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Chimei Innolux Corp (CMIS)

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Wednesday 22 June, 2011

Chimei Innolux Corp

Annual Financial Report

RNS Number : 5634I
Chimei Innolux Corporation
22 June 2011
 



 

 

 

 

 

CHIMEI INNOLUX CORPORATION

AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION

AND SUBSIDIARIES)

CONSOLIDATED FINANCIAL STATEMENTS

AND REPORT OF INDEPENDENT ACCOUNTANTS

DECEMBER 31, 2009 AND 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-------------------------------------------------------------------------------------------------------------

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

 

 

REPORT OF INDEPENDENT ACCOUNTANTS TRANSLATED FROM CHINESE

 

 

To the Board of Directors and Stockholders:

Chimei Innolux Corporation

 

 

We have audited the accompanying consolidated balance sheets of Chimei Innolux Corporation and its subsidiaries as of December 31, 2009 and 2010, and the related consolidated statements of income, of changes in stockholders' equity and of cash flows for the years then ended, expressed in thousands of New Taiwan dollars.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We did not audit the financial statements of certain consolidated subsidiaries, which statements reflect total assets of $15,482,514,000, constituting 2% of the consolidated total assets as of December 31, 2010, and total revenues of $14,969,000,000, constituting 3% of the consolidated total operating revenues for the year then ended. We also did not audit the financial statements of certain long-term investments accounted for under the equity method. These long-term investments amounted to $4,035,627,000 as of December 31, 2010, and the related investment income was $373,225,000 for the year then ended. Those statements were audited by other auditors, whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for these subsidiaries and  investee companies and certain information disclosed in Note 11, is based solely on the reports of other auditors.

We conducted our audits in accordance with the "Rules Governing the Examination of Financial Statements by Certified Public Accountants" 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.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chimei Innolux Corporation and its subsidiaries as of December 31, 2009 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with the "Rules Governing the Preparation of Financial Statements by Securities Issuers" and generally accepted accounting principles in the Republic of China.

As disclosed in Notes 1 and 4(10), Innolux Display Corporation merged with TPO Displays Corporation and Chi Mei Optoelectronics Corporation on March 18, 2010. Innolux Display Corporation is the surviving company and was renamed as "Chimei Innolux Corporation."

As disclosed in Note 3, effective January 1, 2009, the Company and its subsidiaries adopted the amendments to R.O.C. SFAS No. 10, "Accounting for Inventories".

The consolidated financial statements of Chimei Innolux Corporation and its subsidiaries as of and for the year ended December 31, 2010 expressed in U.S. dollars are presented solely for the convenience of the reader and were translated from the financial statements expressed in New Taiwan dollars using the exchange rate of U.S.$1.00:NT$29.14 by the Federal Reserve Bank of New York as of December 31, 2010. This basis of translation is not in accordance with generally accepted accounting principles in the Republic of China.

 

 

 

PricewaterhouseCoopers, Taiwan                               

April 1, 2011

 

 

 

 

 

 

 

 

 

 

 

 

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

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

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


CHIMEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,

(Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 


    2009   

            2010             


NT$

NT$

US$




(Unaudited)




(Note 2)

ASSETS




Current Assets




  Cash and cash equivalents (Note 4(1))

$   36,510,469

$  59,163,013

$  2,030,301

  Financial assets at fair value through profit or loss - current

   (Note 4(2))

-

505,652

      17,353

  Available-for-sale financial assets - current (Notes 4(3)(6))

-

2,892,811

      99,273

  Accounts receivable, net (Note 4(3))

23,434,660

56,388,513

   1,935,090

  Accounts receivable, net - related parties (Note 5)

1,924,153

8,714,217

     299,047

  Other receivables (Notes 4(3)(16))

2,467,060

5,148,475

     176,681

  Other financial assets - current (Note 6)

319,900

2,189

          75

  Inventories, net (Note 4(4))

20,921,481

64,239,601

   2,204,516

  Prepayments

316,444

846,455

      29,048

  Deferred income tax assets - current (Note 4(16))

387,131

780,919

      26,799

  Other current assets

       51,652

      276,931

       9,503

    Total Current Assets

   86,332,950

  198,958,776

   6,827,686

Funds and Investments




  Financial assets at fair value through profit or loss - non-current (Note 4(2))

241,956

192,890

       6,619

  Available-for-sale financial assets - non-current (Note 4(6))

1,154,945

4,402,779

     151,091

  Financial assets carried at cost - non-current (Note 4(8))

581,769

4,316,803

     148,140

  Investment in bonds without active markets - non-current

(Note 4(8))

46,085

-

           -

  Long-term equity investments accounted for under the equity method (Note 4(5))

163,248

4,505,885

     154,629

  Other financial assets - non-current (Note 6)

            -

          700

          24

    Total Funds and Investments

    2,188,003

   13,419,057

     460,503

Fixed Assets (Notes 4(9), 5 and 6)




Cost




    Land

            -

5,114,843

     175,527

    Buildings

9,686,213

161,752,351

   5,550,870

    Machinery and equipment

47,829,185

328,847,855

  11,285,102

    Testing equipment

3,292,244

5,467,393

     187,625

    Transportation equipment

66,209

937,687

      32,179

    Office equipment

655,583

1,846,121

      63,354

    Leased assets

-

1,772,103

      60,813

    Leasehold improvements

25,731

200,425

       6,878

    Other equipment

    1,663,374

    6,351,123

     217,952

  Cost and Revaluation Increment

63,218,539

512,289,901

  17,580,300

  Less: Accumulated depreciation

(   34,051,551)

(  131,946,114)

(   4,528,007)

  Construction in progress and prepayments for equipment

   57,084,559

   78,448,768

   2,692,133

    Net Fixed Assets

   86,251,547

  458,792,555

  15,744,426

Intangible assets (Note 4(10))




  Goodwill

-

17,124,351

      587,658

  Other intangible assets

            -

    1,767,325

      60,649

    Total Intangible Assets

            -

   18,891,676

     648,307

Other Assets




  Rental assets, net (Note 4(9))

-

1,311,721

       45,014

  Idle assets, net (Note 4(9))

-

1,024,035

       35,142

  Deferred expenses (Note 6)

3,618,547

9,601,372

      329,492

  Deferred income tax assets - non-current (Note 4(16))

1,825,908

8,227,210

      282,334

  Other assets - other

      349,403

    1,169,279

      40,126

Total Other Assets

    5,793,858

   21,333,617

     732,108

TOTAL ASSETS

$ 180,566,358

$ 711,395,681

$ 24,413,030

 

(Continued)

CHIMEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED BALANCE SHEETS (CONTINUED)

DECEMBER 31,

 (Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 


    2009   

            2010             


NT$

NT$

US$




(Unaudited)




(Note 2)





LIABILITIES AND STOCKHOLDERS' EQUITY




Current Liabilities




  Short-term loans (Notes 4(11) and 5)

$ 12,175,694

$ 19,579,569

$     671,914

 

  Short-term bills payable (Note 4(12))

-

11,595,760

      397,933

 

  Financial liabilities at fair value through profit or loss - current (Note 4(2))

-

78,294

        2,687

 

  Accounts payable

28,297,282

97,610,477

    3,349,707

 

  Accounts payable - related parties (Note 5)

2,178,498

12,343,298

      423,586

 

  Income tax payable (Note 4(16))

57,672

490,173

       16,821

 

  Accrued expenses (Note 5)

4,382,863

17,078,035

      586,068

 

  Payables for equipment (Note 5)

1,824,086

7,921,818

      271,854

 

  Other payables - other (Notes 4(3) and 7)

170,144

2,556,483

       87,731

 

  Receipts in advance

803,757

1,910,405

       65,560

 

  Long-term liabilities - current portion (Notes 4(13), 5 and 6)

3,969,800

76,811,590

    2,635,950

 

  Lease payable - current (Note 4(9))

-

1,980,000

       67,948

 

  Other current liabilities

   1,613,066

   2,489,853

       85,445

 

    Total Current Liabilities

  55,472,862

 252,445,755

    8,663,204

 

Long-term Liabilities




 

  Hedging derivative liabilities - non-current (Note 4(7))

-

1,171,450

       40,201

 

  Bonds payable (Note 4(14))

-

4,000,000

      137,268

 

  Long-term loans (Notes 4(13), 5 and 6)

30,398,000

176,405,031

    6,053,707

 

  Long-term leases payable (Note 4(9))

           -

   2,960,000

      101,579

 

    Total Long-term Liabilities

  30,398,000

 184,536,481

    6,332,755

 

Other Liabilities




 

  Pension reserve/accrued pension liability (Note 4(17))

-

92,179

        3,163

 

  Other liabilities - other (Note 7)

       5,697

  11,403,716

      391,343

 

    Total Other Liabilities

       5,697

  11,495,895

      394,506

 

    Total Liabilities

  85,876,559

 448,478,131

   15,390,465

 

Stockholders' Equity




 

Parent company shareholders




 

  Capital (Notes 4(18)(19))




 

    Common stock

32,445,962

73,118,098

   2,509,200

 

    Stock subscriptions received in advance

102,450

8,650

         297

 

  Capital Surplus (Note 4(20))




 

    Paid-in capital in excess of par value of common stock

50,583,821

50,583,821

   1,735,890

 

    Capital reserve from long-term investments

14,285

27,664

         949

 

    Capital reserve from merger

270,648

140,015,445

   4,804,923

 

    Capital surplus - employee stock option

-

562,666

      19,309

 

  Retained Earnings (Note 4(21))




 

    Legal reserve

2,328,981

2,328,981

      79,924

 

    Undistributed earnings

7,328,595

(   7,544,042)

(     258,890)

 

  Stockholders' Equity Adjustments




 

    Cumulative translation adjustments

605,878

(   2,031,508)

(      69,715)

 

    Unrealized gain or loss on financial instruments (Note 4(6))

1,009,179

1,700,560

      58,358

 

  Treasury stock (Note 4(22))

           -

(      15,589)

(         535)

 

  Total Parent Company Stockholders' Equity

94,689,799

258,754,746

   8,879,710

 

  Minority Interest

           -

   4,162,804

     142,855

 

    Total Stockholders' Equity

  94,689,799

 262,917,550

    9,022,565

 

Commitments and Contingent Liabilities (Notes 5 and 7)




 

Significant subsequent events (Notes 7 and 9)




 

  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$180,566,358

$711,395,681

$ 24,413,030

 









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

See report of independent accountants dated April 1, 2011.


CHIMEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,

(Amounts expressed in thousands of New Taiwan dollars and U.S. dollars, except for earnings per share)

 


       2009       

                 2010                 

 


NT$

NT$

US$

 




(Unaudited)

 

Operating Revenue



(Note 2)

 

  Sales (Note 5)

$      166,705,209

$     497,682,971

$       17,079,031

 

  Sales returns

(           229,779)

(        1,182,803)

(            40,590)

 

  Sales discounts

(         1,749,221)

(        3,415,214)

(           117,200)

 

    Net Operating Revenues

164,726,209

493,084,954

         16,921,241

 

Operating Costs (Notes 4(4)(24) and 5)




 

  Cost of goods sold

(       160,508,849)

(      471,463,219)

(        16,179,246)

 

Gross profit

         4,217,360

       21,621,735

           741,995

 

Operating Expenses (Note 4(24))




 

  Sales and marketing expenses

(         3,787,546)

(        9,395,777)

(           322,436)

 

  General and administrative expenses

(         1,538,494)

(        7,744,429)

(           265,766)

 

  Research and development expenses

(         2,345,891)

(        9,077,951)

(           311,529)

 

    Total Operating Expenses

(         7,671,931)

(       26,218,157)

(           899,731)

 

Operating loss

(         3,454,571)

(        4,596,422)

(           157,736)

 

Non-operating Income and Gains




 

  Interest income

169,878

395,854

            13,385

 

  Investment income recognized under equity method (Note 4(5))

-

352,588

            12,100

 

  Dividend income

10,257

378,985

            13,006

 

  Gain on sale of investments

6,806

114,215

             3,920

 

  Foreign exchange gain, net

128,732

-

                 -

 

  Gain on valuation of financial assets

   (Notes 4(2)(7))

 

           163,569

 

        3,527,262

 

           121,043

 

  Other non-operating income

           430,837

        1,094,690

            37,567

 

    Total Non-operating Income and Gains

           910,079

        5,863,594

           201,221

 

Non-operating Expenses and Losses




 

  Interest expense

(           579,483)

(        4,670,223)

(           160,268)

 

  Investment loss accounted for under the equity method (Note 4(5))

(            16,986)

-

                  -

 

  Foreign exchange losses

-

(        1,090,240)

(            37,414)

 

  Loss on valuation of financial liabilities

   (Notes 4(2)(7))

(            29,255)

(        1,839,277)

(            63,119)

 

  Other non-operating losses (Notes 4(3)(24) and 7)

(            61,462)

(        7,079,997)

(           242,965)

 

    Total Non-operating Expenses and Losses

(           687,186)

(       14,679,737)

(           503,766)

 

Loss before income tax

(         3,231,678)

(       13,412,565)

(           460,281)

 

Income tax benefit (expense) (Note 4(16))

           834,605

(          801,476)

(            27,505)

 

Consolidated net loss

($        2,397,073)

($      14,214,041)

($          487,786)

 

Attributable to:




 

  Parent company

($        2,397,073)

($      14,835,437)

($          509,111)

 

  Minority interest

                 -

          621,396

            21,325

 


($        2,397,073)

($      14,214,041)

($          487,786)

 

Basic loss per share

Before tax

After tax

Before tax

After tax

Before tax

After tax

  Net loss from operations

($   1.00)

($  0.74)

($   2.07)

($  2.19)

$  0.086

$  0.073

  Minority interest

       -

      -

(    0.10)

(   0.10)

(   0.002)

(   0.002)

  Net loss

($  1.00)

($ 0.74)

($  2.17)

($  2.29)

($  0.084)

($  0.071)








 

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

See report of independent accountants dated April 1, 2011.


CHIMEI INNOLUX CORPORATION AND SUBSIDIARIES

       (FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31,

   (Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 


        Capital Stock      

                    Capital Reserve                 

     Retained Earnings   

                    Others                



Common

   stock     

Stock

dividends

distributable

Paid-in

capital in

excess of

  par value  

Capital

reserve from

long-term

investments

Capital

 reserve

from

   merger  

Employee stock option

Legal

  reserve 

Undistributed

  earnings 

Cumulative

translation

adjustment

Unrealized gain or loss on financial instruments

Treasury

  stock  

Minority

 interests 

 

    Total    

2009 - New Taiwan Dollars














Balance at January 1, 2009

$ 31,131,470

$  105,656

$ 50,337,808

$   14,285

$    270,648

$        -

$ 1,843,886

$ 11,828,376

$  892,201

$        -

$      -

$        -

$ 96,424,330

Appropriations of earnings














  Legal reserve

-

-

-

-

-

-

485,095

(   485,095)

-

-

-

-

-

  Cash dividends

-

-

-

-

-

-

-

(   627,707)

-

-

-

-

(    627,707)

  Retained earnings capitalized

941,561

-

-

-

-

-

-

(   941,561)

-

-

-

-

-

  Employees' bonus capitalized

104,291

-

244,978

-

-

-

-

-

-

-

-

-

349,269

Shares issued for employee stock options

268,640

    (    3,206)

1,035

-

-

-

-

-

-

-

-

-

266,469

Adjustments due to changes in equities of long-term investment

-

-

-

-

-

-

-

(    48,345)

-

-

-

-

(     48,345)

Unrealized gain on financial assets

-

-

-

-

-

-

-

-

-

1,009,179

-

-

1,009,179

Consolidated net loss for 2009

-

-

-

-

-

-

-

( 2,397,073)

-

-

-

-

(  2,397,073)

Cumulative translation adjustments

          -

         -

          -

         -

           -

         -

         -

          -

(   286,323)

         -

       -

         -

(    286,323)

Balance at December 31, 2009

$ 32,445,962

$  102,450

$ 50,583,821

$   14,285

$    270,648

$        -

$2,328,981

$ 7,328,595

$  605,878

$1,009,179

$      -

$        -

$ 94,689,799

2010 - New Taiwan Dollars














Balance at January 1, 2010

$ 32,445,962

$  102,450

$ 50,583,821

$   14,285

$    270,648

$        -

$ 2,328,981

$ 7,328,595

$  605,878

$1,009,179

$      -

$        -

$ 94,689,799

Capitalization of capital reserve

40,463,816

-

-

-

139,744,797

310,999

-

-

-

-

-

-

180,519,612

Employee stock bonus

208,320

(   93,800)

-

-

-

-

-

-

-

-

-

-

114,520

Cost of employee stock options

-

-

-

-

-

251,667

-

-

-

-

-

-

251,667

Parent company shares held by subsidiaries as treasury stock

-

-

-

-

-

-

-

-

-

-

( 15,589)

-

(     15,589)

Changes in net equity of equity method investee

-

-

-

13,379

-

-

-

(    37,200)

-

-

-

-

(     23,821)

Unrealized gain on available-for-sale financial assets

-

-

-

-

-

-

-

-

-

  479,410

-

-

479,410

Unrealized gain on cash flow hedge

-

-

-

-

-

-

-

-

-

211,971

-

-

211,971

Net income for 2010

-

-

-

-

-

-

-

(14,835,437)

-

-

-

621,396

( 14,214,041)

Cumulative translation adjustment derived from long-term foreign investments

-

-

-

-

-

-

-

-

( 2,637,386)

-

-

-

(  2,637,386)

Noncontrolling interest

          -

         -

          -

         -

           -

        -

         -

          -

          -

         -

       -

 3,541,408

   3,541,408

Balance at December 31, 2010

$ 73,118,098

$    8,650

$ 50,583,821

$   27,664

$ 140,015,445

$ 562,666

$ 2,328,981

($ 7,544,042)

($ 2,031,508)

$1,700,560

($15,589)

$ 4,162,804

$ 262,917,550

 



 CHIMEI INNOLUX CORPORATION AND SUBSIDIARIES

       (FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,

   (Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 

 


        Capital Stock      

                    Capital Reserve                 

     Retained Earnings   

                    Others                   



Common

   stock  

Stock

dividends

distributable

Paid-in

capital in

excess of

  par value

Capital

reserve from

long-term

investments

Capital

 reserve

from

   merger 

Employee

stock

  options

Legal

  reserve 

Undistributed

  earnings 

Unrealized

gain or loss on financial

 instruments

Cumulative

translation

adjustment

  Treasury

   stock

Minority

 interests

 

    Total  

2010 - US Dollars (Unaudited-Note 2)














Balance at January 1, 2010

$1,113,451

$    3,516

$1,735,890

$      490

$     9,288

$       -

$   79,924

 $    251,496

$    20,792

 $   34,632

$      -

$       -

$  3,249,479

Capitalization of capital reserve

1,388,600

          -

          -

          -

4,795,635

10,673

         -

            -

           -

         -

       -

        -

6,194,908

Employee stock bonus

7,149

(    3,219)

          -

          -

           -

        -

         -

            -

           -

         -

       -

        -

3,930

Cost of employee stock options

-

-

-

-

-

   8,636

-

-

-

-

-

-

8,636

Parent company shares held by subsidiaries as treasury stock

          -

          -

          -

           -

           -

        -

         -

            -

           -

         -

(     535)

        -

(        535)

Changes in net equity of equity method investee

          -

          -

          -

        459

           -

        -

         -

(       1,277)

           -

         -

       -

        -

(        818)

Unrealized gain on available-for-sale financial assets

          -

          -

          -

          -

           -

        -

         -

            -

           -

    16,452

       -

        -

      16,452

Unrealized gain on cash flow hedge

          -

          -

          -

          -

           -

        -

         -

            -

           -

     7,274

       -

        -

       7,274

Net income for 2010

          -

          -

          -

          -

           -

        -

         -

(     509,109)

           -

         -

       -

   21,324

(     487,785)

Cumulative translation adjustment derived from long-term foreign investments

          -

          -

          -

          -

           -

        -

         -

            -

(     90,507)

     -

       -

        -

(      90,507)

Noncontrolling interest

         -

         -

         -                                        

         -                                        

           -

        -                                        

         -

            -

          -

         -

       -

  121,531

     121,531

Balance at December 31, 2010

$2,509,200

$      297

$1,735,890

$      949

$  4,804,923

$  19,309

$   79,924

($    258,890)

($    69,715)

$   58,358

($    535)

$ 142,855

$  9,022,565

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

See report of independent accountants dated April 1, 2011.           


CHI MEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,

(Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 


     2009       

               2010                


      NT$   

     NT$   

     US$   




(Unaudited)




(Note 2)

CASH FLOWS FROM OPERATING ACTIVITIES




  Consolidated net loss

($    2,397,073)

($  14,214,041)

($    487,785) 

    Adjustments to reconcile net loss to net cash provided by operating activities




      Depreciation and amortization

11,382,828

79,377,590

2,724,009  

      Reversal of allowance for doubtful accounts

(        50,000)

(       66,436)

(       2,280) 

      Reversal of allowance for scrap, obsolescence and price decline of inventories

(       162,245)

(       12,112)

(         416) 

      Compensation cost of employee stock options

-

251,667

8,636  

      Gain on valuation of financial assets and liabilities

(        22,610)

(      378,292)

(      12,982) 

      Investment loss (income) accounted for under equity method

16,986

(      352,588)

(      12,100) 

      Cash dividends from equity method investments

-

134,021

4,599  

      Gain from disposal of investments

(         6,806)

(      114,215)

(       3,920) 

      Amortization of investment in bonds without active markets

(         1,839)

(        1,436)

(          49) 

      Loss on disposal of fixed assets

1,782

87,197

2,992  

      Changes in assets and liabilities




        Accounts receivable

(     7,422,873)

762,473

26,166  

        Accounts receivable - related parties

(       690,567)

(    2,188,890)

(      75,116) 

        Other receivables

(       112,387)

184,446

6,330  

        Inventories

(     3,195,170)

(   14,144,799)

(     485,408) 

        Prepayments

892,524

1,788,107

61,363  

        Deferred income tax assets

(       955,722)

(      357,518)

(      12,269) 

        Other current assets

(        33,173)

(      225,279)

(       7,731) 

        Other assets

(       101,229)

-

   -  

        Accounts payable

10,763,990

10,682,950

      366,608   

        Accounts payable - related parties

1,473,983

1,020,602

35,024  

        Income tax payable

(       391,546)

381,496

13,092  

        Accrued expenses

837,608

8,298,668

284,786  

        Other payables - other

159,169

(      587,555)

(      20,163) 

        Receipts in advance

554,829

1,075,724

36,916  

        Other current liabilities

474,781

(       33,072)

(       1,135) 

        Accrued pension liabilities

-

6,244

214  

        Other liabilities - other

           -  

    6,741,286

     231,341  

          Net cash provided by operating activities

   11,015,240

   78,116,238

   2,680,722  

 

 

 

(Continued)



CHI MEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,

(Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 


     2009       

               2010                


      NT$   

     NT$   

     US$   




(Unaudited)




(Note 2)

CASH FLOWS FROM INVESTING ACTIVITIES




  Decrease in financial liabilities at fair value through profit or loss - current

($       1,896)

($     217,049)

($     7,448) 

  Hedging derivative financial liabilities

-

427,563

14,673  

  Proceeds from disposal of available-for-sale financial assets - non-current

10,289

-

-   

  Increase in long-term investments

(      180,222)

(      440,760)

(     15,126) 

  Proceeds from disposal of long-term equity investments

-

211,377

7,254   

  Increase in financial assets carried at cost - non-current

(      464,936)

(      464,309)

(     15,934) 

  Proceeds from disposal of financial assets carried at cost

-

16,553

568   

  Decrease in other financial assets

319,900)

446,136

15,310   

  Acquisition of fixed assets

(   39,793,264)

(   95,960,021)

(  3,293,068) 

  Proceeds from disposal of fixed assets

4,069

528,084

18,122   

  Decrease in refundable deposits

162,562

18,066

620   

  Increase in deferred expenses

(    3,707,478)

(    1,604,278)

(     55,054) 

  Net cash inflow from merger

            -

   42,601,760

  1,461,968   

        Net cash used in investing activities

(   44,290,776)

(   54,436,878)

(  1,868,115)

CASH FLOWS FROM FINANCING ACTIVITIES




  Decrease in short-term loans

(    4,037,086)

(   10,117,945)

(    347,218) 

  Increase in short-term bills payable

-

10,666,676

366,049   

  Increase in long-term loans

21,398,000

54,038,854

1,854,456   

  Payment of long-term loans

(    6,054,078)

(   38,120,441)

(  1,308,183) 

  Decrease in lease payable

-

(    1,980,000)

(     67,948) 

  Decrease in preferred stock liabilities

-

(   15,000,000)

(    514,756)  

  Increase (decrease) in guarantee deposits

3,707

(       18,281)

(        627) 

  Proceeds from issuance of common stock for employee stock options

266,469

114,520

3,930   

  Payment of cash dividends

(      627,707)

            -

          -   

        Net cash (used in) provided by financing activities

   10,949,305

(      416,617)

(     14,297

Net effect of changes in foreign currency exchange rate

(       69,512)

(      610,199)

(     20,942

Net (decrease) increase in cash and cash equivalents

(   22,395,743)

      22,652,544

  777,368   

Cash and cash equivalents at beginning of year

   58,906,212

   36,510,469

  1,252,933   

Cash and cash equivalents at end of year

$  36,510,469

$  59,163,013

$ 2,030,301  

Supplemental disclosures of cash flow inoformation




  Cash paid for interest

$     625,064

$   4,126,084

$   141,592  

  Cash paid for income tax

$     508,070

$     469,843

$    16,124  

(Continued)

CHI MEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,

(Amounts expressed in thousands of New Taiwan dollars and U.S. dollars)

 


     2009       

               2010                


      NT$   

     NT$   

     US$   




(Unaudited)




(Note 2)

Acquisition of fixed assets by cash




  Increase in fixed assets

$   38,851,766

$   86,278,314

$ 2,960,822   

  Equipment payable at beginning of the year

2,765,584

1,824,086

      62,597  

Payables for equipment acquired from business merger

-

15,779,439

541,504  

  Equipment payable at end of the year

(     1,824,086)

(     7,921,818)

(    271,854

  Paid in cash

$   39,793,264

$   95,960,021

($ 3,293,069

Fair value of assets acquired and liabilities assumed from merger




Current assets

$            -

$  101,193,947

$ 3,472,682  

Bonds and investments

-

47,671,869

1,635,960  

Fixed assets

-

319,943,124

10,979,516  

Goodwill

-

17,124,351

587,658  

Other intangible assets

-

846,713

29,057  

Other assets

-

8,930,033

306,453  

Current liabilities

-

(   150,121,827)

(  5,151,744) 

Long-term liabilities

-

(   160,007,155)

(  5,490,980) 

Other liabilities

             -

(     5,061,443)

(    173,694

Proceeds from business combination

-

180,519,612

6,194,908  

Less: Stock issued pursuant to merger (including Capital reserve- from merger)

-

(   180,208,613)

(  6,184,235) 

Less: Employee stock options

             -

(       310,999)

(     10,673

Net cash provided by business combination

$            -

$            -

$         -  

 

 

 

 

 

 

 

 

 

 

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

See report of independent accountants dated April 1, 2011.


CHIMEI INNOLUX CORPORATION AND SUBSIDIARIES

(FORMERLY INNOLUX DISPLAY CORPORATION AND SUBSIDIARIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2010

(All amounts expressed in thousands of New Taiwan dollars,
except for earnings per share information or unless otherwise specified)

 

1. HISTORY AND ORGANIZATION

 (1) Chimei Innolux Corporation

a. Chimei Innolux Corporation (the "Company") was organized on January 14, 2003 under the Act for Establishment and Administration of Science Parks. The Company merged with TPO Displays Corporation and Chimei Optoelectronics Corporation on March 18, 2010, with the Company as the surviving entity, and was then renamed as Chimei Innolux Corporation.

b. The Company engages in the research, development, design, manufacture and sales of TFT-LCD panels, modules and monitors of LCD, color filter, and low temperature poly-silicon TFT-LCD. As of December 31, 2010, the Company and its subsidiaries had 108,272 employees. The Company was listed on the Taiwan Stock Exchange Corporation (TSEC) in October 2006.

 (2) Consolidated subsidiaries




 Ownership (%)





 December 31,


    Investor    

   Subsidiary    

   Main activities    

 2010

 2009

Description

Chimei Innolux Corporation

Innolux Holding Ltd.

Investment holdings

100

100

-

Chimei Innolux Corporation

InnoJoy Investment Corporation

Investment company

100

100

-

Chimei Innolux Corporation

InnoFun Investment Corporation

Investment company

100

100

-

Chimei Innolux Corporation

TPO Hong Kong  Holding Ltd.

Investment company

100

-

B(c)

Chimei Innolux Corporation

Toppoly Optoelectronics   (B. V. I) Ltd.

Investment company

100

-

B(c)

Chimei Innolux Corporation

Golden Achiever International Ltd.

Investment company

100

-

B(c)

Chimei Innolux Corporation

Bright Information Holding Ltd.

Investment company

57

-

B(c)

Chimei Innolux Corporation

Landmark International Ltd.

Investment company

100

-

B(c)

Chimei Innolux Corporation

Leadtek Global Group Limited

Order swapping and

  investing company

100

-

B(c)

Chimei Innolux Corporation

Yuan Chi Investment  Co., Ltd.

Investment company

100

-

B(c)

Chimei Innolux Corporation

Chi Mei Optoelectronics Japan Co., Ltd.

Investing and selling company

100

-

B(c)

Chimei Innolux Corporation

Gold Union Investments Ltd.

Investment company

100

-

B(c)

Chimei Innolux Corporation

Keyway Investment Management Limited

Investment company

100

-

B(c)

Chimei Innolux Corporation

Chi Mei  Optoelectronics Europe B. V.

Investing and selling  company

100

-

B(c)

Chimei Innolux Corporation

Chi Mei  Optoelectronics (Singapore) Pte Ltd.

Selling company

100

-

B(c)

Chimei Innolux Corporation

Honor Light Services Limited

Trading company

100

-

B(c)

Chimei Innolux Corporation

Chi Mei Energy B.V.

Trading company

100

-

B(c)(g)

Chimei Innolux Corporation

Chi Mei El Corporation

Manufacturing and selling company

90

-

B(c)

Chimei Innolux Corporation

Chi Mei Lighting   Technology Corporation

Manufacturing and selling company

35

-

B(c)(d)

Chimei Innolux Corporation

Jetronics International Corp.

Investment company

32

-

B(c)(d)

Chimei Innolux Corporation

Contrel Technology Co., Ltd.

Manufacturing and selling company

13

-

B(c)

Innolux Holding Ltd.

Lakers Trading Ltd.

Order swapping and trading company

100

100

-

Innolux Holding Ltd.

Rockets Holding Ltd.

Investment company

100

100

-

Innolux Holding Ltd.

Innolux Corporation Ltd.

Trading company

100

100

-

Innolux Holding Ltd.

Suns Holding Ltd.

Investment company

100

100

-

Rockets Holding Ltd.

Stanford Developments Ltd.

Investment company

100

100

-

Rockets Holding Ltd.

Mega Chance Investments Ltd.

Investment company

100

100

-

Rockets Holding Ltd.

Best China  Investments Ltd.

Investment company

100

100

-

Rockets Holding Ltd.

Excel Victory Ltd.

Investment company

100

100

-

Rockets Holding Ltd.

Magic Sun Ltd.

Investment company

100

-

B(a)

Rockets Holding Ltd.

Sonics Trading  Limited

Order swapping and trading company

100

100

-

Rockets Holding Ltd.

Nets Trading Ltd.

Investment company

100

100

-

Suns Holding Ltd.

Warriors Technology Investments Ltd.

Investment company

100

100

-

Best China Investments Ltd.

Asiaward Investment Ltd.

Investment company

100

100

-

Excel Victory Ltd.

Glory Ace

  Investment Ltd.

Investment company

100

100

-

Magic Sun Ltd.

Sun Dynasty Development Ltd.

Investment company

100

-

B(a)

Mega Chance Investments Ltd.

Main Dynasty

 Investment Ltd.

Investment company

100

100

-

Asiaward Investment Ltd.

Innocom Technology (Xiamen) Ltd.

Processing company

100

100

-

Stanford Developments Ltd.

Innocom Technology Shenzhen Ltd.

Processing company

100

-

B(b)

Stanford Developments Ltd.

Full Lucky  Investments Ltd.

Investment company

100

100

-

Full Lucky Investments Ltd.

Innocom Technology Shenzhen Ltd.

Processing company

-

100

B(b)

Main Dynasty Investment Ltd.

Innocom Technology (Jia-shan) Ltd.

Processing company

100

100

-

Glory Ace Investment Ltd.

Innocom Technology (Chongqing) Co., Ltd.

Processing company

100

100

-

Sun Dynasty Investments Ltd.

Innocom Techology (Chengdu) Co., Ltd.

Processing company

100

-

B(a)







Chi Mei Optoelectronics Japan Co., Ltd.

Chi Mei Optoelectronics USA, Inc.

Selling company

100

-

B(c)

Landmark International Ltd.

Ningbo Chi Mei  Electronics Ltd.

Processing company

100

-

B(c)

Landmark International Ltd.

Nanhai Chi Mei  Electronics Corp.

Processing company

100

-

B(c)

Landmark International Ltd.

Ningbo Chi Mei  Optoelectronics Ltd.

Processing company

100

-

B(c)

Landmark International Ltd.

Nanhai Chi Mei Optoelectronics Ltd.

Processing company

100

-

B(c)

Yuan Chi Investment Co., Ltd.

Fulintec Science  Engineering Co., Ltd.

Manufacturing and selling company

53

-

B(c)

Yuan Chi Investment Co., Ltd.

Chi Mei Lighting Technology Corporation

Manufacturing and selling company

9

-

B(c)(d)

Fulintec Science Engineering Co., Ltd.

Fu Cheng  Optoelectronic Technology (Shanghai) Co., Ltd.

Manufacturing company

100

-

B(c)

Chi Mei Optoelectronics Europe B. V.

Chi Mei Optoelectronics Germany GmbH

Selling company

100

-

B(c)

Chi Mei Optoelectronics Europe B. V.

Chi Mei  Optoelectronics UK Ltd.

Selling company

100

-

B(c)

Keyway Investment Management Limited

Foshan Chi Mei Logistics Co., Ltd.

Warehousing and maintenance service company

100

-

B(c)

Keyway Investment Management Limited

Ningbo Chi Mei Logistics Co., Ltd.

Warehousing company

100

-

B(c)

Jetronics International Corp.

Kunshan Guan Jye  Electronics Co., Ltd.

Manufacturing company

100

-

B(c)

Jetronics International Corp.

Champ Win  Technology Corporation

Manufacturing company

100

-

B(c)

Gold Union Investments Ltd.

Ningbo Chi Hsin Electrics Ltd.

Processing company

100

-

B(c)

Gold Union Investments Ltd.

Dongguan Chi Hsin  Electronics Corp.

Processing company

100

-

B(c)

Chi Mei Lighting Technology Corporation

Smart Light Global Limited

Investment company

100

-

B(c)

Smart Light Global Limited

Foshan Chi Mei Lighting Technology Ltd.

Manufacturing and selling company

100

-

B(c)

Chi Mei Energy Corp.

Chi Mei Energy Europe B. V.

Trading company

100

-

B(c)

Contrel Technology Co., Ltd.

Far Technology Co., Ltd.

Investment company

100

-

B(c)

Contrel Technology Co., Ltd.

Contrel Holding Ltd.

Investment company

100

-

B(c)

Far Technology Co., Ltd.

Ningbo Contrel  Technology Co., Ltd.

Processing company

100

-

B(c)

Contrel Holding Ltd.

Ningbo Contrel Trading Co., Ltd.

Trading company

100

-

B(c)

Toppoly Optoelectronics (B. V. I.) Ltd.

Toppoly Optoelectronics (Cayman) Ltd.

Investment company

100

-

B(c)

Toppoly Optoelectronics (Cayman) Ltd.

Toptech Trading Limited

Trading company

100

-

B(c)

Toppoly Optoelectronics (Cayman) Ltd.

TPO Displays (Nanjing) Ltd.

Processing company

100

-

B(c)

Toppoly Optoelectronics (Cayman) Ltd.

TPO Displays  (Sinepal) Ltd.

Trading company

100

-

B(c)

TPO Hong Kong Holding Ltd.

TPO Displays Hong Kong Holding Ltd.

Investment company

100

-

B(c)

TPO Hong Kong Holding Ltd.

TPO Displays Japan K. K.

Manufacturing and selling company

100

-

B(c)

TPO Hong Kong Holding Ltd.

TPO Displays Europe B. V.

Trading company

100

-

B(c)







TPO Hong Kong Holding Ltd.

TPO Displays  USA Inc.

Trading company

100

-

B(c)

TPO Displays Hong Kong Holding Ltd.

TPO Displays Shanghai Ltd.

Processing company

100

-

B(c)

TPO Displays Europe B. V.

TPO Displays  Germany GmbH.

Trading company

100

-

B(c)

TPO Displays Europe B. V.

TPO Displays Sweden AB

Trading company

100

-

B(c)

Bright Information Holding Ltd.

Kunpal Optoelectronics Ltd.

Processing company

100

-

B(c)

Golden Achiever International Ltd.

VAP Optoelectronics (NanjingCorp.

Processing company

100

-

B(c)

Golden Achiever International Ltd.

Dragon Flame Industrial Ltd.

Selling company

100

-

B(c)

Golden Achiever International Ltd.

Eastern Vision  Co., Ltd.

Selling company

100

-

B(c)

A. The financial statements of consolidated subsidiaries as of and for the years ended December 31, 2009 and 2010 were audited by independent accountants.

B. Reasons for change in consolidated subsidiaries are set forth below:

(a)  In the second half of 2010, the Company established the subsidiaries, which were consolidated effective on the acquisition date.

(b)  As a result of the group reorganization in September 2010, the Company's subsidiary, Stanford Developments Ltd., directly owns Innocom Technology Shenzhen Ltd., which was originally owned by Full Lucky Investment Ltd.

(c)  Acquired on March 18, 2010 pursuant to business combination. Please refer to Notes 1 and 4(10) for the related information of business combination.

(d)  The Company has 50% or more of the seats on the board of directors of Chi Mei Lighting Technology Corporation, Jetronics International Corp. and Chi Mei Logistics Co., Ltd. Those companies are included in the consolidated financial statements of the Company as the Company has control over them.

(e)  The Company assigned a representative as the general manager of Contrel Technology Co., Ltd. Therefore, the Company has substantial control over the company which was then consolidated.

(f)  GIO Optoelectronics Corp. and Chi Mei Energy Corp., the Company's investees, reelected the directors in June 2010, and thereafter the Company's representatives comprised less than 50% of the board of directors. Accordingly, the Company discontinued consolidating the revenues and expenses of GIO Optoelectronics Corp. and Chi Mei Energy Corp. on the day the control was lost.

(g)  In September, 2010, the Board of Directors of the Company adopted a resolution to acquire the remaining outstanding shares of Chi Mei Energy Corp., of which the Company originally held 95% ownership, by cash from minority shareholders to wholly own Chi Mei Energy Corp. and then to merge with it.  The merger was conducted through short-form merger subject to the Business Mergers and Acquisitions Law, with the effective date set on November 1, 2010.  The Company was the surviving company and Chi Mei Energy Corp. was the dissolved company.  The Company also assumed the long-term equity investment in Chi Mei Energy Europe B.V. (100% ownership) from Chi Mei Energy Corp.

(3) Subsidiaries not included in the consolidated financial statements: None.

 (4) The adjustment and disposition for the accounting period differences between the Company and the subsidiaries: None.

 (5) Special operating risks on the foreign subsidiaries: None.

 (6) Significant restriction on remittance of funds for the foreign subsidiaries' financial activities to the Company: None.

 (7) Securities issued by the parent company which were held by subsidiaries: The stocks of the Company held by the subsidiary, Contrel Technology Co., Ltd., were accounted as treasury stocks. Please refer to Note 4(22) for the related information on treasury stocks.

 (8) Information on convertible bonds and common stock issued by subsidiaries: No material effects on the stockholders' equity of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the Company and its subsidiaries (collectively referred herein as the Group) are prepared in conformity with the "Rules Governing the Preparation of Financial Statements by Securities Issuers" and generally accepted accounting principles in the Republic of China. The Group's significant accounting policies are summarized as follows:

(1) Basis for preparation of consolidated financial statements

A. All majority-owned subsidiaries and controlled entities are included in the consolidated financial statements.

B. The income (loss) of the subsidiaries is included in the consolidated statements of income effective the date on which the Company gains control over the subsidiaries. The income (loss) of the subsidiaries is excluded from the consolidated statements of income effective the date on which the Company loses control over the subsidiaries.

C. All significant intercompany accounts and transactions are eliminated in the consolidated financial statements.

(2) Translation of financial statements of foreign subsidiaries

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars using the exchange rates at the balance sheet date. Equity accounts are translated at historical rates except for beginning retained earnings, which is carried forward from prior year's balance. Dividends are translated at the rates prevailing at the date of declaration. Profit and loss accounts are translated at weighted-average rates of the year. The resulting translation differences are included in "cumulative translation adjustments" under stockholders' equity.

(3)  Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those assumptions and estimates.

(4)  Convenience translation into U.S. dollars

The financial statements are stated in New Taiwan Dollars. Translation of the 2010 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers, using the Federal Reserve exchange rate on December 31, 2010, of NT$29.14 to US$1 uniformly applied for all the financial statement accounts. Such translation amounts are unaudited and should not be construed as representations that the New Taiwan Dollar amounts represent, have been, or could be converted into U.S. dollars at this rate or any other rate for exchange.

(5)  Criteria for classifying assets and liabilities as current or non-current items

A. Assets that meet one of the following criteria are classified as current assets; otherwise they are classified as non-current assets:

(a) Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle;

(b) Assets held mainly for trading purposes;

(c) Assets that are expected to be realized within twelve months from the balance sheet date; and

(d) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date.

B. Liabilities that meet one of the following criteria are classified as current liabilities; otherwise they are classified as non-current liabilities:

(a)         Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle;

(b)         Liabilities arising mainly from trading activities;

(c)         Liabilities that are to be paid off within twelve months from the balance sheet date; and

(d)         Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date.

(6)  Foreign currency translation

A. The Company and its consolidated subsidiaries maintain their accounts in New Taiwan dollars and functional currencies, respectively. Transactions denominated in foreign currencies are translated into New Taiwan dollars and their functional currencies at the spot exchange rates prevailing at the transaction dates.

B. Receivables, other monetary assets and liabilities denominated in foreign currencies are translated at the spot exchange rates prevailing at the balance sheet date. Exchange gains or losses are recognized in profit or loss.

C. When a gain or loss on a non-monetary item is recognized directly in equity, any exchange component of that gain or loss shall be recognized directly in equity. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss. However, non-monetary items that are measured on a historical cost basis are translated using the exchange rate at the date of the transaction.

(7)  Cash and cash equivalents

Cash and cash equivalents include cash on hand and in banks and other short-term highly liquid investments which are readily convertible to known amount of cash and which are subject to insignificant risk of changes in value resulting from fluctuations in interest rates.

(8)  Financial assets and financial liabilities at fair value through profit or loss

A. Equity financial instruments are recognized and derecognized using trade date accounting; bond investments, beneficiary certificates and derivative instruments are recognized and derecognized using settlement date accounting, and are recognized initially at fair value.

B. These financial instruments are subsequently remeasured and stated at fair value, and the gain or loss is recognized in profit or loss. The fair value of listed stocks, OTC stocks and closed-end mutual funds is based on latest quoted fair prices of the accounting period.  The fair value of open-end and balanced mutual funds is based on the net asset value at the balance sheet date.

C. When a derivative is an ineffective hedging instrument, it is initially recognized at fair value on the date a derivative contract is entered into and is subsequently remeasured at its fair value. If a derivative is a non-option derivative, the fair value initially recognized is zero.

D. Financial assets and financial liabilities at fair value through profit or loss are classified into asset or liability held for trading and those designated at fair value through profit or loss at inception.  Financial assets and financial liabilities are classified as held for trading if acquired principally for the purpose of selling in the short term.  Financial assets and financial liabilities designated as at fair value through profit or loss at inception are those that are managed and whose performance is evaluated on a fair value basis, in accordance with a documented Group's investment strategy.  Information about these financial assets and financial liabilities is provided internally on a fair value basis to the Group's management personnel. The Group has designated almost all of its compound debt instruments as financial liability at fair value through profit or loss.

(9)  Available-for-sale financial assets

A.  Available-for-sale financial assets are recognized and derecognized using trade date accounting; bond investments are recognized and derecognized using settlement date accounting, and are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B.   The financial assets are remeasured and stated at fair value, and the gain or loss is recognized in equity, until the financial asset is derecognized, at which time the cumulative gain or loss previously recognized in equity shall be recognized in profit or loss. The fair values of listed stocks, OTC stocks and closed-end mutual funds are based on latest quoted fair prices of the accounting period. The fair values of open-end and balanced mutual funds are based on the net asset value at the balance sheet date.

C.   If there is any objective evidence that the financial asset is impaired, the cumulative loss that had been recognized directly in equity shall be transferred from equity to profit or loss. When the fair value of an equity instrument subsequently increases, impairment losses recognized previously in profit or loss shall not be reversed. When the fair value of a loan instrument subsequently increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed to the extent of the loss recognized in profit or loss.

(10)  Financial assets carried at cost

A. Investment in unquoted equity instruments is recognized or derecognized using trade date accounting and is stated initially at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. If there is any objective evidence that the financial asset is impaired; the impairment loss is recognized in profit or loss. Such impairment loss shall not be reversed when the fair value of the asset subsequently increases.

(11)  Investment in bonds without active markets

A. Investment in bonds without active markets is recognized and derecognized using trade date accounting and is stated initially at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. This financial asset is carried at amortized cost.

C. If there is any objective evidence that the financial asset is impaired; the impairment loss is recognized in profit or loss. If, subsequently, the fair value of the asset increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the previously recognized impairment loss shall be reversed to the extent of the amount of the amortized cost that would have been recognized at the date the impairment is reversed.

(12)  Hedging derivative instruments

Derivatives are initially recognized at fair value on the date a contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the hedged item.

A.  Fair value hedges:

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss. Changes in the fair value of the hedged asset or liability that are attributable to the hedged item are recognized in profit or loss as an adjustment to the carrying amount of the hedged item. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method was used is amortized to profit or loss over the period of maturity.

B.   Cash flow hedges:

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity.

a. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognized directly in equity are transferred to profit or loss in the same period or periods when the hedged item affects profit or loss.

b. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized directly in equity are transferred into profit or loss in the periods during which the asset acquired or liability assumed affects profit or loss.

(13)  Allowance for doubtful accounts

Allowance for doubtful accounts is provided based on past experience and an evaluation of the collectability of notes and accounts receivable, and other receivables taking into account the aging analysis of receivables and other factors.

(14)  Transactions for accounts receivable securitization

Accounts receivable securitization is the transfer of a designated pool of accounts receivable to a special purpose entity, in the form of issuing beneficial securities or asset-backed securities based on the accounts receivable. Under ROC Statement of Financial Accounting Standards (SFAS) No. 33 "Accounting for Transfers of Financial Assets and Extinguishments of Liabilities", such transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The difference between the book value of accounts receivable and total proceeds received is recorded as a gain or loss on the disposal of financial assets.

(15)  Inventories

The perpetual inventory system is adopted for inventory recognition. Inventories are stated at cost. The cost is determined using the weighted-average method. At the end of period, inventories are evaluated at the lower of cost or net realizable value, and the individual item approach is used in the comparison of cost and net realizable value. The calculation of net realizable value is based on the estimated selling price in the normal course of business, net of estimated costs of completion and estimated selling expenses. As the value of raw materials and supplies decline and the cost of finished goods are over net realizable value, the net realizable value of raw materials and supplies becomes the replacement cost.

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

A.  Long-term equity investments in which the Group holds more than 20% of the investee company's voting shares or has the ability to exercise significant influence on the investee's operational decisions are accounted for under the equity method. The excess of the initial investment cost over the acquired net asset value of the investee is attributable to goodwill, and is subject to impairment test every year. Adjustment of the amount of goodwill amortized in previous year(s) is not required.

B.   Long-term equity investments in which the Group holds more than 50% of the investee company's voting shares or has the ability to exercise significant influence on the investee's operational decisions are accounted for under the equity method and included in the consolidated financial statements.

C.   Exchange differences arising from translation of the financial statements of overseas investee companies accounted for under the equity method are recorded as "cumulative translation adjustment".

(17)  Property, plant and equipment

A.  Property, plant and equipment are stated at cost. Interest incurred on the acquisition of property, plant and equipment is capitalized. Significant renewals or betterments are capitalized and depreciated accordingly. Maintenance and repairs are expensed as incurred.

B.   Depreciation is provided on a straight-line method using the estimated service lives of the assets plus one year as salvage value.  The estimated useful lives of the assets are 2 to 8 years, except for building which is 2 to 50 years.

C.   Rents paid on capital leases are capitalized and depreciated accordingly. Any gain (loss) on the sale and leased back is capitalized and amortized over the lease term.

D.  For sale and leased back assets, if the fair value is less than the book value, the difference is recognized in profit or loss.

E.   Property, plant and equipment that are idle or have no value in use are reclassified to "other assets" at the lower of the fair value less costs to sell or book value. The resulting difference is included in current operations. Depreciation provided on these assets is charged to non-operating expense.

(18)  Intangible assets

A.  Goodwill is the excess of the initial investment cost over the acquired net asset value of the investee when consolidated. Please refer to Note 2(19) for impairment of goodwill.

B.   Patents and royalties are stated at cost and amortized over the estimated life of 5 to 10 years using the straight-line method.

(19)  Deferred expenses

Photo mask, pattern, bank charges for loans, license fee, power line installation cost and computer software are capitalized and amortized over the estimated period of economic benefits under the straight-line method. The estimated period of economic benefits for photo mask and pattern is 1 to 2 years, and others are 3 to 7 years.

(20)  Impairment of non-financial assets

A.  The Group recognizes impairment loss when there is indication that the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of the asset in an arm's length transaction after deducting any direct incremental disposal costs. The value in use is the present value of estimated future cash flows to be derived from continuing use of the asset and from its disposal at the end of its useful life. When the impairment no longer exists, the impairment loss recognized in prior years shall be recovered.

B.   The recoverable amount of goodwill, intangible assets with indefinite useful lives and intangible assets which have not yet been available for use are evaluated periodically.  Impairment loss will be recognized whenever there is indication that the recoverable amount of these assets is less than their respective carrying amount.  Impairment loss of goodwill recognized in prior years is not recoverable in the following years.

(21)  Preferred stock liabilities

The Company issued preferred stocks which are mandatorily redeemable by payment of cash or another financial asset and are classified as liabilities. The interest, dividends, losses and gains on such preferred shares are recognized in profit and loss.

(22)  Retirement plan and pension cost

Under the defined benefit pension plan, net periodic pension costs are recognized in accordance with the actuarial calculations.  Net periodic pension cost includes service    cost, interest cost, and expected return on plan assets, and amortization of unrecognized net transition obligation and gains or losses on plan assets.  Unrecognized net transition obligation is amortized on a straight-line basis over 15 years. Under the defined contribution pension plan, net periodic pension costs are recognized as incurred.

(23)  Income tax

A.  Provision for income tax includes deferred income tax resulting from temporary differences, investment tax credits and loss carryforward. Valuation allowance on deferred tax assets is provided to the extent that it is more likely than not that the tax benefit will not be realized. Over or under provision of prior years' income tax liabilities is included in current year's income tax. When a change in the tax laws is enacted, the deferred tax liability or asset is recomputed accordingly in the period of change. The difference between the new amount and the original amount, that is, the effect of changes in the deferred tax liability or asset, is recognized as an adjustment to current income tax expense (benefit).\

B.   Investment tax credits arising from expenditures incurred on acquisitions of equipment or technology, research and development, employees' training, and equity investments are recognized in the year the related expenditures are incurred.



 

C.   An additional 10% tax is levied on the unappropriated retained earnings and is recorded as income tax expense in the year the stockholders resolve to retain the earnings.

D.  According to the "Income Basic Tax Act", effective January 1, 2006, income tax is accounted for based on the income tax law or other regulations when income tax is equal or more than the basic tax. When income tax is less than the basic tax, income tax payable shall be equal to the basic tax.  The difference cannot be deducted from investment tax credits based on other regulations.

(24)  Earnings per share

A.  The Company adopted R.O.C. SFAS No. 24, "Earnings per share". Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated by taking into account the potentially dilutive securities that were assumed to have been converted to common stock at the beginning of the year.

B.   Effective January 1, 2008, as employees' bonus could be distributed in the form of stock, the diluted EPS computation shall include the estimated shares that would increase from employees' stock bonus issuance in the calculation of the weighted-average number of common shares outstanding during the reporting year, taking into account the dilutive effects of stock bonus on potential common shares; whereas, basic EPS shall be calculated based on the weighted-average number of common shares outstanding during the reporting year that include the shares of employees' stock bonus for the appropriation of prior year earnings, which have already been resolved at the stockholders' meeting held in the reporting year. As the capitalization of employees' bonus is no longer classified as distribution of stock dividends (or retained earnings or capital reserve capitalized), the calculation of basic EPS and diluted EPS for all periods presented shall not be adjusted retroactively.

C.   The potential common shares of the Company and subsidiaries include employee stock options and the estimated shares that would increase from employees' stock bonus issuance as stated above. Treasury stock method is used to test whether or not potential common shares have dilutive effect.

(25)  Share-based payment - employee compensation plan

A.  The employee stock options granted from January 1, 2004 through December 31, 2007 are accounted for in accordance with EITF 92-070, EITF 92-071 and EITF 92-072 "Accounting for Employee Stock Options" as prescribed by the Accounting Research and Development Foundation, R.O.C., dated March 17, 2003. Under the share-based employee compensation plan, compensation cost is recognized using the intrinsic value method and pro forma disclosures of net income and earnings per share are prepared in accordance with the R.O.C. SFAS No. 39, "Accounting for Share-based Payment".

B.   For the grant date of the share-based payment agreements set on or after January 1, 2008, the Company shall measure the services received during the vesting period by reference to the fair value of the equity instruments granted and account for those amounts as payroll expenses during that period.

C.   Subject to elimination of the Company issued employee stock options and the proposed replacement Reward Scheme, the Company should calculate the compensation cost of employee services before and after the merger. The former as part of the cost of merger; the latter is allocated over the remaining period as compensation cost.

(26)  Employees' bonuses and directors' and supervisors' remuneration

Effective January 1, 2008, pursuant to EITF 96-052 of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007, "Accounting for Employees' Bonuses and Directors' and Supervisors' Remuneration", the costs of employees' bonuses and directors' and supervisors' remuneration are accounted for as expenses and liabilities, provided that such recognition is required under legal or constructive obligation and the amounts can be estimated reasonably.  However, if the accrued amounts for employees' bonuses and directors' and supervisors' remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their annual stockholders' meeting subsequently, the differences shall be recognized as gain or loss in the following year. In addition, according to EITF 97-127 of the Accounting Research and Development Foundation, R.O.C., dated March 31, 2008, "Criteria for Listed Companies in Calculating the Number of Shares of Employees' Stock Bonus", the Company calculates the number of shares of employees' stock bonus based on the closing price of the Company's common stock at the previous day of the stockholders' meeting held in the year following the financial reporting year, and after taking into account the effects of ex-rights and ex-dividends.

(27)  Treasury stocks

A.  When a company acquires its outstanding shares as treasury stock, the acquisition cost should be debited to the treasury stock account (a contra account under stockholders' equity) if the shares are purchased.

B.   When a company's treasury stock is retired, the treasury stock account should be credited, and the capital surplus-premium on stock account and capital stock account should be debited proportionately according to the share ratio. An excess of the carrying value of treasury stock over the sum of its par value and premium on stock should first be offset against capital surplus from the same class of treasury stock transactions, and the remainder, if any, debited to retained earnings. An excess of the sum of the par value and premium on stock of treasury stock over its carrying value should be credited to capital surplus from the same class of treasury stock transactions.

C.   The cost of treasury stock is accounted for on a weighted-average basis.

D.  Stocks held by subsidiaries of the Company are stated at the subsidiary's carrying value of the shares, and reclassified from the Company's long-term investments accounted for under the equity method account to treasury stock.

(28)  Revenue and expenses

A.  Revenue is recognized when the earning process is completed and payment is realized or realizable.  Expenses, including research and development costs, are charged to income as incurred.

B.   Regarding the sales to Company's subsidiaries, sales revenue is recognized only when the subsidiary has sold the goods of the Company to customers. Goods which remained unsold by the subsidiary at the end of the accounting period are recorded as inventories by the Company.

(29)  Subsidy from the Government

The Company receives subsidies from the Government related to the research and development of certain products pursuant to agreements. The subsidy income is recorded as deferred income upon receipt of the fund and subsequently recorded in income statement based on the schedule agreed to by the Company and the Government.



 

(30)  Settlement date accounting

If an entity recognizes financial assets using settlement date accounting, any change in the fair value of the asset to be received during the period between the trade date and the settlement date/balance sheet date is not recognized for assets carried at cost or amortized cost. For financial assets or financial liabilities classified as at fair value through profit or loss, the change in fair value is recognized in profit or loss. For available-for-sale financial assets, the change in fair value is recognized directly in equity.

(31)  Merger

The Company accounts for its merger transaction pursuant to the R.O.C. SFAS No. 25, "Accounting for Business Combinations - Purchase Method".

3. CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2009, the Group adopted the amendments to R.O.C. SFAS No. 10, "Accounting for Inventories". As a result of this change in accounting principle, operating cost and non-operating income both decreased by $162,245.

4. DETAILS OF SIGNIFICANT ACCOUNTS

(1)  Cash and cash equivalents


             December 31,          


     2009     

     2010     

Cash on hand

 $         366

 $     412,356

Checking deposits

-

       412,012

Savings deposits

     2,780,000

    24,252,307

Foreign currency deposits

     4,938,974

     3,640,557

Time deposits

    25,561,129

    30,266,168


    33,280,469

    58,983,400

Cash equivalents - Repurchase bonds

     3,230,000

       179,613


 $  36,510,469

 $  59,163,013

(2)  Financial assets and liabilities at fair value through profit or loss


             December 31,            

                   Item                  

      2009    

       2010   

Current items:



 Financial assets held for trading



  Derivatives

 $            -

 $      505,652

 Financial liabilities held for trading



  Derivatives

 $            -

($       78,294)

Non-current items:



 Financial assets designated as at fair value through profit or loss



 Convertible bonds -Sintronic Technology Inc.

 $      220,000

 $      220,000

 Adjustment of designated

as at fair value through profit or loss

        21,956

(        27,110)


 $      241,956

 $      192,890

 

A. The trading items and contract information of derivatives are as follows:


        December 31, 2010       


   Book value

 Contract amount

  (in thousands) 

Financial assets held for trading




Foreign exchange forward contract

$    467,549

USD

    640,000

    - Sell USD (Sell USD/Buy JPY)


JPY

 53,345,841

Foreign exchange forward contract

     34,902

TWD

  3,000,900

    - Sell TWD (Sell TWD/Buy USD)

            

USD

100,000

Foreign exchange forward contract

        374

HKD

34,000

    - Sell HKD (Sell HKD/Buy USD)

            -

USD

1,551

Foreign exchange forward contract

      2,827

HKD

26,000

    - Sell HKD (Sell HKD/Buy JPY)

            -  

JPY

      2,828


$    505,652



Financial liabilities held for trading




Foreign exchange forward contract


USD

     30,000

    - Sell USD (Sell USD/Buy JPY)

($      3,565)

JPY

2,431,170

Foreign exchange forward contract


TWD

3,000,900

    - Sell TWD (Sell TWD/Buy USD)

(      74,729)

USD

100,000


($     78,294)



B. The gain on financial assets and liabilities for the years ended December 31, 2009 and 2010 was $134,314 and $2,099,908, including the unrealized gain on financial assets and liabilities of $22,610 and $378,292, respectively.

(3)  Accounts receivable


             December 31,            


       2009     

       2010     

Notes receivable

$              -

$        270,928

Accounts receivable

      23,487,840

      57,022,465


       23,487,840

       57,293,393

Less: Allowance for doubtful accounts

(          53,180)

(         296,268)

     Allowance for sales returns and discounts

               -

(         608,612)


 $     23,434,660

 $     56,388,513

Accounts receivable securitization

A.  In September 2006, the Company entered into $10 billion, 5-year revolving accounts receivable securitization agreement with Chinatrust Commercial Bank, the trustee. Under the agreement, the Company transferred a pool of accounts receivable to the trustee. The Company transferred its receivables to the bank three times a month, and the bank issued securities backed by these accounts receivable monthly. After the transfer of the accounts receivable, the Company continues to service, administer, and collect the accounts receivable on behalf of the bank. The Company does not bear the risk of collectability, nor provide any collateral to the bank.

B.   As of December 31, 2010, the Company had a one-time sale of accounts receivable totaling $10,071,828 and related rights to the trustee for the issuance of beneficiary certificates. Under the agreement, control over contractual rights of such financial assets was transferred to the buyers, except for subordinated beneficiary certificates amounting to $1,800,164 for the year ended December 31, 2010 (recorded as available-for-sale financial assets). The seller's beneficiary certificates were $1,052,965 for the year ended December 31, 2010 (recorded as available-for-sale financial assets-noncurrent.) The Company recognized the difference between the book value of the financial assets and the proceeds paid of $293,957 as a loss on sale of investments for the year ended December 31, 2010 (recorded as other losses.) Collected receivables not yet replaced by new accounts receivable due to timing difference are recorded as accrued expenses and other current liabilities in the balance sheet, which amounted to $1,302,414 as of December 31, 2010 (recorded as other payables-other).

a. Assumptions used to evaluate retained interests:

  A. Subordinated beneficiary certificates


  December 31, 2010

Estimated dilution reserve rate

0.09%

Estimated loss rate of credit

0.00%

Estimated funding cost rate

2.13%

Estimated expense rate

0.06%

B. Seller's beneficiary certificates


  December 31, 2010

Excess of issuance upper-limit

 $               -

Ineligible accounts receivable

1,673

Aggregate excess concentrations

1,360,068

Reserved for accounts payable

5,849

b. Sensitivity analysis

As of December 31, 2010, the assumptions and sensitivity of the current fair value of residual cash flows with immediate 10% adverse changes in those assumptions were as follows:

A. Effect to subordinated beneficiary certificates


  December 31, 2010

Estimated dilution reserve rate

$              95

Estimated loss rate of credit

-

Estimated funding cost rate

17,496

Estimated expense rate

486

B. Effect to seller's beneficiary certificates


  December 31, 2010

Ineligible accounts receivable

$             129

Aggregate excess concentrations

           104,717

Reserved for accounts payable

450

 

c. Cash flows

Cash inflows from and cash outflows to securitization trustees are as follows:


March 18 to December 31, 2010

Cash from securitization

$               27,685,000

Income from securitization

450

Other cash inflows from retained interest

476

Other charges

-

Accounts receivable factoring

A.  The Group factored its accounts receivable to certain financial institutions without recourse. Under the agreement, the Group is not required to bear uncollectible risk of the underlying accounts receivable, but is liable for the losses incurred on any business dispute. As the Group did not provide any collateral, these accounts receivable meet the derecognition criteria for financial assets. The Group has derecognized the accounts receivable sold to financial institutions, net of the losses estimated for possible business disputes.

As of December 31, 2009 and 2010, the relevant information of accounts receivable factored but unsettled is as follows:

                               December 31, 2009                        

   Institutions    

Accounts

receivable

sold/

derecognized   

Amount

  advanced 

Amount

retained

   (Note)  

 

   Limit    

Mega International

 Commercial Bank

$ 3,766,530

$ 3,766,530

$         -

$ 6,398,000

China Trust Commercial Bank

      89,582

      48,634

      40,948

  5,854,170

Ta Chong Bank

   1,400,685

   1,157,330

     243,355

   4,414,620

Taipei Fubon Bank

     177,867

     160,080

      17,787

     703,780

Taishin Bank

   1,188,202

   1,069,382

     118,820

   4,622,555


$ 6,622,866

$ 6,201,956

$   420,910

$21,993,125

 

                               December 31, 2010                       

   Institutions     

Accounts

receivable

sold/

 derecognized   

Amount

  advanced 

Amount

retained

   (Note)  

 

    Limit  

Mega International

 Commercial Bank

$ 2,774,304

$ 2,774,304

$         -

$ 5,826,000

Taipei Fubon Bank

   7,465,066

   7,084,206

    380,860

 46,768,215


$10,239,730

$ 9,858,510

$   380,860

$52,594,215

a.          Note: shown as "other receivables".

b.          For the years ended December 31, 2009 and 2010, the rate of the group advanced amount were 0.66% to 1.90% and 0.60% to 0.73%, respectively.

c.          For the years ended December 31, 2009 and 2010, the financing charges (expenses) incurred from accounts receivable factoring were $55,231 and $105,646, respectively, and shown as "other non-operating losses".



(4)  Inventories


            December 31,          


      2009    

      2010    

Raw materials and supplies

$     3,323,484

$    17,875,231

Work in process

       7,038,907

      31,527,177

Finished goods

      10,828,911

      23,186,054


      21,191,302

      72,588,462

Less: Allowance for obsolescence and market value decline

(        269,821)

(      8,348,861)


 $    20,921,481

 $    64,239,601

Expense and loss incurred on inventories for the years ended December 31, 2009 and 2010 were as follows:


    For the years ended December 31,  


      2009    

      2010    

Cost of inventories sold

$   160,856,441

$   471,412,220

Gain from price recovery of inventories

(        162,245)

(         12,112)

Income from sale of remnants, pieces and waste

(        185,347)

(        505,555)

Loss on disposal of inventories

               -

         606,147

Others

               -

(         37,481)


 $   160,508,849

 $   471,463,219

The gain from price recovery of inventories recognized by the Group in 2009 and 2010 was due to inventories sold with NRV lower than cost.

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


                   December 31,                


        2009          

        2010          

    Investee company       

  Carrying

   value  

Percent of

ownership

   (%)  

  Carrying

   value  

Percent of

ownership

   (%)  

Ampower Holding Ltd.

$         -

-

$ 1,570,086

45

Chi Mei Materials Technology





  Corporation

          -

-

  1,262,044

18

TOA Optronics Corporation

         -

-

   378,033

40

GIO Optoelectronics Corp.

          -

-

    825,464

31

Others

    163,248

-

    470,258

-


$   163,248


$ 4,505,885


Because of the merger on March 18, 2010, the long-term investments accounted for under the equity method increased as of December 31, 2010 compared with the prior period. Please refer to Note 1 for information on merger.

 

(6) Available-for-sale financial assets


            December 31,         


      2009    

      2010    

Current



Subordinated beneficiary certificates

$             -

$     1,800,164

Seller's beneficiary certificates

               -

       1,052,965

Listed stocks

              -

         39,682


$             -

$     2,892,811

Non-current



Listed stocks and investments in bonds



    Himax Technologies, Inc. (Himax Cayman)

 $             -

       1,706,469

    Entire Technology Co., Ltd.

       1,154,945

         968,674

    JTOUCH Corporation

               -

         752,220

    Mstar Semiconductor Inc. (Cayman)

               -

         426,005

    China Electric Mfg. Corporation

               -

         314,600

    Others

               -

         234,811


 $     1,154,945

 $     4,402,779

A.  Please refer to Note 4(3) for the information on subordinated beneficiary certificates and seller's beneficiary certificates.

B.   The gain on available-for-sale financial assets was $1,009,179 and $479,410 for the years ended December 31, 2009 and 2010, and is shown as an adjustment to stockholders' equity as unrealized gain or loss on financial instruments.

(7) Hedging derivative financial liabilities - non-current


December 31, 2010

Non-current


Interest rate swap contracts

$        392,919

Cross currency swap contracts

          778,531


 $      1,171,450

The gain on fair value hedges was $411,923 for the six-month period ended December 31, 2010. Please refer to Note 10(6) for other information.



(8) Financial assets carried at cost / Investment in bonds without active market


           December 31,            


       2009     

       2010     

Financial assets carried at cost - non-current  



Listed stocks:



  TPV Technology Ltd.

$              -

$      2,958,216

Emerging stocks:



  J TOUCH Corporation

         400,000

               -

  G-TECH Optoelectronics Corporation

              -

        127,161

Unlisted stocks:



  Chi Lin Technology Co., Ltd.

$              -

$        277,093

  AvanStrate Inc.

               -

         286,740

Top Taiwan VI Venture Capital Co., Ltd.

              -

 198,490

  Others

        176,249

469,103

Embedded derivatives:



  ILI Technology Corp. - Convertible bonds

           5,520

               -


$        581,769

$      4,316,803

Investment in bonds without active market -



  non-current                         



Unlisted bonds:



  ILI Technology Corp. - Convertible bonds

$         46,085

$              -

A.     The increase in above investments for the year ended December 31, 2010, except for G-TECH Optoelectronics Corporation and AvanStrate Inc., resulted from the merger on March 18, 2010. Please refer to Note 1 for information on merger.

B. The investment in TPV Technology Ltd. was acquired through private placement with certain restrictions on the transfer of the shares. The restricted shares, whose fair value cannot be measured, shall be accounted for as financial assets carried at cost. The remaining investment is accounted for as financial assets carried at cost because there is no active market for price quoted.

C. The convertible bonds held by the Company's subsidiaries were recognized in "Investments in bonds without active markets" since these do not have quoted prices in an active market. The put options, call options and conversion options embedded in convertible bonds, that had been converted into common stocks in the second half of year 2010, were measured at cost since the convertible bonds have no quoted prices in an active market and their fair value cannot be measured reliably.

D.     J TOUCH Corporation was listed in TSE in July, 2010, and the investment was recognized in "Available-for-sale financial asset - non-current."



(9) Property, plant and equipment


                December 31, 2009             



Accumulated



 Original cost

   depreciation  

   Book value 

Buildings

$  9,686,213

($   4,121,638)

 $   5,564,575

Machinery and equipment

   47,829,185

(   26,777,294)

    21,051,891

Testing equipment

    3,292,244

(    1,958,747)

     1,333,497

Transportation equipment

       66,209

(       34,815)

        31,394

Office equipment

      655,583

(      354,262)

       301,321

Leasehold improvements

       25,731

(       25,731)

             -

Other equipment

    1,663,374

(      779,064)           

       884,310

Construction in progress and




prepayments for equipment

  57,084,559

            -

   57,084,559


$120,303,098

($  34,051,551)

$  86,251,547


                December 31, 2010             

 


 Original cost

Accumulated

   depreciation  

   Book value 

 

Land

$  5,114,843

$           -

 $   5,114,843

 

Buildings

 161,752,351

(   19,350,683)

   142,401,668

 

Machinery and equipment

  328,847,855

(  104,125,015)

   224,722,840

 

Testing equipment

    5,467,393

(    2,985,674)

     2,481,719

 

Transportation equipment

      937,687

(      388,743)

       548,944

 

Office equipment

    1,846,121

(      976,626)

       869,495

 

Leased assets

    1,772,103

(    1,030,081)

       742,022

 

Leasehold improvements

      200,425

(      125,438)

        74,987

 

Other equipment

    6,351,123

(    2,963,854)           

     3,387,269

 

Construction in progress and prepayments for equipment

  78,448,768

            -

   78,448,768

 


$590,738,669

($ 131,946,114)

$ 458,792,555

 

A.      Please refer to Note 6 for property, plant and equipment pledged as collateral.



 

B. As of December 31, 2010, significant leasing agreements were as follows:

a.     The contents of leasing agreements:

  Leased Assets 

  Period  

 Annual Payment

   Terms and Conditions   

Machinery

2008.05.19-

Down payment was

1.The lease transfers ownership

 equipment and

2013.05.19

 $4,000,000 on May

  of the leased property to the

 factory facility


 19, 2008.

  lessee by the end of the lease



 Repayment semi-

  term.



 annually of

2.These leased assets have to be



 $990,000 from May

  fully insured and the



 19, 2009 to May 19,

  Company is responsible for



 2013 with annual

  the maintenance and repair



 floating  interest

  of the leased assets.



rate at 2.0708% in




2010.


b.   Leased assets and leased obligation payable were initially recognized at fair value at the inception of the lease. The depreciation is computed using the straight-line method over the useful economic life.

c.     As of December 31, 2010, future lease payments were as follows:

             Year               

       Amount     

2011

 $        1,980,000

2012

          1,980,000

2013

            980,000


          4,940,000

Less: current portion of lease payable

 (        1,980,000)

Lease payable - non-current

 $        2,960,000

C. Certain property, plant and equipment of the Group are leased to related parties and other companies under operating lease agreements, and were reclassified to assets leased to others.


                December 31, 2010             


     Cost    

   Accumulated

   Depreciation

   Book Value

Land

 $       196,307

 $           -

 $     196,307

Buildings

        1,215,931

(      100,517)

     1,115,414


 $      1,412,238

($     100,517)

 $   1,311,721

D.      Certain property, plant and equipment of the Group are idle, and were reclassified to idle assets.


                December 31, 2010             


     Cost    

   Accumulated

   Depreciation

   Book Value

Machinery and equipment

 $     1,063,566

($      39,531)

 $   1,024,035

The above acquired assets were due to the merger, thus the Company has appointed experts to evaluate the fair value.

(10) Business combinations and intangible assets

A.  The Company, formerly "Innolux Display Corporation", merged with TPO Displays Corporation and Chi Mei Optoelectronics Corporation based on the resolution in the shareholders' meeting on January 6, 2010. Innolux Display Corporation is the surviving company after the merger and was renamed as Chimei Innolux Corporation. TPO Displays Corporation and the shareholders of Chi Mei Optoelectronics Corporation exchanged 3.82912866 and 2.05 common stocks, respectively, for 1 common stock of Chimei Innolux Corporation; therefore 4,046,381,607 stocks were issued by Chimei Innolux Corporation for the exchange. In addition, the preferred shareholders of Chi Mei Optoelectronics Corporation also exchanged 2.05 preferred stock for one preferred stock of Chimei Innolux Corporation, and 731,707,317 stocks were issued for the exchange. Please refer to Appendix 4 (15) for detailed explanations of preferred stocks.

B.   TPO Displays Corporation, founded in 1999, operated in the research, development, manufacture, and the sale of Low Temperature Poly Silicon thin film transistor liquid crystal displays (LTPS/TFT-LCD) and the sale of super-twisted nematic thin film transistor liquid crystal displays (STN/TFT-LCD). Chi Mei Optoelectronics Corporation was established in 1998 and operated in the research, manufacture, and the sale of thin film transistor liquid crystal displays.

C.   The merger date was March 18, 2010. The Company accounts for its merger transaction pursuant to the R.O.C. SFAS No. 25, "Accounting for Business combinations - Purchase Method". The relevant information is as follows:

Business combinations  


       Amount     

Stocks issued pursuant to combination

 $        40,463,816

Capital reserve-from merger

         139,744,797

Value of employee stock options

             310,999

Acquisition cost

         180,519,612

Less: fair value of the net assets acquired from TPO Displays 

     Corporation and Chi Mei Optoelectronics Corporation

(        163,395,261)

Goodwill

 $        17,124,351

The purchase price of this merger is still under assessment period, and the Company has appointed experts to evaluate the fair value of identifiable net assets. The information above represents only the estimated value.

D.  There is no contingent price, options, commitment, or significant disposal of assets in the merger contract.

E.   Pro Forma Supplementary information to the consolidated profit and management results

Since March 18, 2010, the management results of TPO Displays Corporation and Chi Mei Optoelectronics Corporation are consolidated into the profit and loss statements of Chi Mei Innolux Corporation. The pro forma profit and loss statement for the year of 2010 is based on the assumption that the management results of TPO Displays Corporation and Chi Mei Optoelectronics Corporation are consolidated since January 1, 2010. In order to compile the comparative profit and loss statement, it is assumed that the merger had occurred at the beginning of the last fiscal year for comparative purposes. Pro Forma consolidated profit and loss statement is as follows: (The following is the pro forma profit and loss statement of Chi Mei Optoelectronics Corporation for 2009 and 2010.)


           For the years ended December 31,        


        2009        

        2010        


     Amount   

  %

    Amount  

  %   

Operating revenues

 $  470,061,908

 100

 $  542,819,791

 100

Operating costs

 (   470,568,976)

(100)

 (   533,199,231)

( 98)

Gross (loss) profit

(       507,068)

   -

     9,620,560

   2

Operating expenses

 (    23,326,729)

(  5)

 (    21,989,753)

(  4)

Operating loss

(    23,833,797)

(  5)

(    12,369,193)

   2

Non-operating income

      5,889,920

   1

      8,572,637

   2

Non-operating expenses

 (    23,408,131)

(  5)

 (    18,266,704)

(  3)

Loss before income tax

(    41,352,008)

(  9)

(    22,063,260)

(  4)

Income tax benefit

       1,996,945

   -

          59,863

   -

Consolidated net loss

($   39,355,063)

(  9)

($   22,003,397)

(  4)


 Before tax

 After tax  

 Before tax

  After tax  

Pro forma basic loss per share





  Net loss

 ($    5.68)

 ($    5.40)

  ($     2.74)

 ($    2.74)

When calculating the basic loss per share above, the Company assumed that the merger of TPO Displays Corporation and Chi Mei Optoelectronics Corporation occurred at the beginning of 2009.

F.   Other intangible assets

The following intangible assets resulted from the payment on the TFT-LCD related technology and technical license fees.


    December 31, 2010 

Patents

$           1,710,223

Loyalty

                57,102


 $           1,767,325

(11) Short-term loans


             December 31,         


       2009     

       2010     

Secured loans

 $        319,900

 $        291,323

Credit loans

      11,855,794

      19,288,246


$     12,175,694

$     19,579,569

Range of interest rates

     0.43%4.78%

  0.442%4.779% 

Please refer to Note 5(2) G for assets pledged as collateral for short-term loans.



(12) Short-term bills payable


December 31, 2010

Commercial bill payable

$      11,600,000

Less: discount on commercial bill payable

(            4,240)


 $      11,595,760

Issue rate

         0.442%~1%

(13) Long-term loans


          December 31, 2009         


      Period    

      Amount      

Mega International Commercial Bank and 21

2004/8 ~ 2011/8

$        1,969,800

  others - syndicated bank loans



Mizuho Corporation Bank and 3 others -



  syndicated bank loans

2008/9 ~ 2010/12

         2,000,000

Mega International Commercial Bank and 20



others - syndicated bank loans

2008/11 ~ 2013/11

        30,398,000



        34,367,800

Less: current portion


(         3,969,800)



$       30,398,000

Range of interest rates


       0.81%~1.44%



 

 

 

          December 31, 2010        


      Period   

      Amount     

Syndicated bank loans:



 Mega International Commercial Bank and 21    others - mortgaged syndicated bank loans

2008/11 ~ 2013/11

$       25,562,882

 Mega International Commercial Bank and 20 others - mortgaged syndicated bank loans

2010/05 ~ 2015/05

         35,740,000 

Mega International Commercial Bank and 12 others - mortgaged syndicated bank loans

2005/03 ~ 2012/03

          2,100,000

 China Trust Commercial Bank and 10 others - mortgaged syndicated bank loans

2008/09 ~ 2013/08

          5,100,000 

 Bank of Taiwan and 35 others - mortgaged syndicated bank loans

2004/12 ~ 2011/12

         1,096,211

 Bank of Taiwan and 35 others - mortgaged syndicated bank loans

2004/12 ~ 2011/12

         6,221,810

 China Trust Commercial Bank and 32 other banks and financial institutions - mortgaged syndicated bank loans

2006/06 ~ 2012/07

        1,800,764

 China Trust Commercial Bank and 32 other banks and financial institutions - mortgaged syndicated bank loans

2006/06 ~ 2012/07

        20,292,920

 Bank of Taiwan and 33 others - mortgaged syndicated bank loans

2006/11 ~ 2013/11

         5,336,033

 Bank of Taiwan and 33 others - mortgaged syndicated bank loans

2006/10 ~ 2013/11

        29,940,000

 Bank of Taiwan and 31 others - mortgaged syndicated bank loans

2008/09 ~ 2015/02

        39,511,296

 Bank of Taiwan and 18 others - mortgaged syndicated bank loans

2010/03 ~ 2015/02

        17,500,000

 Bank of America and 12 others - secured syndicated bank loans

2006/06 ~ 2011/06

         1,092,373

 Bank of America and 16 others - secured syndicated bank loans

2007/06 ~ 2012/06

         1,092,373

 Bank of America and 15 others - secured syndicated bank loans

2007/04 ~ 2012/07

         2,389,815

 Bank of Taiwan and 22 others - secured syndicated bank loans

2008/05 ~ 2011/05

        17,480,000

Non-guarantee commercial papers

2005/07 ~ 2012/10

         4,949,357

Guarantee commercial papers

2010/12 ~ 2012/07

         1,883,050

Secured loans

2008/11 ~ 2013/09

         4,230,042

Unsecured loans

2005/09 ~ 2011/02

        30,508,122



$      253,827,048 

Less: administrative expenses from syndicated loans


(           610,427)

Less: current portion


(        76,811,590)



$      176,405,031

Range of interest rates


        0.7%~2.29%

A.     Please refer to Notes 5(2) H and 6 for assets pledged as collateral for long-term loans.

B. Because of the merger on March 18, 2010, long-term loans increased as of December 31, 2010 compared with the prior period. Please refer to Note 1 for information on merger.

C. The agreements of the syndicated loan, which were acquired from the merger had been renegotiated with the syndicated loan bank. Under the loan agreements, the Company is required to maintain certain financial ratios, such as current ratio, debt-to-equity ratio, times-interest-earned ratio and net tangible assets. For the year ended December 31, 2010, the Company met all the requirements.

(14) Bonds payable


 December 31, 2010

Secured domestic bonds

$        4,000,000

The bonds payable was acquired because of merger. The bonds payable was originally issued on December 26, 2008 for a period of four years and forty-four days (maturity date of February 8, 2013), at par value of $4 billion and a coupon rate of 2.72%. From the issue date, interest payments are calculated by coupon rate annually; repayable in two equal installments on the fourth year and maturity date. For the year ended December 31, 2010, the interest expense incurred from bonds payable was $86,146.

(15) Preferred stock liabilities

The preferred shares acquired because of merger on March 18, 2010 were 731,707,317 shares and the cost is $15,000,000. Based on the resolution in the shareholders' meeting in June, 2010, the issued preferred stock aforementioned are withdrawn through the revenue, the acquired return from new stock issuance, or both. The withdrawal cost is the original issue price plus the accumulated dividend at the day before cancellation. The Board of Directors concluded the date for capital reduction is October 1, 2010, and paid $15,983,219 for the original issuance price of preferred stock plus accumulated dividends to the shareholders at the same date.

(16) Income tax

A. Income tax expense and income tax payable were reconciled as follows:


   For the years ended December 31, 


      2009    

      2010    

Income tax (benefit) expense

($       834,605)

 $       801,476

Net changes in deferred income tax assets



  (liabilities)

         955,722

       6,478,666

Loss carryforwards from acquisitions

               -

(      4,934,800)

Investment tax credits from acquisitions

               -

(      1,186,447)

Deferred income tax assets of subsidiaries



from acquisitions

               -

(        316,325)

(Under) over provision of prior year's



income tax

(         49,924)

          23,391

Prepaid income tax and withholding tax

(         29,352)

(        406,575)

Effect of change in foreign currency



exchange

(          1,853)

           8,769

Income tax payable, net

 $        39,988

 $       468,155




 

 



Income tax payable

 $        57,672

 $       490,173

Income tax refund receivable shown as

(         17,684)

(         22,018)

"other receivables"

 $        39,988

 $       468,155

B. The deferred income tax assets and liabilities were as follows:


            December 31,         


      2009    

      2010    

Deferred income tax liabilities

($       472,966)

($     1,243,622)

Deferred income tax assets

       4,510,848

      36,654,160

Valuation allowance

(      1,824,843)

(     26,402,409)


 $     2,213,039

 $     9,008,129

C. The temporary differences, unused investment tax credits and related amounts of deferred income tax assets and liabilities were as follows:


                    December 31,                     


          2009          

           2010           


   Amount

 Tax effect

   Amount 

  Tax effect

Current items:        





Temporary differences





 Allowance for obsolescence and market value decline

 $  269,821

$   53,964

$ 1,159,656

$   198,720

 Unrealized gross profit

    231,470

     46,294

      32,740

5,566

 Allowance for doubtful accounts

      5,372

      1,075

      75,056

      12,760

 Accrued loyalty and estimated warranty

  1,559,016

    311,803

   1,928,359

327,821

 Allowance for sales returns and discounts

          -

          -

576,549

98,013

 Unrealized exchange gain

(   130,027)

(    26,005)

(  2,391,602)

(    405,973)

 Unrealized valuation gain on financial assets and liabilities

          -

          -

     525,641

      89,359

Loss carryforwards

          -

          -

  18,444,967

   3,135,644

Investment tax credits

          -

          -


4,669,344

Others

          -

          -

      92,314

      37,776



387,131


8,169,030

Less: Valuation allowance - current

          -

         -


(  7,388,111)



 $  387,131


 $   780,919

 

 

 


                    December 31,                    


          2009         

           2010          


   Amount

 Tax effect

   Amount 

  Tax effect

Non-current items:     





Temporary differences





Unrealized gain on investments

($2,234,808)

($  446,961)

($ 4,191,156)

($   712,496)

Impairment loss on goodwill

    130,774

    26,155

(    736,193)

(    125,153)

Impairment loss on

  assets

         -

          -

  1,081,331

    340,830

Loss carryforwards

  5,362,458

 1,072,492

  90,845,639

 15,443,759

Investment tax credits

          -

 2,999,065

           -

 12,227,040

Others

-

          -

     199,138

     67,528



 3,650,751


  27,241,508

Less: Valuation allowance - non-current


( 1,824,843)


( 19,014,298)



$1,825,908


$ 8,227,210

D.    As of December 31, 2010, the unused investment tax credits are as follows:

Period

          Details of tax credit       

   Amount   

Year of expiry

2007

Tax credits for research and development

 $  1,176,896

2011

2008

Tax credits for research and development

    1,190,344

2012

2009

Tax credits for research and development

    1,025,204

2013

2007

Acquisition of equipment or technology

3,507,434

2011

2008

Acquisition of equipment or technology

    4,907,969

2012

2009

Acquisition of equipment or technology

332,277

2013

2010

Acquisition of equipment or technology

       69,756

2014

2007

Tax credits for training

       14,537

2011

2008

Tax credits for training

       18,788

2012

2009

Tax credits for training

5,062

2013

2008

Tax credits for investment in barren area

   2,754,467

2012

2009

Tax credits for investment in barren area

   1,893,650

2013



$ 16,896,384


 

 

 

 

 

 

E. As of December 31, 2010, the unused loss carryforwards are as follows:

 Year in which

  loss was incurred  

  Unused loss

   carryforwards   

 

    Amount    

 

 Year of expiry

2003

$      3,587,761

$       609,919

2008

2004

3,424,759

         582,209

2009

2005

3,971,350

         675,129

2010

2006

       7,461,096

      1,268,387

2011

2007

4,312,017

733,043

2012

2008

6,384,367

1,085,342

2013

2009

51,594,493

8,771,064

2014~2019

2010

      28,554,763

      4,854,310

2015~2020


$    109,290,606

$    18,579,403


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F. The investment tax credits and loss reliefs listed in item 4 and 5 include the part which are acquired but not utilized by both surviving and acquired company. In accordance with Article 38 of Business Mergers and Acquisitions Act, Chimei Innolux Corporation shall deduct the loss reliefs, which are not subtracted before the merger, of all involved companies for the last five years from the net income of each year within the 5 years since the loss fiscal year. The amount of deduction is calculated based on the ratio of surviving company equity shareholders of all involved companies after the merger. The amounts of succeeding and potential loss reliefs and investment tax credits of Chimei Innolux Corporation are $4,934,800 and $1,186,447, respectively.

G. As of December 31, 2010, the Company's income tax returns through 2006 have been assessed and approved by the Tax Authority.

H.    The Company's indirectly-owned Mainland China subsidiaries, such as Innocom Technology Shenzhen Ltd., Ninbo Chi Mei Optoelectronics Ltd., Nanhai Chi Mei Optoelectronics Ltd. etc, are foreign-invested manufacturing enterprises established in the PRC. Under the PRC tax regulations, their corporate income tax shall be levied at the rate of 18% to 25%, and they are exempt from corporate income tax for the first and second profit-making years and are subject to a 50% reduction of corporate income tax from the third through fifth profit-making years. These subsidiaries can use investment tax credits on national production equipment for the first profit-making year.

(17) Retirement plan

(1)   The Company has established a defined benefit pension plan in accordance with the Labor Standards Law, covering all regular employees for services provided prior to July 1, 2005, and employees who choose to remain in the benefit pension plan subsequent to the enforcement of the Labor Pension Act on July 1, 2005. The Company contributes on a monthly basis an amount equal to 2% of the employees' monthly salaries and wages to the retirement fund deposited with Bank of Taiwan, the trustee, under the name of the independent retirement fund committee.

A)   The related actuarial assumptions used to calculate the pension liability were as follows:

 

 


    2009  

    2010  

Discount rate

2.25%

1.75%

Expected return rate on plan assets

2.25%

1.75%

Rate of increase in compensation

3.00%

3.50%

B)   Reconciliation of funded status:


       December 31,       


    2009  

    2010  

Benefit obligation:



  Vested benefit obligation

($     2,117)

 $         -

  Non-vested benefit obligation

(     62,324)

(    716,098)

  Accumulated benefit obligation

(     64,441)

(    716,098)

  Additional benefits based



   on future salary increases

(     42,316)

(    732,233)

  Projected benefit obligation

(    106,757)

(  1,448,331)

Fair value of plan assets

     98,139

  1,169,051

Funded status

(      8,618)

(    279,280)

Unrecognized net pension loss

     55,860

    282,906

Accrued pension cost

($    47,242)

 $     3,626

C)   Details of net pension cost were as follows:

 

    2009  

    2010  

Service cost

 $     1,013

$    13,113

Interest cost

       2,513

19,833

Expected return on plan assets

(      2,628)

(     18,009)

Amortization of unrecognized pension



  loss

       1,689

        523

Net periodic pension cost

$     2,587

$    15,460

(2)   In accordance with the Labor Pension Act, the Company has a defined contribution employee retirement plan covering all domestic employees. The Company contributes monthly an amount based on 6% of employees' monthly salaries and wages to the employees' personal pension accounts with the Bureau of Labor Insurance. Employees may choose to receive pension on a monthly basis or as lump sum payment upon retirement determined based on the account balance plus accumulated investment gains. The pension expenses under this plan amounted to $119,725 and $540,549 for the years ended December 31, 2009 and 2010, respectively.

(3)   The subsidiaries in mainland China have defined contribution pension plans and contribute an amount monthly based on 10%~11% of employees' monthly salaries and wages to an independent fund administered by a government agency. The plan is administered by the government of mainland China and the subsidiaries do not have further pension liabilities. The pension expenses under this plan amounted to $273,444 and $664,218 for the years ended December 31, 2009 and 2010, respectively.

(4)   As of December 31, 2009 and 2010, the subsidiaries which participated in defined contribution pension plans recognized reserve according to the respective local laws for retirement plan. Pension expenses in the amount of $182,653 were recognized for the year ended December 31, 2010.

(18) Common stock

A.     As of December 31, 2010, the Company's authorized and outstanding capital was $105,000,000 (including $2,000,000 reserved for stock options) and $73,118,098, respectively, with a par value of $10 (dollars) per share.

B. The stockholders at the special stockholders' meeting on January 6, 2010 approved the merger of the Company with other companies by share conversion, with the Company as the surviving company. The Company issued 4,046,382 thousand new shares according to the merger contract. Please refer to Note 4(10) for information on merger.

C. The new stocks, which were issued due to the merger, include the common stock issued by acquired company in May and December, 2006 through private replacement. The issuance of 570,929 thousand stocks was determined based on the exchange ratio in the merger contract. The rights and obligations of the private common equity are the same as other issued common stocks except for the restriction regulated by securities act on negotiation and listing application after at least three years since the date of negotiable securities payment and an additional public issuance. The aforementioned private common equity has not been publicly issued as of December 31, 2010.

D.     For the years ended December 31, 2009 and 2010, the Company issued common stock for 26,561 and 11,452 thousand shares, respectively, through the exercise of employee stock options under the stock-based employee compensation plan. As of December 31, 2009 and 2010, the amount of $102,450 and $8,650 (10,245 and 865 thousand shares) represents payments received in advance for shares to be issued, respectively, and was shown as "Common stock subscribed".

E. In June 2009, the stockholders at their annual stockholders' meeting resolved to transfer unappropriated earnings of $941,561 and employees' stock bonus of $349,269 to common stock (shown as "stock dividends distributable").

F. In accordance with the Board of Directors' resolution in August 2007, the Company decided to issue 300 million shares of common stock for cash, including 149,967.5 thousand units of global depository receipts (GDRs), which represent 299,935 thousand shares of common stock with a unit of GDRs representing 2 shares of common stock. Per unit was issued premium 9.02 US dollar. As of December 31, 2010, there are 1,086,000 units outstanding, representing 2,172,000 shares of common stocks.



(19) Share-based payment-employee compensation plan

A. As of December 31, 2010, the Company's share-based payment transactions are set forth below:

 Type of arrangement

Grant date

Quantity granted

(in thousand units)

Contract

period

Vesting

conditions

Employee stock options

2004.01.09

47,000

6 years

Note A, C

Employee stock options

2004.03.31

20,000

6 years

Note A, C

Employee stock options

2004.05.07

15,000

6 years

Note A, C

Employee stock options

2004.12.03

28,000

6 years

Note A

Employee stock options

2005.09.21

12,000

6 years

Note A

Employee stock options

2007.12.20

25,000

6 years

Note B

Employee stock options

2010.05.13

20,000

5 years

Note A

Note AThe employees may exercise the stock options in installment based on 30%, 30% and 40% of total options granted on completion of the specified year(s) of service (one year to four years) from the grant date.

Note BThe employees may exercise the stock options in installment based on 40%, 30% and 30% of total options granted on completion of the specified years of service (three to five years) from the grant date.

Note CThe employee stock options had already expired.

Note DThe fair value of employee stock options which were granted on May 13, 2010 was estimated using the Black-Scholes option pricing model. The information is as follows:

Type of arrangement

Grant date

Price

(dollar)

Strike price

(dollar)

Expected volatility

  (%) 

Expected duration

(month)

Expected dividend yield (%)

Risk-free interest rate (%)

Fair value per unit

Employee stock options

2010.05.13

39.85

39.85

51.57

48.6

0

0.80

15.12~

16.98

B. Employee stock options acquired because of merger

a.   Details

 Type of arrangement  

Grant date

Quantity granted

(in thousand units)

Contract

period

Vesting

conditions

Employee stock options

2006.04.01

17

5 years

Note 2

Employee stock options

2007.12.27

120

5 years

Note 2

Employee stock options

2009.09.30

24,819

5 years

Note 2

Employee stock options

2006.07.19

11 (Note 1)

6 years

Note 3

Employee stock options

2007.07.02

21 (Note 1)

6 years

Note 3

Employee stock options

2007.12.27

2 (Note 1)

6 years

Note 3

1.  Each unit of stock options can subscribe for 1,000 shares of common stock

2.  The employees may exercise the stock options in installment based on 50%, and 50% of total options granted on completion of the specified years of service (two to three years) from the grant date.

3.  The employees may exercise the stock options in installment based on 25%, 25%, 25% and 25% of total options granted on completion of the specified years of service (two to five years) from the grant date.

4.  The unit of employee stock options above were adjusted by share conversion rate.

b.   For the employee stock options assumed by the Company due to business combination, the cost after calculation attributable to acquisition cost (equal amount was recognized as capital reserve - employee stock options under stockholders' equity) and attributable to compensation cost over the remaining vesting period after business combination was $310,999 and $453,371, respectively.

c.   The fair value of employee stock options is estimated using the Hull & White (2002) Enhanced FASB 123 of the aforementioned binomial model. The information is as follows:

Type of

 arrangement

Grant date

Price

(dollar)

Strike price

(dollar)

Expected volatility

  (%)

Expected duration

(month)

Expected dividend yield (%)

Risk-free interest rate (%)

Fair value per unit

Employee stock options

2006.04.01

51.60

91.20

45.10

24.34

0.61

0.82

0.62

Employee stock options

2007.12.27

51.60

64.00

45.10

36.30

0.61

0.82

2.66~

2.8

Employee stock options

2009.09.30

51.60

39.20

45.10

36.78

0.61

0.82

3.57~

4.14

Employee stock options

2006.07.19

51.60

55.21

45.10

12.04

0.61

0.82

4.64~

4.77

Employee stock options

2007.07.02

51.60

67.53

45.10

24.78

0.61

0.82

4.23~

4.41

Employee stock options

2007.12.27

51.60

80.63

45.10

48.54

0.61

0.82

3.65~

3.82

C. For the years ended December 31, 2009 and 2010, details of the employee stock option plan are as follows:


           For the year ended December 31, 2009             

  Stock Options

Quantity

(in thousand

  units) 

Weighted

average

exercise price

(in dollars)

Range of exercise price (in

 dollars) 

Weighted

average

remaining vesting

  period 

Weighted

average stock

price of stock

options at

exercise date

Outstanding options at the beginning of the year

  71,192

$  37.30




Options exercised

(  26,561)

10.03



$     38.88

Outstanding options at the end of the year

  44,631

   51.09

$  10.00

1.01 years





$  84.80

4.00 years


Exercisable options at the end of the year

  14,831

   10.00





           For the year ended December 31, 2010            

  Stock Options

Quantity

(in thousand

  units) 

Weighted

average

exercise price

(in dollars)

Range of exercise price (in

 dollars) 

Weighted

average

remaining vesting

  period 

Weighted

average stock

price of stock

options at

exercise date

Outstanding options at the beginning of the year

   44,631

$  51.09




Options increased from merger

   24,990

53.76




Options granted

   20,000

39.85




Options exercised

 (  11,452)

10.82



$     41.8

Options expired

(   5,355)

   10.00




Outstanding options at the end of the year

   72,814

   39.37

$   10.00

0.75 year





$   66.80

3    years





$   39.85

4.38 years





$39.2~91.2

2.86 years


Exercisable options at the end of the year

    2,981

       -




D. The following sets forth the pro forma consolidated net income and earnings per share based on the assumption that the compensation cost is accounted for using the fair value method for the stock options granted before the effectivity of R.O.C. SFAS No. 39, "Accounting for Share-based Payment":



For the years

     ended December 31,     



    2009    

    2010  

Consolidated net

Net loss as reported

($ 2,397,073)

($14,835,437)

 loss

Pro forma net loss

($ 2,727,123)

($15,168,760)

Basic loss per share

Basic LPS as reported

($      0.74)

($      2.29)

 (LPS)

Pro forma basic LPS

($      0.84)

($      2.34)

(20)  Capital reserve

A.  Under R.O.C. Securities and Exchange Act, paid-in capital in excess of par value (including consolidation premium) and donated surplus of capital reserve may be used to increase the registered capital, and the annual capitalized amount shall not exceed 10% of issued and outstanding capital.

B.   The capital reserve can only be used to offset losses and /or to increase capital.

C.   Please refer to Note 4(19) for employee stock options information.

 

(21)  Retained earnings

A.  Pursuant to the ROC Company Law, 10% of the annual after-tax net income of each company must be appropriated as legal reserve until the total amount of the legal reserve equals the share capital. Such reserve can only be used to offset a deficit and cannot be distributed as cash dividends. When the legal reserve has reached 50% of the company's issued share capital, up to 50% thereof can be used to increase share capital in accordance with resolutions at the stockholders' meeting.

B.   In accordance with the Company's Articles of Incorporation, net income must be distributed in the following order:

a. to cover prior years' losses, if any;

b. as legal reserve equal to 10% of net income after tax and distribution pursuant to clause (a);

c. as any other legally required reserve;

d. to pay dividends on preferred shares;

e. to pay bonuses to employees not less than 5% of net income after tax and distribution pursuant to clauses a. to d.; and

f.  the remaining amount, if any, shall be distributed pursuant to the proposal of the board of directors in accordance with the Company's dividend policy and resolution approved at the stockholders' meeting, of which 0.1% should be paid as remuneration to directors and supervisors and the remaining amount as dividends to shareholders.

Dividends may be distributed in the form of cash or shares, or a combination of both; provided, however, that dividends distributed in respect of any fiscal year in the form of shares shall not exceed two-thirds of total dividends to stockholders.  All shares issued, outstanding and fully paid as of the relevant dividend record date are entitled to share equally in any dividend or other distribution approved by the stockholders.

C.   The appropriation of 2008 earnings had been resolved at the stockholders' meeting in June 2009. Details are summarized below:


                   2008                   


      Amount    

Dividends per

   share (in dollars)   

Legal reserve          

$          485,095

$                  -

Stock dividends

           941,561

                0.30

Cash dividends

           627,707

                 0.20


$        2,054,363


Information on the appropriation of the Company's earnings referred above as resolved by the Board of Directors and approved by the stockholders will be posted in the "Market Observation Post System" at the website of the Taiwan Stock Exchange.

D.  The estimated amounts of employees' bonus and directors' and supervisors' remuneration for the year ended December 31, 2008 were $349,269 and $1,571, respectively, which were computed based on certain percentages of net income, prescribed by the Company's Articles of Incorporation, and were recognized as operating costs or operating expenses for the year ended December 31, 2008. Information on the appropriation of the Company's employees' bonus and directors' and supervisors' remuneration as resolved by the Board of Directors and approved by the stockholders will be posted in the "Market Observation Post System" at the website of the Taiwan Stock Exchange  Employees' bonus and directors' and supervisors' remuneration for 2008 as resolved by the stockholders at the stockholders' meeting on June 19, 2009 were not significantly different from those amounts recognized in the 2008 financial statements.  Employees' bonus totaling $349,269 was distributed through issuance of 10,429,000 shares of stock at $33.49 (in dollars) per share and by cash of $17 (in dollars).  The calculation of shares of employees' stock bonus distributed is based on the closing price of the Company's common stock on June 18, 2009, the previous day of the 2009 stockholders' meeting, after taking into account the effects of ex-rights and ex-dividends.

E.   As of December 31, 2010, the undistributed earnings, on a tax basis, is as follows:

Before January 1, 1998:

$                -

On and after January 1, 1998:

          

  Subjected to 10% additional tax

          7,291,395

  Not yet subjected to 10% additional tax

(        14,835,437)


 $        7,544,042

F.   Information related to the Imputation Tax System as of and for the years ended December 31, 2009 and 2010 is as follows:   


             December 31,             


       2009      

       2010      

Balance of the tax credit account

 $        1,030,506

 $        1,030,424

The stockholders at the stockholders' meeting decided not to pay dividends in 2010, so there is no creditable tax rate for 2009. The estimated creditable tax rate is 5.09% for 2010. The Company had no undistributed earnings for the year ended December 31, 2010 due to accumulated deficit, so there is no estimated creditable tax rate for 2010.

(22) Treasury stocks

A. Change in treasury stocks in 2010


        For the year ended December 31, 2010        


      Number of shares (in thousands)      


Reason for reacquisition  

Beginning

Increase

Decrease

 Ending

Amount

The stocks of the  Company held by  subsidiaries transferred from  long-term  investments

         -

     389

       -

    389

 $15,589

B. Stocks held by subsidiaries of the Company are treated as treasury stock. The treasury stocks held by the subsidiaries wherein the Company's ownership is more than 50%  cannot be participated in cash capital increase and have no right to vote. The remaining held by subsidiaries has equal right to common stockholders.

C. The Company's subsidiary, Contrel Technology Co., Ltd., holds 3,004 thousand of the Company's stocks, and the book value on Contrel Technology Co., Ltd. is $40.3 dollar per share. Based on the ownership percentage held by Contrel, the treasury stock amounted to $15,589.

 

 

 

(23) Loss per common share


             For the year ended December 31, 2009          


         Amount       

Number of shares

(in thousands)

Loss per

   common share    


Before tax

  After tax  

Before tax

After tax

Basic loss per share:     






Consolidated net loss

(($3,231,678)

($2,397,073)

  3,237,124

($   1.00)

($  0.74)

 


             For the year ended December 31, 2010          


        Amount        

Number of shares

(in thousands)

Loss per

   common share   


 Before tax

  After tax

Before tax

After tax

Basic loss per share:  






Consolidated net loss

($13,412,565)

($14,214,041)

6,478,209

($    2.07)

($   2.19)

Minority interests

(    614,874)

(    621,396)


(     0.10)

(    0.10)

Shareholders of the parent

($14,027,439)

($14,835,437)


($    2.17)

($   2.29)

The treasury stocks shown in Note 4(22) had no significant effect in the calculation of loss per share. As employee stock options had anti-dilutive effect for the years ended December 31, 2009 and 2010, these were not included in the calculation of loss per share.

(24)  Personnel, depreciation and amortization expenses


             For the year ended December 31, 2009    


  Operating costs

Operating expenses

      Total     

Personnel expenses




  Salaries

 $     6,169,951

$      1,491,724

 $     7,661,675

  Labor and health insurance

         168,956

           69,998

         238,954

  Pension

         311,187

          84,569

         395,756


 $     6,650,094

$      1,646,291

 $     8,296,385

Depreciation

 $     8,776,904

$        597,281

 $     9,374,185

Amortization

 $     1,459,924

$        548,719

 $     2,008,643

 


             For the year ended December 31, 2010    


Operating

   costs   

Operating

 expenses  

Non-operating

expenses (Note)

    Total    

Personnel expenses





  Salaries

 $20,242,265

$5,646,143

$          -

 $25,888,408

  Labor and health insurance

   1,335,243

    368,765

           -

   1,704,008

  Pension

  1,045,246

    357,634

           -

   1,402,880

  Other

  2,103,544

    414,195

           -

   2,517,739


 $24,726,298

$6,786,737

$          -

 $31,513,035

Depreciation

 $71,418,532

$1,613,245

$    168,710

 $73,200,487

Amortization

 $ 2,851,006

$3,326,097

           -

 $ 6,177,103

Note: Non-operating expenses pertain to depreciation of rental and idle assets.

5. RELATED PARTY TRANSACTIONS

(1)  Names of related parties and their relationship with the Company

        Names of related parties            

   Relationship with the Company         

Hon Hai Precision Industry Co., Ltd. and

subsidiaries (Hon Hai and subsidiaries)

Same major stockholder

G-TECH Optoelectronics Corporation (G-TECH)

An indirect investee company of Hon Hai

accounted for under the equity

method

Advanced Optoelectronic Technology Inc.

(Advanced)

An indirect investee company of Hon Hai

accounted for under the equity method

Pan-International Industrial Co. and subsidiaries

  (Pan-International and subsidiaries)

An indirect investee company of Hon Hai

accounted for under the equity method

Ampower Holding Ltd. and subsidiaries

(Ampower and subsidiaries)

An indirect investee company under the equity method (Note B)

Leadtek Global Group Limited (LGG)

Subsidiary (Note B)

Ningbo Chi Mei Optoelectronics Ltd. (NBCMO)

An indirect wholly-owned subsidiary (Note B)

Nanhai Chi Mei Optoelectronics Ltd. (NHCMO)

An indirect wholly-owned subsidiary (Note B)

TPO Displays Shanghai Ltd. (TPO Shanghai)

An indirect wholly-owned subsidiary (Note B)

Chi Mei Corporation and subsidiaries

  (CMC and subsidiaries)

A company which accounted the Company and its subsidiaries under equity method (Note B)

A. Except for those transactions with the above related parties, there were no material transactions between the other related parties for the year ended December 31, 2009 and 2010.

B. The Group had new related parties due to the merger on March 18, 2010. The disclosure of transactions between the Company and the related parties is from March 18, 2010, but the disclosure of balance sheet accounts is as of December 31, 2010.

(2)  Significant transactions and balances with related parties

A. Sales


        For the years ended December 31,       


         2009        

         2010        


   Amount 

  % of
 net sales

   Amount 

  % of
 net sales

CMC and subsidiaries

 $         -

       -

 $29,775,155

       6

Hon Hai and subsidiaries

   9,786,660

       6

  16,445,699

       3

Others

     139,550

       -

   2,051,042

       -


 $ 9,926,210

       6

 $48,271,896

       9

Sales prices charged to related parties were similar to non-related party transactions. The collection period was 30~120 days to related parties, and 30~90 days to non-related parties.

B. Purchases


           For the years ended December 31,      


          2009        

          2010        


   Amount 

 % of net
 purchases

   Amount 

 % of net
purchases

CMC and subsidiaries

 $         -

        -

 $28,935,264

        6

Hon Hai and subsidiaries

   5,600,791

        3

  10,075,738

        2

Advanced

     392,569

        -

   1,948,073

        -

Ampower and subsidiaries

           -

        -

   1,015,855

        -

Others

     601,928

        -

   2,001,445

        -


 $ 6,595,288

        3

 $43,976,375

        8


There is no similar transaction to compare with, and the transaction terms were decided by negotiation or at market prices. The payment term was 30~120 days to related parties, and 30~180 days to non-related party after delivery.

C. Processing costs


           For the years ended December 31,      


          2009         

          2010         


   Amount  

Accrued

 expenses  

   Amount  

Accrued

  expenses

Hon Hai and subsidiaries

 $  934,121

$1,644,955

 $1,859,725

$1,891,228

The Group subcontracted the processing of products of Hon Hai and subsidiaries in Mainland China. The processing fees were charged based on cost plus method.

D. Accounts receivable


                  December 31,                


          2009        

          2010       


   Amount 

% of total
accounts

 receivable

   Amount 

% of total
accounts

 receivable

CMC and subsidiaries

 $         -

        -

 $ 5,199,512

        8

Hon Hai and subsidiaries

   1,873,604

        8

   3,457,580

        5

Others

     50,549

       -

     57,125