higher of the amount of income tax payable determined pursuant to the Income Tax Law or the minimum amount prescribed under the AMT Act is provided by the Company as income tax payable. In addition, the Company has considered the impact of AMT in future years when evaluating realized deferred tax asset.

(25) Earnings per share

Earnings per share are computed according to the R.O.C. SFAS No. 24, “Earnings per share”. Basic earnings per share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the current reporting period. Diluted earnings per share is computed by taking basic earnings per share into consideration plus additional common shares that would have been outstanding if the dilutive share equivalents had been issued. Net income (loss) is also adjusted for interest and other income or expenses derived from any underlying dilutive share equivalents. The weighted-average of outstanding shares is adjusted retroactively for stock dividends and bonus share issues.



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(26) Derivatives financial instrument and hedge activities

In order to hedge the resulting from the volatility in exchange rate, the Company and its subsidiaries entered into foreign exchange forward contracts. The derivative are initially recognized and re-measured at fair value. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability. If the derivative financial products does not meet the criteria for hedge accounting, the changes in fair value is transferred to the income statement. In additional, the derivative financial products shall be reclassified as financial assets or liabilities for trade purpose. Hedges are classified as the following three categories:

a. Fair value hedges

Fair value hedges are hedges of the Company’s exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment.

b. Cash flow hedges

Cash flow hedges are hedges of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognized directly in equity, while the ineffective portion is recognized in profit or loss immediately.

c. A net investment in a foreign operation hedges

At inception of the hedge, there is formal documentation of the hedging relationship and the Company’s risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk will be assessed. There must be a reasonable basis for how the Company plans to assess the hedging instrument’s effectiveness.



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Hedges which meet the strict criteria for hedge accounting are accounted for as follows: Fair value hedges Fair value hedges are hedges of the Company’s exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss. Cash flow hedges Under cash flow hedge accounting, the profit or loss on the hedging instrument is recognized as profit or loss in the same period when the profit or loss on the hedged item is affected. The profit or loss on the hedging instrument is recognized as an adjustment to stockholders’ equity and reclassified into current profit or loss when forecast transactions that are being hedged affect profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liabilities, the associated gains or losses that were recognized directly in equity shall be reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liabilities, it removes the associated gains and losses that were recognized directly in equity and includes them in the initial cost or other carrying amount of the asset or liability. However, if the Company expects that all or a portion of a loss recognized directly in equity will not be recovered in one or more future periods, it shall reclassify the amount that is not expected to be recovered into profit or loss. The Company and its subsidiaries shall discontinue prospectively the hedge accounting for an existing hedge if any one of the following occurs:

a. The derivative is expired or sold, or terminated, or exercised. b. Any criterion for hedge accounting is no longer met. c. The Company removes the designation of the fair value hedge.

(27) Operating segment information

An operating segment is a component of an entity that has the following characteristics: a. engaging in business activities from which it may earn revenues and incur expenses; b. whose operating results are regularly reviewed by the entity’s chief operating decision

maker to make decisions about resources to be allocated to the segment and assess its performance; and

c. for which discrete financial information is available.



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The Company discloses its operating segment information in the consolidated financial statements of Sercomm Corporation and subsidiaries.

3. Accounting changes

Effective January 1, 2011, the Company adopted the third revised SFAS No. 34, “Financial instruments: Recognition and Measurement.” Such changes in accounting principle did not have significant effect on the Company’s financial statements for the year ended December 31, 2011.

4. Cash and cash equivalent

As of December 31, 2012 2011

Cash on hand $2,700 $2,694 Checking and savings accounts 1,103,885 878,442 Time deposits 2,415,244 2,014,887 Cash equivalents 1,138,377 972,586 Total $4,660,206 $3,868,609

As of December 31, 2012 and 2011, the savings accounts outside Taiwan were NT$21,169 thousand (RMB$2,717 thousand and USD$283 thousand) and NT$2,007 thousand (USD$66 thousand), respectively.

5. Financial assets (liabilities) at fair value through profit or loss-current

(a) Details of the financial assets or financial liabilities at fair value through profit or loss are as follows:

Financial assets held for trading - current As of December 31, 2012 2011 Foreign currency forward contracts $412 $- Foreign currency option contracts 694 24,122 Convertible bond embedded derivatives - 6,261 $1,106 $30,383 Financial liabilities held for trading - current As of December 31, 2012 2011 Foreign currency forward contracts $(269) $(284)



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The Company entered into the above-mentioned derivative financial instruments primarily for the purpose of hedging exchange risk associated with the assets, liabilities, or commitments denominated in foreign currencies. However these financial instruments do not satisfy the criteria of hedge accounting and thus are classified under “financial assets at fair value through profit or loss-current” and “financial liabilities at fair value through profit or loss-current”.

(b) The details of the Company’s foreign exchange forward contracts are as follows:

December 31, 2012 Currency Nominal amount Maturity date

Sell foreign exchange forward USD/NTD USD$4,000 thousand 2013.1.10-2013.2.19 Buy foreign exchange forward USD/NTD USD$2,000 thousand 2013.1.14-2013.1.17

December 31, 2011 Currency Nominal amount Maturity date

Sell foreign exchange forward USD/NTD USD$1,000 thousand 2012.1.11

(c) The details of the Company’s foreign exchange option contracts are as follows:

December 31, 2012 Nominal Amount Strike Price Maturity date

Put Options EUR$1,000 thousand 1.338 (EUR/USD) 2013.1.21

December 31, 2011 Nominal Amount Strike Price Maturity date

Put Options EUR$5,000 thousand 1.45 (EUR/USD) 2012.1.25-2012.5.25

(d) Please refer to Note 14 for the Company’s third domestic unsecured convertible bonds

payable related to embed derivatives financial asset. (e) Net gain on financial assets and financial liabilities held for trading during 2012 and 2011

were NT$13,852 thousand and NT$10,950 thousand, respectively. (f) Please refer to Note 32 for financial risk information.



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6. Derivative financial instruments for hedging

The Company entered into the foreign currency option contracts for the purpose of hedging future cash flow fluctuations and risks due to changes in foreign currencies. As of December 31, 2012, hedged items designated as cash flow hedges and their respective hedging derivative financial instruments and values were as follows:

December 31, 2012 Currency Expected Cash Flow Period Nominal Amount

Call options EUR/USD 2013.1.21-2014.2.25 EUR 25,000 thousand Put options EUR/USD 2013.1.21-2014.2.25 EUR 25,000 thousand

Movement of the hedging derivative financial Instruments are as follows:

For the years ended December 31, 2012 2011

Balance, beginning of year $- $- Net change in unrealized loss on hedging derivative financial instruments

(8,772) -

Balance, end of year $(8,772) $-

The balance for the period are as follows:


Derivative financial assets for hedging $21,980 $- Derivative financial liability for hedging (30,752) - Adjustment to shareholder’s equity $(8,772) $-

7. Notes and accounts receivable－net


Notes receivable $301,612 $732,669 Less: Allowance for doubtful accounts - - Net $301,612 $732,669



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Accounts receivable $1,521,073 $1,897,495 Less: Allowance for doubtful accounts (7,224) (6,580) Net $1,513,829 $1,890,915

The Company entered into account receivable factoring agreements (without recourse) with several financial institutes in Taiwan. Under the agreements, the Company has surrendered control over the receivable to the factors. The factors had fully paid out the sales proceeds and assumed substantially all risks of collection as receivable were transferred.

The details of accounts receivable derecognized for the year ended December 31, 2012 and 2011 are summarized as follows:

As of December 31, The Factor (Transferee) 2012 2011 Credit line

HSBC Bank (Taiwan) $- $1,137 USD 250 thousand Taishin Bank 75,043 201,019 USD 65,000 thousand Fubon Financial Bank 9,204 9,436 USD 5,000 thousand DBS Bank (Taiwan) 170,004 14,327 USD 34,200 thousand $254,251 $225,919

8. Inventories


Raw materials $989,112 $979,474 Work in process 372,059 338,083 Finished goods 1,017,398 677,180 Subtotal 2,378,569 1,994,737 Less: Allowance for loss on decline in market value and

obsolescence (102,759) (86,820)

Net $2,275,810 $1,907,917

For the ended December 31, 2012 and 2011, cost of goods sold were NT$16,282,234 thousand and NT$11,261,997 thousand, including NT$84,901 thousand and NT$60,334 thousand of write-down of inventories to net realizable value, respectively.



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9. Financial assets measured at cost-noncurrent


Unlisted stocks Industrial Bank of Taiwan $40,000 $40,000 TECO Nanotech Co., Ltd. 10 10 Cerpass Consultancy Corp. 7,444 7,444 Ubiquisys Ltd. 58,272 60,580 Subtotal 105,726 108,034 Less : Accumulated impairment of financial asset (58,272) - Total $47,454 $108,034

(1) After considering objective evidence and the result of the impairment loss testing, the value

of investment in Ubiquisys Ltd. has write-down, the Company recognized impairment loss amounted to NT$58,272 thousand for the year ended December 31, 2012. As of December 31, 2012, accumulated impairment loss was NT$58,272 thousand.

(2) The stock investments were measured at cost because they were not traded in an open

market and did not have fair value. (3) The financial assets measured at cost were not pledged.

10. Property, plant and equipment

(1) The Company rented the Nankang Software Industrial Park office by capital lease, please refer to Note 15.

(2) The information of interest capitalized is as follows:

Year Total interest expense Interest capitalized Interest rates applied

2011 $65,797 $399 1.48%-1.66%

(3) Please refer to Note 28 for property, plant and equipment pledged as collateral.



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11. Intangible assets

As of December 31, 2012 Computer

software cost Development expenditures Land use right Total

Cost: Beginning of the year $186,435 $299,362 $119,541 $605,338 Purchase 23,460 33,472 - 56,932 Translation adjustment (485) - (3,438) (3,923) End of the year 209,410 332,834 116,103 658,347

Accumulated amortization:

Beginning of the year 124,701 229,289 4,352 358,342 Amortization 20,091 25,975 2,860 48,926 Translation adjustment (378) - (138) (516) End of the year 144,414 255,264 7,074 406,752

Book value:

Beginning of the year $61,734 $70,073 $115,189 $246,996 End of the year $64,996 $77,570 $109,029 $251,595

As of December 31, 2011 Computer

software cost Development expenditures Land use right Total

Cost: Beginning of the year $165,663 $268,678 $103,472 $537,813 Purchase 23,271 30,684 7,004 60,959 Translation adjustment (2,499) - 9,065 6,566 End of the year 186,435 299,362 119,541 605,338

Accumulated amortization:

Beginning of the year 107,845 198,027 1,433 307,305 Amortization 19,700 31,262 2,750 53,712 Translation adjustment (2,844) - 169 (2,675) End of the year 124,701 229,289 4,352 358,342

Book value:

Beginning of the year $57,818 $70,651 $102,039 $230,508 End of the year $61,734 $70,073 $115,189 $246,996

Please refer to Note 28 for Land use right pledged as collateral.



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12. Property not used in operations

Details of the property not used in operations are as follows:


Leased assets-land $10,020 $10,020 Leased assets-buildings 5,752 5,752 Less: Accumulated depreciation (1,560) (1,402) Net $14,212 $14,370

Oriental Technopolis, the building where the Company’s office premises were located, suffered fire damage on May 12, 2001. Although the Company’s office was not deranged during the fire incident, some research and development equipments and office equipments were partially damaged. Since the building was required to be renovated before it can be re-used, the Company had relocated its office after the incident. The book value of the land and building of the original office in the Oriental Technopolis had been reclassified as Idle Assets in 2001. In December 2002, the Company reclassified the Idle Assets as Land and Construction-In-Progress due to that the Reconstruction Committee of Oriental Technopolis had approved to proceed with competitive price bidding process for the renovation project. The renovation project had been delayed because the financing difficulties of the original contractor. In 2007, the Reconstruction Committee of Oriental Technopolis had sought a new contractor to execute the contract. The Company reclassified the land and damaged building at their carrying amount of NT$43,230 thousand and NT$25,628 thousand, respectively, to “Idle Asset”. The reconstruction was completed and ready to use in June 2011. Related land and building are transfer from idle assets to fixed assets. The Company rented the building’s parking lot to others and thus had recorded them as “assets leased to others”.

13. Short-term loans

As of December 31, 2012

Items Amounts Interest rate Collateral Secured loans $117,516 1.06% Land use right and Building Credit loans 1,786,578 0.90%~3.73% None Total $1,904,094



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Items Amounts Interest rate Collateral Secured loans $236,521 2.32%-3.27% Land use right and Building Credit loans 2,388,977 0.94%-1.75% None L/C loans 194,209 Total $2,819,707

Please refer to Note 28 for Bank loans as collateral. 14. Bonds payable

A. The Company’s bonds payable are as follows:

As of December 31 Item 2012 2011

The third domestic unsecured convertible bonds payable $187,697 $460,851 The fourth domestic unsecured convertible bonds payable 599,700 600,000 The fifth domestic unsecured convertible bonds payable 600,000 - Less: discount on bonds payable (100,299) (92,585) Total 1,287,098 968,266 Less: Current portion - (425,426) Net $1,287,098 $542,840 Embedded derivatives (Note 1) Financial asset- non current $459 $6,261 Less: Current portion (Note 2) - (6,261) Net $459 $- Equity instrument (Note 3) $108,103 $57,732

Note 1: Including bonds holder’s put option value and the Company’s call option value,

which are recorded as financial assets at fair value through profit or loss. Note2: According to the Company’s third unsecured convertible bonds payable issuing

clause (refer to term (f)), bonds holders could exercise put option in August 2012. As of December 31, 2011 the Company reclassified bonds payable due in one year and related derivatives financial assets to current liabilities and assets.

Note 3: Conversion option value, which is recorded as additional paid-in capital-option.



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B. The Company’s Board of Directors resolved on June 24, 2011, June 17, 2011 and June 27,

2012 to issue the third, fourth and fifth domestic unsecured convertible bonds, which were issued on August 6, 2010, August 30, 2011 and August 31, 2012, respectively. The terms and conditions of the bonds are as follows:

Third domestic unsecured convertible bond:

(a) Issue Amount: NT$600,000 thousand, each with a face value of NT$100 thousand, issued

based on 100% of par value. (b) Par Value’s annual interest rate:0%. (c) Issuing period: from August 6, 2011 to August 6, 2015. (d) Conversion method:

i. Conversion period: The bondholder may, on the following day when reaching one full month from the bond issuing date and ten days prior to maturity, except for the closed period, at any time request the Company to convert the bonds into the Company’s common stocks in accordance with this measure.

ii. Conversion price and adjustments: With the convertible bonds’ conversion price set at

NT$22.24 per share at the time of issue, and following the issue of the convertible bonds, the conversion price is to be adjusted in accordance with stipulations set by the convertible bonds’ issuing provisions, when the Company increased the common stocks (except when the Company reissues or stages a private solicitation of common stocks with convertible rights or staging for an exchange of the common stocks through share pledging of a variety of marketable securities, or when the Company increases the common stocks already issued or solicited, including but not limited to capital reinvestment, earnings converting to capital reinvestment, capital reserve converting to capital reinvestment, employee bonuses converting to capital reinvestment, merger or new share issue by an invested entity, stock division and cash capital reinvestment for participating in offshore depository certificates and the like through solicitation issue or private solicitation), or when the common stock cash dividends of a given year against the ratio of the current price per share exceed 1.5%, or when the Company converts at a conversion price lower than the going price per share for a variety of marketable securities through share pledging reissue or private solicitation of common stocks with convertible rights or share pledging right, or when the Company reduces the common stocks in a capital reduction due to cancellation of the common stocks held in vault.



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As of December 31, 2012, the conversion price was adjusted to $19.25 per share.

(e) The Company’s call option:

Under the following circumstances, effective from 1 month after the issuance until 40 days prior to maturity, the Company may recall the convertible bonds at par value plus 2% real yield per year:

i. The closing price of the Company’s common stocks exceeds 30% of the last adjusted

conversion price at the time for 30 consecutive business days.

ii. The balance of the Company’s total outstanding bonds currently in circulation falls lower than 10% of the par value.

(f) Bondholder’s put option:

During the 40-day period prior to reaching two years and four years after issuance, bondholders may notify the Company’s stockholders’ service entity in writing to request the Company to buy back the convertible bonds at the par value plus 2% yearly yield of the bonds.

Fourth domestic unsecured convertible bond:


based on 100% of par value.

(b) Par Value’s annual interest rate:0%. (c) Issuing period: from August 31, 2011 to August 31, 2016. (d) Conversion method:

i. Conversion period: The bondholder may, on the following day when reaching one full

month from the bond issuing date and ten days prior to maturity, except for the closed period, at any time request the Company to convert the bonds into the Company’s common stocks in accordance with this measure.



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As of December 31, 2012, the conversion price was adjusted to $38.59 per share.


Under the following circumstances, effective from 1 year after the issuance until 40 days prior to maturity, the Company may recall the convertible bonds at par value per year:


conversion price at the time for 30 consecutive business days. ii. The balance of the Company’s total outstanding bonds currently in circulation falls

lower than 10% of the par value.


During the 40-day period prior to reaching three years after issuance, bondholders may notify the Company’s stockholders’ service entity in writing to request that the Company buy back the convertible bonds at the par value.



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Fifth domestic unsecured convertible bond:


based on 100% of par value. (b) Par Value’s annual interest rate:0%. (c) Issuing period: from August 31, 2012 to August 31, 2016. (d) Conversion method:

i. Conversion period: The bondholder may, on the following day when reaching one full

month from the bond issuing date and ten days prior to maturity, except for the closed period, at any time request the Company to convert the bonds into the Company’s common stocks in accordance with this measure.



As of December 31, 2012, the conversion price remains the same.



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Under the following circumstances, effective from 1 year after the issuance until 40 days prior to maturity, the Company may recall the convertible bonds at par value per year:


conversion price at the time for 30 consecutive business days. ii. The balance of the Company’s total outstanding bonds currently in circulation falls

lower than 10% of the par value.


During the 40-day period prior to reaching three years after issuance, bondholders may notify the Company’s stockholders’ service entity in writing to request the Company to buy back the convertible bonds at the par value.

C. The conversion of the third domestic unsecured convertible bonds payable is as follows:

For the years ended December 31, 2012

Converted

Par value Shares (thousand)

Balance, beginning of period $182,600 8,654 Converted during this period 247,400 12,171

Balance, ending of period $430,000 20,825

For the years ended December 31, 2011

Converted

Par value Shares (thousand)

Balance, beginning of period $68,800 3,251 Converted during this period 113,800 5,403

Balance, ending of period $182,600 8,654



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D. The conversion of the forth domestic unsecured convertible bonds payable is as follows:

For the years ended December 31, 2011 Converted Par value Shares (thousand)

Balance, beginning of period $- $- Converted during this period 300 8 Balance, ending of period $300 $8

E. The Company has, in complying with stipulations set by the R.O.C. SFAS No. 36, separated

the value of the bonds’ conversion option as an equity instrument from the net value of the bonds, which was accounted as capital reserve in the amount of NT$108,103 thousand. As for third domestic unsecure convertible bond because the Company’s call option and Bondholder’s put option were not closely related to the economic characteristics and risks of the host contract, they are bifurcated as embedded derivates and accounted for as the financial liabilities at fair value through profit or loss, however; the forth and fifth domestic unsecure convertible bond’s call option and bondholder’s put option were closely related to the economic characteristics and risks of the host contract, thus they are not bifurcated.

F. For the year ended December 31, 2011 and 2012, the related discount amortization was

NT$21,117 thousand and NT$14,866 thousand, which was recorded as interest expenses under the non-operating expenses. As for the gain (loss) on valuation on financial liabilities, it was NT$(5,085) thousand and NT$8,129 thousand for the year ended December 31, 2011 and 2012, which was recorded as valuation gain (loss) on financial liabilities at fair value through profit or loss under the non-operating income (expense).

15. Lease payables


Lease payables $332,643 $349,768 Less: current portion (19,272) (18,864) Total $313,371 $330,904



38

The Company signed a contract with Industrial Development Bureau, Ministry of Economic Affairs to lease an office space in Nankang Software Industrial Park on August 15, 2003 and July 31, 2007, respectively. These capital leases expire on various dates from August 2003 to August 2013 and from July 2007 to July 2017, respectively. The annual lease payment is adjusted according to Industrial Development Bureau’s prescribed rental rate yearly. The prescribed rental rate is adjusted every January 1 and July 1 semi-annually based on the interest rate of long-term loan and annual base on Consumer Price Index. In addition, the Company has bargain purchase option within the lease term. According to the contract, the minimum lease payments (include interest expenses) for the future are as follows:

Year Amounts Discounted present value 2013 $26,287 $22,063 2014 26,287 21,594 2015 26,287 21,134 2016 26,288 20,685 2017 21,293 7,080 2018-2022 81,491 58,221 2023 8,149 5,509 Total $216,082 $156,286

16. Pension plan

The defined benefit plan under the Labor Standard Law is disbursed based on the units of service years and the average salary in the last month of the service year. The Company contributes an amount equivalent to 4% of the employees’ total salaries and wages basis to the pension fund deposited at the Bank of Taiwan in the name of an administered pension fund committee. Since March 2005, the Company decreases the contributive ratio from 4% to 2%. As of December 31, 2012 and 2011, the Company has contributed the amount of NT$63,964 thousand and NT$61,884 thousand, respectively. The Labor Pension Act of R.O.C. (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. In accordance with the Act, employees may choose to elect either the Act, by retaining their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. For employees who elect the Act, the Company will make monthly contribution of no less than 6% of the employees’ monthly salaries to the employee’s individual pension accounts. In accordance with the Act, the Company has established a pension plan and contribution 6% of the employee’s salaries to employee’s individual pension account since July 1, 2005. According to the Act, the Company recognized pension cost and contributed NT$21,343 thousand and NT$18,622 thousand to employee’s individual accounts for the years ended December 31, 2012 and 2011, respectively.



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(1) The components of net pension cost are as follows:

For the year ended December 31, 2012 2011

Service cost $593 $620 Interest cost 1,857 1,627 Expected return on plan assets (1,176) (1,024) Amortization and deferral 1,677 1,597 Net pension cost $2,951 $2,820

(2) The funding status of the pension plan is as follows:


Benefit obligation Vested benefit obligation $11,779 $2,090 Non-vested benefit obligation 58,179 65,163 Accumulated benefit obligation 69,958 67,253 Effect from projected salary increase 29,416 30,485 Projected benefit obligation 99,374 97,738

Fair value of plan assets (63,964) (61,884) Fund status 35,410 35,854 Unrecognized net transitional benefit obligation (281) (422) Unrecognized loss (28,034) (29,745) Accrued pension liabilities $7,095 $5,687

(3) Vested benefit of retirement based on Labor Standard

Law

$12,977 $2,196

(4) The actuarial assumptions are as follows:


Discount rate 1.75% 1.90% Growth rate in future compensation level 3.00% 3.00% Expected long-term rate of return on plan assets 1.75% 1.90%



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17. Capital stock

(1) As of January 1, 2011, the authorized and issued capital of the Company was NT$2,500,000 thousand and NT$1,747,405 thousand, respectively. The par value of the Company’s common stock is NT$10 per share.

(2) For the year ended December 31, 2011, the Company issued NT$13,060 thousand for

conversion of employee stock option exercise, each with par value of NT$10. The issuance had been approved by the relevant authority.

(3) The third issue of domestic unsecured convertible bonds of the Company had been

converted by bond holders into 6,587 thousand common stocks in 2011. As a result, the capital increased by NT$65,872 thousand. The issuance had been approved by the relevant authority.

(4) The third and forth issue of domestic unsecured convertible bonds of the company had been

converted by bond holders into 12,341 thousand common stock in 2012. As a result, the capital increased by NT$123,408 thousand. The issuance had been approved by the relevant authority.

(5) For the year ended December 31, 2012, the Company issued NT$23,110 thousand for

conversion of employee stock option exercise, each with par value of NT$10. As of December 31, 2012, there are still 1,676 thousand common stocks amount NT$16,760 thousand has not been approved by the relevant authority which was accounted for as advanced receipts for common stock.

(6) As of December 31, 2012, the authorized and issued capital of the Company was

NT$2,500,000 thousand and NT$1,956,095 thousand, respectively. The par value of the Company’s common stock is NT$10 per share.

18. Employee stock options

On October 16, 2003, November 11, 2005 and December 3, 2007, the Company was authorized by the Securities and Futures Bureau of the Financial Supervisory Commission, Executive Yuan, to issue employee stock options with a total number of 24,000, 50,000 and 20,000 units, respectively. Each unit entitles an optionee to subscribe to 100 share of the Company’s common stock. Settlement upon the exercise of the options will be made through the issuance of new shares by the Company. An optionee may exercise the options in accordance with certain schedules as prescribed by the plan starting 2 years from the date of grant. The compensation costs for employee stock options for the years ended 31, December 2012, and 2011, were both NT$0. Detailed information relevant to the employee stock options is disclosed as follows:



41

Date of grant

Total number of options granted

(units)

Total number of options outstanding

(units)

Original exercise price

(NTD)

Adjusted exercise price

(NTD) October 23, 2003 24,000 - $26.0 $10.0 November 14, 2005 50,000 9,370 $23.0 $10.0 December 14, 2007 20,000 - $27.8 $18.2

(1) As of December 31, 2012, there had been no cancellations or amendments to the stock options plan. The contractual life of options is 10 years and 5 years. There is no cash settling option and the Company does not have past practice of settling in cash.

Detailed information relevant to the employee stock options is disclosed as follows:


Option (units)

Weighted- average

exercise price (NTD)

Option (units)

Weighted- average

exercise price (NTD)

Outstanding at beginning of year (Note) 32,940 $14.56 46,448 $13.63 Granted - - - - Exercised (23,110) 16.33 (13,060) 10.00 Forfeited - - - - Expired (460) 18.20 (448) 10.00 Outstanding at end of year (Note) 9,370 10.05 32,940 15.11 Exercisable at end of year (Note) 9,370 32,940 Weighted-average fair value of options granted during the period (NTD)

$-

$-

Note: These stock options were granted for employees prior to adopting R.O.C SFAS

No.39; therefore the Company did not recognize these stock options in accordance with R.O.C SFAS No.39. These stock options have not supervised sustained, so they do not adopt R.O.C. SFAS No.39.

The weighted-average stock price was NT$39.65 and NT$41.22 when the exercise date of the options exercised for the years ended December 31, 2012 and 2011, respectively.



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(2) The information of the Company’s outstanding stock options as of December 31, 2012 is as

follows: Outstanding Stock Options Exercisable Stock Options

Authorization date

Range of exercise

price (NTD)

Option (units)

Weighted-average remaining

contractual life (years)

Weighted-average exercise

price (NTD)

Option (units)

Weighted-average exercise

price (NTD)

2005.11.14 10 9,370 - 10.00 9,370 10.00

(3) The fair value of these options was calculated at the grant date using the Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2012 and 2011:

2012 2011 Expected dividend yields 5.35%-14.19% 5.35%-14.19% Volatility factors of the expected market price 39.48%-56.41% 39.48%-56.41% Risk-free interest rate 1.85%-2.69% 1.85%-2.69% Weighted-average expected life of the options 3.5-6.55 year 3.5-6.55 year

Note: The assumptions adopting for the years ended December 31, 2012 and 2011 before

the effective date of were used for disclosure of the pro-forma information.

The expected duration of the stock option is according to historical information, might not be the condition that the employee carry out actually. The expected volatility index forecast that, the tendency in the future by means of historical volatility index, and it might be incompatible with the real condition.

(4) The Company used the intrinsic value method to recognize compensation costs for its

employee stock options issued from 2004 to 2007. The compensation costs for the years ended December 31, 2012 and 2011 was both $0. Pro forma information using the fair value method on net income and earnings per share is as follows:

For the year ended December 31, 2012 Basic earnings per share Diluted earnings per share

Net income $754,836 $781,039 Earnings per share (NTD) 3.90 3.45 Pro forma net income 754,836 781,039 Pro forma earnings per share (NTD) 3.90 3.45

For the year ended December 31, 2011 Basic earnings per share Diluted earnings per share

Net income $583,041 $589,777 Earnings per share (NTD) 3.29 2.81 Pro forma net income $583,041 589,777 Pro forma earnings per share (NTD) 3.29 2.81



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19. Capital reserve

Pursuant to the Company Law, capital reserve can only be used to offset an accumulated deficit or be increase common stock. However, only the capital reserve of the following nature can be transferred to capital (i) the income derived from the issuance of new share premium; (ii) the income from endowments received by the company. In addition, the Company can only use the capital reserve to make up its deficit when the legal reserve or other special reserve is insufficient to make up such losses and the total amount used each year cannot exceed 10% of the issued capital.

20. Legal reserve

The Company Law stipulates that companies must retain at least 10% of their annual earnings, as defined in the Law, until such retention equals to the amount of paid-in capital. This retention is accounted for as a legal reserve account upon approval at the shareholders’ meeting. The legal reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.

21. Distribution of earnings and dividend policies

According to the Company’s Articles of Incorporation, the Company’s annual earnings shall be used to offset an accumulated deficit, if any, and be retained at a rate of 10% as legal reserve, as defined in the Company Law, except when such retention equals the amount of issued common stock. After the aforementioned deduction, 15% of remaining earnings should be distributed as employees’ bonus. 2% of remaining earnings should be distributed as directors’ and supervisors’ remuneration. The distribution of any remaining earnings, after deducting employees’ bonuses and directors’ and supervisors’ remuneration, is subject to shareholders’ approval. A special reserve is equal to the reduction in stockholders’ equity (for example, cumulative translation adjustments and unrealized loss on long-term investment in stock, etc). If the aforementioned reduction in stockholders’ equity is reserved, the same amount could be removed from special reserve and transferred to unapporpriated earnings. Any appropriations of the profits are recorded in the year of stockholder approval and given effect to in the financial statements of that year. Distribution of profits may also be made by way of cash dividend, and the amount of that should in principle exceed or equal 10% of total dividends. This cash dividend percentage may be adjusted depending on actual profit of the year and operational conditions.



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The policy for dividend distribution should reflect factors such as current and future investment environment, fund requirements, domestic and international competition and capital budgets, as well as the benefit of stockholders, share bonus equilibrium, and long-term financial planning. The appropriations of earnings for 2011 had been approved in the stockholders’ meetings, and the date of payment was August 22, 2012. During the year ended December 31, 2012, the Company estimated the amounts of the employee bonuses and remuneration to directors and supervisors for 2012 to be $101,903 thousand and $13,587 thousand, respectively, and recognized as operating costs or operating expense for the period. The estimates were based on post-tax net income for 2012 and the Company’s Articles of Incorporation, and considered factors such as appropriation to legal reserve etc. The number of shares distributed as stock dividends was calculated based on the closing price one day earlier than the date of shareholders’ meeting of 2013 and considered the impacts of ex-right/ex-dividend. The difference between the estimation and the resolution of shareholders’ meeting will be recognized in profit or loss of 2013. The Company has paid employees’ bonuses and directors and supervisors’ remunerations of NT$78,710 thousand and NT$10,495 thousand in 2011, respectively, and there is no difference between the amount estimated and paid. Information on the board of directors’ recommendations and stockholders’ approvals is available at “Market Observation Post System” on the Website of Taiwan Stock Exchange Corporation. The Company’s distributions of 2011 and 2010 earnings were approved by the stockholders’ meetings on June, 2012 and June, 2011, respectively, and the detailed information is as follows: 2011 Distribution of Earnings 2010 Distribution of Earnings Cash dividend NT$2.5 per share NT$1.55 per share

22. Treasury stock

Details of the treasury stock transactions are as follows: For the year ended December 31,

(In thousand shares) Purpose Beginning Increase Decrease Ending

2011 For transfer to employees 4,029 - 4,029 -



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According to Securities and Exchange Law of the R.O.C., total shares of treasury stock shall not exceed 10% of the Company’s stock issued. Total purchase amount shall not exceed sum of retained earnings, capital reserve-premiums, and realized capital reserve. Treasury stock shall not be pledged, nor should it be entitled voting rights or receive dividends, in compliance with Securities and Exchange Law of the R.O.C.

23. Operating cost and expense

The Company’s personnel, depreciation, and amortization expense are summarized as follows: For the year ended December 31,

Item

2012 2011

Operating

cost

Operating

expenses

Total

Operating

cost

Operating

expenses

Total

Personnel expenses

Salaries $666,397 $564,072 $1,230,469 $538,537 $560,041 $1,098,578

Labor and health insurance 8,033 44,175 52,208 5,420 37,963 43,383

Pension 2,532 21,762 24,294 1,863 19,579 21,442

Other personnel expenses 7,958 48,132 56,090 9,608 31,657 41,265

Depreciations 108,608 122,320 230,928 110,518 72,718 183,236

Amortization 38,258 46,225 84,483 41,895 38,990 80,885

24. Income tax

(1) The components of deferred tax assets (liabilities) as of December 31, 2012 and 2011 are summarized as follows:


(A) Total deferred income tax assets $107,253 $101,743

(B) Total deferred income tax liabilities $(16,701) $(116,794)

(C) Total valuation allowance $(50,736) $(57,603)



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(D) Deferred income tax assets-current $33,757 $32,356 Deferred income tax liabilities-current (1,307) (4,883) Valuation allowance for deferred income tax

assets-current - - Net deferred income tax assets-current $32,450 $27,473 Deferred income tax assets-noncurrent $73,496 $69,387 Deferred income tax liabilities-noncurrent (15,394) (111,911) Valuation allowance for deferred income tax

assets-noncurrent (50,736) (57,603) Net deferred income tax assets (liabilities) -noncurrent $7,366 $(100,127)

(E) The temporary differences of deferred tax assets (liabilities), loss carryforward, and

income tax credits were summarized as follows:


Amount Income tax

effect Amount Income tax

effect Unrealized sales discounts $24,621 $4,186 $17,734 $3,015 Unrealized gross profit 885 150 671 114 Loss on inventory value decline

and obsolescence

92,308 14,837 66,979 11,386 Unrealized foreign exchange loss

(gain)

(6,852) (1,165) (4,693) (798) Development expenditures

capitalization

(77,570) (13,187) (70,073) (11,912) Investment income accounted for

under the equity method

- - (588,229) (99,999) Pension liabilities 2,475 421 2,300 391 Unrealized loss (gain) on valuation

of financial assets

(837) (142) (9,447) (1,606) Accrued service expenses 609 103 567 96 Accrued expenses 205,596 32,234 104,382 17,745 Amortization of discount on bonds

payable

20,997 4,586 18,875 3,209 Difference of depreciated expenses

between financial and tax

(14,713) (2,207) - - Foreign currencies of cumulative

translation adjustments on long-term equity

- - (14,584) (2,479) Unused investment tax credit - 50,736 - 65,787



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(2) Reconciliation between the income tax expense and the income tax calculated on pre-tax

financial statement income based on the statutory rate is as follows:


Income tax on pre-tax income at statutory rate $201,084 $161,322 Tax effect of following:

Permanent differences (24,057) 6,972 Temporary differences 114,637 (61,740)

Income tax payable for continuing operation $291,664 $106,554

(3) The components of tax expenses are as follows:


Income tax payable $291,664 $106,554 Used investment tax credits (8,970) (24,625) Estimated tax at 10% on unappropriated earnings 5,605 1,519 Deferred income tax expense (benefit) resulting from:

Unrealized sales discounts (1,171) (806) Unrealized gross profit (36) 5,177 Loss on inventory value decline and obsolescence (3,451) (2,502) Unrealized foreign exchange loss (gain) 367 3,975 Development expenditures capitalization 1,275 (99) Investment income accounted for under the equity

method (99,999) 61,724

Pension liabilities (30) (3) Unrealized loss (gain) on valuation of financial

assets (1,464) (151)

Accrued service expenses (8) 211 Accrued expenses (14,489) (17,119) Accrued repair liabilities for idle asset - 437 Amortization of discount on bonds payable (1,377) (2,345) Difference of depreciated expenses between

financial and tax 2,207 -

Investment tax credits 15,051 18,031 Deferred tax assets-valuation allowance (6,867) - Adjustment of prior year’s tax expense 16,864 (31,563) Effect on exchange rate (15,291) - Income tax expense $179,880 $118,415



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(4) The integrated income tax information of the Company is as follows:


Imputation credit account (ICA) $62,748 $30,316


Actual (estimated) creditable ratio for the appropriation of retained earnings

9.22% 16.90%

The imputation credit allocated to shareholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of imputation credit is made.

(5) As of December 31, 2012, investment tax credit of the Company consisted of the follows:

Total tax credit Unused tax credit Year of expiration $62,503 $50,736 2013

(6) The R.O.C. income tax authorities had assessed the income tax returns of the Company

through 2009. The 2003 to 2007 income tax return have been assessed by the authorities for additional tax payable NT$89,366 thousand due to research and development and the ratio of tax exemption. The Company disagreed with the assessment about the ratio of tax exemption and subsequently filed a tax appeal. The appeal is still under review.

(7) The income tax of foreign subsidiaries is estimated at local tax rate.

25. Segment financial information

For management purposes, the Company is organized into business units based on its area and services and has two reportable segments as follows:

a. Taiwan: segment engages in Management of Group, Technology R&D and Sales of products.



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b. Mainland China: segment engages in Manufacturing, Repairing, and Sales of products in

Mainland China.

Management monitors the operating results of its business units separately for the purpose of

making decisions about resource allocation and performance assessment. Segment performance

is evaluated based on operating profit or loss and is measured consistently with operating profit

or loss in the consolidated financial statements.

a. Information about reportable segment profit or loss, assets and liabilities

For the year ended December 31, 2012

Taiwan

Segment

Mainland

China

Segment

Total

segments All other

Adjustments

and

eliminations Consolidated

Revenue

External customers $16,498,942 $2,804,056 $19,302,998 $4,976 $- $19,307,974

Inter-segment 143,767 176,145 319,912 107,211 (427,123) -

Interest revenue 18,814 41,768 60,582 36 (26,587) 34,031

Total revenue $16,661,523 $3,021,969 $19,683,492 $112,223 $(453,710) $19,342,005

Interest expense $41,140 $68,803 $109,943 $823 $(26,587) $84,179

Depreciation and

amortization

109,741 204,363 314,104 1,307 - 315,411

Investment gain 831 - 831 - - 831

Reportable segment

profit

$1,357,790 $354,816 $1,712,606 $(23,206) $(754,684) $934,716

Reportable segment

assets

$5,938,389 $8,614,931 $14,553,320 $40,675 $(1,945,507) $12,648,488

Reportable segment

liabilities

$4,787,407 $6,148,790 $10,936,197 $22,563 $(1,945,497) $9,013,263



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Taiwan

Segment

Mainland China

Segment Total

segments All other

Adjustments and

eliminations Consolidated

Revenue

External customers $10,602,184 $2,821,821 $13,424,005 $7,430 $- $13,431,435

Inter-segment 275,699 277,773 553,472 48,226 (601,698) -

Interest revenue 13,120 26,685 39,805 2 (15,926) 23,881

Total revenue $10,891,003 $3,126,279 $14,017,282 $55,658 $(617,624) $13,455,316

Interest expense $33,295 $48,336 $81,631 $92 $(15,926) $65,797

Depreciation and amortization

98,160

164,728

262,888

1,233

-

264,121

Investment gain 831 - 831 - - 831

Reportable segment profit

$1,341,241 $426,141 $1,767,382 $(37,590) $(1,028,336) $701,456

Reportable segment assets

$5,546,282 $8,857,129 $14,403,411 $49,577 $(2,674,806) $11,778,182

Reportable segment liabilities

$4,470,947 $6,610,682 $11,081,629 $69,480 $(2,500,012) $8,651,097

1. Inter-segment revenues are eliminated upon consolidation and reflected in the “adjustments

and eliminations” column. All other adjustments and eliminations are part of detailed reconciliations presented further below.

2. Segment profit including operating activities with inter-segment. Inter-segment profit are eliminated upon consolidation and reflected in the ‘adjustments and eliminations’ column.

3. Segment asset not include deferred tax asset, investment, and derivatives financial instruments. The assets described above are controlled by the group basis.

b. Reconciliations of reportable segment revenues, profit or loss, assets and liabilities

(i) Revenues

For the year ended December 31, 2012 2011 Total revenues for reportable segments $19,683,492 $14,017,282 Other revenues 112,223 55,658 Elimination of intersegment revenues (453,710) (617,624) Group revenues $19,342,005 $13,455,316



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(ii) Profit or loss

For the year ended December 31, 2012 2011 Total profit or loss for reportable segments $1,712,606 $1,767,382 Other profit or loss (23,206) (37,590) Elimination of intersegment profits (754,684) (1,028,336) Income before income tax expense $934,716 $701,456

(iii) Assets


Total assets for reportable segments $14,553,320 $14,403,411 Other assets 40,675 49,577 Elimination of receivable from corporate

headquarters (1,945,507) (2,674,806)

Other unallocated amounts 254,638 245,935 Group assets $12,903,126 $12,024,117

(iv) Liabilities


Total assets for reportable segments $10,936,197 $11,081,629 Other liabilities 22,563 69,480 Elimination of payable from corporate headquarters (1,945,497) (2,500,012) Unallocated defined benefit pension liabilities 39,201 100,411 Group assets $9,052,464 $8,751,508

(v) Other material items


Reportable

segment totals Adjustments Group totals Interest revenue $60,582 $(26,551) $34,031 Interest expense 109,943 (25,764) 84,179 Depreciation and amortization 314,104 1,307 315,411 Impairment of assets 58,272 - 58,272



52


Reportable

segment totals Adjustments Group totals Interest revenue $39,805 $(15,924) $23,881 Interest expense 81,631 (15,834) 65,797 Depreciation and amortization 262,888 1,233 264,121

(vi) Geographical information

(a) Revenue from external client

For the year ended December 31, Area 2012 2011

Europe $3,323,123 $3,362,624 America 12,211,207 5,962,730 Asia 3,721,908 4,001,738 Other 51,750 104,343 Total $19,307,988 $13,431,435

Revenues are attributed to countries on the basis of the customer's location.

(b) Non-current assets:

As of December 31, Area 2012 2011

Taiwan $1,613,306 $1,040,116 China 1,948,790 1,996,856 others 10,412 10,526 Total $3,572,508 $3,047,498

(vii) Major customers

Individual customer accounts for at least 10% of net sales were as follows:


Customers Amount Percentage Amount Percentage Customer C $4,975,138 25.82 $141,061 1.07 Customer B 2,666,682 13.84 2,310,254 17.45 Customer A 2,640,091 13.70 2,530,794 19.11 Customer E 748,194 3.88 1,412,042 10.66



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26. Earnings per share

The calculation of earnings per share is provided as follows:


Amounts (Numerator) Share expressed (Denominator) (In thousands)

Earnings per share

(NTD)

Income before

income tax Net

income

Income before

income tax Net

income Basic Net income $934,716 $754,836 193,325 $4.83 $3.90 Less: Minority interests gain - - - - Shareholders of the parent income $934,716 $754,836 $4.83 $3.90 Effect of dilution

Convertible bonds payable $26,203 $26,203 29,480 Employee stock option in 2005 $- $- 713 Employee stock option in 2007 $- $- 3 Employees’ bonuses $- $- 2,730

Diluted Net income $960,919 $781,039 226,251 $4.25 $3.45 Less: Minority interest gain - - - - Shareholders of the parent income $960,919 $781,039 $4.25 $3.45


Amounts (Numerator) Earnings per share

(NTD)

Income before

income tax Net

income

Share expressed (Denominator) (In thousands)

Income before

income tax Net

income Basic Net income $701,456 $583,041 177,410 $3.95 $3.29 Less: Minority interests gain - - - - Shareholders of the parent income $701,456 $583,041 $3.95 $3.29 Effect of dilution

Convertible bonds payable $6,736 $6,736 27,712 Employee stock option in 2005 $- $- 1,046 Employee stock option in 2007 $- $- 828 Employees’ bonuses $- $- 2,527

Diluted Net income $708,192 $589,777 209,523 $3.38 $2.81 Less: Minority interest gain - - - - Shareholders of the parent income $708,192 $589,777 $3.38 $2.81



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27. Related party transactions

(1) Name and relationship of related parties

Name of related parties Relationship with the Company Seven people including Por-Yuan, Wang Directors of the Company Three people including Ruei-song, Guo Supervisors of the Company Eight people including Por-Yuan, Wang Vice president and other key management

personnel of the Company

(2) Significant related party transactions

Compensation of key management personnel

Categories 2012 2011 Salaries, bonuses, and other remuneration $65,048 $52,441

The Company’s key management personnel includes directors, supervisors and management that is vice president or above.

For details of total compensation paid to the Company’s key management personnel including Directors, Supervisors, President and Vice-President, please refer to the annual report for the Company.

28. Assets pledged as collateral

The assets pledged of the Company and its subsidiaries were as follows:

As of December 31, Assets pledged Purpose of pledge 2012 2011

Property, plant and equipment-building Bank loan $367,121 $281,396 Intangible assets-land use right Bank loan 91,746 11,198 Refundable deposits-time deposit and cash Custom duty guarantee 2,592 2,592 Restricted assets-time deposit and cash National Tax Administration

guarantee. L/C guarantee and reserve account

26,599 11,557

Total $488,058 $306,743



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29. Commitments and contingent liabilities

(1) The Company signed an agreement with an overseas customer; the agreement stated that the

overseas customer needs to pay to the Company License Royalty Rate and the Company shall be liable for any third party infringement claims. The received amount as calculated by the License Royalty Rate has been set up as a trust fund by the Company. As of December 31, 2012, the Company recognized the trust fund as other financial assets-noncurrent and other current liabilities amounting to NT$135,643 thousand (including interest revenue $664 thousand) and NT$134,979 thousand, respectively.

(2) The company provided endorsement and guarantee for the subsidiary only, please refer to

Note 33.

30. Significant disaster loss

None. 31. Significant subsequent events

The Company leased an office space from Nankang Software Industrial Park for ten years, from July 2007 to July 2017. The Company bought the office space in 2013. Purchase price was NT$273,560 thousand.

32. Others

(1) Financial risk management objectives and policies

The Company’s and its subsidiaries’ principal financial instruments, other than derivatives, are comprised of cash and cash equivalents, common stock, loans and bonds payable. The main purpose of these financial instruments is to manage financing for the Company’s and its subsidiaries’ operations. The Company and its subsidiaries also hold various other financial assets and liabilities such as accounts receivables and accounts payables, which arise directly from its operations. The Company and its subsidiaries also enter into derivative transactions, including foreign forward exchange contracts, foreign exchange option and embedded derivative of convertible bonds payable. The purpose is to avoid the foreign currency exchange risk arising from the Company’s and its subsidiaries’ operation activities. The Company’s and its subsidiaries’ policies are not enter into trading purpose derivative transactions.



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The main risks arising from the Company’s and its subsidiaries’ financial instruments include cash flow interest rate risk, foreign currency risk, credit risk, and liquidity risk. Cash flow interest rate risk The floating interest rate and fixed rates are used to hedge floating interest rate fluctuations of long-term bank loan, lease payable, and bonds payable. Foreign currency risk The Company and its subsidiaries have foreign currency risk arising from purchases or sales. The Company and its subsidiaries utilize forward contracts to avoid foreign currency risk. The Company and its subsidiaries buy or sell the same amount of foreign currency with hedged items through forward contracts. Credit risk The Company and its subsidiaries trade only with established and creditworthy third parties. It is the Company’s and its subsidiaries’ policies that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis, which consequently minimizes the Company’s and its subsidiaries’ exposure to bad debts. With respect to credit risk arising from the other financial assets of the Company and its subsidiaries, which are comprised of cash and cash equivalents available-for-sale financial assets and certain derivative instrument, the Company’s and its subsidiaries’ exposure to credit risk arising from the default of counter-parties are limited to the carrying amount of these instruments. As the Company and its subsidiaries trade only with established third parties, it does not for any collateral from third parties. Liquidity risk The Company’s and its subsidiaries’ objective are to maintain a balance of funding continuity and flexibility through the use of financial instruments such as bank loans and cash and cash equivalents.



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(2) Information of financial instruments

(A) Fair value of financial instruments


Financial assets Book value Fair value Book value Fair value Non-derivative financial instruments Assets

Cash and cash equivalent $4,660,206 $4,660,206 $3,868,609 $3,868,609 Notes receivable-net 301,612 301,612 732,669 732,669 Account receivable-net 1,513,829 1,513,829 1,890,915 1,890,915 Other receivables 339,189 339,189 290,635 290,635 Restricted assets-current 26,599 26,599 11,557 11,557 Other financial assets-noncurrent 135,643 135,643 80,045 80,045 Financial assets measured at cost-noncurrent 47,454 - 108,034 -

Refundable deposits 29,431 - 45,047 -

Liabilities Short-term loans 1,904,094 1,904,094 2,819,707 2,819,707 Notes payable 107,336 107,336 77,082 77,082 Accounts payable 3,959,260 3,959,260 3,277,137 3,277,137 Accrued expenses 826,884 826,884 654,121 654,121 Lease payables 332,643 332,643 349,768 349,768 Bonds payable 1,287,098 1,287,098 968,266 968,266

Derivative financial instruments Assets

Financial assets at fair value through income statement-current

$1,106 $1,106 $30,383 $30,383

Derivative financial assets for hedging-current

21,980 21,980 - -

Financial assets at fair value through income statement-noncurrent

459 459 - -



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Financial assets Book value Fair value Book value Fair value Liabilities

Financial liabilities at fair value through income statement-current

$269 $269 $284 $284

Derivative financial liabilities for hedging-current

30,752 30,752 - -

(B) The methods and assumptions used to estimate the fair value of financial instruments are

as follows:

(a) The book value of short-term financial instruments approximates to the fair value due to their short maturities. Short-term financial instruments include cash and cash equivalents notes receivable, account receivable, other receivables, restricted assets, short-term loans, notes payable, accounts payable and accrued expenses.

(b) The fair value of other financial assets-noncurrent is based on book values which

approximate present value of future cash inflows. (c) Refundable deposits are based on book value because the maturity date is uncertain. (d) The fair value of financial assets measured at cost is unable to be estimated since

there is no active market in trading those unlisted investments. (e) Lease payables are estimated based on the present values of future cash flow. For

bank loans associated with floating interest rate, the carrying value represents its fair value. The fair values of convertible bonds are determined based on their market price which was provided by financial institution.

(f) The fair value of derivative financial instruments is based on the amount the

Company expects to receive and to pay assuming that the contracts are settled at the balance sheet date. The fair value includes the unrealized gain on unsettled contracts in current period generally. The Company refers to quoted prices provided by financial institutions for its derivative financial instruments.



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(C) The fair value of the Company’s and its subsidiaries’ financial assets and liabilities

determined by the quoted prices in active markets or valuation technique as follows:

As of December 31, Active market quotation Valuation technique

Financial assets 2012 2011 2012 2011 Non-derivative financial instruments Assets

Cash and cash equivalent $4,660,206 $3,868,609 $- $- Notes receivable-net - - 301,612 732,669 Accounts receivable-net - - 1,513,829 1,890,915 Other receivables - - 339,189 290,635 Restricted assets-current - - 26,599 11,557 Other financial assets-noncurrent - - 135,643 80,045 Refundable deposits - - 29,431 45,047

Non-derivative financial instruments Liabilities

Short-term loans - - 1,904,094 2,819,707 Notes payable - - 107,336 77,082 Accounts payable - - 3,959,260 3,277,137 Accrued expenses - - 826,884 654,121 Lease payables - - 332,643 349,768 Bonds payable - 1,287,098 968,266

Derivative financial instruments Assets

Financial assets at fair value through income statement-current

- - 1,106 30,383 Derivative financial assets for hedging-current

- - 21,980 -

Financial assets at fair value through income statement-noncurrent - - 459 -

Liabilities

Financial liabilities at fair value through income statement-current

- - 269 284 Derivative financial liabilities for hedging-current

- - 30,752 -



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(D) As of December 31, 2012 and 2011, the Company and its subsidiaries’ financial asset

with fair value interest rate risk exposure amounted to NT$2,432,836 thousand and NT$2,017,478 thousand, respectively. The Company and its subsidiaries’ financial liabilities with cash flow interest rate risk exposure as of December 31, 2012 and 2011 were amounted to NT$3,523,835 thousand and NT$4,137,741 thousand respectively.

(E) For the year ended December 31, 2012 and 2011, total interest revenue and interest

expense for financial assets or liabilities that are not at fair value through profit or loss were NT$34,031 thousand and NT$23,881 thousand, NT$84,179 thousand and NT$65,797 thousand, respectively. During the years ended December 31, 2012 and 2011, the Company recognized gains amounted to NT$8,767 thousand and NT$19,079 thousand due to the changes of the fair value through valuation techniques.

(F) Guarantee for letter of credit of subsidiaries in pledge refers to Note 28. (G) Financial risk information

(a) Market risk

Forward contracts held as of December 31, 2012 and 2011 were intended for hedging purposes. Gains or losses arising from the fluctuations in exchange rates are likely to be offset against the gains or losses from the hedged items. As a result, no significant exposure to market risk is anticipated. The Company’s fixed interest rate domestic unsecured convertible bond will fluctuate in line with the market interest rate monument. The Company also operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to New Taiwan Dollars. Gains or losses due to changes in foreign exchange rates will be offset by monetary assets and liabilities both denominated in foreign currency and the foreign currency forward exchange contract entered into.

(b) Credit risk:

Financial assets are influenced by potential effects of transaction counterparties’ non-fulfillment of contract. Effects include the concentration of credit risk of the Company’s and its subsidiaries’ financial instruments, components, amount of contracts, and other receivables. There is no significant credit risk exposure.



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(c) Liquidity risk

No significant cash flow risk is anticipated since the working capital is sufficient to meet the cash flow requirements. The Company and its subsidiaries entered into foreign exchange forward contracts, since the forward rate has been fixed, no significant cash flow risk is anticipated. In addition, the Company and its subsidiaries invest unlisted stocks. The significant liquidity risk is expected.

(d) Cash flow interest rate risk

The Company and its subsidiaries’ bank loan and lease payable were floating rate liabilities; therefore, changes in the market interest rates may cause future cash flows to be volatile. Bonds payable expose the Company to market interest rate and stock price volatility risk.

(3) Significant intercompany transactions among consolidated entities for the years ended

December 31, 2012 and 2011 are disclosed in Attachment 1. (4) The information of foreign currency financial assets / liabilities is as follows:

(Unit : Foreign currency : thousand, NTD: thousand) As of December 31, 2012 Foreign currency Exchange rate NT

Financial assets-monetary items Cash and cash equivalents RMB 315,582 4.6741 $1,475,062 Cash and cash equivalents USD 54,242 29.136 1,580,686 Notes and Accounts receivable RMB 171,411 4.6741 801,192 Notes and Accounts receivable USD 33,273 29.136 969,442 Other receivables RMB 8,460 4.6741 39,543 Other receivables USD 8,762 29.136 255,290 Restricted assets RMB 2,480 4.6741 11,592 Refundable deposits RMB 3,652 4.6741 17,070 Refundable deposits JPY 7,665 0.3375 2,587

Financial liabilities-monetary items Short term loan USD 63,264 29.136 1,843,260 Accounts payable USD 99,490 29.136 2,898,741 Accounts payable RMB 197,329 4.6741 922,335 Accrued expenses RMB 31,928 4.6741 149,235



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Foreign currency Exchange rate NT Financial assets-monetary items

Cash and cash equivalents RMB 333,678 4.8125 $1,605,823 Cash and cash equivalents USD 27,088 30.2900 820,496 Cash and cash equivalents JPY 68,676 0.3905 26,818 Accounts receivable RMB 320,918 4.8125 1,544,418 Accounts receivable USD 27,753 30.2900 840,638 Other receivables RMB 18,628 4.8125 89,647 Other receivables USD 6,067 30.2900 183,769 Restricted assets RMB 2,401 4.8125 11,555 Refundable deposits RMB 6,229 4.8125 29,977 Refundable deposits JPY 7,665 0.3905 2,993

Financial assets-non monetary items Financial assets measured at cost-noncurrent

USD 2,000 30.2900 60,580

Financial liabilities-monetary items

Short term loan USD 93,090 30.2900 2,819,707 Accounts payable USD 64,558 30.2900 1,955,462 Accounts payable RMB 149,363 4.8125 718,809 Accrued expenses USD 746 30.2900 22,596 Accrued expenses RMB 28,187 4.8125 135,650

(5) The Financial Supervisory Commission (“FSC”) requires companies with shares listed on

the TSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market to prepare their financial statements in accordance with the International Financial Reporting Standards, International Accounting Standards, and Interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as recognized by the FSC (collectively referred to as “IFRSs”), and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, starting 2013. Under Rule No. 0990004943 issued by the FSC on February 2, 2010, the Company makes the following pre-disclosures on the adoption of IFRSs as follows:



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(A) The main contents of the plan to adopt IFRSs and the current status:

The Company has set up a project team and made a plan to adopt IFRSs. Leading the implementation of this plan is Mr. Leo Chen. The main contents of the plan, estimated completion schedule and status of execution as of December 31, 2012, were as follows:

Contents of Plan Responsible Department

or Personnel Status of

Execution 1. Establish a project team Accounting department Completed 2. Make a plan to adopt IFRSs Accounting department Completed 3. Identify differences between the existing

accounting policies and IFRSs Accounting department Completed

4. Identify consolidated entities under IFRSs Accounting department Completed 5. Select voluntary exemptions under IFRS 1

“First-time Adoption of International Financial Reporting Standards” and assess the impact of these exemptions

Accounting department Completed

6. Assess the adjustments required for IT system

Accounting and IT department

Completed

7. Assess the adjustments required for internal controls

Accounting and Internal Control department

Completed

8. Finalize the accounting policies under IFRSs Accounting department Completed 9. Finalize the selection of voluntary

exemptions under IFRS 1 “First-time Adoption of International Financial Reporting Standards


10. Prepare opening IFRS statement of financial position


11. Prepare IFRSs comparative information for 2012


12. Finalize adjustments to the internal control (including financial statements process and the associated IT system)

Accounting department, Internal Control department, and IT department

Completed



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B. Material differences between the existing accounting policies and the accounting

policies to be adopted under IFRSs and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers are described in the table below.

The Company assesses the material differences in accounting polices based on the IFRSs as recognized by the FSC and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers expected to become effective in 2013. However these assessments may be changed as the FSC may recognize different versions of IFRSs or amend the Guidelines Governing the Preparation of Financial Reports by Securities Issuers in the future. Furthermore, the Company has decided the accounting policies to be adopted under IFRSs based on the current circumstances, should circumstances change in the future, the accounting policies to be adopted may change accordingly. The material differences in accounting policies described in the table below may not result in any adjustment on the date of transition to IFRSs, due to the voluntary exemptions selected under IFRS 1 “First-time Adoption of International Financial Reporting Standards”.

Accounting Issues Description of differences

Translation of foreign currencies

Under the requirements of ROC GAAP, as the Company is not a foreign operation, the Company does not need to determine its functional currency. However under the requirements of IAS 21 “The Effects of Changes in Foreign Exchange Rates”, all entities (including the parent) included in the reporting entity is required to determine their respective functional currencies.

Financial assets measured at cost

Under the requirements of the existing Guidelines Governing the Preparation of Financial Reports by Securities Issuer, equity investments in unlisted entities or entities traded on Emerging Stock market should be measured at cost. However under the requirements of IAS 39, only investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured could be measured at cost. The fair value of investments in equity instruments that do not have a quoted market price in an active market is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that instrument or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.



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Fixed assets

For fixed assets acquired prior to the issuance of Accounting Research and Development Foundation Interpretation No 97-340, even if the cost of a component of the asset is significant relative to the total cost of such asset, that component is not depreciated separately. Furthermore, for fixed assets acquired prior to the issuance of Accounting Research and Development Foundation Interpretation No 97-340, the cost of such assets does not include the costs of dismantling and removing the asset and restoring the site on which it is located, and related provision is not recognized. However under the requirements of IAS 16 “Property, Plant and Equipment”, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The cost of an item of property, plant and equipment comprises the costs of dismantling and removing the asset and restoring the site on which it is located. The cost of regular major inspections is expensed as incurred under ROC GAAP. However under the requirements of IAS 16, when each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection is derecognized.

Employee benefits

There is no guidance under ROC GAAP for short-term compensated absences. The Company recognizes the cost as expense as employees take these absences. However under the requirements of IAS 19 “Employee Benefits”, the Company shall recognize and accrue for the accumulating compensated absences.

Employee benefits

The Company has selected a rate of return on relatively high-safety fixed-income investment as the discount rate under ROC GAAP. However under the requirements of IAS 19, the rate used to discount post-employment benefits obligations shall be determined by reference to market yields on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields on government bonds shall be used. Under the requirements of ROC GAAP, minimum pension liability is to be recognized for the excess of the accumulated benefit obligation over the pension plan assets. There is no such requirement under IAS 19. Under the requirements of ROC GAAP, the unrecognized transitional net assets (or net benefit obligation) should be amortized on a straight-line basis over the average remaining service period of employees still in service and expected to receive benefits. There is no such requirement under IAS 19.



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Share-based payment

The Company’s share-based payment arrangements have applied intrinsic value method in accordance with Accounting Research and Development Foundation Interpretation No 92-070-072; however under IFRS 2 “Share-based Payment”, such arrangements should be measured using fair value method.

Income taxes

Under the requirements of ROC GAAP, deferred tax assets are recognized in full, however, if there is over 50% possibility that the economic benefits of a deferred tax asset become unrealizable, a valuation allowance account should be established to reduce the carrying amount of the deferred tax asset. However under the requirements of IAS 12 “Income Taxes”, a deferred tax asset shall be recognized to the extent that it is probable that it would be utilized.

Income taxes

Under the requirements of ROC GAAP, a deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. If a deferred tax asset or liability is not related to an asset or liability for financial reporting, it should be classified as current or noncurrent according to the expected reversal date of the temporary difference. However under the requirements of IAS 1 “Presentation of Financial Statements”, deferred tax assets or liabilities are classified as noncurrent. There is no guidance under ROC GAAP that deals with the applicable tax rates for related deferred tax assets or liabilities arising from unrealized intergroup profits and losses. Under the Company’s existing accounting policy, the Company’s tax rate is used to calculate deferred tax assets or liabilities arising from unrealized profits and losses of upstream intergroup transactions. For downstream or side stream intergroup transactions, the Company’s tax rate is also used to recognize deferred tax assets or liabilities by adjusting investment gains or losses. However under the requirements of IAS 12, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. Therefore buyer’s tax rate should be used to calculate the deferred tax assets or liabilities arising from unrealized intergroup profits and losses.



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(C) The preliminary assessment on the quantitative impacts of the material differences between the existing accounting policies and the accounting policies to be adopted under IFRSs and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers is as follows: I. Reconciliation of the balance sheet as at January 1, 2012

ROC GAAP Adjustments IFRSs

Current assets (a)、(e) $8,976,619 $(24,542) $8,952,077

Funds and Investments (b) 188,079 (9,726) 178,353

Property, plant and equipment (c)、(d)、(f) 2,496,673 (50,594) 2,446,079

Intangible Assets (c)、(e) 246,996 (105,394) 141,602

Other assets (a)、(c)、(d)、(e)、(f)、(g)、(h) 115,750 186,777 302,527

Total Assets 12,024,117 (3,479) 12,020,638

Current liabilities(g) 7,771,950 4,508 7,776,458

Long term liabilities 837,744 - 873,744

Other liabilities(h) 105,814 32,240 138,054

Total liabilities 8,751,508 36,748 8,778,256

Capital 1,827,960 - 1,827,960

Capital reserve 308,989 - 308,989

Special reserve(j) - 131,678 131,678

Retained earnings(g)、(h)、(i) 973,481 - 973,481

Cumulative translation adjustment (i) 162,179 (162,179) -

Unrealized Gain (Loss) on financial instruments (b)

- (9,726) (9,726)

Stockholders’ equity 3,272,609 (40,227) 3,232,382

(a) Under the requirements of IAS 1 “Presentation of Financial Statements”, the

Company’s deferred tax assets and liabilities are classified as non-current. Furthermore, deferred tax assets and liabilities are not offset in accordance with the requirements under IAS 12. This reclassification has decreased deferred tax asset-current by NT$27,473 thousand and increased deferred tax asset-non-current by NT$27,473 thousand as at January 1, 2012.



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(b) The Company’s financial assets measured at cost are reclassified to available-for-sale financial assets-non-current and carried at fair value at each reporting date in accordance with the requirements of IFRSs. Consequently, as at January 1, 2012, the financial assets measured at cost-non-current is decreased by NT$47,444 thousand, available-for-sale financial assets-non-current is increased by NT$37,718 thousand and the unrealized gain of available-for-sale financial assets is increased by NT$9,726 thousand.

(c) The Company has reclassified deferred charges NT$56,333 thousand to related

assets in accordance with the revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and the requirements under IFRSs. Consequently, this reclassification has resulted in the amount of net fixed assets increased by NT$46,538 thousand and intangible assets increased by NT$9,795 thousand.

(d) The Company has reclassified prepayment for equipments to prepayments in

accordance with the revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and the requirements under IFRSs. Consequently, this reclassification has resulted in the amount of net fixed assets reduced by NT$111,502 thousand and prepayment for equipments increased by NT$111,502 thousand.

(e) Land use rights which have been determined as operating leases are

reclassified to prepaid rent under current assets and long-term prepaid rent under non-current assets. This reclassification has resulted in an increase of long-term prepaid rent in the amount of NT$112,258 thousand and an increase of prepaid rent in the amount of NT$2,931 thousand.

(f) The Company has reclassified property not used in operations to property, plant

and equipment in accordance with the revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and the requirements under IFRSs. Consequently, this reclassification has resulted in the amount of other assets reduced by NT$14,370 thousand and prepayment for equipments increased by NT$14,370 thousand.



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(g) The Company recognizes accumulated compensated absences as expenses in accordance with IAS 19 “Employee Benefits”. Consequently, accrued expenses-current is increased by NT$4,508 thousand, deferred tax assets-non-current is increased by NT$766 thousand and retained earnings are decreased by NT$3,742 thousand.

(h) The Company has recognized all cumulative actuarial gains and losses directly

in retained earnings at the date of transition. Furthermore the minimum pension liability is reversed and all remaining balance of unrecognized transitional net assets is recognized in retained earnings by the Company in accordance with IAS 19 “Employee Benefits”. Consequently, as at January 1, 2012, accrued pension liability is increased by NT$32,240 thousand, deferred tax asset-non-current is increased by NT$5,481 thousand. In total, the retained earnings is decreased by NT$26,759 thousand.

(i) Accumulated balance of exchange differences resulting from translating the

financial statements of a foreign operation is deemed to be zero as at the date of transition. Consequently, the accumulated exchange differences is decreased by NT$162,179 thousand and retained earnings is increased by NT$162,179 thousand.

(j) Following the adoption of IFRSs, in accordance with the Order No.

Financial-Supervisory-Securities-Corporate-1010012854 issued by FSC, for any unrealized revaluation gains and cumulative translation adjustments (gains) recorded to shareholders’ equity that the Company elects to transfer to retained earnings by the application of the exemption under IFRS 1 “First-time Adoption of International Financial Reporting Standards”, the Company is required to set aside an equal amount of special reserve. An equal amount of the Company’s cumulative translation adjustments gains in the amount of NT$162,179 thousand that the Company elects to transfer to retained earnings by application of the exemption under IFRS 1 has been set aside to special reserve. However, the Company’s retained earnings increased NT$131,678 thousand as a result of adoption of IFRS that is not enough to set aside to special reserve from translation adjustments gains of NT$162,179 thousand , thus the Company can only set aside NT$131,678 thousand to special reserve.

Other explanations are as follows: The functional currency of the Company is still New Taiwan Dollars under IFRSs; therefore there is no material impact on the financial statements.



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II. Reconciliation of the balance sheet as at December 31, 2012

ROC GAAP Adjustments IFRSs Current assets (a)、(e) $9,330,159 $(29,603) $9,300,556 Funds and Investments (b) 183,556 (2,459) 181,097 Property, plant and equipment (c)、(d)、(f) 3,026,655 (95,243) 2,931,412 Intangible Assets (c)、(e) 251,595 (94,564) 157,031 Other assets (c)、(d)、(e)、(f)、(g)、(h) 111,161 226,183 337,344

Total Assets 12,903,126 4,314 12,907,440 Current liabilities (g) 7,436,720 7,600 7,444,320 Long term liabilities 1,600,469 - 1,600,469 Other liabilities(h) 15,275 30,551 45,826

Total liabilities 9,052,464 38,151 9,090,615 Capital 1,972,855 - 1,972,855 Capital reserve 498,409 - 498,409 Special reserve (j) - 131,678 131,678 Retained earnings(g)、(h)、(i)、(j) 1,259,633 (877) 1,258,756 Cumulative translation adjustment (i) 128,537 (162,179) (33,642) Unrealized Gain (Loss) on financial instruments (b)

- (2,459) (2,459)

Gain/Loss on hedging derivative financial instruments

(8,772) - (8,772)

Stockholders’ equity 3,850,662 (33,837) 3,816,825 (a) Under the requirements of IAS 1 “Presentation of Financial Statements”, the

Company’s deferred tax assets and liabilities are classified as non-current. Furthermore, deferred tax assets and liabilities are not offset in accordance with the requirements under IAS 12. This reclassification has decreased deferred tax asset-current by NT$32,450 thousand and increased deferred tax asset-non-current by NT$32,450 thousand as at January 31, 2012.

(b) The Company’s financial assets measured at cost are reclassified to

available-for-sale financial assets-non-current and carried at fair value at each reporting date in accordance with the requirements of IFRSs. Consequently, as at January 1, 2012, the financial assets measured at cost-non-current is decreased by NT$47,444 thousand, available-for-sale financial assets-non-current is increased by NT$44,985 thousand and the unrealized loss of available-for-sale financial assets is increased by NT$2,459 thousand.



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(c) The Company has reclassified deferred charges NT$51,972 thousand to related assets in accordance with the revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and the requirements under IFRSs. Consequently, this reclassification has resulted in the amount of net fixed assets increased by NT$37,507 thousand and intangible assets increased by NT$14,465 thousand.

(d) The Company has reclassified prepayment for equipments to prepayments in

accordance with the revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and the requirements under IFRSs. Consequently, this reclassification has resulted in the amount of net fixed assets reduced by NT$146,962 thousand and prepayment for equipments increased by NT$146,962 thousand.

(e) Land use rights which have been determined as operating leases are

reclassified to prepaid rent under current assets and long-term prepaid rent under non-current assets. This reclassification has resulted in an increase of long-term prepaid rent in the amount of NT$106,182 thousand and an increase of prepaid rent in the amount of NT$2,847 thousand.

(f) The Company has reclassified property not used in operations to property, plant

and equipment in accordance with the revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and the requirements under IFRSs. Consequently, this reclassification has resulted in the amount of other assets reduced by NT$14,212 thousand and prepayment for equipments increased by NT$14,212 thousand.

(g) The Company recognizes accumulated compensated absences as expenses in

accordance with IAS 19 “Employee Benefits”. Consequently, accrued expenses-current is increased by NT$7,600 thousand, deferred tax assets-non-current is increased by NT$1,292 thousand and retained earnings are decreased by NT$6,308 thousand.

(h) The Company has recognized all cumulative actuarial gains and losses directly

in retained earnings at the date of transition. Furthermore the minimum pension liability is reversed and all remaining balance of unrecognized transitional net assets is recognized in retained earnings by the Company in accordance with IAS 19 “Employee Benefits”. Consequently, as at January 1, 2012, accrued pension liability is increased by NT$30,551 thousand, deferred tax asset-non-current is increased by NT$5,481 thousand. In total, the retained earnings is decreased by NT$25,070 thousand.



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(i) Accumulated balance of exchange differences resulting from translating the financial statements of a foreign operation is deemed to be zero as at the date of transition. Consequently, the accumulated exchange differences is decreased by NT$162,179 thousand and retained earnings is increased by NT$162,179 thousand.

(j) Following the adoption of IFRSs, in accordance with the Order No.

Financial-Supervisory-Securities-Corporate-1010012854 issued by FSC, for any unrealized revaluation gains and cumulative translation adjustments (gains) recorded to shareholders’ equity that the Company elects to transfer to retained earnings by the application of the exemption under IFRS 1 “First-time Adoption of International Financial Reporting Standards”, the Company is required to set aside an equal amount of special reserve. An equal amount of the Company’s cumulative translation adjustments gains in the amount of NT$162,179 thousand that the Company elects to transfer to retained earnings by application of the exemption under IFRS 1 has been set aside to special reserve. However, the Company’s retained earnings increased NT$131,678 thousand as a result of adoption of IFRS that is not enough to set aside to special reserve from translation adjustments gains of NT$162,179 thousand , thus the Company can only set aside NT$131,678 thousand to special reserve.

Other explanations are as follows: The functional currency of the Company is still New Taiwan Dollars under IFRSs; therefore there is no material impact on the financial statements.

III. Reconciliation of the income statement for the year ended December 31, 2012

ROC GAAP Adjustments IFRSs Net sales $19,267,971 $- $19,267,971 Cost of goods sold (16,282,234) - (16,282,234) Gross profit (2,985,737) - 2,985,737 Operating expenses (a)、(b) (1,953,080) (1,403) (1,954,483) Operating income 1,032,657 (1,403) 1,031,254 Non-operating income and expenses (97,941) - (97,941) Income from continuing operations before income tax

934,716 (1,403) 933,313

Income tax expenses (a) (179,880) 526 (179,354) Net income 754,836 (877) 753,959



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(a) The Company in accordance with IAS 19 “Employee Benefits”. Consequently,

the pension costs for the year ended December 31, 2012, recognized operating expense, is decreased by NT$1,689 thousand.

(b) The Company recognizes accumulated compensated absences as liabilities under

the requirements of IAS 19 “Employee Benefits”. Consequently, the operating expense for the year ended December 31, 2012, is increased by NT$3,092 thousand. The income tax expenses is decreased by NT$526 thousand.

The functional currency of the Company is still New Taiwan Dollars under IFRSs, therefore there is no material impact on the financial statements.

(D) According to the requirements under IFRS 1, “First-time Adoption of International

Financial Reporting Standards”, the Company prepares its first IFRS financial statements based on the effective IFRS standards and makes adjustments retrospectively, except for the optional exemptions and mandatory exemptions under IFRS 1. The optional exemptions selected by the Company are as follows:

(a) The Company has recognized all cumulative actuarial gains and losses directly to

retained earnings as at January 1, 2012. (b) The Company has elected to disclose amounts requited by paragraph 120A (p) of

IAs 19 prospectively from January 1, 2012. (c) Cumulative currency translation differences for all foreign operations are deemed to

be zero as at January 1, 2012. (d) IFRSs 2, has not been applied to equity instruments in share-based payment

transactions that were granted on or before November 7, 2002, nor has it been applied to equity instruments granted after November 7, 2002, that vested before January 1, 2012.

33. Additional disclosures

The following are additional disclosures for the Company and its affiliates as required by the R.O.C. Securities and Futures Bureau:



74

(1) Major transactions information:

(A) Financing provided: Refer to Attachment 2. (B) Endorsement/guarantee provided: Refer to Attachments 3. (C) Securities held as of December 31, 2012: Refer to Attachment 4. (D) Marketable securities acquired or disposed of with accumulated amount exceeding the

lower of NT$100 million or 20 percent of the capital stock: Refer to Attachment 5. (E) Acquisition of individual real estate with amount exceeding the lower of NT$100

million or 20 percent of the capital Stock: Refer to Attachment 6. (F) Disposal of individual real estate with amount exceeding the lower of NT$100 million or

20 percent of the capital stock: None. (G) Related party transactions for purchases and sales amounts exceeding the lower of

NT$100 million or 20 percent of the capital stock: Refer to Attachment 6. (H) Receivables from related parties with amount exceeding the lower of NT$100 million or

20 percent of the capital stock: None. (I) Financial instruments and derivative transactions: Refer to Note 5 and Note 6.

(2) Information on re-invested enterprises:

(A) For those who directly or indirectly have major influence or control over the investee

company: Please refer to Attachment 8. (B) For those who directly or indirectly have control over the investee company, the

investee company’s transaction information listed under items A to I shall be disclosed: Please refer to Attachment 2, 4, 6 and 7.

(3) Information on Mainland China investments: Please refer to Attachment 9.

SERCOMM CORPORATION AND SUBSIDIARIES(Expressed in Thousands of New Taiwan Dollars Unless Otherwise Stated)

Attachment 1：Significant intercompany transactions between consolidated entitiesNo.

Percentage of consolidated operating revenues or consolidated total assets

(Note1) (Note 2) (Note 3)For the year ended December 31, 2012

0 Sercomm Corporation Senslinq Inc. 1 Commission expenses $33,748 - 0.17%0 Sercomm Corporation Senslinq Inc. 1 Other current assets 743 - 0.01%0 Sercomm Corporation Senslinq Inc. 1 Other payable 8,386 - 0.06%0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Sales revenue 112,644 Note 4 0.58%0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Interest revenue 3,829 - 0.02%0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Accounts receivable 66,470 Note 4 0.51%0 Sercomm Corporation Sernet Technology (Suzhou) Limited 1 Accounts payable 1,314,695 Note 5 10.19%0 Sercomm Corporation Sernet Technology (Suzhou) Limited 1 Interest revenue 2,547 - 0.01%0 Sercomm Corporation Sercomm Japan Corp. 1 Commission expenses 33,584 - 0.17%0 Sercomm Corporation Sercomm Japan Corp. 1 Other current assets 4,363 - 0.03%0 Sercomm Corporation Sercomm Japan Corp. 1 Other payable 1,563 - 0.01%0 Sercomm Corporation Sercomm Japan Corp. 1 Interest revenue 827 - -0 Sercomm Corporation Sercomm France SARL 1 Commission expenses 33,563 - 0.17%0 Sercomm Corporation Sercomm France SARL 1 Other payable 4,423 - 0.03%0 Sercomm Corporation Sercomm France SARL 1 Other current assets 8,079 - 0.06%1 Zealous Investments Ltd. Sercomm Trading Co. Ltd. 2 Other current assets 3,788 - 0.03%2 Sercomm Deutschland GmbH Sercomm France SARL 3 Commission expenses 1,371 - 0.01%2 Sercomm Deutschland GmbH Sercomm France SARL 3 Accrued expense 1,390 - 0.01%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Accounts receivable 290,512 - 2.25%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Other current assets 216,295 - 1.68%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Rent revenue 4,834 - 0.02%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Sales revenue 147,108 - 0.76%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Interest revenue 19,385 - 0.10%3 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Commission expenses 31,131 - 0.16%4 Sercomm Japan Corp. Sernet Technology (Suzhou) Limited 3 Sales revenue 5,052 - 0.03%

Note 1：The Company and its subsidiaries are coded as follows: 1.The Company is coded 0. 2.The subsidiaries should be coded consecutively beginning from "1" in the order presented in the table above.Note 2：Transactions are categorized as follows: 1.The parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary.Note 3：The percentage with respect to the consolidated asset/revenues for transactions of balance sheet items are based on each items balance at period-end. For profit or loss items, cumulative balances are used as basis.Note 4：The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection period for third party was month-end 90 days, while the terms for domestic sales was net 30-75 days. The collection period for overseas sales was net 30-240 days.Note 5：The list of significant intercompany transactions doesn't include transactions as the Company purchased materials on its subsidiary, Sernet Technology (Suzhou) Limited's behalf, sold the materials to Sernet Technology (Suzhou) Limited, and then bought the final products from Sernet Technology (Suzhou) Limited. In 2012, the Company purchased materials for such transactions amounted to $287,430 thousand. The Company bought the final products from Sernet Technology (Suzhou) Limited amounted to $12,731,837 thousand. In order to avoid double counting for such transactions above, the Company did not recognize related sales and cost of goods sold of materials and work-in-process until selling the final products. In addition, the Company reversed the amount which have not been bought back from Sernet Technology (Suzhou) Limited to inventory account and reversed the related accounts receivable/payable balance.

Name of related parties Counterparty

Transactions

Account Amount TermsNature of relationship

75


Attachment 1-1：Significant intercompany transactions between consolidated entitiesNo.

Percentage of consolidated operating revenues or consolidated total assets

(Note1) (Note 2) (Note 3)For the year ended December 31, 2011

0 Sercomm Corporation Senslinq Inc. 1 Commission expenses $21,295 - 0.16%0 Sercomm Corporation Senslinq Inc. 1 Other current assets 889 - 0.01%0 Sercomm Corporation Senslinq Inc. 1 Other payable 2,659 - 0.02%0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Sales revenue 248,788 Note 4 1.84%0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Accounts receivable 190,317 Note 4 1.58%0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Other receivable 364,707 - 3.03%0 Sercomm Corporation Sernet Technology (Suzhou) Limited 1 Sales revenue received in advance 42,872 - 0.36%0 Sercomm Corporation Sernet Technology (Suzhou) Limited 1 Accounts payable 1,191,881 Note 5 9.91%0 Sercomm Corporation Sercomm Japan Corp. 1 Commission expenses 9,333 - 0.07%0 Sercomm Corporation Sercomm Japan Corp. 1 Other receivables 60,921 - 0.51%0 Sercomm Corporation Sercomm France SARL 1 Commission expenses 12,227 - 0.09%0 Sercomm Corporation Sercomm Trading Co. Ltd. 1 Other receivable 2,995 - 0.02%1 Zealous Investments Ltd. Sercomm Trading Co. Ltd. 2 Temporary payments 3,938 - 0.03%2 Sercomm Investments Ltd. Sercomm Trading Co. Ltd. 3 Temporary payments 6,967 - 0.06%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Accounts receivable 225,294 - 1.87%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Rent revenue 3,802 - 0.03%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Sales revenue 280,135 - 2.07%3 Sernet Technology (Suzhou) Limited Dwnet Technology (Suzhou) Limited 3 Interest revenue 14,423 - 0.11%3 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Commission expenses 27,587 - 0.20%3 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Other current liabilities 7,582 - 0.06%4 Sercomm Japan Corp. Sernet Technology (Suzhou) Limited 3 Sales revenue 5,220 - 0.04%

Note 1：The Company and its subsidiaries are coded as follows: 1.The Company is coded 0. 2.The subsidiaries should be coded consecutively beginning from "1" in the order presented in the table above.Note 2：Transactions are categorized as follows: 1.The parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary.Note 3：The percentage with respect to the consolidated asset/revenues for transactions of balance sheet items are based on each items balance at period-end. For profit or loss items, cumulative balances are used as basis.Note 4：The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection period for related parties was month-end 90-210 days, while the terms for domestic third party sales was net 30-75 days. The collection period for overseas sales was net 30-240 days. Note 5：The list of significant intercompany transactions doesn't include transactions as the Company purchased materials on its subsidiary, Sernet Technology (Suzhou) Limited's behalf, sold the materials to Sernet Technology (Suzhou) Limited, and then bought the final products from Sernet Technology (Suzhou) Limited. In 2011, the Company purchased materials for such transactions amounted to $1,886,755 thousand. The Company bought the final products from Sernet Technology (Suzhou) Limited amounted to $8,542,148 thousand. In order to avoid double counting for such transactions above, the Company did not recognize related sales and cost of goods sold of materials and work-in-process until selling the final products. In addition, the Company reversed the amount which have not been bought back from Sernet Technology (Suzhou) Limited to inventory account and reversed the related accounts receivable/payable balance.

Name of related parties CounterpartyNature of relationship

Transactions

Account Amount Terms

76


Attachment 2：Financing provided for the year ended December 31, 2012Name of Name of Maximum balance Actual Interest Nature of Total transaction Reason for Allowance for Loan limit per Maximum amount available

Number finance provider counterparty Account during 2012 Ending balance amountprovided

rate financing activity amount financing doubtful accounts Item Value entity (Note l) for law (Note 2)

0 Sercomm Dwnet Technology (Suzhou) Other receivables $600,200 $582,720 $- 2.50% Note 3(2) $- Operating $- - $- $740,848 $1,481,696Corporation Limited -related party

0 Sercomm Sercomm Japan Corp. Other receivables 150,050 - - 2.50% Note 3(2) - Operating - - - 740,848 1,481,696 Corporation -related party

0 Sercomm Sernet Technology (Suzhou) Other receivables 450,150 - - 2.50% Note 3(2) - Operating - - - 740,848 1,481,696 Corporation Limited -related party

1 Sernet Dwnet Technology (Suzhou) Other receivables 428,040 324,310 208,485 5.00% Note 3(2) - Operating - - - 1,852,121 3,704,242

Technology Limited -related party

(Suzhou)

Limited

Note 1：According the Company's Operational Procedures for Loaning Funds to Others, the maximum amount permitted to a single borrower as follows:

(1)Trading partner: The amount shall not exceed the higher of the sales or purchases amount from the counterparty at the time of the leading event or one year, whichever is lesser.

(2)Short-term financing: The amount shall not exceed 20 percent of stockholders' equity as stated in its latest financial statement.

(3)The company loan to 100% overseas equity investee is not limited to 40% of stockholder's equity as stated in its latest financial statememt. However the agreegate amount should not exceed 100% net assets. Loan to individual investee should not exceed 50% net assets.

Note 2：The agreement amount of loans for subsidiary to others shall not exceed 40% of stockholders' equity as stated in its latest financial statement.

Note 3：The nature of financing activities as follows:

(1)Trading partner.

(2)Short-term financing

Assets pledged

77


(Expressed in Thousands of New Taiwan Dollars Unless Otherwise Stated)

Attachment 3: Endorsement / guarantee provided for others for the year ended December 31, 2012

Name of endorsees Relationship Ending balance0 Sercomm Sernet Technology The Company's $1,852,121 $600,200 $582,720 $- 15.73% $3,407,242

Corporation (Suzhou) Limited equity investee (USD 20,000 thousand) (USD 20,000 thousand) (Note1)

(Note2)

1 Sercomm Dwnet Technology The Company's 1,852,121 600,200 582,720 - 15.73% 3,407,242

Corporation (Suzhou) Limited equity investee (USD 20,000 thousand) (USD 20,000 thousand) (Note1)

(Note3)

Note 1 :According the Company's Operational Procedures for Endorsement / guarantee provided for others, the maximum amount permitted to a single borrower as follows: (1)The ceilings on the amounts is permitted to make in endorsements/guarantees on the Company’s aggregate endorsement/guarantee amount for any single entity shall not exceed 25% of stockholders'

equity as stated in its latest financial statement; the total amount shall not exceed 50% of stockholders' equity as stated in its latest financial statement.

(2)The restriction in Note1(1) shall not apply to inter-company loans of funds between foreign companies in which the Company holds, directly or indirectly, 100% of the voting shares. However the Endorsement / guarantee amount should not exceed 100% net assets. Provide endorsement / guarantee to individual investee should not exceed 50% net assets.

(3)The ceilings on the amounts is whole permitted to make in endorsements/guarantees on the Company and its subsidiaries' aggregate endorsement/guarantee amount for any single entity shall not exceed 50% of stockholders' equity as stated in its latest financial statement; the total amount shall not exceed 100% of stockholders' equity as stated in its latest financial statement.

Note 2：Sernet Technology (Suzhou) Limited's actual amount provided was $262,224 thousand for the year ended December 31, 2012.

Note 3：Dwnet Technology (Suzhou) Limited's actual amount provided was $434,126 thousand for the year ended December 31, 2012.

Limit of totalguarantee/endorsemen

t amount

Percentage of accumulatedguarantee amount to net

assets value from the latestfinancial statementNumber Name of endorsers

Endorsee Endorsementlimit for a

single entityMaximum balance for

the period

Amount of collateralguarantee/endorsemen

t

78



Attachment 4：Securities held as of December 31, 2012

Held company name Securities type and name Relationship with the Company Financial statement account Percentage of Note

ownership (%)

Sercomm Corporation Stocks

Senslinq Inc. The Company's equity investee Long-term investments accounted for under the equity method 250 $8,366 100.00 $8,366 Note 1

Sercomm Investments Ltd. The Company's equity investee Long-term investments accounted for under the equity method 1,200 341 100.00 341 Note 1

Sercomm Trading Co. Ltd. The Company's equity investee Long-term investments accounted for under the equity method 46,800 2,469,911 100.00 2,469,911 Note 3

Shukuan Investment Ltd. The Company's equity investee Long-term investments accounted for under the equity method 2,800 16,723 100.00 16,273 Note 3Sercomm Japan Corp. The Company's equity investee Long-term investments accounted for under the equity method 4 2,828 100.00 2,828 Note 1Sercomm France SARL The Company's equity investee Long-term investments accounted for under the equity method 100 6,547 100.00 6,547 Note 1Sercomm Deutchland GmbH The Company's equity investee Long-term investments accounted for under the equity method 100 371 11.00 371 Note 1

Industrial Bank of Taiwan - Financial assets measured at cost-noncurrent 4,154 40,000 0.17 - Note 2

TECO Nanotech Co., Ltd. - Financial assets measured at cost-noncurrent - 10 - - Note 2

Shukuan Investment Ltd. Stocks

Cerpass Technology Corp. - Financial assets measured at cost-noncurrent 747 7,444 3.69 - Note 2

Sercomm Trading Co. Ltd. Stocks

Zealous Investments Ltd. The Company's equity investee Long-term investments accounted for under the equity method 30,956 1,855,430 100.00 1,855,430 Note 3

Smart Trade Inc. The Company's equity investee Long-term investments accounted for under the equity method 16,000 618,507 100.00 618,507 Note 3

Zealous Investments Ltd. Stocks

Sernet Technology (Suzhou) Limited The Company's equity investee Long-term investments accounted for under the equity method 29,900 1,863,713 100.00 1,863,173 Note 3

Ubiquisys Limited - Financial assets measured at cost-noncurrent 875 - 3.78 - Note 2

(Note5) (Note 5)

Smart Trade Inc. Stocks

Dwnet Technology (Suzhou) Limited The Company's equity investee Long-term investments accounted for under the equity method 16,000 618,505 100.00 618,505 Note 3

Sercomm France SARL Stocks

Sercomm Italian SRL The Company's equity investee Long-term investments accounted for under the equity method 10 386 100.00 386 Note 1

Note 1: Amount was recognized based on the unreviewed or unaudited financial statements in 2012.

Note 2: Can't obtain the financial statements of the company in time.

Note 3: Amount was recognized based on the audited financial statements.

Note 4: On July, 2012, the Company acquired 100% share holding in Sercomm Japan Corp. from shukuan Investment Ltd.

Note 5: The value of investment in Ubiquisys Ltd. has write-down, the Company recognized impairment loss amounted to NT$58,272 thousand for the year ended December 31, 2012.

Period ended

Shares/units(in thousands)

Market value orNet asset valueBook value

79

Attachment 5：Acquisition of individual real estate with amount exceeding the lower of NT$100 million or 20 percent of the capital stock for the year ended December 31, 2012

Name of Transaction Transaction Payment Nature of Prior transaction of related counter-party Price Purpose of Other

properties Types of property date amount status Counter-party relationship Owner Relationships Transfer date Amount reference Acquisition commitments

Sercomm Buildings and Land 2011.10.12 $298,454 100% fulfilled AboCom Systems, Inc. None N/A N/A N/A N/A Note Plant expansion None

Corporation

Sercomm Buildings and Land 2012.09.18 291,893 100% fulfilled Industrial Development None N/A N/A N/A N/A Bidding Office expansion None

Corporation Bureau, Ministry of

Economic Affairs

Note : Acquired an appraisal report.



80

Attachment 6：Related party transactions for purchases and sales amounts exceeding the lower of NT$100 million or 20 percent of the capital stock for the year ended December 31, 2012

Sercomm Corporation The Company's equity investee Sales $112,644 0.68 210 (Note1) (Note1) $66,470 6.11

Sercomm Corporation The ultimate parent company Purchases 111,992 4.96 210 - - 67,024 7.85

Sercomm Corporation The Company's equity investee Purchases 12,731,837 88.02 30 (Note1) (Note1) 1,314,695 68.93 (Note2)

Affiliate with the same parent company Sales RMB 22,647 1.19 120 - - RMB 62,154 21.00

(thousand) (thousand)

Affiliate with the same parent company Purchases RMB 22,646 4.62 120 - - RMB 62,154 34.00

(thousand) (thousand)

Note 1：The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection period for related parties was month-end 90-210 days, while

the terms for domestic third party sales was net 30-75 days. The collection period for overseas sales was net 30-240 days.

Note 2：The company designate Sernet Technology (Suzhou) Limited for outward processing, please refer to Attachment 1 Note 5.

Notes and accounts receivable(payable)

Purchases(Sales) Amount

Percentage oftotal purchases

(sales) (%) Term Unit price Term


NoteBalance

Percentage oftotal

receivables(payable) (%)

Purchases(Sales) Company Related party Relationship

TransactionsDetails of non-arm'slength transaction

Dwnet Technology(Suzhou) Limited




Sernet Technology(Suzhou) Limited



81


Attachment 7：Receivables from related parties with amount exceeding the lower of NT$100 million or 20 percent of the capital stock as of December 31, 2012

Amount

Action adoptedfor overdue

accountsSernet Technology (Suzhou) Sercomm The ultimate parent company $1,314,695 - ####### - $- $- Limited Corporation

Sernet Technology (Suzhou) Dwnet Technology Affiliate with the same parnet 290,512 - - - - - Limited (Suzhou) Limited company

Ending balanceRelationshipThe name of the companyName of

counterparty

Overdue receivables

Allowance fordoubtful accountsSubsequent collectionsTurnover rate

82



Attachment 8：For those who directly or indirectly have major influence or control over the investee company

Ending Beginning Shares Percentageof

Book Net income(loss)balance balance (in thousands) ownership value of the investee

Sercomm Corporation Senslinq Inc. Sales of IT products $7,939 $7,939 250 100.00 $8,366 $3,913 $3,913 Note 1

Sercomm Investments Ltd. Investment overseas, technology R&D andinternational trading

40,037 40,037 1,200 100.00 341 (6,845) (69,845) Note 1

Sercomm Trading Co. Ltd. Investment overseas, technology R&D andinternational trading

1,471,186 1,471,186 46,800 100.00 2,469,911 245,881 245,881 Note 2

Shukuan Investment Ltd. Investment activity 56,298 56,298 2,800 100.00 16,273 83 83 Note 2

Sercomm Japan Inc. Sales of IT products 67,305 9,617 4 100.00 2,828 (25,657) (25,657) Note 1

(Note 3)

Sercomm France SARL Sales of IT products 4,004 4,004 100 100.00 6,547 1,718 1,718 Note 1

Sercomm Deutschland GmbH Sales of IT products 3,727 - 100 100.00 371 (3,441) (3,441) Note 1

Sercomm Trading Co. Ltd. Zealous Investments Ltd. Investment overseas, technology R&D andinternational trading

989,358 989,358 30,956 100.00 1,855,430 176,884 176,884 Note 2

Smart Trade Inc. Investment overseas, technology R&D andinternational trading

481,829 481,829 16,000 100.00 618,507 64,313 64,313 Note 2

Zealous Investments Ltd. Sernet Technology (Suzhou) Limited Manufacture of routers, communicationproducts, Wlan products; sales and after-

912,672 912,672 29,900 100.00 1,863,173 236,883 236,883 Note 2

Smart Trade Inc. Dwnet Technology (Suzhou) Limited R&D center of software; sales and after-sales service

481,829 481,829 16,000 100.00 618,505 64,313 64,313 Note 2

Sercomm France SARL Sercomm Italian SRL Sales of IT products 388 - 10 100.00 386 - - Note 1

Note 1: Amount was recognized based on the unreviewed or unaudited financial statements.


Note 3: On July, 2012, the Company acquired 100% share holding in Sercomm Japan Corp. from shukuan Investment Ltd.

Note

Investmentincome (loss)

recognized

Balance as of December 31, 2012

Investor company Investee companyMain businesses and

products

Original investment amount

83


(Expressed in Thousands of New Taiwan Dollars Unless Otherwise Stated)Attachment 9：Information on Mainland China investments

Outflow InflowSernet Technology(Suzhou) Limited

Manufacture of routers,communication products, Wlanproducts; sales and after-salesservice

$916,872(USD28,900

thousand)

Investment incash

(Note 1)

$912,672(USD28,900

thousand)

$- $- $912,672(USD28,900

thousand)

100.00 % $236,883(Note 3)

$1,863,173 $-


R&D center of software; salesand after-sales service

$481,709(USD16,000

thousand)

Investment incash

(Note 2)

$481,829(USD16,000

thousand)

$- $- $481,829(USD16,000

thousand)

100.00 % $64,313(Note 3)

$618,505 $-

$1,394,501 (USD 44,990 thousand) Unlimited (Note 4)

Note 1: The Company established Sercomm Trading Co. Ltd. in the third country. The Company reinvest Zealous Investments Ltd. (through Sercomm Trading Co. Ltd.) and then invest in Mainland China.

Note 2: The Company established Sercomm Trading Co. Ltd. in the third country. The Company reinvest Smart Trade Inc. (through Sercomm Trading Co. Ltd.) and then invest in Mainland China.


Note 4: The Mainland China investment limit is without limit of stockholders' equity on December 31, 2012 according to "Examine Standards of Investments and Technical Cooperation in Mainland of China Area", published by

Investment Commission, MOEA.

USD 45,154 thousand

Accumulatedoutflow of

investment fromTaiwan as of

January 1, 2011

Investee company Main businesses and productsTotal amount

of paid-incapital

Method ofinvestment

Accumulated investment in Mainland Upper limit on investment

China as of December 31, 2011

Investment amountsauthorized by Investment

Commission, MOEA

Accumulatedinward

remittance ofearnings as ofDecember 31,

2011

Investment flows

Accumulatedoutflow of

investment fromTaiwan as of

December 31, 2011

Investmentincome(loss)

recognized

Carryingvalue as ofDecember31, 2011

Percentageof

ownership

84

Documents

Address: 8F, No.3-1, YuanQu St., Taipei 115, Taiwan, R.O.C. … · 2018-08-01 · December 31, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars) 2012 2011 Assets Notes