leer t o shareholders - sercomm · 002 | 2017 annual report design zentrum nordrhein westfalen in...

Le�er to ShareholdersCompany Highlight00� Review of 201� Business Results00� Performance and Pro�tability Analysis00� Research and Development Status00� Summary of 2017 Business Plan00� Future Development Strategy

Company Overview0�� Milestones0�� Organizaon0� Board Members0�� Management Team0�� Corporate Governance0�� Internal Control System Execuon Status 0� Resoluons of Board Meengs 0�� Cer�ed Public Accountant (CPA) Informaon0�� Changes in Share Posions among Directors, Supervisors, Managers0�� Informaon of the Company’s Top Ten Shareholders0�� Long-Term Investments Ownership

Capital & Shares0�� Capital & Shares0�0 Status of Employee Stock Opon Plan

Business Overview0�� Business Acvies0� Long-term and Short-term Business Development Plans0� Market, Producon and Sales Outlook0�� Main Product Applicaons0�� Employer-employee Relaonships0�� Environmental Expenditure

Financial Review and Analysis0� Consolidated Financial Statements0�� Financial Analysis0�� 2017 Audit Commi�ee’s Review Report 0�� Financial Status and Operang Results

Special Disclosure0�� Subsidaries

Financial Informa�on

Contents

2017 Annual Report | 001

I. Letter to Shareholders Sercomm Corporation celebrated its 25th

anniversary in 2017. The overall market was full of opportunities and challenges. Sercomm adapted the advantages of system integration and grasped the business opportunities in broadband upgrades. The annual revenue and shipment volume hit a record high and created outstanding results. Sercomm set a fourth consecutive company record in 2017 with sales of NT$38.6 billion, a 5% increase over the NT$36.7 billion sales in 2016. The operating profit was NT$1.53 billion, the income before tax was NT$1.58 billion, and the net income attributable to owners of parent was NT$ 1.31 billion. Based on 244 million weighted average shares, the EPS for year 2017 was NT$ 5.38.

Looking back at 2017, Sercomm successfully dominated digital convergence opportunities. Its principal products - FTTx products, Cable DOCSIS 3.x, Integrated Access Devices, and SMB products - boosted Sercomm's operating performance. Meanwhile, benefiting from the commission of the new plant in Suzhou and the automation of production lines, Sercomm's accumulated shipment volume of broadband devices reached 33 million units; the overall production capacity reached the next level, making Sercomm the leader in the industry. Sercomm continues to expand its global footprint and has gained ground in Europe, China, and other emerging markets. Sercomm's market share in telecommunications has continued to increase. It has also actively participated in the International Telecommunications Exhibition and has exchanged information on 5G communications technologies and artificial intelligence (AI) with major international telecommunications companies.

Sercomm, an international corporate citizen, focuses on its own business ventures while maintaining its commitment to advancing corporate governance. In the area of corporate governance, Sercomm was awarded by FinanceAsia with the “Best Managed Company” and “Best Mid-Cap Company” for the third consecutive year. Sercomm actively concentrates on product innovation and R&D. The company received the “Red Dot Product Award Design” by

| 2017 Annual Report 002

Design Zentrum Nordrhein Westfalen in Germany, showing that Sercomm's R&D abilities are highly esteemed. Sercomm also published its first Corporate Social Responsibility Report, which was prepared according to international standards, demonstrating that 2017 was the first year of Sercomm’s corporate social responsibility in which it hoped to accomplish corporate social responsibility goals and declare its concept of perpetuating its business.

Facing the Internet of Things and the 5G era, Sercomm is optimistic about the AIoT (AI and IoT convergence) business trend and dominates the key technologies of communication. Sercomm has become the major solution partner behind Telcos, and is able to launch high value-added products such as Cloud IoT, Smart Energy Management, Smart Health, Smart Cities, LPWA solutions, and Small Cells. We are living in an environment of rapid transformation in the world of technological development. Sercomm and its employees will spare no effort to maintain the superior quality of the company s research and development and to build on its operational efficiency, which is one of the company s core competencies. Sercomm has maintained a firm commitment to continually enhance its corporate governance and corporate social responsibility. Sercomm will continue to move towards sustainable development and to seek better corporate value for its shareholders, customers, and employees.

James Wang President & CEO

Sercomm Corporation


II. Company Highlight 2.1 Review of 2017 Business Results

Unit: Thousand NTD

Item 2016 2017 Year on Year Change (%)

Wired Product 6,855,710 4,130,729 -39.75

Wireless Product 29,264,024 33,925,943 15.93

Others 582,000 543,330 -6.64

Total Revenue 36,701,734 38,600,002 5.17

2.2 Performance and Profitability Analysis

Item 2016 2017

Financial Structure

Debt over Equity (%) 69.06 70.82

Long-term Funds to Fixed Assets Ratio (%) 233.87 229.73

Liquidity Analysis

Current Ratio (%) 120.63 118.22

Quick Ratio (%) 84.86 82.25

Profitability

Return on Assets (%) 6.54 5.50

Return on Equity (%) 20.36 17.66

To Paid-in Capital (%) Operating Income 72.90 62.45

Pretax Income 74.21 64.46

Profit Margin (%) 3.97 3.33

Earning per Share(NTD) 6.02 5.38

2.3 Research and Development Status At Sercomm, new product R&D projects are formulated in response to market demand based on

our core network communications technology, market trends and the evolving IT & communications

industry. All research proposals for new products must also undergo a review by R&D, marketing and

sales units before R&D resources are invested.

To accelerate the acquisition of new technologies, Sercomm also actively seeks out partnership

opportunities in addition to in-house R&D. This has led to the development of various application

servers that offer high-performance, ease of administration and integration with the Internet. A total of 8

projects were completed from our 2017 R&D plan.


2.4 Summary of 2017 Business Plan (1) Business Direction

1. Deliver high performance in management to maintain the Company’s high rate of growth and solid profitability.

2. Actively develop all kinds of specialized servers, maintain technical leadership and emphasize long-term cultivation of personnel.

3. Strengthen quality of service, continue the optimization of work processes and improve overall operational efficiency.

4. Consolidate existing gains in the European, American and Japanese markets while actively developing our distribution channels in other regions to establish a global distribution network.

5. Focus on cost and quality control while expanding our production capability to meet market demand.

(2) Projected Sales and Basis

Looking back at 2017, Sercomm benefited from the booming development of the broadband

telecommunications market. The company sales revenue hit a record high for the fourth

consecutive year and performed excellently. With a strong knowledge base in software/hardware

integration and mechanical design, Sercomm has become a strategic partner in providing

solutions to major telecom operators. The company has successfully mastered key technologies in

the broadband industry, including the home, enterprise, telecommunications, IoT, and cloud

service markets. Sercomm's major products - FTTx products, Cable DOCSIS 3.x, and Integrated

Access Device - continued to gain strength. Total shipments of wireless broadband equipment

reached 33 million units in 2017, making Sercomm a leader in the industry.

The new production plant in Suzhou allowed for the continuing automation of the production

line and optimization of the manufacturing management system, thus optimizing Sercomm's

manufacturing capacity. Sercomm's commitment to increasing unit production efficiency leads to

operating efficiency, reducing company costs, and implementing efficiency improvements.

Looking forward to the overall economy in 2018 and facing the coming 5G Mobile

Communications era, the development of IoT-related applications is flourishing. The company has

been deeply involved in research and development of key technologies in broadband

telecommunications. With a number of new leading-edge communications technologies, it helps

customers develop new market opportunities and continues to enhance the added value of

products, which will further increase its operating momentum in the future.

(3) Major Production and Marketing Policies 1. Carry out sound production and target management while improving production processes. 2. Closely monitor the quality and delivery times of key components as well as


supply-and-demand and changes in pricing. 3. Dedicate resources to the development of new products and expand existing product ranges to

quickly meet market demand. 4. Actively expand our marketing network and form strategic alliances with brand partners and

telecom operators in European, North America and Asia. 5. Strengthen sales management, consolidate market niches and expand developing markets. 6. Stay fully up-to-date on market distribution channels and demand. Strengthen collection of

market intelligence. 7. Boost Sercomm's industry profile, establish a sound market reputation and provide high-quality

service. 8. Continue to carry out production cost reduction plans to make products more price competitive. 9. Enrich the properties and regions of our clients to avoid the risk of over-concentration.

2.5 Future Development Strategy 1. Expand the company’s market value to benefit shareholders and employees. 2. Pay attention to intellectual property and cultivate outstanding personnel. 3. Strengthen technology research and development. 4. Improve market position and become the market leader. 5. Increase operational income and maximize profitability.

2.5.1 The Effects of External Competition, Regulation and the Overall Business Environment

As for the external competition situation, as soon as the 3GPP set up the 5G standard,

many countries had already invested in the development of 5G. The "Taiwan 5G Industry

Alliance" was established jointly by Chunghwa Telecom, the 5G Technology Program Office of

the Department of Industrial Technology of the Ministry of Economic Affairs, the Industrial

Technology Research Institute and the Institute for Information Industry. The goal is to test the

experimental 5G network at the end of this year (2018) and early next year, then launch 5G

pre-commercial operation (between the experiments and commercial deployments) in Taiwan

in 2020.

With the invitation of the Ministry of Economic Affairs, the "Taiwan 5G Industry Alliance"

was led by Chunghwa Telecom and established on January 29, 2018. The goal is to launch

Taiwan's 5G pre-commercial operation in 2020 and synchronize with the international 5G

standard and schedule of commercial operation. The Alliance includes the group of end

equipments, small cells, networking, service platforms, application services, and integration

testing. The Alliance focuses on the R&D of 5G technologies and innovative applications such

as chips and end equipments, manufacturing and system connections, research and


manufacturing of small cell and SDN-related products, and edge computing, etc. In doing so,

the Alliance hopes to connect the industry chain of chips, networking, and small cell to end

equipments and edge computing, service platforms, information security, and content

suppliers including MediaTek, Asus, HTC, Advantech, Quanta, and Sercomm. There are more

than 40 manufacturers working together to accelerate the promotion of 5G development in

Taiwan.

With the arrival of the 5G era, many industries will be transposed and changed. Under the

leadership of the national team, 5G technology will lead to the application development of 4K

and 8K content, which will promote the development of LCD TVs and other industries in

response. In the future, we will sell systems, small cells, and other products to clients around

the world and continue to improve the development of enterprises and re-create a prosperous

Taiwanese society.

In China, China Mobile and seven other agencies will work together to set up 500 stations

in five major cities to form 26 types of 5G business scenarios. Regarding the 5G plan of China

Mobile:

Actively participate in the third phase testing of 5G technological R&D in the first quarter

of 2018 and build a scale experimental testing network to make the 5G industry chain

reach the pre-commercial goal within one year.

When the R15 standard is frozen in the third quarter of 2018, launch a 5G scale

experiment in five major cities, conduct a verification of critical technology applications

and commercial operations, and commence developing a business demonstration

network.

Start business demonstrations in 12 cities in the first quarter of 2019.

Start commercial terminal chips in the second quarter of 2019 and begin operational

verification of commercial construction.

Verizon, the telecommunications leader in the U.S., announced on December 29, 2017

that it will use Samsung Electronics from Korea as the leading network facilities supplier and

provide 5G (fifth generation mobile network) service in Sacramento, California in the second

half of 2018. 5G commercial operation is planned to be launched in 3 to 5 cities before the end

of 2018, starting with Sacramento, California, in the second half of 2018. In fact, AT&T began

to test 5G operation in 11 cities in 2017. They announced that they would finish 5G testing in

20 cities before the end of 2017, but then they revealed that they would pilot a test of 5G

service in Texas. The other two U.S. telecommunication companies, T-Mobile and Sprint, will

work together to construct a 5G network all over the U.S. which is going to be finished by the

end of 2019 or in early 2020.


The Trump administration is contemplating the nationalization of 5G networks. According

to Reuters, a senior U.S. government official said that President Trump's national security

team is scrutinizing strategy options to contend against China. One of the options is to

construct a 5G wireless network using a government agency, that is, in order to maintain

federal control of part of the U.S. mobile network and to prevent penetration from China.

managing part of the U.S. mobile network with the federal government to prevent the

penetration of China. In the following 6 to 8 months, the Trump administration will have an

intense debate internally regarding how to construct a nationalized network and how to raise

financial support. There should be loud protests from the relevant industries on this issue.

There are changes in the legal environment, including the amendment and addition of legal

rules and executive orders from the competent authority:

1. Add and delete amendments to the "Statute for Industrial Innovation.” The amendments were

promulgated by Presidential Decree Hua-tzung-Yi No. 10600141601 on November 22, 2017 and

were effective on the day of promulgation. The key points of the amendments are:

(1) State-owned enterprises invest in R&D. To encourage state-owned enterprises to invest actively

in innovation and R&D and to create breakthroughs and innovation in product technology or

service processes, state-owned enterprises should budget at a specific ratio of their total budget

to invest in R&D. The ratio of the budget should be determined by the competent authorities and

each ministry of each state-owned enterprises based on their characteristics and size.

(2) Tax incentives for Limited Partnership Venture Capital to attract international funds to invest in

Taiwan. This refers to the international taxation system and the Venture Capital established

under the Limited Partnership Act. If the investment meets the criteria below, it may tax using the

concept of Pass-Through Entities. The criteria are: Total investment amount is above TWD 300

million, total funds invested in Taiwan are higher than 50% of the total capital, and the amount

invested in new ventures is above 30% of the total paid-in capital or TWD 300 million (whichever

is lower).

(3) A tax incentive for Angel Investors. To assist new ventures in obtaining working capital, if an

individual invests cash in a new venture that is less than two years from start-up, the amount can

be deducted from their individual gross consolidated income, but the amount deducted is limited

to TWD 3 million every year.

(4) Stocks for employee remuneration are subject to tax-deferment. Income tax returns with a

five-year deferred-payment tax subject to employee remuneration stocks (stocks for employee

remuneration, employees subscribed for cash capital increases, treasury stocks distributed to

the employees, employee stock warrants and restricted employee shares) are amended to be

levied based on the transfer price when the stock is transferred.

(5) The stocks distributed to inventors in institutions for academic research are entitled to

tax-deferral. Inventors (such as professors, research fellows, etc.) who receive stocks distributed


from institutions for academic research are allowed to pay tax based on the transfer price when

the stock is transferred in order to promote industrialization of the research achievement.

(6) Encourage innovation procurement. Assist procurement personnel from government agencies to

perform preferential purchasing of software, innovative products, and services according to

inter-entity supply contracts.

(7) Set up an evaluation mechanism for intangible assets. In order to enhance the circulation and

utilization ability between government R&D achievements and market, an intangible assets

evaluation database will be established and work with other measures such as financial

investments.

(8) Mandatory auctions for idle industrial land. The government will develop industrial parks, and if

the land meets the definition of idle land, a "progressive, diversified administrative control

measure" will be applied, such as deadline improvement, fines, and negotiation, mandatory

auctions, or others in order to speed up the industrial usage of the idle land.

2. The "Standards of Withholding Rates for Various Incomes" were amended and promulgated by

Decree No. 10604722530 issued by the Ministry of Finance on December 29, 2017, and have been

in effect since January 1, 2018.

Currently, when individual shareholders (hereinafter referred to as domestic investors) residing

within the territory of the Republic of China receive dividends, the dividends should be included in

the gross consolidated income and filed as part of the income tax return, receiving the highest

income tax rate of 45%. 50% of the profit-seeking enterprise income tax is permitted to be offset as

tax payable. When individual shareholders do not reside within the territory of the Republic of China

or profit-seeking enterprise shareholders have their head office outside the territory of the Republic

of China (hereinafter referred to as foreign investors), the income tax should be withheld at a rate of

20% of the amount distributed by the withholder when payment is made. The tax burden for the

dividends is unbalanced and leads to domestic capital shareholders trying to avoid tax burdens by

converting into foreign investors.

To improve the fairness of income tax on dividend income between domestic and foreign

investors, prevent tax avoidance by false foreign investors, establish an income tax system that

complies with international trends, and is competitive, fair and reasonable, starting from 2018, the

structure of the income tax rate for profit-seeking enterprise income tax and individual income tax

will be adjusted. The income tax rate for profit-seeking enterprises will increase from 17% to 20%,

the maximum income tax rate for individual income tax will be reduced from 45% to 40%, the partial

imputation system in the integrated income tax system will be abolished at the same time and an

alternative dividend income tax system will be implemented. The standard which adjusts the income

tax withholding rate for the dividend income of foreign investors will be amended from 20% to 21%,

reducing the tax burden difference from a maximum 16.8% to 4% between domestic and foreign


investors.

Ifo, a German Institution for Economic Research, has conducted World Economic Survey (WES)

for the 1st quarter of 2018. The survey received responses from 1,199 experts in 120 countries. The

indicator rose from 17.1 to 26.0 points for the first quarter of 2018. Furthermore, the indicator

recorded positive value for five consecutive quarters and also highest level since autum 2007. The

world economic situation is 28.3 points, which increased 11.1 points compared with previous quarter.

The index expectations for the next 6 months is 23.9 points which increased 7.0 points compared

with previous quarter.

For the World Economic Climate in major regions, the Ifo economic climate improved in

advanced economies and economic expectations also showed an exceptional improvement. The

expectation of 6 months later were increase on the evaluation compared with the previous quarter.

The economic climate for emerging markets and developing economies recorded positive value for

four consecutive quarters. Both assessments of the current economic situation and expectations

remain positive.

According to Ifo survey, short and long-term interest rates will rise in the next six months. They

expect world trade to pick up significantly. The price level increase in the world economy is expected

to gather impetus in the months ahead.

World Economy

2016 Q1

2016 Q2

2016 Q3

2016 Q4

2017 Q1

2017 Q2

2017 Q3

2017 Q4

2018 Q1

Climate -7.0 -3.5 -6.6 -0.7 3.0 13.5 13.2 17.1 26.0

Situation -14.2 -17.4 -16.8 -14.9 -8.7 5.1 12.5 17.2 28.3

Expectation 0.5 11.6 4.1 14.6 15.5 22.2 14.0 16.9 23.9

Source Ifo World Economic Survey (WES) of the 1st quarter 2018.


World Economic Climate in Advanced Economies

Source Ifo World Economic Survey (WES) of the 1st quarter 2018.

World Economic Climate in Emerging Market and Developing Economies

Source Ifo World Economic Survey (WES) of the 1st quarter 2018


Through findings in the survey of Taiwan the current overall economy remain “satisfactory”,

which sames as the previous result. Capital expenditures were “worse", due to the “worse”

expectation percentage increase. Private consumption turned to negative, due to the “better”

expectation percentage decrease and increase in “satisfactory” expectation. As shown, the primary

result was lower than previous quarter. The expectations of economy after six months were thought

to be “getting better”, due to the “worse” expectation percentage decrease and increase in

“satisfactory” expectation. Capital expenditures were “better", which lower than the previous quarter.

Private consumption turned to positive to “better”, due to the “better” expectation percentage

increase and decrease in “worse” expectation. Moreover, the expert expected export/import would

turn better, and the US dollar to appreciate against the New Taiwan dollar. Furthermore, increase in

long-term and short-term interest rates and decrease in the stock price level.

WES Survey Results in Taiwan (evaluation of the current situation)

Notes:

1. The survey results in the first quarter of 2018 in Taiwan were preliminary statistics of the questionnaires which the council assisted the Ifo in collecting. For the final result, the full report published by the Ifo shall prevail.

2. WES was a qualitative survey and respondents shall choose an answer from three possible categories: “good”, “satisfactory” and “bad”; The individual replies are combined for each country without weighting as an arithmetic mean of all survey responses in the respective country. Thus, for each qualitative question and for each country the respective percentage shares (+), (=) an�� - and ��-shares. As a result, the balance ranges from -100 points and +100 points. The mid-range lies at 0 points and is reached if the share of positive and negative answers is equal.

Data Source: National Development Council. The survey period was in January 2018. Completed questionnaires were returned by 12 of the 12 interviewees.


WES Survey Results in Taiwan (expectation after 6 months)

Notes:

1. The survey results in the first quarter of 2018 in Taiwan were preliminary statistics of the questionnaires which the council assisted the Ifo in collecting. For the final result, the full report published by the Ifo shall prevail.

3. WES was a qualitative survey and respondents shall choose an answer from “getting better” (ascending or increasing), “remain unchanged” (constant or reasonable), “getting worse” (descending or decreasing) for each question. After netted the positive replies and the -negative replies, and divided through the amount of all received responses and multiplied by 100. The positive answers indicates that the majority expects trends to increase, whereas the negative answers replies the expectation of decreasing trend. While 0 point replies the situation remain unchanged. Data Source: National Development Council. The survey period was in January 2018. Completed questionnaires were returned by 12 of the 12 interviewees.

In summary, the overall economic view is that the major world economies are in an upward trend.

This is also true of the Taiwan economy. Given the forecast of an economic future in which growth will

be moderate, the company intends to be prudent and pragmatic. Sercomm constantly reviews all

outside factors which can influence its operation, and is prepared to make whatever adjustments are

necessary to ensure that the company meets its operational objectives.

The most significant variable is the start of a Sino-US trade war this year. The United States,

defending against solar cells and washing machines, levied punitive tariffs on steel and aluminum.

They also announced the investigation results of section 301 on March 22. U.S. President Trump


considered a big “fine” as part of a probe into China's alleged theft of intellectual property of the U.S.

and announced that the U.S. government would impose high tariff investment restrictions on products

imported from China worth USD 60 billion per year.

To counterbalance the loss because of the trade war launched by the United States, China is

studying an increase on tariffs on partial products imported from the U.S. The total amount affected is

about USD 3 billion that the U.S. exports to China. Among them, a 15% tariff increase will be imposed

on fruits, seamless steel pipes, etc., and a 25% tariff increase will be imposed on pork and recycled

aluminum.

After Trump signed the memorandum, based on U.S. regulations, the product list covered by the

tariffs will be published 15 days after the signing date. And then the public comment period will last for

30 days, so the scope of the products of the trade sanction launched by the U.S. on China will be

clearer after 45 days. There will be a 60-day consultation period after the confirmation of the product list,

which will provide space for both parties to negotiate. The tariffs will be imposed on Chinese products

after the consultation period.

Based on the statistics of the trade war between China and the U.S., China's losses will be higher

than those of the U.S., thus sparking moderate response from China. Although China is expected to

take repercussive actions, the spokesman of the Ministry of Commerce of the People's Republic of

China stated that the U.S. used the principle of “national security” to restrict the import of products. The

restriction severely damages the multi-trade system represented by the WTO, disturbs the international

trade order, and has been opposed by several WTO members. He said that the Chinese are also

negotiating with the U.S. through multi-level and multi-channel pathways and will take legal actions

under the WTO structure. China will continue to work with other WTO members to maintain the stability

and authority of multilateral trade rules.

Taiwan, of course, where exports are economic arteries, is a direct and indirect victim of the

restriction. The impact is higher than in other countries, and it is likely that the scale of indirect damage

is higher than direct damage, making it difficult to estimate damages. The participation rate of Taiwan in

the global value chain is as high as 67.6%. The direct impact is significant because of the U.S. having

started protectionist measures against China. The output reduction will be 0.8% of GDP. The output

reduction will increase to 1.8% of GDP if the effects of retaliation by China are included.

The minister of the Ministry of Economic Affairs, Shen Jong-Chin, said that if the U.S. imposes

sanctions on the section 301 investigation, it may affect two industries in Taiwan—one that invests in

and manufactures end equipments in China and sells to the system integrators in China or sells directly

to the U.S. and the other that produces components or semi-finished goods for clients in China to

further assemble and sell to the U.S. Taiwan exports 40% of its products and services to China. Many


of its exports are semi-finished goods and equipment. If the economy in China slows down, exports will

decrease. The exports from Taiwan to China will definitely decrease. On the macroscopic view, export

trade is Taiwan's economic artery. If global trade decreases and economic growth decreases, then

Taiwan's economy would certainly be affected.

The indirect victimization may be overwhelming and hard to estimate. Based on historical data,

every 1% change in the economic growth rate of China effects Taiwan’s economic growth rate by

0.29%. Every 1% change in the economic growth rate of the U.S. affects Taiwan’s economic growth

rate by 0.07%. Therefore, irrespective of the level of economic damage in China and the U.S., it is

certain that Taiwan’s economic growth will be reduced, and it may have a double synergistic effect.

According to the IMF study, if the export growth rate of China decreased by 1%, the growth rate of

exports of Asian economies to China will be reduced by 2% to 3%. And because of the close economic

and trade relationship across the strait, the impact on Taiwan will be higher than the numbers

mentioned above.

Because of the high correlation between the industries of Taiwan and China, many Taiwanese

companies invest in China, and many intermediate materials exported to China are ultimately sold to

the United States. According to statistics from the Ministry of Economic Affairs, the number of

intermediate materials that Taiwan exported to China (including Hong Kong) last year was USD 113.32

billion (approximately NTD$ 3.4 trillion), which is 86.97% of the total exports of Taiwan to China

(including Hong Kong). Deducting the agreed items of the WTO ITA, the amount is USD 29.23 billion

(approximately NTD$ 876.9 billion). If the U.S. imposes sanctions on China, Taiwan will certainly be

adversely affected. At this stage, what the government can do is to try to obtain an exemption from the

United States through bilateral consultation.

If the Trump administration is not satisfied with the improvement of the trade deficit with China in

the future, the trade war will intensify. Many countries will file claims against the U.S. through the WTO,

and then the WTO will take one or two years to finish the decision process. No matter what the result is,

the impact to the industries in the sanctioned countries has happened, and the United States will also

be affected by the increase in costs because of the rise in import tariffs.

Because of the Sino-US trade war, short-term uncertainty to Taiwan's economic development is

quite high, and a lot of turbulence will occur. Kan Kamhon, director of the Institute of Economics,

Academia Sinica, predicts that the next step from Trump will be to force China to sit down and talk, as

no one will benefit if the trade war is launched. If the United States imposes import tariffs on products

from China, U.S. consumers will be immediately affected by higher prices for products from China. The

United States will have to pay a relatively high cost. It is estimated that the chances of starting a trade

war are lower than not starting a trade war.


Based on Ma Tieying, an economist at DBS, in order to avoid the tariffs imposed by the U.S. in the

long run, technology companies located in China may try to decentralize their production lines to other

Asian countries. Since the supply chain of the semiconductor industry in Taiwan has been established

completely for high value-added enterprises, it may be a good choice to relocate their production lines

to Taiwan.

Wu Chung-Shu, President of the Chung-Hua Institute for Economic Research, estimated that the

economic growth rate for Taiwan this year will reach 2.2% to 2.3%, but this will be affected by the

Sino-US trade war. The reasons for uncertainty are high this year.


III. Company Overview 3.1 Milestones Date of Establishment: July 29, 1992

2017

Participated in “2017 International CES” and displayed the full range of IoT solutions

Participated in “Mobile World Congress 2017” and displayed IoT solutions and the full range of LTE Small Cells.

Launched the World’s First LWA Small Cell

Sercomm Full HD WiFi IP Camera and Smart Door Window Sensor won Red Dot Product Design Award 2017

Participated in “2017 Broadband Forum” and showcased full range of Broadband Residential Gateway

Enrolled in “Taiwan High Compensation 100 Index”

Sercomm Russia Grand Opening

Acquired Certification of "Taiwantrade Supplier Verification" by TÜV Rheinland

Published first Corporate Social Responsibility Report according to international standards

R&D Achievements LTE-M Module

10GPON Gateway

Human Factor Smart Lighting Cloud Platform

Outdoor Small Cell

NB-IoT Module

Smart Doorbell Camera

Outdoor Fixed Wireless LTE High Speed Relay CPE Equipment

2018

Participated in “2018 International CES” and displayed the full range of AIoT and LPWA products.

Participated in “Mobile World Congress 2018” and displayed LTE-M solutions


3.2 Organization 3.2.1 Organization Chart

Shareholders’ Meeting

BOD

Chairman

President / CEO

Compensation Committee

Auditing Office

Human Resource Division

Financial Management

Division

Sales Division II

Sales Division I

Sales Division III

Intelligent System

Business Unit

New Business

Development Division

Intelligent System

Engineering Division

Product Development

Division

Research & Development

Division

Global Supply & Logistics Division

Chief Operation

Officer

Information Service Division

Quality Assurance

Division

Manufacturing Division

Audit Committee


3.2.2 ��

Department Main Responsibilities

President Office Drafting, planning, implementation and monitoring of company operation plans

Research & Development Division New Product Research and Development and drafting, planning and implementation for technical blueprints.

Product Development Division Product development project operation, customer services and support etc.

Sales Division I Sales promotion and operation, customer services and support etc.

Sales Division II Sales promotion and operation, customer services and support etc.

Sales Division III Sales promotion and operation, customer services and support etc.

New Business Development Division New business promotion and operation, customer services and support etc.

Intelligent System Business Unit IP Surveillance’s sales promotion and operation, customer services and support etc.

Intelligent System Engineering Division

Research and development on Intelligent related products, product operation and product planning

Global Supply & Logistics Division Production material planning, procurement, management and inventory control.

Manufacturing Division All product QA-related work, including production implementation, product testing and machine maintenance. Production control, property management and material procurement etc.

Quality Assurance Division Planning, promotion, implementation and monitoring of quality control procedures

Finance Management Division Finances and accounting, legal and stock-related operations

Human Resources Division Creating strategic human resources systems and solutions, including recruitment, salaries and bonuses, professional development, performance management and providing general HR services

Information Service Division Network management, information system importation, planning, operation and monitoring

Auditing Office Auditing, maintenance and improvement of internal control systems, offering recommendations and assisting in creating solutions for issues faced by other departments, including improving operations and efficiency.


3.3 Board Members 3.3.1 Information Regarding Board Members

As of April 7, 2018

Name / Position Nationality Elected

Date Term Gender (Yrs)

Date First Elected

Shareholding when Elected

Current Shareholding

Spouse & Minor

Shareholding Education & Experience

Current Position

Shares % Shares % Shares %

Paul Wang Chairman Representative of Pacific Venture Partners Co. Ltd.

Taiwan 2016.6.15 Male 3 2004.6.11 3,671,926 1.51 3,671,926 1.49 0 0.00

Carnegie Melon University, PhD in Physics Chairman of Sercomm Corporation

Note 1

Lu, Shyue-Ching Director Representative of ZhuoJian Investment Co., Ltd.

Taiwan 2016.6.15 Male 3 2013.6.20 3,472,094 1.43 4,197,094 1.71 0 0.00

University of Hawaii, Ph.D in Electric Engineering Former Chairman of Chunghwa Telecom Co.

Independent Director of MiTAC Holdings and Radium Life Tech Co., Ltd., Directors of CTCI ASI Corporation

James Wang Director & President

Taiwan 2016.6.15 Male 3 2001.5.28 959,006 0.48 989,006 0.40 0 0.00

Harvard Business School, MBA Carnegie-Melon University, ME President of Sercomm Corporation

Note 2

Ben Lin Director & Executive VP.

Taiwan 2016.6.15 Male 3 2004.6.11 744,201 0.31 744,201 0.30 736,896 0.30

National Tsing Hua University, MS Director of IBM Subsidiary

Note 3

Shih, Chin-Tay Independent Director

Taiwan 2016.6.15 Male 3 2013.6.20 0 0.00 0 0.00 0 0.00

Princeton University, PhD in Electrical Engineering Stanford University, MS in Management Science and Engineering Dean of the College of Technology Management of National Tsing Hua University

Independent Director of Vanguard International Semiconductor Corporation and FocalTech Systems Co.,Ltd.

Steve K. Chen Independent Director

U.S.A 2016.6.15 Male 2 2014.6.17 0 0.00 0 0.00 0 0.00

Harvard University, PhD in Law Active Lawyer

Note 4


Name / Position Nationality Elected

Date Term Gender (Yrs)

Date First Elected

Shareholding when Elected


Spouse & Minor

Shareholding Education & Experience

Current Position

Shares % Shares % Shares %

Rose Tsou Independent Director

Taiwan 2017.6.22 Female 1 2017.6.22 0 0.00 0 0.00 0 0.00

Northwestern University, Kellogg School of Management, MBA Boston University MS in Mass Communication Head of Oath APAC

Note 5

Note Directors and supervisors are not spouse or within second-degree relative of consanguinity to each other.

Shares under Trust with Discretion Reserved:

Director and President/James Wang – 1,000,000 Shares

Director and Executive VP/Ben Lin – 3,154,439 Shares

Note 1 Chairman and CEO of Sercomm USA Inc.; Director of Prosperity Dielectrics Co., Ltd., and Taiwan Cement Co., Ltd., ;

Independent Director of Taishin Financial Holdings, UPC Technology Corp; Chairman of Monte Jade Science and

Technology Association

Note 2 Owner of Sercomm Trading Co. and Zealous Investments Ltd.; Chairman of Shukuan Investments Ltd., Sernet (Suzhou)

Technology Ltd., DWNet Technology Ltd., ZhuoJian Investment Co., Ltd. and Suzhou FemTel Communications;

Independent Director of Creative Sensor Inc.; Director of Sercomm Japan Corp., Sercomm Russia LLC, Hawxeye Inc.

and Nanjing FemTel Communications

Note 3 Owner of Smart Trade Inc.; Director of Shukuan Investments Ltd., Sernet (Suzhou) Technology Ltd., Sercomm USA

Inc., Sercomm Japan Corp., Sercomm Russia LLC, Hawxeye Inc., Suzhou FemTel Communications, Nanjing FemTel

Communications and Presciense Limited

Note 4 Executive Director of TriMax & Companies LLC and DNF Asset Management LLC; Director of Spatial Digital Systems

Inc., StemBios Technologies, Inc. and Bloominous Inc.; Chairman of eGtran Corporation, Gtran Inc., EZconn

Corporation, Oak Analytics Inc. and PhazrIO Inc.

Note 5: Independent Non-Executive Director of Haier Electronics Group Co., Ltd., Director of Hong Kong Television

Entertainment Company Limited and FundRich Securities Co. Ltd.


3.3.2 Major Institutional Shareholders

April 7, 2018

Name of Institutional Shareholder Primary Shareholder of Institutional Shareholder Shareholding %

Pacific Venture Partners Co. Ltd. Su Yi 62.50%

DaYuan Management Consulting Co. Ltd. 35.00%

ZhuoJian Investment Co., Ltd.

An-Bang Lin 25.48%

James Wang 17.34%

Zhu-Xian Lin 12.33%

3.3.3 Major Shareholders of the Major Shareholders that Are Juridical Persons

April 7, 2018

Name of Juridical Persons Major Shareholders of the Juridical Persons Shareholding%

DaYuan Management Consulting Co. Ltd. Honesty Ventures Limited 75.00%

5388 SUNRISE INC. 25.00%


3.3.4 Professional Qualifications and Independence Analysis of Directors and Supervisors

Criteria

Name

Meet One of the Following Professional Qualification Requirements, Together with

at Least Five Years Work Experience

Independence Criteria(Note)

Number of Other Public

Companies in Which the

Individual is Concurrently Serving as an Independent

Director

An Instructor or Higher Position in a

Department of Commerce, Law,

Finance, Accounting, or Other Academic

Department Related to the Business

Needs of the Company in a Public

or Private Junior College, College or

University

A Judge, Public Prosecutor, Attorney,

Certified Public Accountant, or Other

Professional or Technical Specialist Who has Passed a

National Examination and been Awarded a

Certificate in a Profession

Necessary for the Business of the

Company

Have Work Experience in the Areas of Commerce,

Law, Finance, or Accounting, or Otherwise Necessary

for the Business of

the Company

1 2 3 4 5 6 7 8 9 10

Paul Wang Chairman Representative of Pacific Venture Partners Co. Ltd.

� � � � � � 2


� � � � � � � � � � � 2

James Wang � � � � � � � � � 1

Ben Lin � � � � � � � � � 0

Shih, Chin-Tay � � � � � � � � � � � � 2

Steve K. Chen � � � � � � � � � � � � 0

Rose Tsou � � � � � � � � � � � 0

Note Please tick the corresponding boxes if directors or supervisors have been any of the following during the two years prior to being elected or during the term of office.

1. Not an employee of the Company or any of its affiliates.

2. Not a director or supervisor of the Company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the Company, its parent company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares.

3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of 1% or more of the total number of outstanding shares of the Company or ranking in the top 10 in holdings.


4. Not a spouse, relative within the second degree of kinship, or lineal relative within the fifth degree of kinship, of any of the persons in the preceding three subparagraphs.

5. Not a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total number of outstanding shares of the Company or that holds shares ranking in the top five in holdings.

6. Not a director, supervisor, officer, or shareholder holding 5% or more of the share, of a specified company or institution that has a financial or business relationship with the Company.

7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the Company or to any affiliate of the Company, or a spouse thereof.

8. Not having a marital relationship, or a relative within the second degree of kinship to any other director of the Company.

9. Not been a person of any conditions defined in Article 30 of the Company Law.

10. Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law.


3.3.5 Remuneration to Directors

Unit: Thousand NTD

Name / Position

Base Compensation (A)

Bonus to Directors (C)

Allowances (D)

Ratio of total remuneration to Net

Income (%) A+C+D

Salary, Bonuses & Allowances

(E)

Severance Pay (F)

Profit Sharing-Employee Bonus (G)

Ratio of Compensation to Net Income (%) A+C+D+E+F+G

Sercomm Consolidated Subsidiaries







Sercomm Consolidated Subsidiaries Cash

Bonuses Stock

Bonuses Cash

Bonuses Stock

Bonuses Paul Wang Chairman Representative of Pacific Venture Partners Co. Ltd.

0 0 13,119 13,119 24 24 1.00 1.00 1,400 4,280 0 0 0 0 0 0 1.11 1.33

James Wang Director & President

0 0 5,247 5,247 24 24 0.40 0.40 8,400 11,280 192 192 8,000 0 8,000 0 1.67 1.89

Ben Lin Director & Executive VP

0 0 5,247 5,247 24 24 0.40 0.40 3,850 8,040 66 66 4,000 0 4,000 0 1.01 1.32


5,310 5,310 5,247 5,247 78 78 0.81 0.81 0 0 0 0 0 0 0 0 0.81 0.81



Rose Tsou Independent Director


Compensation Range

Name of Director

Total Amount A+C+D

Total Amount A+C+D+E+F+G

Sercomm Consolidated Subsidiaries Sercomm Consolidated

Subsidiaries

Below NTD 2,000,000 Rose Tsou Rose Tsou Rose Tsou Rose Tsou

NTD 2,000,000 NTD 5,000,000 Shih, Chin-Tay; Steve K. Chen

Shih, Chin-Tay; Steve K. Chen



NTD 5,000,000 NTD 10,000,000

Lu, Shyue-Ching - Representative of ZhuoJian Investment Co., Ltd.; James Wang; Ben Lin

Lu, Shyue-Ching - Representative of ZhuoJian Investment Co., Ltd.; James Wang; Ben Lin

Lu, Shyue-Ching - Representative of ZhuoJian Investment Co., Ltd.

Lu, Shyue-Ching - Representative of ZhuoJian Investment Co., Ltd.

NTD 10,000,000 NTD 15,000,000

Paul Wang- Representative of Pacific Venture Partners Co. Ltd.

Paul Wang- Representative of Pacific Venture Partners Co. Ltd.

Paul Wang- Representative of Pacific Venture Partners Co. Ltd.; Ben Lin

NTD 15,000,000 NTD 30,000,000 James Wang

Paul Wang- Representative of Pacific Venture Partners Co. Ltd.; James Wang; Ben Lin

NTD 30,000,000 NTD 50,000,000

NTD 50,000,000 NTD 100,000,000

Over NTD 100,000,000

Total 7 7 7 7


3.3.6 Remuneration to Supervisor

Unit: Thousand NTD

Name / Position

Base Compensation (A)

Bonus to Supervisors (B)

Allowances (C)

T Ratio of total remuneration

(A+B+C) to net income (%)


Subsidiaries Sercomm Consolidated Subsidiaries Sercomm Consolidated

Subsidiaries

J.S. Kuo Supervisor Representative of An-Long Co. Ltd.

0 0 0 0 36 36 0.00 0.00 Edward Y. Way Supervisor Representative of YCSY Co., Ltd.

Cynthia Hsueh Supervisor

Note: Following the establishment of the Audit Committee, the Supervisory mechanism was abolished starting from June, 2017.

Compensation Range

Name of Supervisor

Total Amount A+B+C


Below NTD 2,000,000

J.S. Kuo- Representative of An-Long Co. Ltd., Edward Y.

Way - Representative of YCSY Co., Ltd., Cynthia Hsueh

J.S. Kuo- Representative of An-Long Co. Ltd., Edward Y. Way - Representative of YCSY Co., Ltd.,

Cynthia Hsueh

NTD 2,000,000 NTD 5,000,000

NTD 5,000,000 NTD 10,000,000

NTD 10,000,000 NTD 15,000,000

NTD 15,000,000 NTD 30,000,000

NTD 30,000,000 NTD 50,000,000

NTD 50,000,000 NTD 100,000,000

Over NTD 100,000,000

Total 3 3


3.4 Management Team 3.4.1 Information Regarding Management Team

As of April 7, 2018

Name / Position Nationality Gender Elected Date


Spouse & Minor Shareholding Education &

Experience Current Position

Shares % Shares %

James Wang CEO / President Taiwan Male 2000.01.24 989,006 0.40 0 0.00

Harvard Business School, MBA Carnegie-Melon University, ME President of Sercomm Corporation

Note 1

Ben Lin Executive VP. Taiwan Male 1992.07.29 744,201 0.30 736,896 0.30

National Tsing Hua University, MS Director of IBM Subsidiary

Note 2

Charles Chu Senior VP Taiwan Male 2000.06.15 40,787 0.02 0 0.00

Michigan State University, MS in Mechanical Engineering Vice President of Northern United M&E Company

Owner of Huayi (Suzhou) Telecommunication Technologies Ltd. Director of DWNet Technology Ltd.; Supervisor of Sercomm Japan Corp.

Leo Chen VP Taiwan Male 2001.10.15 0 0.00 0 0.00

University of Illinois, MSA Director of Lite-On Group

Director of Shukuan Investments Ltd. WeiYun Co., Ltd

Jemmy Lee VP Taiwan Male 2002.04.24 82,171 0.03 0 0.00

Vice President of Proview Company China

-

Hawk Wu VP Taiwan Male 2007.03.01 110,000 0.04 0 0.00 Director of Quanta

Computer Corp. -

Vicky Lin VP Malaysia Female 2013.02.01 195,000 0.08 0 0.00

National Taiwan University BS in Economics Sales VP of Ayecom Technology

-

Colette Chen VP Taiwan Female 2013.02.01 80,000 0.03 0 0.00

Tamkang University, MS in European Studies Sales Manager of Veccom Co., Ltd.

-


Name / Position Nationality Gender Elected Date


Spouse & Minor Shareholding Education &

Experience Current Position

Shares % Shares %

Earl Liao VP Taiwan Male 2013.07.01 470,486 0.19 1,163 0.00

National Chiao Tung University MS in Electrical Control Engineering President of Sercomm Suzhou Research & Development Center

-

Genevieve Lu VP Taiwan Female 2015.05.14 44,000 0.02 0 0.00

University of California, MBA Human Resources VP of Yahoo!

-

Winnie Hsieh Director Auditing Office

Taiwan Female 2007.06.15 406 0.00 0 0.00

Tamkang University, BS in Finance and Banking Special Assistant of WeiTai Corp.

-

Note Shares under Trust with Discretion Reserved:

CEO and President/James Wang – 1,000,000 Shares

Executive VP/Ben Lin – 3,154,439 Shares

Note 1 Owner of Sercomm Trading Co. and Zealous Investments Ltd.; Chairman of Shukuan Investments Ltd., Sernet (Suzhou)

Technology Ltd., DWNet Technology Ltd., ZhuoJian Investment Co., Ltd. and Suzhou FemTel Communications;

Independent Director of Creative Sensor Inc.; Director of Sercomm Japan Corp., Sercomm Russia LLC, Hawxeye Inc.

and Nanjing FemTel Communications

Note 2 Owner of Smart Trade Inc.; Director of Shukuan Investments Ltd., Sernet (Suzhou) Technology Ltd., Sercomm USA

Inc., Sercomm Japan Corp., Sercomm Russia LLC, Hawxeye Inc., Suzhou FemTel Communications, Nanjing FemTel

Communications and Presciense Limited


3.4.2 Compensation of President and Vice President

Unit: Thousand NTD

Name / Title

Salary(A) Severance Pay (B)

Bonuses and Allowances (C)

Profit Sharing- Employee Bonus (D)

Ratio of total compensation

(A+B+C+D) to net income (%)


Subsidiaries Sercomm Consolidated Subsidiaries


Sercomm Consolidated Subsidiaries Cash

Bonuses Stock

Bonuses Cash

Bonuses Stock

Bonuses James Wang CEO/ President

24,689 29,765 1,378 1,378 12,907 16,657 * 0 * 0 2.97 3.64

Ben Lin Executive Vice President Charles Chu Senior Vice President Leo Chen Vice President Jemmy Lee Vice President Hawk Wu Vice President Vicky Lin Vice President Colette Chen Vice President Earl Liao Vice President Genevieve Lu Vice President *Note: The compensation for employees and directors has not yet been decided and cannot be estimated on May 5. 2018. The compensation for last year was NT$ 40,700,500.

Compensation Range Name of President and Vice President


Under NT$ 2,000,000

NT$2,000,000 ~ NT$5,000,000

Ben Lin, Charles Chu, Leo Chen, Jemmy Lee, Hawk Wu, Vicky Lin,

Colette Chen, Earl Liao, Genevieve Lu

Charles Chu, Leo Chen, Jemmy Lee, Hawk Wu, Vicky Lin, Colette

Chen, Earl Liao, Genevieve Lu

NT$5,000,000 ~ NT$10,000,000 James Wang Ben Lin

NT$10,000,000 ~ NT$15,000,000 James Wang

NT$15,000,000 ~ NT$30,000,000

NT$30,000,000 ~ NT$50,000,000

NT$50,000,000 ~ NT$100,000,000

Over NT$100,000,000

Total 10 10


3.4.3 Employee Profit Sharing Granted to Management Team Unit: Thousand NTD

Title Name Stock Bonus Cash Bonus Total Employee Profit Sharing

Total Employee Profit Sharing Paid

to Management Team as a % of

2017 Net Income

CEO/ President James Wang

0 40,701 40,701 3.10%

Executive Vice President Ben Lin

Senior Vice President Charles Chu

Vice President Leo Chen

Vice President Jemmy Lee

Vice President Hawk Wu

Vice President Vicky Lin

Vice President Colette Chen

Vice President Earl Liao

Vice President Genevieve Lu

*Note: The compensation for employees and directors has not yet been decided on May 5. 2018. The above compensation estimates are based on previous year.


3.4.4 Comparison of Remuneration for Directors, Supervisors, Presidents and Vice Presidents in the Most Recent Two Fiscal Years and Remuneration Policy for Directors, Supervisors, Presidents and Vice Presidents

The ratio of total remuneration paid by the company and by all companies included in the

consolidated financial statements for the most recent two fiscal years to directors, supervisors,

presidents and vice presidents of the Company, to the net income

Title 2016 2017


Subsidiaries

Directors

7.5% 9.3% 7.6% 9.2% Supervisors

Presidents and Vice Presidents

Directors / Supervisors President / Vice President

1. Remuneration policy Applied in accordance with Article 18 and 29 of the Articles of Incorporation

Applied in accordance with Regulations Governing the Salary and Remuneration, and the Implementation Rules for employees’ performance evaluation.

2. Standards and combinations Compensation for directors and supervisors, traveling expenses

Base salary, duty allowance, food allowance, employees bonus

3. The procedures for determining remuneration

Applied in accordance with the effective Articles of Incorporation after the resolution by the Annual Shareholders Meeting

Salaries are contracted by education, experience, and years of service, and approved by the Company's delegation of authorization.

4. Association of operational performance

Based on the Company's profits

Compensation was given by the rate of target completion, operational performance, and contributions.

5. Association of future risks

Fulfill duties of operation and supervision, and develop business policies turning a crisis into an opportunity

Enhance employees’ coherence to achieve the goal of sharing profit and loss between employers and employees.


3.5 Corporate Governance 3.5.1 Board of Directors The Board of Directors held 4 meetings in 2017. The attendance of Directors were as follows:

Title Name Attendance in Person By Proxy Attendance Rate (%) Remarks

Chairman

Paul Wang Chairman

Representative of Pacific Venture

Partners Co. Ltd.

4 0 100

Director

Lu, Shyue-Ching Representative of

ZhuoJian Investment Co., Ltd.

4 0 100

Director James Wang 4 0 100

Director Ben Lin 4 0 100 Independent

Director Shih, Chin-Tay 3 0 75

Independent Director Steve K. Chen 4 0 100

Independent Director Rose Tsou 2 0 100 Elected on

2017.6.22

Supervisor J.S. Kuo

Representative of An-Long Co. Ltd.

2 0 100 Discharged on 2017.6.22

Supervisor Edward Y. Way

Representative of YCSY Co., Ltd.

2 0 100 Discharged on 2017.6.22

Supervisor Cynthia Hsueh 2 0 100 Discharged on 2017.6.22

Annotations:

1. (1) Securities and Exchange Act §14-3 resolutions

Date of Board Meeting Resolution Individual Directors’ Opinions

Company’s Response

2017.3.27 The endorsement and guarantee for DWnet Technology (Suzhou) Co., Ltd

None None

2017.8.11 To make fund lending for Sernet (Suzhou) Technologies Corporation

None None

2017.11.3 The endorsement and guarantee for Sercomm Russia LLC. None None

2017.11.3 The endorsement and guarantee for Sercomm Japan Corp. None None

4. If there are Directors’ avoidance of motions in conflict of interest, the Directors’ names, contents of motion, causes for avoidance and voting should be specified: None

5. Measures taken to strengthen the functionality of the Board: Following the establishment of the Audit Committee, Sercomm board by-election of one Independent Director. To implement the spirit of corporate governance, the Company complies all the requirements and fully discloses Sercomm’s business and financial information on the company website, in the annual report, and through the Market Observation Post System to effectively enhance the transparency of information.


3.5.2 Audit Committee The Audit Committee held 2 meetings in 2017. The attendance of Independent Directors were as

follows:

Title Name Attendance in Person

AttendanceRate (%) Remarks

Independent Director Shih, Chin-Tay 2 100 The Company established the Audit

Committee on June, 2017 in order to

substitute for the supervisor’s

functions.

Independent Director Steve K. Chen 2 100

Independent Director Rose Tsou 2 100

Annotations:

1. (1) Securities and Exchange Act §14-5 resolutions

Date of Board Meeting Resolution Individual Directors’ Opinions

Company’s Response

2017.8.11 To make fund lending for Sernet (Suzhou) Technologies Corporation

None None

2017.11.3 The endorsement and guarantee for Sercomm Russia LLC. None None

2017.11.3 The endorsement and guarantee for Sercomm Japan Corp. None None

(2) There were no other written or otherwise recorded resolutions on which an Independent Director had a dissenting opinion or qualified opinion in 2017.

6. If there are Individual Directors’ avoidance of motions in conflict of interest, the Individual Directors’ names, contents of motion, causes for avoidance and voting should be specified: None

7. Descriptions of the communications between the Independent Directors, the Internal Auditors, and the Independent Auditors in 2017 (which should include the material items, channels, and results of the audits on the corporate finance and/or operations, etc.): The Internal Auditors and the Independent Directors communicate with each other quarterly on Audit Committee. And Internal Auditors present the audit report during the meeting. All of above matters were reviewed and approved by the Audit Committee whereupon independent directors raised no objection.

The Board of Directors held 4 meetings in 2017. The attendance of supervisor was as follows:

Title Name Attendance in Person

Attendance Rate (%) Remarks

Supervisor J.S. Kuo

Representative of An-Long Co. Ltd.

2 100 Discharged on 2017.6.22

Supervisor Edward Y. Way

Representative of YCSY Co., Ltd.

2 100 Discharged on 2017.6.22

Supervisor Cynthia Hsueh 2 100 Discharged on 2017.6.22


3.5.3 Taiwan Corporate Governance Implementation as Required by the Taiwan Financial Supervisory Commission

Assessment Item Implementation Status Non-

implementationand its

reason(s) Yes No Explanation

1. Does Company follow “Taiwan Corporate Governance Implementation” to establish and disclose its corporate governance practices?

V Sercomm �� #�� <� Not regulated

2. Shareholding Structure & >��@�[�\� � (1) Does Company have Internal

Operation Procedures for ��\��@�suggestions, concerns, disputes and litigation matters. If yes, have these procedures been implemented accordingly?

V

Sercomm has set up an investor relations department to deal with shareholder issues. Furthermore, there are investor relations section and stakehold��@�\�\]� �section on the Company website that provide links to each relevant business department for �� @��@��

None

(2) Does Company possesses a list of major shareholders and beneficial owners of these major shareholders?

V

Sercomm keeps track of the shareholding conditions of the directors, supervisors, managers and shareholders who possess more than 10% of the C�]��@�� any time

None

(3) Has the Company built and executed a risk management �� ]��<�� the Company and its affiliates?

V Sercomm and its subsidiaries formulate relevant management measures according to relevant provisions.

None

(4) Has the Company established internal rules prohibiting insider trading on undisclosed information?

V Sercomm has established Procedures for Handling Inside Information Material. None

3. Composition and Responsibilities of the Board of Directors (1) Has the Company established a

diversification policy for the composition of its Board of Directors and has it been implemented accordingly?

V

Selection guidelines for the Company's directors: The candidates for directors should be nominated, and the review criteria and procedures for the candidates will be fully disclosed at MOPS. The selected directors should have diversified professional backgrounds, experience, and excellent vision. Also, guidelines are being formulated for diversified membership of the board of directors, considering the organization culture, business model and long-term development. With total seven directors of the company, each directors@ hold professional backgrounds compose the board of directors of the Company, which includes professors, CPAs, lawyers and industry leaders. Currently, there are three independent directors (including one female director), and one of the directors is located in the United States. The number of directors who have no managing responsibility

None





in this Company is up to half of the board of directors.

(2) Other than the Compensation Committee and the Audit Committee which are required by law, does the Company plan to set up other Board committees?

V

Sercomm’s Compensation Committee consists of four members, including Hongshou Chen and three independent directors, Chin-Tay Shih, Steve K. Chen and Rose Tsou, wherein Chin-Tay Shih serves as the convener. The meeting shall held at least one regular meeting each quarter.

None

(3) Has the Company established methodology for evaluating the performance of its Board of Directors, on an annual basis?

V Sercomm has not yet established a methodology for evaluating the performance of its Board of Directors.

Not regulated

(4) Does the Company regularly evaluate its external auditors’ independence?

V

The Board of Directors evaluates the independence of external auditors annually. The evaluation was approved by the Board meeting on 03/27/2017. The accountants of Ernst & Young through our evolution have met the standard of independence and no ��^� ��\�� ]�� Please refer note 1 for the Assessment of Accountant's Audit independence and Eligibility. Furthermore, the company decide to discountinue the engagement with Ernest & Yang. The new accounting firm is PricewaterhouseCoopers (PwC) Taiwan. Liang, Yi-Chang and Wu, Yu-Lung are the new CPA of the company.

None

4. Does the Company established a full- (or part-) time corporate governance unit or personnel to be in charge of corporate governance affairs (including but not limited to furnish information required for business execution by directors, handle matters relating to board mee ��\��@ meetings according to laws, handle corporate registration and amendment registration, produce (or record?) minutes of board meetings and shareholders meetings, etc.

V

The Investor Relations Department of the Company is responsible for corporate governance. Their responsibilities include: �� \��@�� _�integrating the rules and systems regarding corporate governance from various departments to ensure full information disclosure, conducting corporate briefings and symposia on business performance, participating in investment forums occasionally, and maintaining a proper communication channel with investors. Besides, the Financial Accounting Department is the unit of the board of directors meetings and provides the information needed by the directors and supervisors used in conducting their business, and also prepares the most updated regulatory developments related to company operation in order to assist the directors and supervisors in regulatory compliance.

None





5. Has the Company established a means of communicating with its Stakeholders or created a Stakeholders Section on its Company website? Does the Company respond to stakeholders’ questions on corporate responsibilities?

V

Sercomm has a stakeholders’ engagement section on the Company website to address our corporate social responsibilities and any other issues. Moreover, the Company provides investor relations, customer and corporate social responsibility related department communication channels for stakeholders.

None

6. Has the Company appointed a professional registrar for its Shareholders’ Meetings?

V The Company has appointed Taishin International Bank Stock Affairs Division to deal with shareholder affairs.

None

7. Information Disclosure (1) Has the Company established a

corporate website to disclose information regarding its financials, business and corporate governance status?

V

Sercomm has set up a Chinese/English website (http://www.Sercomm.com) to disclose the information regarding the Company’s financials, business and corporate governance status.

None

(2) Does the Company use other information disclosure channels (e.g. maintaining an English-language website, designating staff to handle information collection and disclosure, appointing spokespersons, webcasting

investor’s conference etc.)?

V

In addition to the spokespersons and investor relations department, the Company’s website contains company information in both Chinese and English. The website is maintained and updated by dedicated personnel. The Company also provides related information in the Market Observation Post System according to the regulations, and holds regular investor conferences to report the Company’s operational status.

None

8. Has the Company disclosed other information to facilitate a better understanding of its corporate governance practices (e.g. including but not limited to employee rights, employee wellness, investor relations, supplier relations, rights of stakeholders, directors’ training records, the implementation of risk management policies and risk evaluation measures, the implementation of customer relations policies, and purchasing insurance for directors)?

V Please refer to the Sercomm website and annual report for more information. (http://www.Sercomm.com)

None

9. The improvement status for the result of Corporate Governance Evaluation announced by Taiwan Stock Exchange: N/A


Notes 1: Assessment of Accountant's Audit independence and Eligibility

Items Assessment Results

Accountant Independence

Does the accountant have any direct or indirect material financial interest in the Company? No Yes

Does the accountant engage in any financing or guaranteeing with the Company’s directors? No Yes

Does the accountant have any close business relationships and potential employment relationships with the Company? No Yes

Whether the accountant or any of audit team members currently or for the last two years has acted as a director, management, or been in a position which had a significant impact on the audit work in the Company?

No Yes

Does the accountant provide the Company with non-audit services that may directly affect the audit work No Yes

Whether the accountant is a broker for the stocks or other securities issued by the Company? No Yes

Whether the accountant serves as the defender of the Company or, on behalf of the Company, deal the conflict between other third parties? No Yes

Does the accountant have a kinship relationship with any person who acts as a director, management, or is in the position which has a significant impact on the audit work in the Company?

No Yes


3.5.4 Compensation Committee

Compensation Committee Members’ Professional Qualifications and Independent Analysis

Criteria Name

Meet the Following Professional Qualification Requirements, Together with at Least Five Years Work

Experience Criteria (Note)

Number of Other

Taiwanese Public

Companies Concurrently Serving as a Compensati

on Committee Member in

Taiwan

An Instructor or Higher Position in a Department of Commerce, Law,

Finance, Accounting, or

Other Academic Department

Related to the Business Needs of the Company

in a Public or Private Junior

College, College or University

A Judge, Public Prosecutor,

Attorney, Certified Public Accountant,

or Other Professional or

Technical Specialists Who Has Passed a

National Examination and Been Awarded a Certificate in a

Profession Necessary for the Business of the

Company

Have Work Experience in

the Area of Commerce,

Law, Finance, or Accounting, or Otherwise Necessary for

the Business of the Company

1 2 3 4 5 6 7 8


� � � � � � � � � � 2


� � � � � � � � � � 0

Rose TsouIndependent Director

� � � � � � � � � 0

Hilo Chen � � � � � � � � � 1

Note Compensation Committee Members, during the two years before being elected or during the term of office, meet any of the following situations; please tick the appropriate corresponding boxes:

1. Not an employee of the company or any of its affiliates.

2. Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary in which the company holds, directly or indirectly, more than 50 percent of the voting shares.

3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders.

4. Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs.


5. Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as of its top five shareholders.

6. Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company.

7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof.

8. Not been a person of any conditions defined in Article 30 of the Company Law.

3.5.5 Compensation Committee Meeting Status

1. Compensation Committee consists of three members. The tenure is from June 15, 2016 to June 14, 2019.

2. Compensation Committee convened three regular meetings in 2017. The Committee members’ attendance status is as follows:

Title Name Attendance in Person By Proxy Attendance Rate

in Person (%) Notes

Chair Shih, Chin-Tay 3 0 100%

Member Hilo Chen 3 0 100%

Member Steve K. Chen 2 1 67%

Member Rose Tsou 1 0 100% Appointed on Aug. 2017

Notes

1. There was no recommendation of the Compensation Committee which was not adopted or was modified by the Board of Directors in 2017.

2. There were no written or otherwise recorded resolutions on which a member of the Compensation Committee had a dissenting opinion or qualified opinion.


3.5.6 Social Responsibility Implementation Status as Required by the Taiwan Financial Supervisory Commission


implementation and its


1. Implementation of Corporate Governance (1) Does the Company have a

corporate social responsibility policy and evaluate its implementation?

V CSR policy is under discussion according to related regulations. Not regulated

(2) Does the Company hold regular CSR training? V

Sercomm regularly devotes resources to employee CSR training and cultivation, and also provides senior managers with information advocating an understanding of the importance of CSR.

None

(3) Does the Company have a dedicated (or ad-hoc) CSR organization with Board of Directors authorization for senior management, which reports to the Board of Directors?

V Sercomm has created a department which is responsible for CSR matters, in order to comply with the regulations.

Report to Chairman and

President

(4) Does the Company set a reasonable compensation policy, integrate employee appraisal with CSR policy, and set clear and effective incentive and disciplinary policies?

V

Sercomm offers its employees the most competitive total compensation to attract and retain talented individuals who will become the best momentum of sustainable corporate growth. The Company's overall compensation package includes: basic salaries, rewards and employee bonuses. Employee’s total compensation is based on the overall assessment of professional knowledge and skills, work responsibilities, performance.

None

2. Environmentally Sustainable Development (1) Is the Company committed

to improving resource efficiency and to the use of renewable materials with low environmental impact?

V

To pursue the balance between environmental protection and business sustainability, Sercomm actively participates in global environmental protection programs, such as the Carbon Disclosure Project (CDP), the Hazardous Substances Free (HSF) and Lead-free Process, etc.

None

(2) Has the Company set an Environmental management system designed to industry characteristics?

V

Sercomm’s factories located in Chunan and Suzhou have already obtained certifications of Environmental Management System (ISO 14001) and Occupational Health and Safety Management System (OHSAS 18001). The Company is also dedicated to pollution prevention, energy and resource saving, waste reduction and accident prevention with the aim of providing a comfortable and safe working environment.

None





(3) Does the Company track the impact of climate change on operations, carry out greenhouse gas inventories, and set energy conservation and greenhouse gas reduction strategy?

V

Sercomm values the environmental sustainability topic, and continues to implement and maintain various management systems (e.g. ISO 9001 and ISO 14001, et al.), and various regulations applicable internationally (e.g. RoHS and conflict minerals, et al.). Sercomm is committed to comply with various EHS laws and regulations and continues to fulfill the environmental protection policy.

Emissions Management - Delivering production quantities of lead-free

devices - The waste solution of various organic solvents

(flux and detergent) applied in the production lines is handled by the legal cleaning service provider contracted by the factories.

Waste Management Sercomm reduces the consumption of energy and resource and mitigates the environmental impact caused during the product campaign and service. Sercomm strictly implements garbage sorting and reduction of waste at its factory premises, installs the storage area for the waste in accordance with the relevant requirements, and contracts the qualified waste disposition service provider to dispose of the waste. Meanwhile, it will conduct an audit on the site from time to time.

Carbon Emissions Management Since 2014, Sercomm has set the boundary of organization per the customer’s need and performed the greenhouse gas inspection by phase. Meanwhile, it set 2014 as the record year and the annual carbon emission is expected to increase <10%.

Please refer to Sercomm CSR report Chapter 4 “Enviromental Sustainability” for more detail.

None





3. Promotion of Social Welfare (1) Does the Company set

policies and procedures in compliance with regulations and internationally recognized human rights principles?

V

Sercomm believes in that human resource is the key to maintaining its core competitiveness and, therefore, spares no effort to train its employees and strictly comply with various requirements under the labor laws and Electronic Industry Citizenship Coalition (EICC). In light of the philosophy of "human resources are the foundation for innovation”, the Company is dedicated to recruiting professionals for all positions available. Sercomm assigns employees adequately and properly based on their specialties and professions, regardless of race, gender, age, religion, political affiliation, social class, language, thoughts, birthplace, marriage, physical or mental disability. All employees are entitled to the same rights of work, salary and benefits. Meanwhile, the Company forbids any form of discrimination, including age, race, skin color, gender or religious bias. We believe that new ideas can be generated through the interaction among employees of different cultures, backgrounds and experiences. In addition, the Company follows the existing relevant national laws, including the Labor Standards Act, the Employment Services Act and the Act of Gender Equality in Employment, etc., to ensure that applicants and employees are treated equally with respect to recruitment, assignment, development, evaluation and reward, and to prohibit child labor, forced labor, and violations of human rights.

None

(2) Has the Company established appropriately managed employee appeal procedures?

V

An Employee Opinion Box provides a channel for employees to express their suggestions or opinions. (Sexual harassment , fraud or ethics violations mailbox: [email protected])

None

(3) Does the Company provide employees with a safe and healthy working environment, with regular safety and health training?

V

Sercomm’s ESH (Environment and Employee Safety and Health Protection) policy is focused on establishing a safe working environment and keeping employees healthy. The Company periodically provides a full medical examination to all employees and irregular training for emergency personnel.

None

(4) Has the Company established a mechanism for regular communication with employees and use reasonable measures to notify employees of operational changes which may cause significant impact to employees?

V

Sercomm ensures every employee has a smooth internal communication path with management. Furthermore, the Company has established the Employee Welfare Committee to protect employees' rights to their benefits. Annual staff meetings ensure that every employee understands the Company’s operations and performance expectations.

None





(5) Has the Company established effective career development training plans?

V

Sercomm believes that human resources are the foundation for innovation. The Company combines corporate needs and each individual’s career development as a main corporate orientation. The Company actively promotes relevant educational training and divides the training framework into 5 major systems to enhance the cultivation of talent in a targeted and systematic way.

None

(6) Has the Company set polices and consumer appeal procedures in its R&D, purchasing, production, operations, and service processes?

V

Sercomm endeavors to understand stakeholders’ opinions and recommendations, and to build a good communication channel to ensure mutual understanding and respect. Stakeholders can submit their concerns via [email protected].

None

(7) Does the Company follow regulations and international standards in the marketing and labeling of its products and services?

V

Sercomm complies with the environmental laws and requirements of the International Covenant in order to maintain its status as a green corporation implementing sustainable development and abides by the International Covenant’s voluntary commitments in the areas of environmental health and safety and energy conservation.

None

(8) Does the Company evaluate environmental and social track records before engaging with potential suppliers?

V

Sercomm screens new suppliers based not only on general items, such as quality, cost, delivery and service, but also on Sercomm’s specifications and requirements for green products. Each candidate needs to sign a “Product Quality Guarantee Agreement” and to pass a green product audit prior to becoming a qualified supplier. The Company regularly reviews suppliers through assessments to evaluate supplier performance.

None

(9) Does the Company’s contracts with major suppliers include termination clauses if they violate CSR policy and cause significant environmental and social impact?

V

Sercomm works closely with all suppliers. Through effective communication, tracking and management, Sercomm ensures the exclusion of components containing banned or restricted chemical materials and maintains links to a component approval process. Sercomm also demands all suppliers sign a “Product Quality Guarantee Agreement” wherein the content clearly states Sercomm’s requirements and regulations for green products. No material containing environmentally hazardous materials is allowed, including raw materials defined under the commitment of the European Union Restriction of Hazardous Substances (RoHS) protocol and the Registration, Evaluation, Authorization and Restriction of Chemical Substances protocol (REACH).

None





4. Enhanced Information Disclosure

Does the Company disclose relevant and reliable CSR information on its website and the Taiwan Stock Exchange website?

V

Sercomm has published a “Corporate Social Responsibility Report“ which is also published on the Company website. Please refer to Sercomm website for more details.

None

5. If the Company has established its corporate social responsibility code of practice according to “Listed Companies Corporate Social Responsibility Code of Practice,” please describe the operational status and differences: Sercomm �� >��[�� #��

6. Other important information to facilitate better understanding of the Company’s implementation of corporate social responsibility:

Since Sercomm was founded, its social participation has been rooted in its core value. Sercomm has been dedicated to “Care for Rural Area Education” and “Training of Young Talents” as the major elements of its social participation. Sercomm exerts the strength gathered by employees from inside out, expands its social participation, provides feedback to the community, and services to people in the hopes of building a society which is innovative and diversified and that shows care for the society and environmental sustainability.

Care for Rural Area Education and Promote Social Mobility>��]]��}�� \��_��_<�� -year full-time teacher project, TFT recruited young educators with the sense of mission to work for the rural area elementary schools which need the educational resources. Sercomm provided them with the training and support system on an on-going basis. As a result, TFT has became the promoter of fine-quality education and has exerted its influence permanently in Taiwan. In addition to sponsoring the salary and training of rural area teachers, Sercomm also organizes the volunteer workers’ groups, and has each volunteer worker's group propose its teacher supporting plan to provide the ad hoc assistance per the need of each teacher or school. Sercomm volunteer workers’ groups help rural area teachers solve any difficulty met by them in the process of teaching by organizing activities with the aid of software and hardware and routine communication and by utilizing the enterprise’s resources as their strong backup. Sercomm expects to enable the rural area children to receive the education they deserve and �� @�� \�� \�� \��

Cultivation of Talents and Student Programs

Sercomm has played the role responsible for bridging the internal and external society charity groups to gather the charity and care, expand resources, and provide help. In order to care for the vulnerable groups in the community, Sercomm donates a fixed fund to orphanages and rural area schools each year �� >��]]� >��<� �� \� �� }� �� ]]�� society, Sercomm has its R&D supervisors nominate excellent junior high school students from the supervisors’ hometown to receive the incentives granted by Sercomm in order to encourage the students to study hard and enable the young people and poor students to mitigate their economic burden and help �� ]��@��]��>rcomm supports rural children in the hopes that the students may complete studies to help themselves and others and later contribute to society.

7. Other information regarding the “Corporate Responsibility Report ” which are verified by certification bodies: Sercomm@�� >��[�� [��


3.5.7 Taiwan Corporate Conduct and Ethics Implementation as Required by the Taiwan Financial Supervisory Commission




1. Establishment of Corporate Conduct and Ethics Policy and Implementation Measures (1) Does the Company have

bylaws and publicly available documents addressing its corporate conduct and ethics policy and measures, and the commitment regarding implementation of such policy from the Board of Directors and the management team?

V

All important policies relating to the operation, investment, acquisition or disposition of assets, the lending of funds, articles of guarantee or endorsement, and financing from banks are subject to the study and assessment of the competent authorities of the Company and to the resolution of the Board.

None

(2) Does the Company establish relevant policies which are duly enforced to prevent unethical conduct and provide implementation procedures, guidelines, consequence of violation and complaint procedures in such policies?

V

Sercomm established an “Operating Procedures for Handling Internal Material Information” for employee to comply with these relevant regulations.

None

(3) Does the Company establish appropriate compliance measures for the business activities prescribed in Paragraph 2, Article 7 of the Ethical Corporate Management Best Practice Principles for TWSE/GTSM Listed Companies and any other such activities associated with high risk of unethical conduct?

V All Sercomm employees and suppliers are required to sign a “Declaration of Integrity”. None

2. Ethic Management Practice (1) Does the Company assess

the ethics records of those it has business relationships with and include business conduct and ethics related clauses in the business contracts?

V Sercomm requires that every supplier must complete and sign business and ethics clauses as part of the Supplier's Undertakings.

None

(2) Does the Company set up a unit which is dedicated to or tasked with promoting the Company’s ethical

V

The Company advocates ethical corporate management and has appointed a designated department to ensure the implementation of decisions of the Board in such matters. Related

None





standards and reports directly to the Board of Directors with periodical updates on relevant matters?

documents are subject to approval across the corporate hierarchy and require proper authorization. The HR representatives of ethical corporate management report to the Board quarterly.

(3) Does the Company establish policies to prevent conflict of interests provide appropriate communication and complaint channels and implement such policies properly?

V

The Company has established a policy requiring the avoidance of any conflict of interest. This policy on ethical business practices is inserted into agreements with the employees and suppliers. In addition, the Company also provides channels to report unethical practices and keeps the identity of the informants in strict confidence. The e-mail for filing complaints is: [email protected]

None

(4) To implement relevant policies on ethical conducts, does the Company establish effective accounting and internal control systems that are audited by internal auditors or CPAs periodically?

V

The accounting of all transactions is reviewed under established accounting principles. In cases of materiality, or in questionable cases, the Company will consult with CPAs for verification and confirmation.

None

(5) Does the Company provide internal and external ethical conduct training programs on a regular basis?

V

The Company holds an orientation for new employees, provides general managerial and developmental training regularly, and advocates the ethical corporate management policy of the Company.

Not regulated

3. Implementation of Complaint Procedures (1) Does the Company

establish specific complaint and reward procedures, set up conveniently accessible complaint channels, and designate responsible individuals to handle the complaint received?

(2) Does the Company establish standard operation procedures for investigating the complaints received and ensuring such complaints are handled in a confidential manner?

(3) Does the Company adopt proper measures to prevent a complainant from retaliation for his/her filing a complaint?

V

The Company has established a stakeholders’ engagement section on Company websites and has designated a department for responding to the queries and communications of stakeholders (or related parties) .The stakeholders (or related parties) may report on or file complaints relating to questionable matters. All reports and complaints are handled in accordance with standard operation procedures which maintain principles of confidentiality and non-disclosure. The e-mail for report and complaints is: [email protected]

None





4. Information Disclosure Does the Company disclose its guidelines on business ethics as well as information about implementation of such guidelines on its website and Market Observation Post System (“MOPS”)?

V Sercomm has not yet disclosed its guidelines on business ethics on the Market Observation Post System ("MOPS").

None

5. If the Company has established corporate governance policies based on TWSE Corporate Conduct and Ethics Best Practice Principles, please describe any discrepancy between the policies and their implementation. Sercomm has not yet established the “Corporate Conduct and Ethics Best Practice Principles”.

6. Other important information to facilitate better understanding of the Company’s corporate conduct and ethics compliance practices (e.g., review the company’s corporate conduct and ethics policy): None


3.6 Internal Control System Execution Status

Sercomm Corporation

Statement of Declaration of Internal Control Date: March 12, 2018

Sercomm Corporation has conducted internal audits in accordance with its Internal Control Regulations for the period ended December 31st, 2017, and hereby declares the following:

1. The Company acknowledges and understands that the establishment, nforcement, and preservation of internal control systems are the responsibility of the Board and that the managers and the Company have already established such systems. The purpose is to reasonably ensure the effectiveness (including profitability, performance, and security of assets), the reliability, timeliness, transparency of financial reporting, and legal and regulation compliance.

2. Internal control systems have limitations, no matter how perfectly they are designed. As such, effective internal control systems may only reasonably ensure the achievement of the aforementioned goals. Further, the operation environment and situation may vary, and hence the effectiveness of the internal controls systems. The internal control systems of the Company feature certain self-monitoring mechanisms. The company will take immediate corrective actions once any shortcomings are identified.

3. The Company judges the effectiveness of the internal control systems in design and enforcement according to the “Criteria for the Establishment of Internal Control Systems of Public Offering Companies” (hereinafter referred to as “the Criteria”). The Criteria is instituted for judging the effectiveness of the design and enforcement of internal control systems. There are five components for effective internal control as specified by the Criteria with which the procedures for effective internal controls are composed: (1) Control environment, (2) Risk evaluation, (3) Control operation, (4) Information and communication, and (5) Monitoring. Each of the elements in turn contains certain audit items, and the Criteria shall be referred to for details.

4. The Company has adopted the aforementioned internal control systems for an internal assessment of the effectiveness of internal control design and enforcement.

5. Based on the aforementioned audit findings, the Company holds that within the aforementioned period, its internal control procedures (including the procedures to monitor subsidiaries), effectiveness and efficiency of operations, reliability, timeliness, transparency of reporting, and compliance with relevant legal regulations, and design and enforcement of internal controls, are effective. The aforementioned goals can be achieved with reasonable assurance.

6. This statement of declaration shall form an integral part of the annual report and prospectus of the Company and shall be made public. If there is any fraud, concealment, or unlawful practices discovered in the content of the aforementioned information, the Company shall be liable to legal consequences under Article 20, 32, 171, and 174 of the Securities and Exchanges Act.

7. This statement of declaration has been approved by the Board on March 12, 2018 with all Directors in session under unanimous consent.

Sercomm Corporation

Paul Wang

Chairman

James Wang

President and CEO


3.7 Major Resloutions of Board Meetings and Shareholders’ Meeting

3.7.1 Major Resolutions of Board Meetings

Date Major Resolutions

2017.3.27

1. Ratification of 2016 Internal Control System Statement

2. Ratification of Bank Line of Credit

3. Approval of 2016 Business Report and 2017 Business Plan 4. Approval of 2016 remuneration to Directors and Supervisors, Employee Profit sharing, and

Management Bonus

5. Approval of 2016 Profit Distribution

6. Approval of 2016 Financial Statement

7. Approval of Artical of Incorporation

8. Approval of by-election of the Independent Director

9. Approval of convening 2017 Annual shareholders Meeting 10. Approval to provide the endorsement and guarantee for DWnet (Suzhou) Technologies

Corporation

2017.5.4


2. Approval of the Audit Committee Charter

3. Approval of Qualification of the nominated Independent Directors 4. Approval of removing non-competition restrictions on Managerial officers, Directors and

Representatives

2017.8.11

1. Ratification of Bank Line of Credit 2. Approval of amendment of Remuneration Committee Charter and Remuneration of

Management Board and Supervisory Board members 3. Approval of changes Compensation Committee members 4. Approval on loaning of funds for Sernet (Suzhou) Technology Ltd.

2017.11.11


2. Ratification of provide the endorsement and guarantee for Sercomm Russia LLC.

3. Approval of Employee Stock Option issuing new shares for stock conversion

4. Approval of Compensation Committee for Management Bonus and Employee Profit sharing

5. Approval of remuneration to Directors and Supervisors and Management Bonus.

6. Approval of 2018 Internal Audit Plan

7. Approval on loaning of funds for Sercomm Japan Corp.

2018.3.12


2. Ratification of 2017 Internal Control System Statement

3. Ratification of amendment of the Operational Procedures for Loaning of Company Funds

4. Approval of 2017 Business Report and 2018 Business Plan 5. Approval of 2017 remuneration to Directors and Supervisors, Employee Profit sharing, and

Management Bonus


Date Major Resolutions

6. Approval of 2017 Profit Distribution

7. Approval of 2017 Financial Statement

8. Approval of amendment of the Operational Procedures for Loaning of Company Funds

9. Approval of convening 2018 Annual shareholders Meeting

10. Approval to provide the endorsement and guarantee for Hawxeye Inc.

11. Approval of amendment of the Rules of Procedure for Board of Directors Meetings

12. Approval of amendment of the Audit Committee Charter

13. Approval of change Accounting Firm and Charted Public Accountant

2017.4.23

1. Approval of amendment of 2017 Profit Distribution 2. Approval of the issuance of new common shares for cash or domestic convertible bonds in

private placement 3. Approval of convening 2018 Annual shareholders Meeting supplementary notice

3.7.2 Major Resolutions of Shareholders’ Meeting and Implementation Status

Date Major Resolutions Implementation Status

2017.6.22

Acknowledgement Items:

1. Adoption of the 2016 Business Report and Financial Statements

Approved

2. Adoption of the proposal for Distribution of 2016 Profits

Approved a cash dividend per share of NT$4.2 and cash dividend payment date was August, 15, 2017.

Discussion Items:

1. Amendment to the Articles of Incorporation Approved

2. Amendment to the Rules and Procedure of Shareholder Meetings, Rules for Director and Supervision Elections, the Operational Procedures for Acquisition and Disposal of Assets, the Operational Procedures for Endorsements and Guarantees, the Operational Procedures for Loaning of Company Funds

Approved

3. By-election of the Company's Independent Director

Accredited by Ministry of Economic Affairs on July 18, 2017.

4. Release of restrictions on competitive activities of Director Approved


3.8 Certified Public Accountant (CPA) Information (1) If non-audit fees paid to CPAs, their accounting firm and its affiliates are more than one-fourth of

audit fees, specify the amount of audit and non-audit fees, as well as the scope of non-audit

services: CPA Service Fees

Accounting Firm Name of CPA Period covered by CPA’s audit Note

Ernst & Young Hsu, Hsin-Min

2017/01/01 ~ 2017/12/31 None Lin, Hung Kang

Unit: Thousand NTD

Range of CPA service fee Audit fee Non-audit fee Total

1 Under NT$ 2,000 247 247

2 NT$2,000 ~ NT$4,000

3 NT$4,000 ~ NT$6,000 3,773 3,773

4 NT$6,000 ~ NT$8,000

5 NT$8,000 ~ NT$10,000

6 NT$10,000 and above

(2) For CPA changes, if the audit fee in the first year is lower than that of the prior year, specify the

audit fee before and after the change and the reasons: Not applicable

(3) If audit fees dropped by more than 15%, specify the amount and percentage of decline and

reasons: Not applicable


(4) Information on CPA changes: A. Former CPAs

Date of Change Approved by BOD on March 12, 2018

Reasons and Explanation of Changes Internal management needs

State Whether the Appointment is Terminated or Rejected by the Consignor or CPAs

Clients Status CPA Consignor

Appointment terminated automatically V

Appointment rejected (discontinued)

The Opinions other than Unmodified Opinion Issued in the Last Two Years and the Reasons for the Said Opinions (Note)

None

Is there any Disagreement in Opinion with the Issuer None

Supplementary Disclosure (Disclosures Specified in Article 10.6.1.4~7 of the Standards)

None

��B. Succerssor CPAs

Accounting Firm PricewaterhouseCoopers (PwC) Taiwan

CPA Liang, Yi-Chang

Wu, Yu-Lung

Date of Engagement Approved by BOD on March 12, 2018

Prior to the Formal Engagement, Any Inquiry or Consultation on the Accounting Treatment or Accounting Principles for Specific Transactions, and the Type of Audit Opinion that Might be Rendered on the Financial Report

None

Written Opinions from the Successor CPAs that are Different from the Former CPA’s Opinions None

��C. The Reply of Former CPAs on Article 10.6.1 and Article 10.6.2.3 of the Standards: None.

(5) Company Chairman, President or finance/accounting manager held positions in the Company’s

audit firm or its affiliates within the past year: Not applicable


3.9 Changes in Share Positions among Directors, Supervisors, Managers

Unit: Shares

Title Name

2017 Current Year to April 7

Shareholding Increase / Decrease

Stock Mortgage

Shareholding Increase / Decrease

Stock Mortgage

Chairman Paul Wang Representative of LiJin Financial Consultant Co. Ltd.

0 0 0 0

Director & President James Wang 10,000 0 0 0

Director & Executive VP Ben Lin 0 350,000 0 0

Director Lu, Shyue-Ching Representative of Pacific Venture Partners Co. Ltd

225,000 0 0 0

Independent Director Shih, Chin-Tay 0 0 0 0

Independent Director Steve K. Chen 0 0 0 0

Senior Vice President Charles Chu (10,000) 0 (5,000) 0

Vice President Leo Chen 0 0 0 0

Vice President Jemmy Lee 80,000 0 0 0

Vice President Hawk Wu 100,000 0 0 0

Vice President Colette Chen 79,303 0 0 0

Vice President Vicky Lin 50,000 0 0 0

Vice President Earl Liao 65,000 0 0 0

Vice President Genevieve Lu 44,000 0 0 0

Auditing Supervisor Winnie Hsieh (6,000) 0 0 0


3.10 Information of the Company’s Top Ten Shareholders

Name Shareholding Spouse & Minor

Shareholding by Nominee Arrangement

The relationship between

any of the Company’s

Top Ten Share holders

Shares % Shares % Shares % Name Relation

Owner of Cathay Life Insurance Co., Ltd. - Diao-kuei, Huang

21,416,000 8.72% 0 0.00% 0 0.00%

Owner of Fubon Life Insurance Co., Ltd. - Richard M.Tsai

13,565,000 5.52% 0 0.00% 0 0.00%

Owner of Yun Chuan Investment Ltd. - Bo-Lu Lin

10,750,360 4.38% 0 0.00% 0 0.00%

New Labor Pension Fund 7,851,000 3.20% 0 0.00% 0 0.00%

Old Labor Pension Fund 7,303,000 2.97% 0 0.00% 0 0.00%

Owner of Chunghwa Post Co., Ltd. - Kwo-Tsai Wang

5,775,000 2.35% 0 0.00% 0 0.00%

Owner of Taiwan Life Insurance Co., Ltd. - Su-Guo Huang

5,150,000 2.10% 0 0.00% 0 0.00%

Su Yi 4,809,322 1.96% 0 0.00% 0 0.00%

Vanguard Emerging Markets Stock Index Fund, A Series of Vanguard International Equity Index Funds

4,199,000 1.71% 0 0.00% 0 0.00%

Owner of ZhuoJian Investment Co., Ltd. - James Wang

4,197,094 1.71% 0 0.00% 0 0.00%


3.11 Long-Term Investments Ownership

Investee Sercomm Investment Total Investment

Investment Amount % Investment Amount %

Sercomm USA Inc. 650,000 shares 100.00% 650,000 shares 100.00%

Shukuan Investments Ltd. 2,800,000 shares 100.00% 2,800,000 shares 100.00%

Sercomm Trading Co., Ltd. USD$ 46,800,000 100.00% USD$ 46,800,000 100.00%

Zealous Investments Ltd. USD$ 30,956,000 100.00% USD$ 30,956,000 100.00%

Sernet (Suzhou) Technology Ltd. USD$ 29,900,000 100.00% USD$ 29,900,000 100.00%

Smart Trade Inc. USD$ 16,000,000 100.00% USD$ 16,000,000 100.00%

DWNet Technology Ltd. USD$ 16,000,000 100.00% USD$ 16,000,000 100.00%

Sercomm Japan Corp. 9,800 shares 100.00% 9,800 shares 100.00%

Sercomm France SARL 1,000 shares 100.00% 1,000 shares 100.00%

Sercomm Italian SRL 10,000 shares 100.00% 10,000 shares 100.00%

Sercomm Deutschland GmbH EUR$ 100,000 100.00% EUR$ 100,000 100.00%

Sercomm Russia LLC RUB$ 10,000 100.00% RUB$ 10,000 100.00%

Huayi (Suzhou) Telecommunication Technologies Ltd.

RMB$ 500,000 100.00% RMB$ 500,000 100.00%

HawXeye Inc. 800,000,000 shares 55.00% 800,000,000 shares 55.00%

Suzhou FemTel Communications RMB$ 6,500,000 100.00% RMB$ 6,500,000 100.00%

Nanjing FemTel Communications RMB$ 2,500,000 100.00% RMB$ 2,500,000 100.00%


IV. Capital & Shares 4.1 Capital & Shares 4.1.1 Capitalization

Unit: Shares, as of December 31, 2017

Type of Share Authorized Shares

Issued Shares Un-issued Shares Total Shares

Common Stock 245,653,767 74,346,233 *320,000,000

4.1.2 History of Capitalization Unit: Shares/ NTD, as of December 31, 2017

Year/ Month

Issue Price

Authorized Paid-In Capital Source of Capital

Shares Amount Shares Amount

2017/12 10 *320,000,000 *3,200,000,000 245,653,767 2,456,537,670 StockOptions

* The amendments to Articles of Incorporation of authorized share capital was approved by General

Shareholders Meeting on June 26th, 2012. However, there are no changes in registered capital

temporality.

4.1.3 Status of Shareholders As of April 7, 2018

Type of Shareholders

Government Agencies

Financial Institutions

Other Legal Entities

Foreign Institutions Individual Total

Number of Shareholders 4 59 81 173 14,012 14,329

Shareholding 20,489,000 56,639,512 43,839,535 55,183,084 69,502,636 245,653,767

Ownership% 8.34% 23.06% 17.85% 22.46% 28.29% 100.00%


4.1.4 Distribution Profile of Ownership Unit: Shares, as of April 7, 2018

Class of Shareholding Number of Shareholders Shareholding (share) %

1 999 3,256 613,903 0.25%

1,000 5,000 8,836 17,633,256 7.18 %

5,001 10,000 1,084 8,687,982 3.54 %

10,001 15,000 315 4,029,544 1.64 %

15,001 20,000 205 3,829,267 1.56 %

20,001 30,000 201 5,196,019 2.12 %

30,001 40,000 76 2,725,238 1.11 %

40,001 50,000 64 2,980,913 1.21 %

50,001 100,000 104 7,610,646 3.10 %

100,001 200,000 76 10,998,641 4.48 %

200,001 400,000 33 9,275,018 3.78 %

400,001 600,000 23 11,159,705 4.54 %

600,001 800,000 8 5,646,394 2.30 %

800,001 1,000,000 8 7,323,572 2.98 %

Over 1,000,001 40 147,943,669 60.22 %

Total 14,329 245,653,767 100.00 %

4.1.5 Major Shareholders Unit: Shares, as of April 7, 2018

Name of Shareholders Shareholding %

Cathay Life Insurance Co., Ltd. 21,416,000 8.72%

Fubon Life Insurance Co., Ltd. 13,565,000 5.52%

Yun Chuan Investment Ltd. 10,750,360 4.38%

New Labor Pension Fund 7,851,000 3.20%

Old Labor Pension Fund 7,303,000 2.97%

Chunghwa Post Co., Ltd. 5,775,000 2.35%

Taiwan Life Insurance Co., Ltd. 5,150,000 2.10%

Su Yi 4,809,322 1.96%

Vanguard Emerging Markets Stock Index Fund 4,199,000 1.71%

Owner of ZhuoJian Investment Co., Ltd. 4,197,094 1.71%


4.1.6 Market Price, Net Worth, Earnings and Dividends per Share

Unit: NTD/ Thousand Shares

Item 2016 2017 March 31, 2018

Market Price

Highest 88.70 89.30 89.60

Lowest 65.90 73.50 78.90

Average 76.40 79.74 83.86

Net Value per Share

Before Distribution 30.29 29.66 30.40

After Distribution 29.09

Earnings per Share

Weighted Average Shares 242,647 243,616 245,654

Earning per Shares 6.02 5.38 0.76

Dividends per Share (Note 1)

Cash Dividend 4.20 3.75

Stock Dividend

From Retained Earnings 0 0

From Capital Surplus 0 0

Accumulative Undistributed Dividends -

Return on Investment (Note 2)

Price / Earning Ratio 12.69 14.82 11.03

Price / Dividend Ratio 18.19 21.26

Cash Dividend Yield Rate 5.50 4.70

Note1 Pending for Shareholder's approval

Note2 Price / Earning Ratio = Average market price / Earnings per share; Price / Dividend Ratio= Average market price / Cash dividend per share; Cash Dividend Ratio = Cash dividend per share / Average market price

4.1.7 Dividend Policy

The appropriations of the Company's earnings are base on the annual net income. The dividend

amount is determined by the profit earning condition, financial condition and future operating needs for

cash. In principle, dividends could be distributed in cash and/or in the form of stock; nevertheless, cash

dividends shall be no less than 10% of the aggregate amount distributed.


4.1.8 Dividends Paid

Year EPS NT$

Cash Dividend NT$ per share

Share Dividend NT$ per share

2017 5.38 3.75 -

2016 6.02 4.20 -

2015 5.57 4.00 -

2014 4.21 3.00 -

2013 4.19 3.00 -

2012 3.90 2.75 -

2011 3.29 2.39 -

2010 1.88 1.47 -

2009 1.24 1.00 -

2008 1.88 1.50 -

2007 3.65 2.00 0.40

2006 2.69 0.99 0.99

2005 2.76 1.07 1.07

4.1.9 Distribution of Profit

Sercomm's Board of Directors adopted a proposal for 2017 profit distribution. This proposal is

subject to approval by shareholders at the annual general meeting, scheduled for June 3, 2018.

4.1.10 Proposal of Profit Distribution for 2017

Unit: NTD

Cash dividend $3.75 per share Cash bonus to employees $266,138,910 Remuneration to Directors and Supervisors $28,861,090


4.2 Status of Employee Stock Option Plan 4.2.1 Issuance of Employee Stock Options

As of March 31, 2018

Category 1st Employee Stock Options

Date of Approval by Regulatory Authority 2015/5/25

Issue Date 2015/5/27

Number of Shares Issued (Share) 10,000,000

Number of Shares Issued / Total Issued Shares (%) 4.12%

Exercise Period 10 years

Method of Provision Issue of new shares

Vesting Schedule

After 2 full years have elapsed from the time the stock option holder is allocated the employee stock options, the option holder may exercise the share purchase rights according to the schedule set out below. The duration of the stock options is 10 years. The stock options and rights and interests therein may not be transferred, pledged, given to others, or disposed in any other manner, except by succession. After the expiration of the duration of the employee stock options, any unexercised options shall be deemed forfeited, and the stock option holder may not make any further claim to share purchase rights. Percentage of share purchase rights that may be exercised according to the time elapsed since the allocation of the stock options (cumulative) Two full years have elapsed: 50 Three full years have elapsed: 75 Four full years have elapsed: 100%

Number of Shares in Exercised Options (Share) 2,734,000

Total Amount in Exercised Options (NTD) 149,003,000

Number of Shares In Unexercised Options (Share) 7,266,000

Price per Share In Unexercised Options (NTD) 54.5

Number of Shares In Unexercised Options as Share of Total Issued Shares (%) 2.96%

Impact on Shareholders’ Equity (%) 5.48%


4.2.2 List of Executives Receiving Employee Stock Options and the Top Ten Employees with Stock Options

As of March 31, 2018

Title Name No. of Stock

Options

Stock Options as a Percentage of Shares

Issued

Exercised Unexercised

No. of Shares Converted

Strike Price (NT$)

Amount (NT$

thousands)

Converted Shares as a Percentage of Shares

Issued

No. of Shares Converted

Strike Price (NT$)

Amount (NT$

thousands)

Converted Shares as a Percentage of Shares

Issued

President James Wang

2,092,000 0.85 419,000 54.5 22,836 0.17 1,673,000 54.5 91,178 0.68

Executive VP Ben Lin

Subsidiary CEO Paul Wang

Senior VP Charles Chu

VP Leo Chen

VP Jemmy Lee

VP Hawk Wu

VP Colette Chen

VP Vicky Lin

VP Earl Liao

VP Genevieve Lu

Director Winnie Hsieh


V. Business Overview

5.1 Business Activities 5.1.1 Business Scope

Item 2016 2017

Wired Product 18.68% 10.70%

Wireless Product 79.73% 87.89%

Others 1.59% 1.41%

Total 100.00% 100.00%

5.1.2 Main Products

(1) Fixed Mobile Products

(2) Broadband Access

(3) Smart Home Control

(4) Enterprise & SMB

(5) Home Connectivity

(6) Telematics

5.1.3 New Products under Developing

(1) BOB 10G PON Gateway

(2) Outdoor Small Cell

(3) LTE Battery IP Camera

(4) LTE-M/NB-IoT Tracker

(5) 11ax Router

5.2 Industry Overview 5.2.1 Industry Status and Development

With the speedy growth in demand for internet access and the trends of the Internet of Things,

cloud, big data, and mobile internet access in 2017, along with the sudden increase of data

transmission and data volume, the data center and terminal should be upgraded, and both the speed

and bandwidth for internet access need to be improved. It is estimated that the capital expenditure for

network equipment of global telecom operators will be USD 96.3 billion in 2018, which is a slight

increase of 1.4% compared with 2017. The reason for this small growth is mainly because the

construction of global communication networks in the last two years has gradually matured. New

investment expenditures will stimulate the communications market in 2018 and 2019. It is expected that


5G investment will start earlier than scheduled. The total investment will be higher than the total 4G

investment.

Regarding the user section, through upgrades in hardware, users will experience the best

high-speed internet access. The requirements for new equipment and replacing existing equipment

with new hardware has become one of the factors in the growth of networking industry in the last two

years. After all, the existing hardware was too old to handle content with the new bandwidth. Besides,

the demand from emerging countries who would like to invest in network infrastructure was another

reason for the growth of the networking industry. As countries invest in national broadband network

strategies, the construction of optical fiber to homes will grow.

The industry treated 5G as a disruptive technology during its launch, but it is now the strategic core

for the development of various sectors. The most updated “5G and the Internet of Things” report

published by Ericsson, a well-known networking company, on MWC fully discloses the huge potential

revenue which comes with the digitalization of various industries by 5G. The world is about to embrace

the 5G era. Based on the latest reports of action trends published by Ericsson, video and audio data

makes up about 50% of mobile transmission, and it will be 75% in 2022. We will need a faster network

and more significant network capacity to communicate. At the MWC, which was held in Barcelona this

year, 5G is still a hot topic. In 2023, it is expected that the volume of mobile transmission will be eight

times that of the current transmission volume and will increase at least 40% annually. In addition to

applying 4G networks, 5G will become a vital transmission network. It is estimated that 20% of the

transmission volume will use the 5G network in 2023. The total global subscribers to 5G will reach one

billion at the end of 2023, and North America will grow faster than other areas of the world.

According to statistics from Ericsson, the number of global mobile subscribers increased by 95

million in the third quarter of 2017 and led to total subscribers numbering 7.8 million. Ericsson reported

that the number of new subscribers is mainly from China, with an increase of 30 million, followed by

Indonesia, the United States, Angola, and Pakistan.

Observe the distribution of mobile users. As 4G LTE becomes the mainstream of mobile

communication technologies, many global operators have gradually turned 2G users into 3G and 4G,

resulting in a significant decline in 2G use. According to statistics, in the third quarter of 2017, 2G GSM

and EDGE subscribers reduced by 130 million, 3G WCDMA and HSPA subscribers increased by 60

million, while 4G LTE subscribers increased by 170 million, making 4G subscribers reach 2.5 billion

subscribers. By the end of 2017, 4G LTE was the mainstream technology selected by global mobile

users. By the end of 2023, the total number of 4G subscribers will reach 5.5 billion. By then, the

percentage of LTE subscribers to the total number of mobile subscribers will exceed 60%.

5G is expected to start commercial deployments in 2020, and the 5G standardization project is


being accelerated now. Early deployment of 5G is going to happen in markets such as the United

States, South Korea, Japan, and China. The first 5G NR commercial networks are expected to be used

in 2019. Most network deployments will begin in 2020.

Regarding global mobile communication users from a technology utilization point of view, North

America is the region with the most substantial number of LTE users worldwide, and LTE users are

about 80% of the total mobile users. This trend is expected to extend to 5G. It is estimated that 5G

users in North America will be about 37% of the total mobile users by the end of 2023. As for the

development of 5G in other regions, Northeast Asia, South Korea, Japan, and China will be the first

countries to deploy 5G. The proportion of 5G users will reach 34% in Northeast Asia by 2023. The 5G

development in Western Europe is supposed to be slow; 5G users will only account for 16% of the total

number of users by the end of 2023.

The whole 5G network architecture will apply wavelength-division multiplexing (WDM) technology,

which will continue to progress further from the backbone network to metropolitan area networks and

access networks, realizing bandwidth expansion with low costs amid rising demands for optical

communication-related products. In the early period, the market will favor optical fiber and optical fiber

cable. Also, there are cell site antennas and RF components. It is expected that network optimization

and maintenance will have a new wave of market opportunities for network communication equipment.

Networking companies in Taiwan will enter the 5G market through various paths. Microelectronics

Technology Inc. focuses on 5G RRH products, and Suntec focuses on 5G millimeter-wave antennas.

Sercomm, Alpha Networks Inc., Gemtek and Arcadyan have aimed at manufacturing 5G end-user

equipment and small cells. The industry expects to begin shipping in small quantities in 2019.


5.2.2 The Relationship between the Upstream, Midstream and Downstream Parts of the Industry

Sercomm’s main business is the manufacture of wired and wireless networking products including

network application servers. In the computer networking industry we belong in the midstream segment.

Our upstream includes IC manufacturers and electronic components suppliers while our downstream

includes the average user, network equipment suppliers and enterprise network system developers.

Upstream Midstream Downstream

CPU Vendor LANN IC General User

IC Supplier Hub System Integrator

ASIC (in-house design) Bridge Enterprise network system developer

PCB Maker ISDN Interface (Terminal Adapter, Router, Card Modem etc.)

Computer peripherals/ Printer/Fax/Modem /ISDM/Multimedia Vendor

Chip Network Application Server Network Hardware Vendor

Passive Component Network Operating System Telecom Operator

Resistor and Capacitor Supplier

Adapter Supplier

DRAM and SRAM Supplier

Flash Memory Supplier

5.2.3 Products Development and Competition

With the trends of the Internet of Things, cloud computing, big data, and mobile internet access in

2017, both internet speed and network bandwidth were improved by the global networking industry.

The growth impulse of the industry mainly comes from the increase in investment in broadband network

equipment by telecom operators. In fixed-line broadband access equipment technology, FTTx

technology is the mainstream, while xDSL continues to degenerate. In 2017, 52% of fixed-line

broadband users were located in Asia; 27% in Europe, the Middle East, and Africa; and 12% in the

United States. Technology specifications of Cable and VDSL in particular, which have a relatively high

market share of fixed-lines in European and American countries, continued to evolve. For example,

Cable was upgraded from DOCSIS 3.1 to Full Duplex DOCSIS 3.1, xDSL was enhanced from VDSL 2

to G.Fast, and optical fiber has also evolved from GPON to 10G GPON.

Currently, copper cable technology has improved from VDSL2, VD2L2+, and Vectoring to G.fast.

The speed of broadband has reached 100M, and even 1G and is heading towards higher-bandwidth in


the future. VDSL2 supports 20M~50M, Vectoring supports 50M~100M, and G.fast supports 1G

connections, which realizes the ultra-bandwidth goal. VDSL2 is a supplement to the speeds of

G.SDHSL, and G.fast will complement the distances of VDSL2 and provide a more diversified selection

of copper cable access technologies. The evolution of the specifications above, whether in fixed-line or

mobile networks, is to increase the speed of the Internet and bandwidth and to meet consumer

requirements for a faster and more stable network.

VDSL is the solution for deploying the fixed-line networks for Europe (the United Kingdom and

Germany), Brazil, North America (the United States and Canada), and some other countries.

Openreach, a subsidiary of British Telecom, launched UK Telecom's Ultra-Wideband Investment

Program to improve speed and expand the coverage of the fixed network. Except for FTTP and

long-distance VDSL, it also deployed G.fast copper cable access technology to achieve faster speeds,

a target of 100 Mbit/s or more.

Deutsche Telekom invested 2 billion euros to deploy GPON+VDSL2 in more than 50 major cities

across Germany. Swiss Telecom, Belgium Telecom, Dutch KPN, Swedish Telecom, and Turkish

Telecom all deployed VDSL2 in FTTN. BT in the UK invests in G.fast to increase the connection speed

to 300 Mbit/s, expects to improve the coverage to 10 million households, and invests in higher-speed

optical fiber to over 2 million homes.

As the production of VDSL in Japan comes to a close, VDSL operators provided another method to

solve the broadband service of multi-dwelling units (MDUs). EneCom, for example, accelerates the

commercial deployment of G.fast in Japan. With the deployment of G.fast, the provider will launch 8K

TV service and high-broadband service applications, establishing the foundation for future deployments

of XG-FAST providing up to 10Gbps speeds. They emphasized that the Customer Premises (CPE) of

VDSL are compatible. The old VSAL CPE will be replaced with the new G.fast CPE.

The cable TV service provider in North America (Multimedia System Operator, MSO) utilizes

DOCSIS technology to lead other countries. DOCSIS 3.0 is the primary solution. It will deploy DOCSIS

3.1 technology in the future and renew the existing network. Comcast introduced Software

Defined-Wide Area Network (SD-WAN) products for the first time and provided 1Gbps DOCSIS 3.1

broadband service for businesses.

To accelerate the construction of an all-country optical fiber network, China has actively increased

the coverage of optical fiber for broadband access networks in various cities and towns, making the

internet connection speed rate per capita match that of European and American countries. Accordingly,

China has been actively developing the communications industry in the last two years. The largest

fixed-line broadband market on the planet is in China, which has more than 300 million connected

users or more than one-third of total global users; the United States is the second largest market with


approximately 110 million users; and Japan has around 40 million, followed by Germany, France,

Russia, the United Kingdom, Brazil, South Korea (South Korea provides the fastest average fixed-line

broadband speed in the world) and India. The former ten countries account for 75% of global

broadband access. With the constant increase of global broadband users, the compound growth rate of

global fixed-line broadband users is expected to increase 5% in the following three years, and FTTx

broadband technology will become the leading solution.

Currently, WiFi is widely implemented, including NB and smart phones. It is expected that the

global sales of WiFi chips in 2021 will reach more than 4 billion. The main solution of WiFi will be

802.11ac in 2018. 802.11ac is based on 802.11n but with a broader RF bandwidth (up to 160MHz),

MIMO support, and high-density 256-QAM modulation. 802.11ax is treated as an enhanced version of

802.11ac, and both work in the 5GHz band. The 802.11ax applies multi-user, multiple-input, and

multiple-output (MU-MIMO) technology to divide the signal into four different signal channels in the time

domain, frequency domain, and spatial domain, etc. Each signal channel can communicate with a

single device, and this will double efficiency. 802.11ax applies Orthogonal Frequency Division Multiple

Access (OFDMA) to load more data in the same space area and is compatible with 802.11a/b/g/n and

ac equipment. So the 802.11ax STAs (Station) can communicate with conventional STAs, the core

technology of the next-generation high-speed wireless communication network. Observe the

development of the next-generation WiFi network. Whether it is the network, terminal equipment, or

chip R&D, all are deployed around network capacity expansion and network efficiency.

There are tremendous opportunities in the IoT market, which include technologies such as LTE-M,

LoRa, NB-IoT, Sigfox, Weightless, HaLow, and RPMA (the technology owner is Ingenu, USA), all in the

network deployment phase in 2017. Currently, expansion is beginning in various application areas.

Observing the technical characteristics of each technology, LoRa is suitable for applications dedicated

to smart cities, industry, and vendors, and is rapid and flexibly deployed. NB-IoT and LTE-M are

generally applied in telecommunication operators' networks to provide extensive connections, broad

coverage and low-cost network solutions. Basically, the two technologies will coexist and complement

each other.


Trends in Gross Margin Rate for Taiwanese Networking Vendors

Source: M.O.P.S

Given the increasing diversification of applications to the IoT in 5G, Sercomm will focus on its

capacity to integrate firmware and will surpass its industry competitors and maintain a competitive edge

in smart home, telematics, cloud applications, and other IoT applications. This will help to bring in

revenue and maintain a certain level of profit.

5.2.4 Research & Development Expenses Unit: Thousand NTD

Item 2017 2018 Q1

R&D Expenses 1,645,589 414,146

Net Sales 38,600,003 7,963,266

R&D/Net Sales (%) 4.26% 5.20%


5.2.5 R&D Achievements:

(1) Fixed Mobile Products

Outdoor Small Cell

LWA Small Cell

Outdoor Fixed Wireless LTE High Speed Relay CPE Equipment

(2) Broadband Access

10G PON Broadband Gateway

(3) Smart Home Control

Smart Doorbell

Human Factor Smart Lighting Cloud Platform

(4) IoT Products

NB-IoT Module

LTE-M Module

5.3 Long-term and Short-term Business Development Plans 5.3.1 Long-term Development Plans

(A) Enrich knowledge of the industry, cultivate employees with expertise in industry IT networks and

develop core technology products.

(B) Strengthen collaboration with well-known international technology companies, improve

technology R&D capability and develop high value-added products.

(C) Actively develop new products with the goal of diversifying operations and entering the

international market.

5.3.2 Short-term Development Plans

(A) Marketing strategy

Consolidate existing customers and actively expand the market; build a complete marketing

network; fully implement quality assurance and inspection measures. Set up a comprehensive

after-sales service to provide customers with professional advice and repair services for

products.

(B) Production strategy

Strengthen product planning and production process management. Provide employees with

re-training as well as implement budget and cost control measures to increase productivity and

reduce production costs. Fully implement quality assurance and inspection measures.


5.4 Market, Production and Sales Outlook 5.4.1 Revenue Breakdown by Geography

Unit: Thousand NTD

Region 2016 2017

Amount % Amount %

Taiwan 12,532 0.03 102,792 0.27

Europe 7,224,659 19.69 9,284,213 24.05

North America 19,175,265 52.25 15,556,022 40.30

Asia ex-Taiwan 10,255,005 27.94 13,524,538 35.04

Other 34,273 0.09 132,438 0.34

Total 36,701,734 100.00 38,600,003 100.00

5.4.2 Market Analysis of Major Product Categories Market Share in Networking Industry

Sercomm production (NT$billion)

Taiwan Wireless Networking Marekt Size (NT$billion) Sercomm market share

WLAN 31.9 125.2 25.48% Source: Market Intelligence & Consulting Institute (MIC), Jun, 2017

Strong demand driven by broadband infrastructure upgrades worldwide contributed to the

magnificent growth of all Sercomm products.

Digital convergence is accelerating broadband equipment to the ultra-wideband G era (Gigabit).

Sercomm demonstrates its advantages in system integration and has gained business in Europe,

China, and emerging markets. The telecommunications market share is increasing. With strong

demand for FTTx products, Cable DOCSIS 3.x, Integrated Access Devices, and SMB products,

Sercomm has experienced an increase in operating performance. The total shipment volumes of

broadband devices reached nearly 33 million units in 2017, and the telecom market share continues

to rise.


5.4.3 Future Supply and Demand in the Market and Potential for Growth

(1) From 2016 to 2026, the expected digitalized income of ICT industry participants will increase by 13.6% annually. Currently, the expected growth rate of the operator's service revenue is 1.5%. The importance of 5G to all businesses is increasing day by day. According to the “Impact of 5G on Industry Report” published by Ericsson, 5G application cases will be launched in 2018. With that, activities related to 5G will commence quickly, and more than 70% of the enterprises will launch 5G application products in 2021. It is most likely that manufacturing, energy, public utilities, public transportation, and financial services industries will be the first to propose 5G application services in 2020.

(2) With the increasing attention and investment in smart cities throughout the global market, the research institute IDC predicts that technology-related investments in smart cities all over the world will be about USD 80 billion in 2018, increasing steadily in the following years. It is estimated that the investments will reach USD 135 billion by 2021.

(3) From a geographical point of view, the United States will be the biggest market for smart city technology on the planet. It is supposed that expenditures in 2018 will be USD 22 billion, followed by China, contributing USD 20.9 billion in 2018, an increase of 20.2% from USD 17.3 billion in 2017. China and the United States will show similar growth trajectories. The expected compounding rate for the five-year average from 2016 to 2021 is 19.0% and 19.3%, respectively. As for Latin America, the compound annual growth rate will be 28.7%, and Canada will be 22.5%, making it the fastest increasing expenditure region.

(4) According to the research of Strategy Analytics, the Internet of Things will develop quickly. By 2020, smart homes will become one of the major development factors. According to the statistics, by the end of 2017, nearly 20 billion Internet of Things and interconnection devices were deployed globally and will rise by 10 billion in the next four years. The development of corporate IoT has always been a significant driver. By 2020 and beyond, smart homes will stimulate the growth of connectivity and IoT devices, with an estimated total of 50 billion units.

(5) The Topology Research Institute indicates that as the 5G standard starts the actual formulation stage, 5G application scenarios will gradually reach a consensus, and the demand for 5G applications is continually emerging as well. The deployment of small cells to satisfy the increasing requirement for data transmission is very important for the development of 5G. It is concluded that by the year 2018, the installed capacity of small cell equipment in the world will be 2.838 million sets, and in 2019 it will increase to 4.329 million sets. The annual increase rate will be 52.5%.

5.4.4 Competitive Niche

Sercomm has foreseen the increasing maturity of the broadband networking market in the future,

therefore our products can now all use wireless technology. Our customers have also recognized the


quality and stability of our products. We continue to enhance our product features to meet market

demand. Sercomm expects an increase in revenue due to the widespread use of the Internet and the

growth of the broadband market.

5.4.5 Positive and Negative Factors in Long-Term Development

(A)Positive Factors

a. High level of flexibility in product combinations

As Sercomm considers its own long-term development strategy and market positioning, the path

forward points towards an operational mode of placing equal emphasis on both commodity and

niche products, consolidating the existing market and customers, and pursuing a stable growth of

operations. The company’s business strategy will be to make timely adjustments in relation to the

growth of the profits and revenue, and thereby expand its economic scale and enhance its market

position. Sercomm's business portfolio is divided into large-scale volume production of

lower-margin products and custom higher-margin niche products. It is Sercomm's intention to

maintain a business model that balances volume commodity/niche products after taking the

company's long-term strategy and market positioning into account. Primary focus is given to

consolidating existing markets and customers with the goal of pursuing steady growth while

maintaining profit margins. This approach is aimed at strengthening and reinforcing the company's

operations. The company's business strategy will also adjust profits and revenues as necessary in

order to build up Sercomm's economies of scale and boost its market standing.

b. Leadership in technology R&D

Sercomm was the first Taiwanese manufacturer to develop wireless routers, wireless printer

servers and MFPs. It was also the first company to announce an 11n ADSL Gateway and the first

company in Taiwan to announce a mesh WiFi router. Sercomm’s customers have all

acknowledged these products’ quality and attractiveness to the market, allowing Sercomm to join

the ranks of suppliers to front-line brands. The collaboration with international networking

companies contributes to the product’s international competitiveness and continued business

expansion.

c. Layout of telecommunication service provider

This market demands multiple application equipments that are high value-added, instead of low

gross profit market. In terms of QuadPlay (four in one) and Small Cell, it is expected that the

shipments will be increased due to the increasing demand in the market, thereby helping the

average price and gross profit rate positively.

d. 5G development

The market in Europe is recovering, and the market shares in France, Southern Europe, and


Russia are increasing. European business is expected to extend to the Middle East and Africa.

Sercomm will continue to invest in India, Latin America, Southeast Asia, and Northeast Asia. With

the injection of the new markets, Sercomm is confident in its overall operating growth this year.

(B) Unfavorable Factors and Countermeasures The cost of raw materials started to rise nearly one year ago. Not only did DRAM rise from the first

half of last year all the way to the fourth quarter, Sercomm faces a lack of materials for active and

passive components. In order to meet the requirements, the raw materials have raised since the fourth

quarter of last year. The cost of raw materials has risen 2-3 times so far, and some costs have

increased 6-7 times more. With the attraction of high gross profit, it is possible that existing

manufacturers will expand production capacity to compete with other new plants. It is expected that

prices will stabilize in the first and second quarters this year.

Except for the fast-rising raw material costs, the appreciation of the TWD has also affected the

revenue and gross profit of the company. The critical policy will be the adjustment of the product

portfolio this year, increasing the proportion of the products with high gross profits. Such products

include Small Cell, NB-IoT of LPWA and LTE-M, and other applications of the Internet of Things.

Sercomm is expected to improve profitability beyond this proportion.

The sales in the China market last year were large enough to support the aggregate optical fiber

demand. But considering that the market demand in China will reach a ceiling in 2018, the demand will

decrease because of the transit of traditional 2.5G to 10G. In order to get through the transitional period

smoothly, the manufacturing capacity in China will be exported to Southeast Asia. In India, the

population will soon surpass that of China, increasing Sercomm's interest in expanding its reach in

India in the near future.


5.5 Main Product Applications With its strength in integration of network communication products accumulated after many years,

Sercomm has not only become the leading supplier of world-class WLAN equipment but also controls

the critical technology for Next-Generation Networks after the continuous R&D in network

communication technology. To deal with the emerging network applications integrated into homes,

Sercomm created value-added network communication products with its high-level software and

hardware product integration technology. The whole series of high-performance, high-quality and

diversified professional broadband network communication products include broadband network

communication access points, Integrated Access Device, Enterprise & SMB products, FTTx Products

and Smart Home Control/ Surveillance. No matter whether at home or in the office, they may satisfy

customers’ demands for diversified and all-in-one digital integration network communication.

5.5.1 Product Manufacturing Process

The manufacturing processes for our company’s products are divided into PCB assembly and final

product assembly.

PCB assembly includes the SMT process and the DIP insertion process. The process is as follows:

The final product assembly process is as follows:

Prepare Material Front SMT

Infrared Welding Rear SMT

Insertion SolderAutomatic

Testing High

Temperature Baking

Automatic Testing

Housing Assembly Load Software

Function Testing Packaging

Shipping


5.5.2 Customers that Accounted for at Least 10% of Annual Consolidated Net Revenue

Unit: Thousand NTD 2016 2017 2018 First Quarter

Customers Sales Revenue

As % of 2016 Total Net

Revenue

Relations to

Sercomm Customers Sales Revenue

As % of 2017 Total Net

Revenue

Relations to

Sercomm Customers Sales

Revenue

As % of 2018 Q1

Total Net

Revenue

Relations to

Sercomm

Customer A

13,099,750 35.69 None Customer A

11,328,142 29.35 None Customer A

1,505,192 18.90 None

Customer B

6,493,466 17.69 None Customer B

5,346,168 13.85 None Customer B

1,209,993 15.19 None

Others 16,108,517 46.62 Others 21,925,693 56.80 Others 5,248,081 65.91

Total Sales Revenue

36,701,734 100.00 Total Sales

Revenue 38,600,003 100.00

Total Sales

Revenue 7,963,266 100.00

Production – A

Unit: Unit / Thousand NTD

Main Products 2016 2017

Capacity Quantity Amount Capacity Quantity Amount

Wired Product 13,000,000 11,632,180 6,957,185 10,000,000 8,026,887 3,792,341

Wireless Product 20,000,000 18,222,525 26,389,399 28,000,000 26,726,243 31,937,946

Total 33,000,000 29,854,705 33,346,584 38,000,000 34,753,130 35,730,287

Production – B

Unit: Unit / Thousand NTD

Main Products

2016 2017

Export Domestic Export Domestic

Quantity Amount Quantity Amount Quantity Amount Quantity Amount

Wired Product 11,098,250 6,854,967 959 743 7,877,581 4,130,230 1,481 499

Wireless Product 18,009,472 29,258,584 3,043 5,476 24,784,365 33,859,572 11,047 66,371

Others 0 575,773 0 6,227 0 507,408 0 35,922

Total 29,107,722 36,689,288 4,002 12,446 32,661,946 38,497,210 12,528 102,792


5.6 Environmental Expenditure Total value of losses or penalties due to environmental pollution in the most recent year and up to the

date of publication: None

Future response strategies and potential expenditure:

As a high-tech electronic company, Sercomm's production process including assembly, testing and

packaging of final products and semi-assemblies. No wastewater, gases or noises are emitted during

production. Waste disposal is carried out in accordance with the Business Waste Disposal Plan while

the waste is disposed and recycled legally.

As global environmental awareness has expanded, the European Union, North America, Japan

and other countries have, one after another, established relevant environmental requirements in

response to environmental issues. In concert with this development, Sercomm has, through green

design, introduced a lead-free process in the product development stage, and thereby achieved the

purpose of reducing the company’s impact on the environment. At the same time, through green

procurement, it has extended these environmental requirements to the acquisition of components and

raw materials, and expanded the same requirements to the use of the products and the disposal of

waste.

5.7 Employer-employee Relationships 5.7.1 Employees

Year 2016 2017 2018/05/05

Headcount 4,654 4,861 4,901

Average Age 33.11 32.62 33.06

Average Seniority (years) 3.73 4.61 4.46

As Total Employees %

Ph. D. 0% 0% 0%

Master 8% 8% 8%

College 39% 39% 38%

Senior High School 53% 52% 53%

Junior High School or Lower 1% 1% 1%

The implementation of an employee welfare policy, continuing education and training, retirement

system, and labor-management coordination and the protection of the rights of the employees:


5.7.2 Employee welfare policy

The Company provides the National Health Insurance, labor insurance and group insurance in

accordance with Labor Standards Act and relevant laws /regulations to increase the protection of the

rights of the employees. The premiums are undertaken by the Company. Additionally, budget is

planned every year for employees’ education and training. The company established the Employee

Welfare Committee, which was approved by the Department of Labor, Taipei City Government in

October 1996.

For compensation & benefits, not only marriage, funeral and maternity subsidies are provided to

employees, but also company outings and various recreational activities are regularly organized for

employees with physical and mental relaxation.

5.7.3 Learning and Development

Sercomm believes that it is the responsibility of the Company to provide appropriate educational

and training opportunities for employees, and to encourage the self-training of employees so that they

can continue to realize their potential. Therefore, the Company’s consistent policy is to improve its

staff’s skills through various training and development programs so that the performance of its

employees will not only meet the Company’s business needs, but also help them achieve their personal

goals. The Company has an education and training system, and prepares an annual budget for

colleagues’ education and training. In 2017, the number of employees who engaged in advanced study

was 26,482, and the number of man hours was 57,531 hours.

5.7.4 Pension plan and implementation situation

The Company has formulated a pension plan for the employees who are formally employed, and

since February 4, 1997 has maintained a Business Entity Supervisory Committee of Labor Retirement

Reserve in accordance with the Labor Standards Act. It appropriates labor pension reserve funds at a

certain percentage of the total monthly wages of the company’s employees and deposits this amount in

a designated pension fund account at the Central Trust of China.

The Labor Pension Act came into force in July 1, 2005, and adopted a defined contribution plan.

As a result of the implementation of the Act, employees may choose to apply the provisions in respect

to pensions prescribed in the Labor Standards Act. The amount of labor pension borne by the employer

shall not be less than six percent of the worker's monthly wage.

5.7.5 Labor-management consultation

The rights and obligations of both parties of the workers and employers shall be governed by the

Labor Standards Act and its relevant laws and regulations, as well as the provisions of the Company’s


administrative regulations. Since its establishment the Company has maintained good

worker-employer relationships. In order to maintain good worker-employer relationships, the Company

implements a humanistic management approach and works hard to strengthen two-way

communication between employees and the employer to create a better future.

5.7.6 Employee interests maintenance measures

The Company established a labor retirement reserve fund committee and holds worker-employer

coordination meetings with the labor representatives elected by the employees to discuss relevant

affairs and operations. Meanwhile, the Company provides employees with health examinations every

two years and, for staff engaged in special operations, adds special health examination items. The

Company also established and promulgated the Sexual Harassment Prevention Act, and grants

employees paternity leave and unpaid parental leave in accordance with the Gender Equality in

Employment Act. For employees whose work is not considered satisfactory, the Company will give

them appropriate work improvement plans, and if they fail to meet the job requirements again, will

transfer them to other positions depending on the actual situation, or will proceed with the termination

of their employment according to the law.


VI. Financial Review and Analysis

6.1 Condensed Balance Sheet IFRSs (Consolidated) Unit: Thousand NTD

Item 2013 2014 2015 2016 2017 As of March

31, 2018

Current Assets 9,471,368 13,912,947 18,029,817 19,472,018 20,457,851 18,138,323

Property, Plant and Equipment 3,245,122 3,321,363 3,380,603 3,265,690 3,248,680 3,286,682

Intangible Assets 138,650 131,845 307,021 285,607 297,551 284,800

Other Assets 537,759 622,242 810,542 755,738 763,364 875,738

Total Assets 13,392,899 17,988,397 22,527,983 23,779,053 24,767,446 22,585,543

Current Liabilities

Before Distribution 7,887,024 11,652,110 15,328,506 16,141,585 17,304,180 14,870,781

After Distribution 8,493,356 12,339,764 16,256,848 17,161,848

Noncurrent Liabilities 778,180 277,340 261,842 280,400 236,970 274,027

Total Liabilities



Equity Attributable to Shareholders of the Parent

Capital Stock 2,110,586 2,299,623 2,413,636 2,429,198 2,456,538 2,456,538

Capital Surplus 852,945 1,390,698 1,529,471 1,617,572 1,764,717 1,767,213

Retained Earning



Others 72,174 333,022 358,567 153,979 -412,962 -388,566

Treasury Shares 0 0 0 0 0 0

Noncontrolling Interests 0 6,090 -1,432 -1,896 -25,098 -26,719

Total Equity Before Distribution 4,727,695 6,058,947 6,937,635 7,357,068 7,226,296 7,440,735



6.2 Condensed Balance Sheet IFRSs (Unconsolidated) Unit: Thousand NTD

Item 2013 2014 2015 2016 2017

Current Assets 5,007,513 5,546,441 7,509,151 8,740,147 8,297,609

Property, Plant and Equipment 1,445,140 1,533,665 1,514,622 1,628,637 1,666,095

Intangible Assets 127,457 116,262 197,796 196,862 268,732

Other Assets 3,460,540 4,044,730 4,986,770 5,187,526 5,791,181

Total Assets 10,040,650 11,241,098 14,208,339 15,753,172 16,023,617

Current Liabilities

Before Distribution 4,479,333 4,898,414 7,011,002 8,122,086 8,526,012


Noncurrent Liabilities 833,622 289,827 258,270 272,122 246,211

Total Liabilities



Equity Attributable to Shareholders of the Parent

Capital Stock 2,110,586 2,299,623 2,413,636 2,429,198 2,456,538

Capital Reserve 852,945 1,390,698 1,529,471 1,617,572 1,764,717

Retained Earning



Others 72,174 333,022 358,567 153,979 -412,962

Treasury Shares 0 0 0 0 0

Noncontrolling Interests 0 0 0 0 0

Total Equity Before Distribution 4,727,695 6,052,857 6,939,067 7,358,964 7,251,394



6.3 Condensed Statement of Income IFRSs (Consolidated) Unit: Thousand NTD

Item 2013 2014 2015 2016 2017 As of March 31, 2018

Operating Revenue 19,076,628 23,192,689 35,011,966 36,701,734 38,600,003 7,963,266

Gross Profit From Operations 3,070,040 3,654,987 4,983,969 5,368,728 5,027,843 1,032,641

Net Operating Income 872,191 1,180,417 1,664,706 1,770,910 1,534,204 210,458

Non-operating Income and Expenses 151,530 8,521 -81,391 31,873 49,354 26,088

Income Before Tax 1,023,721 1,188,938 1,583,315 1,802,783 1,583,558 236,546

Net Income 844,927 949,059 1,297,000 1,455,295 1,288,158 183,319

Other Comprehensive Income 138,939 239,821 12,380 -208,929 -573,152 28,624

Total Comprehensive Income 983,866 1,188,880 1,309,380 1,246,366 715,006 211,943

Net Income, Attributable to Owners of Parent 844,927 949,302 1,304,508 1,461,654 1,311,868 185,568

Net Income, Attributable to Non-controlling of Interests 0 -243 -7,508 -6,359 -23,710 -2,249

Comprehensive Income Attributable to Owners of Parent 983,866 1,188,877 1,316,902 1,252,556 738,208 213,564

Comprehensive Income Attributable to Non-controlling of Interests 0 3 -7,522 -6,190 -23,202 -1,621

Basic Earnings per share 4.19 4.21 5.57 6.02 5.38 0.76

6.4 Condensed Statement of Income IFRSs (Unconsolidated) Unit: Thousand NTD

Item 2013 2014 2015 2016 2017

Operating Revenue 17,011,137 19,230,890 25,807,240 27,842,239 29,285,814

Gross Profit From Operations 1,904,097 2,045,112 2,621,986 3,001,062 2,773,723

Net Operating Income 592,027 682,126 735,810 927,979 831,798

Non-operating Income and Expenses 366,039 319,440 676,802 717,016 605,319

Income Before Tax 958,066 1,001,566 1,412,612 1,644,995 1,437,117

Net Income 844,927 949,302 1,304,508 1,461,654 1,311,868

Other Comprehensive Income 138,939 239,575 12,394 -209,098 -573,660

Total Comprehensive Income 983,866 1,188,877 1,316,902 1,252,556 738,208

Basic Earnings per share 4.19 4.21 5.57 6.02 5.38


6.5 Financial Analysis IFRSs

Item

2013 2014 2015 2016 2017 As of March 31, 2018

Non- consolidated Consolidated Non-

consolidated Consolidated Non- consolidatedConsolidated Non-

consolidated Consolidated Non- consolidated Consolidated Consolidated

Financial Ratio (%)

Total Liabilities to Total Assets 52.91 64.70 46.15 66.32 51.16 69.20 53.29 69.06 54.75 70.82 67.06

Long-term Funds to Property, Plant, Equipment

384.83 169.67 413.56 190.77 475.19 212.96 468.56 233.87 450.01 229.73 234.73

Liquidity (%)

Current Ratio 111.79 120.09 113.23 119.4 107.11 117.62 107.61 120.63 97.32 118.22 121.97

Quick Ratio 84.48 84.61 78.42 86.39 63.30 81.44 70.25 84.86 63.55 82.25 81.31

Time Interest Earned 27.38 19.48 32.06 15.43 41.42 22.17 37.16 25.96 27.13 27.66 15.68

Operating Performance

AR Turnover (Times) 14.12 8.55 14.76 6.59 14.64 6.40 9.17 5.38 8.00 5.38 4.93

AR Turnover (Days) 25.85 42.67 24.72 55.38 24.94 57.02 39.78 67.89 45.63 67.84 74.05

Inventory Turnover (Times) 15.67 6.52 12.86 6.24 10.29 6.67 8.60 5.76 9.61 5.80 4.64

AP Turnover (Times) 6.63 3.68 6.89 3.49 8.46 3.80 7.46 3.25 7.08 3.13 2.66

Inventory Turnover (Days) 23.30 55.98 28.39 58.51 35.47 54.69 42.43 63.35 37.98 62.93 78.68

Property, Plant, Equipment Turnover (Times)

13.24 6.18 12.91 7.06 16.93 10.45 17.72 11.04 17.78 11.88 9.69

Total Assets Turnover (Times) 1.82 1.45 1.81 1.48 2.03 1.73 1.86 1.59 1.84 1.55 1.41

Profitability

Return on Assets (%) 9.35 6.77 9.17 6.48 10.48 6.71 10.01 6.54 8.54 5.50 3.31

Return on Equity (%) 19.78 19.78 17.61 17.60 20.08 19.96 20.45 20.36 17.96 17.66 10.00

Pre-Tax Income to Pay-in Capital(%) 45.39 48.50 43.55 51.7 58.53 65.60 67.72 72.90 58.5 64.46 38.52

Net Income / Sales (%) 4.97 4.43 4.94 4.09 5.05 3.70 5.25 3.97 4.48 3.33 2.30

EPS (NTD) 4.19 4.19 4.21 4.21 5.57 5.57 6.02 6.02 5.38 5.38 0.76

Cash Flow

Cash Flow Ratio (%) 22.27 11.81 2.77 6.70 -1.34 10.38 4.26 15.45 4.06 14.69 3.05

Cash Flow Adequacy Ratio (%) 90.59 79.24 68.53 62.37 45.55 69.58 42.5 88.06 46.7 79.80 36.79

Cash Reinvestment Ratio (%) 7.77 5.76 -7.21 2.26 -10.42 10.13 -7.31 16.14 9.31 17.05 4.91

Leverage Operating Leverage 3.79 3.09 3.72 2.86 4.41 3.00 3.90 2.97 4.42 3.42 4.68

Financial Leverage 1.07 1.07 1.05 1.08 1.05 1.05 1.05 1.04 1.07 1.04 1.08


1. Financial Ratio

(1) Total Liabilities to Total Assets Total Liabilities Total Assets (2) Long-term Funds to Property, Plant, and Equipment Total Equity Non-current

Liabilities Property, Plant, and Equipment 2. Ability to Pay Off Debt

(1) Current Ratio Current Assets Current Liability (2) Quick Ratio Current Assets Inventory Prepaid Expenses Current Liability (3) Interest Protection Net Income Before Income Tax and Interest Expense Interest

Expense 3. Ability to Operate

(1) Account Receivable (including Account Receivable and Notes Receivable from Operation) Turnover Net Sales the Average of Account Receivable (including Account Receivable and Notes Receivable from Operation) Balance

(2) A/R Turnover Day 365 Account Receivable Turnover (3) Inventory Turnover Cost of Goods Sold the Average of Inventory (4) Account Payable (including Account Payable and Notes Payable from Operation)

Turnover Cost of Goods Sold the Average of Account Payable including Account Payable and Notes Payable from Operation Balance

(5) Inventory Turnover Day 365 Inventory Turnover (6) Fixed Assets Turnover Net Sales Net Fixed Assets (7) Total Assets Turnover Net Sales Total Assets

4. Earning Ability

(1) Return on Assets PAT Interest Expense×( Interest Rate) the Average of Total Assets

(2) Return on Equity PAT the Average of Net Equity (3) Net Income Ratio PAT Net Sates (4) EPS Profit Attributable to Owners of Parent Dividend from Prefer Stock

Weighted Average Outstanding Shares 5. Cash Flow

(1) Cash Flow Ratio Cash Flow from Operating Activities Current Liability (2) Net Cash Flow Adequacy Ratio Most Recent 5-year Cash Flow from Operating

Activities Most Recent 5-year (Capital Expenditure the Increase of Inventory Cash Dividend)

(3) Cash Investment Ratio Cash Flow from Operating Activities Cash Dividend(Property, Plant, and Equipment Long-term Investment Other Non-current AssetsWorking Capital)

6. Leverage

(1) Operating Leverage (Net Revenue Variable Cost of Goods Sold and Operating Expense) Operating Income

(2) Financial Leverage Operating Income (Operating Income Interest Expenses)


6.6 2017 Audit Committee’s Review Report

Audit Committee’s Review Report

The Board of Director has prepared the Company’s 2017 Business Report, Financial Statements, and proposal for allocation of profits. The CPA firm of Ernst & Young was retained to audit Sercomm’s Financial Statements and has issued an audit report relating to the Financial Statements. The Business Report, Financial Statements and profit allocation proposal have been reviewed and determined to be correct and accurate by the Audit Comaumittee members of Sercomm Corporation. According to Article 219 of the Company Law, we hereby submit this report. To Sercomm Corporation 2017 Annual Shareholders’ Meeting

Chairman of the Audit Committee Steve K. Chen

March 12, 2018


6.7 Financial Status and Operating Results 6.7.1 Financial Position

Unit: Thousand NTD

Item 2016 2017 Difference Change %

Current Assets 19,472,018 20,457,851 985,833 5.06

Non-Current Assets 4,307,035 4,309,595 2,560 0.06

Total Assets 23,779,053 24,767,446 988,393 4.16

Current Liabilities 16,141,585 17,304,180 1,162,595 7.20

Non-Current Liabilities 280,400 236,970 -43,430 -15.49

Total Liabilities 16,421,985 17,541,150 1,119,165 6.82

Capital Stock 2,429,198 2,456,538 27,340 1.13

Capital Surplus 1,617,572 1,764,717 147,145 9.10

Retained Earnings 3,158,215 3,443,101 284,886 9.02

Other Equity Interest 153,979 -412,962 -566,941 -368.19

Total Shareholders' Equity 7,357,068 7,226,296 -130,772 -1.78

6.7.2 Operating Results Unit: Thousand NTD

Item 2016 2017 Difference Change %

Operating Revenues 36,701,734 38,600,003 1,898,269 5.17

Operating Costs 31,333,006 33,572,160 2,239,154 7.15

Gross Profit from Operations 5,368,728 5,027,843 -340,885 -6.35

Operating Expenses 3,597,818 3,493,639 -104,179 -2.90

Operating Profit 1,770,910 1,534,204 -236,706 -13.37 Non-Operating Income and Expenses

31,873 49,354 17,481 54.85

Income before Tax 1,802,783 1,583,558 -219,225 -12.16

Analysis of Deviation over 20%

Decrease in non-operating income and expenses Mainly due to increase in interest income and decrease in

interest expense in 2017.

6.7.3 Cash Flow Analysis

Item 2016 2015 Change%

Cash Flow Ratio (%) 15.45 14.69 -4.92

Cash Flow Adequacy Ratio (%) 88.06 79.80 -9.38

Cash Reinvestment Ratio (%) 16.14 17.05 5.64


6.7.4 Projected Cash Flow

Unit: Thousand NTD

Beginning Cash Balance

Cash Flows from Operating

Activities

Cash Flows from Investing & Financing

Activities

Projected Ending Cash Balance

Source of Funding for Cash Shortfall

Investing Plan

Financing Plan

6,484,163 -453,945 847,473 5,182,745 Private Placement

Analysis of Cash Flow

NT$453,945 thousand net cash generated by operating activities: mainly from decrease in gross margin,

increase in account receivable, depreciation and amortization expense and account payable.

NT$1,346,689 thousand net cash used in investing activities: primarily for purchase fixed asset and

intangible asset

NT$499,216 thousand net cash used in financing activities: primarily for cash dividend payment, private

placement investing and repay bank loan

Remedial Actions for Liquidity Shortfall None


VII. Special Disclosures

7.1 Subsidaries 7.1.1 Affiliated Companies Chart

Sercomm Corporation

Sercomm USA Inc.

HawXeye Inc.

Sercomm Russia LLC.

Sercomm Japan Corp.

Shukuan Investments

Ltd.

Sercomm France SARL

Sercomm Italian SRL

Sercomm Deutschland

GmbH

Smart Trade Inc.

DWNet Technology

Ltd.

Suzhou FemTel

Communications

Nanjing FemTel

Communications

Sercomm Trading Co.,

Ltd.

Zealous Investment

Ltd.

Sernet (Suzhou) Technology

Ltd.

Huayi (Suzhou) Telecommunication

Technologies Ltd.


7.1.2 Affiliated Companies

Company Date of Incorporation Paid-in Capital Major Business

Sercomm USA Inc 1996/09/25 USD$650,000 Sales of IT Products

Shukuan Investments Ltd. 2002/12/31 NTD$28,000,000 Investment Activity

Sercomm Trading Co., Limited 2002/06/24 USD$46,800,000 Investment Overseas,

International Trading

Zealous Investments Ltd. 1999/08/12 USD$30,956,000 Investment Overseas, International Trading

Sernet (Suzhou) Technology Ltd. 2000/02/18 USD$29,900,000

Manufacture of Routers, Communication Products, WLAN Products; Sales and After-sales Service

Smart Trade Inc. 2003/03/21 USD$16,000,000 Investment Overseas, International Trading

DWNet Technology Ltd. 2004/01/14 USD$16,000,000 R&D Center of Software; Sales and After-sales Service

Sercomm Japan Corp. 2010/03/15 JPY$490,000,000 Sales of IT Products and International Trading

Sercomm France SARL 2011/01/27 EUD$100,000 Sales of IT Products and International Trading

Sercomm Italian SRL 2012/02/21 EUD$10,000 Sales of IT Products and International Trading

Sercomm Deutschland GmbH 2012/06/29 EUD$100,000 Sales of IT Products and

International Trading

Sercomm Russia LLC. 2013/04/18 RUB$10,000 Sales of IT Products and International Trading


2013/07/15 RMB$500,000

Manufacture of Routers, Communication Products, WLAN Products; Sales and After-sales Service

HawXeye Inc. 2015/04/23 USD$1,452,000 Development of advanced image analysis technology

Suzhou FemTel Communications 2009/11/20 RMB$6,500,000

Telecom equipment, software development and provide related technology service

Nanjing FemTel Communications 2013/01/16 RMB$2,500,000

Telecom equipment, software development and provide related technology service


7.1.3 Directors, Supervisors and Presidents of Affiliated Companies

Company Title Name / Representative Shareholdings

Investment Amount %

Sercomm USA Inc. Owner Paul Wang 650,000 shares 100%

Shukuan Investments Ltd. Owner James Wang 2,800,000 shares 100%

Sercomm Trading Co., Limited Owner James Wang USD$46,800,000 100%

Zealous Investments Ltd. Owner James Wang USD$30,956,000 100%

Sernet (Suzhou) Technology Ltd. Owner James Wang USD$29,900,000 100%

Smart Trade Inc. Owner Ben Lin USD$16,000,000 100%

DWNet Technology Ltd. Owner James Wang USD$16,000,000 100%

Sercomm Japan Corp. Owner Nobuhisa Itoh 9,800 shares 100%

Sercomm France SARL Owner D’Humieres Thierry Michael Lee 1,000 shares 100%

Sercomm Italian SRL Owner D’Humieres Thierry 10,000 shares 100%

Sercomm Deutschland GmbH Owner D’Humieres Thierry

Michael Lee EUR$100,000 100%

Sercomm Russia LLC. Owner Gleb Fedorov RUB$10,000 100%


Owner Charles Chu RMB$500,000 100%

HawXeye Inc. Owner Andy Lin 800,000,000 shares 55%

Suzhou FemTel Communications Owner James Wang RMB$6,500,000 100%

Nanjing FemTel Communications Owner James Wang RMB$2,500,000 100%


7.1.4 Operational Highlights of Sercomm Subsidiaries

Unit: Thousand NTD / Year 2017

Company Capital Stock Assets Liabilities Net Worth Net

Revenue Operation

Income(Loss) Net

Income Basic EPS

Sercomm USA Inc. 20,739 27,251 5,530 21,721 88,171 4,194 1,693 0.00

Shukuan Investments Ltd. 28,000 33,125 4 33,121 0 -35 238 0.00

Sercomm Trading Co., Limited 1,471,186 5,195,256 16 5,195,240 0 0 647,065 0.00

Zealous Investments Ltd. 989,358 4,159,952 53,676 4,106,276 0 -68,810 443,269 0.00

Sernet (Suzhou) Technology Ltd. 933,252 11,945,023 7,942,029 4,002,994 25,202,842 600,851 541,362 0.00

Smart Trade Inc. 481,829 1,088,802 0 1,088,802 0 0 203,796 0.00

DWNet Technology Ltd. 481,829 6,309,536 5,220,735 1,088,801 9,231,596 244,627 203,796 0.00

Sercomm Japan Corp. 157,721 53,455 68,900 -15,445 97,977 -14,312 -16,141 0.00

Sercomm France SARL 4,004 21,810 11,436 10,374 48,953 2,186 1,424 0.00

Sercomm Italian SRL 388 4,054 2,421 1,633 17,254 577 577 0.00

Sercomm Deutschland GmbH

3,727 19,889 16,528 3,361 29,897 1,401 1,433 0.00

Sercomm Russia LLC. 10 264,616 245,364 19,252 668,789 9,313 6,889 0.00


2,454 1,943 0 1,943 0 -52 -21 0.00

HawXeye Inc. 44,690 2,087 57,976 -55,889 33,761 -53,349 -53,374 0.00

Suzhou FemTel Communications 32,599 -3,491 29,507 -32,998 33,765 -9,669 -22,051 0.00

Nanjing FemTel Communications 12,538 11,141 30,110 -18,969 8,499 -11,560 -12,426 0.00


Independent Auditors’ Report

To Sercomm Corporation

Opinion

We have audited the accompanying consolidated balance sheets of Sercomm Corporation (the

“Company”) and its subsidiaries as of 31 December 2017 and 2016, and the related consolidated

statements of comprehensive income, changes in equity and cash flows for the years ended 31

December 2017 and 2016, and notes to the consolidated financial statements, including the summary

of significant accounting policies (together “the consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the consolidated financial position of the Company and its subsidiaries as of 31 December

2017 and 2016, and their consolidated financial performance and cash flows for the years ended 31

December 2017 and 2016, in conformity with the requirements of the Regulations Governing the

Preparation of Financial Reports by Securities Issuers and International Financial Reporting

Standards, International Accounting Standards, Interpretations developed by the International

Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as

endorsed by Financial Supervisory Commission of the Republic of China.

Basis for Opinion

We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of

Financial Statements by Certified Public Accountants and auditing standards generally accepted in

the Republic of China. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are

independent of the Company and its subsidiaries in accordance with the Norm of Professional Ethics

for Certified Public Accountant of the Republic of China (the “Norm”), and we have fulfilled our

other ethical responsibilities in accordance with the Norm. We believe that the audit evidence we

have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in

our audit of 2017 consolidated financial statements. These matters were addressed in the context of

our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and

we do not provide a separate opinion on these matters.


1. Revenue Recognition

Net sales recognized by the Company amounted to NT$38,600,003 thousand for the year ended

31 December 2017. As the business operations spanned multinational markets across the globe,

the trading terms in the sales contracts signed with international customers varied. The time that

significant risks and rewards of ownership of the goods were transferred to the buyers would be

different depending on the sales contracts or orders. We believe there is significant risk for revenue

recognition as a result of the increased complexity of transactions due to these factors. Therefore,

we considered this a key audit matter.

Our audit procedures included (but not limited to) the following:

1. We evaluated the appropriateness of the accounting policy related to the revenue recognized

from sale of goods and the transactions from new sales by testing the effectiveness of the

internal control determined by the management. We confirmed that revenue was recognized

when the rights and significant risks were transferred by verifying the terms recorded on the

original sales contracts or purchase orders.

2. We confirmed the correctness of recognizing revenue from sale of goods and the existence of

sales revenue by performing tests of transaction detail which included reviewing vouchers of

selected samples and cash receipts record.

3. We performed cutoff testing through periods before and after the balance sheet date by

reviewing related documentation of selected samples.

4. We confirmed the correctness of timing of recognizing revenue from sale of goods by reviewing

journal entries through the periods after the balance sheet date to determine if there’s any

material sales discount and allowance.

We also considered the appropriateness of the disclosure of operating revenue in Notes 4 and 6.

2. Valuation of Inventories

As of 31 December 2017, the Company's net inventories amounted to NT$6,061,829 thousand,

which represented 25% of total consolidated assets and was significant to the financial statements.

As the Company’s inventory value was affected by market demand and rapid changes in

technology, management had to accrue allowance for obsolete and slow-moving inventories. In

addition, management had to measure the loss due to write-downs of inventories at the lower of

cost and their net realizable values according to IAS2 to calculate the loss of the writing-down.

Therefore, we considered this a key audit matter.


Our audit procedures included (but not limited to) the following:

1. to understand the process of how management decided the process to determine the net

realizable value of inventories and identify the slow-moving inventories and defective goods,

assess the reasonability of inventories valuation policy, and test the effectiveness of related

internal control.

2. to test the inventories’ net realizable value as of balance sheet date. We sampled the inventory

items and reviewed the relevant evidences to test the adequacy of net realizable value which

management used. We re-compared the net realizable value to book value of the ending balance

of inventories to verify the accuracy of the loss due to write-downs of inventories.

3. to test the accuracy of inventories’ aging as of balance sheet date by sampling inventories, and

reviewing the related evidences.

4. to evaluate the allowance for valuation loss of slow-moving and defective inventories by

observing inventories count on balance sheet date, and by understanding the status and the

storage of inventories.

We also considered the appropriateness of the disclosure of inventories in Notes 4, 5 and 6.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial

statements in accordance with the requirements of the Regulations Governing the Preparation of

Financial Reports by Securities Issuers and International Financial Reporting Standards, International

Accounting Standards, Interpretations developed by the International Financial Reporting

Interpretations Committee or the former Standing Interpretations Committee as endorsed by Financial

Supervisory Commission of the Republic of China and for such internal control as management

determines is necessary to enable the preparation of consolidated financial statements that are free

from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the ability

to continue as a going concern of the Company and its subsidiaries, disclosing, as applicable, matters

related to going concern and using the going concern basis of accounting unless management either

intends to liquidate the Company and its subsidiaries or to cease operations, or has no realistic

alternative but to do so.

Those charged with governance, including audit committee or supervisors, are responsible for

overseeing the financial reporting process of the Company and its subsidiaries.


Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements

as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s

report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a

guarantee that an audit conducted in accordance with auditing standards generally accepted in the

Republic of China will always detect a material misstatement when it exists. Misstatements can arise

from fraud or error and are considered material if, individually or in the aggregate, they could

reasonably be expected to influence the economic decisions of users taken on the basis of these

consolidated financial statements.

As part of an audit in accordance with auditing standards generally accepted in the Republic of China,

we exercise professional judgment and maintain professional skepticism throughout the audit. We

also:

1. Identify and assess the risks of material misstatement of the consolidated financial statements,

whether due to fraud or error, design and perform audit procedures responsive to those risks, and

obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk

of not detecting a material misstatement resulting from fraud is higher than for one resulting from

error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the

override of internal control.

2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the internal control of the Company and its subsidiaries.

3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.

4. Conclude on the appropriateness of management’s use of the going concern basis of accounting

and, based on the audit evidence obtained, whether a material uncertainty exists related to events

or conditions that may cast significant doubt on the ability to continue as a going concern of the

Company and its subsidiaries. If we conclude that a material uncertainty exists, we are required to

draw attention in our auditor’s report to the related disclosures in the consolidated financial

statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based

on the audit evidence obtained up to the date of our auditor’s report. However, future events or

conditions may cause the Company and its subsidiaries to cease to continue as a going concern.

5. Evaluate the overall presentation, structure and content of the consolidated financial statements,

including the accompanying notes, and whether the consolidated financial statements represent the

underlying transactions and events in a manner that achieves fair presentation.


6. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or

business activities within the Company and its subsidiaries to express an opinion on the

consolidated financial statements. We are responsible for the direction, supervision and

performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned

scope and timing of the audit and significant audit findings, including any significant deficiencies in

internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant

ethical requirements regarding independence, and to communicate with them all relationships and

other matters that may reasonably be thought to bear on our independence, and where applicable,

related safeguards.

From the matters communicated with those charged with governance, we determine those matters

that were of most significance in the audit of 2017 consolidated financial statements and are therefore

the key audit matters. We describe these matters in our auditor’s report unless law or regulation

precludes public disclosure about the matter or when, in extremely rare circumstances, we determine

that a matter should not be communicated in our report because the adverse consequences of doing

so would reasonably be expected to outweigh the public interest benefits of such communication.

We have audited and expressed an unqualified opinion on the parent company only financial

statements of the Company as of and for the years ended 31 December 2017 and 2016.

Ernst & Young, Taiwan

12 March 2017

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of

operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not

those of any other jurisdictions. The standards, procedures and practices to review such consolidated financial statements are those

generally accepted and applied in the Republic of China.


Ass

ets

Note

sA

mount

%A

mount

%L

iabi

litie

s and

Equ

ityN

ote

sA

mount

%A

mount

%

Cur

rent

ass

ets

Cur

rent

liab

ilitie

sC

ash a

nd c

ash e

quiv

alen

ts4 a

nd 6

$6,4

84,1

63

26

$5,7

21,3

41

24

Short

-ter

m b

orr

ow

ings

6$1,8

76,3

61

8$2,1

35,3

17

9

Curr

ent

der

ivat

ive

finan

cial

ass

ets

for

hed

gin

g4,

5 a

nd 6

-

-

341,6

19

2C

urr

ent

finan

cial

lia

bil

itie

s at

fai

r val

ue

thro

ugh p

rofi

t or

loss

4,

5 a

nd 6

12,6

06

-

457

-

Note

s re

ceiv

able

, net

4 a

nd 6

912,6

70

41,2

65,2

11

5C

urr

ent

der

ivat

ive

finan

cial

lia

bil

itie

s fo

r hed

gin

g4,

5 a

nd 6

217,1

62

1-

-

Acc

ounts

rec

eivab

le,

net

4,

5 a

nd 6

6,2

87,6

48

25

5,8

58,6

30

25

Acc

ounts

pay

able

11,4

67,3

82

46

10,0

04,7

04

42

Oth

er r

ecei

vab

les,

net

6339,5

23

1481,6

67

2O

ther

pa y

able

s3,0

32,0

39

12

3,1

59,5

98

13

Inven

tori

es,

man

ufa

cturi

ng b

usi

nes

s4,5

and 6

6,0

61,8

29

25

5,5

06,9

69

23

Curr

ent

tax l

iabil

itie

s4,

5 a

nd 6

257,7

51

1305,4

42

1

Pre

pay

men

ts250,4

51

1206,6

64

1C

urr

ent

pro

vis

ions

4,

5 a

nd 6

112,9

56

-

168,7

39

1

Oth

er c

urr

ent

asse

ts121,5

67

189,9

17

-

Curr

ent

leas

e obli

gat

ions

pay

able

4 a

nd 6

13,6

47

-

13,3

78

-

Tot

al c

urre

nt a

sset

s20,4

57,8

51

83

19,4

72,0

18

82

Oth

er c

urr

ent

liab

ilit

ies

9314,2

76

1353,9

50

2

Tot

al c

urre

nt li

abili

ties

17,3

04,1

80

69

16,1

41,5

85

68

Non

-cur

rent

ass

ets

Non-c

urr

ent

finan

cial

ass

ets

atfa

ir v

alue

thro

ugh p

rofi

t or

loss

4,

5 a

nd 6

24,1

21

-

-

-

Non

-cur

rent

liab

ilitie

sN

on-c

urr

ent

avai

lable

-for-

sale

fin

anci

al a

sset

s4,

5 a

nd 6

23,6

32

-

60,5

23

-

Def

erre

d t

ax l

iabil

itie

s4,

5 a

nd 6

60,6

75

-

92,7

09

-

Non-c

urr

ent

finan

cial

ass

ets

mea

sure

d a

t co

st4 a

nd 6

60,1

20

-

63,3

75

-

Non-c

urr

ent

leas

e obli

gat

ions

pay

able

4 a

nd 6

114,2

31

1128,4

69

1

Pro

per

ty,

pla

nt

and e

quip

men

t4 a

nd 6

3,2

48,6

80

13

3,2

65,6

90

14

Net

def

ined

ben

efit

lia

bil

itie

s noncu

rren

t4,

5 a

nd 6

57,8

10

-

52,9

43

-

Inta

ngib

le a

sset

s4 a

nd 6

297,5

51

1285,6

07

1G

uar

ante

e dep

osi

ts r

ecei

ved

4,2

54

-

6,2

79

-

Def

erre

d t

ax a

sset

s4,

5 a

nd 6

301,2

57

1309,2

44

1T

otal

non

-cur

rent

liab

ilitie

s236,9

70

1280,4

00

1

Pre

pay

men

ts f

or

busi

nes

s fa

cili

ties

47,5

26

-

33,2

87

-

Tot

al li

abili

ties

17,5

41,1

50

70

16,4

21,9

85

69

Guar

ante

e de p

osi

ts p

aid

848,5

34

-

25,7

18

-

Oth

er n

on-c

urr

ent

finan

cial

ass

ets

9166,7

94

1165,2

19

1E

quity

att

ribu

tabl

e to

ow

ners

of p

aren

tL

ong-t

erm

pre

pai

d r

ents

89,9

36

194,0

22

1Sh

are

capi

tal

4 a

nd 6

Oth

er n

on-c

urr

ent

asse

ts1,4

44

-

4,3

50

-

Ord

inar

y s

har

e2,4

56,5

38

10

2,4

29,1

98

10

Tot

al n

on-c

urre

nt a

sset

s4,3

09,5

95

17

4,3

07,0

35

18

Ca p

ital s

urpl

usA

ddit

ional

pai

d-i

n c

apit

al a

risi

ng f

rom

ord

inar

y s

har

e290,8

86

1123,5

21

1

Addit

ional

pai

d-i

n c

apit

al a

risi

ng f

rom

bond c

onver

sion

1,3

82,4

85

61,3

82,4

85

6

Chan

ges

in s

ubsi

dia

ries

' ow

ner

ship

8,6

28

-

8,1

37

-

Em

plo

yee

shar

e opti

ons

56,7

84

-

77,4

95

-

Res

tric

ted s

tock

s to

em

plo

yee

s25,9

34

-

25,9

34

-

Tot

al c

a pita

l sur

plus

1,7

64,7

17

71,6

17,5

72

7

Ret

aine

d ea

rnin

gsL

egal

res

erve

894,3

96

4748,2

31

3

Spec

ial

rese

rve

131,6

78

1131,6

78

-

Un

a ppro

pri

ated

ret

ained

ear

nin

gs

2,4

17,0

27

10

2,2

78,3

06

10

Tot

al r

etai

ned

earn

ings

3,4

43,1

01

15

3,1

58,2

15

13

Oth

er e

quity

inte

rest

(412,9

62)

(2)

153,9

79

1

Non

-con

trol

ling

inte

rest

6(2

5,0

98)

-

(1,8

96)

-

Tot

al e

quity

7,2

26,2

96

30

7,3

57,0

68

31

Tot

al a

sset

s$24,7

67,4

46

100

$23,7

79,0

53

100

Tot

al li

abili

ties a

nd e

quity

$24,7

67,4

46

100

$23,7

79,0

53

100

The

acco

mpan

yin

g n

ote

s ar

e an

inte

gra

l par

t of

the

conso

lidat

ed f

inan

cial

sta

tem

ents

.

Eng

lish

Tra

nsla

tion

of C

onso

lidat

ed F

inan

cial

Sta

tem

ents

Ori

gina

lly Is

sued

in C

hine

se

SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

SC

ON

SOL

IDA

TE

D B

AL

AN

CE

SH

EE

TS

31 D

ecem

ber

2017

and

31

Dec

embe

r 20

16(E

xpre

ssed

in T

hous

ands

of N

ew T

aiw

an D

olla

rs)

31 D

ecem

ber

2017

31 D

ecem

ber

2016

31 D

ecem

ber

2017

31 D

ecem

ber

2016


Note Amount % Amount %

Operating revenues 4, 5 and 6 $38,600,003 100 $36,701,734 100

Operating costs 6 (33,572,160) (87) (31,333,006) (85)

Gross profit form operations 5,027,843 13 5,368,728 15

Operating expenses 5, 6,7 and 9

Selling expenses (1,020,627) (3) (1,045,432) (3)

Administrative expenses (827,423) (2) (847,290) (2)

Research and development expenses (1,645,589) (4) (1,705,096) (5)

Total operating expenses (3,493,639) (9) (3,597,818) (10)

Net operating income 1,534,204 4 1,770,910 5

Non-operating income and expenses 6

Other income 9 107,708 - 94,467 -

Other gains and losses 1,040 - 9,620 -

Finance costs (59,394) - (72,214) -

Total non-operating income and expenses 49,354 - 31,873 -

Income before tax 1,583,558 4 1,802,783 5

Income tax expenses 4, 5 and 6 (295,400) (1) (347,488) (1)

Net Income 1,288,158 3 1,455,295 4

Other comprehensive income (loss) 4 and 6

Items that will not be reclassified subsequently to profit or lossRemeasurement of defined benefit pension plans (8,095) - (5,434) -

Income tax related to items that will not be reclassified 1,376 - 924 -

Items that may be reclassified subsequently to profit or lossExchange differences on translation of foreign operations (45,154) - (409,025) (1)

Unrealized gain on available-for-sale financial assets 3,109 - 726 -

Gain (loss) on effective portion of cash flow hedges (574,225) (1) 238,089 1

Income tax relating to components of other comprehensive income 49,837 - (34,209) (1)

Other comprehensive income (loss), net of tax (573,152) (1) (208,929) (1)

Total comprehensive income $715,006 2 $1,246,366 3

Net income attributable to :

Owners of parent $1,311,868 $1,461,654

Non-controlling interests (23,710) (6,359)

$1,288,158 $1,455,295

Comprehensive income attributable to:

Owners of parent $738,208 $1,252,556

Non-controlling interests (23,202) (6,190)

$715,006 $1,246,366

Earnings per share (NT$) 4 and 6

Basic earnings per share $5.38 $6.02

Diluted earnings per share $5.24 $5.85

English Translation of Consolidated Financial Statements Originally Issued in Chinese

SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended 31 December 2017 and 2016(Expressed in Thousands of New Taiwan Dollars Excepts Earnings Per Share Information)

For the years ended 31 December

2017

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

2016


Ord

inar

y s

har

e

Ad

van

ce

rece

ipts

fo

r

shar

e ca

pit

alC

apit

al s

urp

lus

Leg

al r

eser

ve

Spec

ial

rese

rve

Unap

pro

pri

ated

reta

ined

earn

ings

Exch

ange

dif

fere

nce

s o

n

tran

slat

ion o

f

fore

ign

finan

cial

stat

emen

ts

Unre

aliz

ed

gai

ns

(lo

sses

)

on a

vai

lable

-

for-

sale

finan

cial

ass

ets

Gai

ns

(lo

sses

)

on e

ffec

tive

po

rtio

n o

f ca

sh

flo

w h

edges

To

tal

equit

y

attr

ibuta

ble

to

ow

ner

s o

f

par

ent

No

n-

Co

ntr

oll

ing

inte

rest

To

tal

Equit

y

Bal

ance

as o

f 1 J

anua

ry 2

016

$2

,41

1,2

78

$2

,35

8$

1,5

29

,47

1$

61

7,7

80

$1

31

,67

8$

1,8

87

,93

5$

22

9,1

65

$1

2,3

53

$1

17

,04

9$

6,9

39

,06

7$

(1,4

32

)$

6,9

37

,63

5

Appro

pri

atio

ns

and

dis

trib

uti

ons

of

20

15

ear

nin

gs

Leg

al r

eser

ve

appro

pri

ated

-

-

-

13

0,4

51

-

(13

0,4

51

)-

-

-

-

-

-

Cas

h d

ivid

end

s o

f o

rdin

ary s

har

e-

-

-

-

-

(9

36

,32

2)

-

-

-

(93

6,3

22

)-

(9

36

,32

2)

Net

inco

me

(lo

ss)

for

the

yea

r en

ded

31

Dec

ember

20

16

-

-

-

-

-

1,4

61

,65

4-

-

-

1

,46

1,6

54

(6,3

59

)1

,45

5,2

95

Oth

er c

om

pre

hen

sive

gai

n (

loss

), n

et o

f ta

x f

or

the

yea

r en

ded

31

-

-

-

-

-

(4,5

10

)(3

88

,32

6)

72

61

83

,01

2(2

09

,09

8)

16

9(2

08

,92

9)

D

ecem

ber

20

16

To

tal

com

pre

hen

sive

inco

me

-

-

-

-

-

1,4

57

,14

4(3

88

,32

6)

72

61

83

,01

21

,25

2,5

56

(6,1

90

)1

,24

6,3

66

Co

nver

sio

n o

f co

nver

tible

bo

nd

s1

7,9

20

(2,3

58

)4

3,5

34

-

-

-

-

-

-

59

,09

6-

5

9,0

96

Chan

ges

in s

ubsi

dia

ries

' ow

ner

ship

-

-

8,1

37

-

-

-

-

-

-

8,1

37

5,7

26

13

,86

3

Co

mpen

sati

on c

ost

ari

sing f

rom

em

plo

yee

sto

ck o

pti

ons

-

-

36

,43

0-

-

-

-

-

-

3

6,4

30

-

36

,43

0

Bal

ance

as o

f 31

Dec

embe

r 20

16$

2,4

29

,19

8$

-

$1

,61

7,5

72

$7

48

,23

1$

13

1,6

78

$2

,27

8,3

06

$(1

59

,16

1)

$1

3,0

79

$3

00

,06

1$

7,3

58

,96

4$

(1,8

96

)$

7,3

57

,06

8

Bal

ance

as o

f 1 J

anua

ry 2

017

$2

,42

9,1

98

$-

$

1,6

17

,57

2$

74

8,2

31

$1

31

,67

8$

2,2

78

,30

6$

(15

9,1

61

)$

13

,07

9$

30

0,0

61

$7

,35

8,9

64

$(1

,89

6)

$7

,35

7,0

68

Appro

pri

atio

ns

and

dis

trib

uti

ons

of

20

16

ear

nin

gs

Leg

al r

eser

ve

appro

pri

ated

-

-

-

14

6,1

65

-

(14

6,1

65

)-

-

-

-

-

-

Cas

h d

ivid

end

s o

f o

rdin

ary s

har

e-

-

-

-

-

(1

,02

0,2

63

)-

-

-

(1

,02

0,2

63

)-

(1

,02

0,2

63

)

Net

inco

me

(lo

ss)

for

the

yea

r en

ded

31

Dec

ember

20

17

-

-

-

-

-

1,3

11

,86

8-

-

-

1

,31

1,8

68

(23

,71

0)

1,2

88

,15

8

Oth

er c

om

pre

hen

sive

gai

n (

loss

), n

et o

f ta

x f

or

the

yea

r en

ded

31

-

-

-

-

-

(6,7

19

)(5

0,9

02

)3

,10

9(5

19

,14

8)

(57

3,6

60

)5

08

(57

3,1

52

)

D

ecem

ber

20

17

To

tal

com

pre

hen

sive

inco

me

-

-

-

-

-

1,3

05

,14

9(5

0,9

02

)3

,10

9(5

19

,14

8)

73

8,2

08

(23

,20

2)

71

5,0

06

Chan

ges

in s

ubsi

dia

ries

' ow

ner

ship

-

-

49

1-

-

-

-

-

-

4

91

-

49

1

Issu

rance

of

sto

ck f

rom

exer

cisi

ng e

mplo

yee

sto

ck o

pti

ons

27

,34

0-

1

21

,66

3-

-

-

-

-

-

1

49

,00

3-

1

49

,00

3

Co

mpen

sati

on c

ost

ari

sing f

rom

em

plo

yee

sto

ck o

pti

ons

-

-

24

,99

1-

-

-

-

-

-

2

4,9

91

-

24

,99

1

Bal

ance

as o

f 31

Dec

embe

r 20

17$

2,4

56

,53

8$

-

$1

,76

4,7

17

$8

94

,39

6$

13

1,6

78

$2

,41

7,0

27

$(2

10

,06

3)

$1

6,1

88

$(2

19

,08

7)

$7

,25

1,3

94

$(2

5,0

98

)$

7,2

26

,29

6

SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

S

CO

NSO

LID

AT

ED

ST

AT

EM

EN

TS

OF

CH

AN

GE

S IN

EQ

UIT

Y

For

the

year

s end

ed 3

1 D

ecem

ber

2017

and

201

6

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

)

The

acco

mpan

yin

g n

ote

s ar

e an

inte

gra

l par

t o

f th

e co

nso

lid

ated

fin

anci

al s

tate

men

ts.

Eng

lish

Tra

nsla

tion

of C

onso

lidat

ed F

inan

cial

Sta

tem

ents

Ori

gina

lly Is

sued

in C

hine

se

EQ

UIT

Y A

TT

RIB

UT

AB

LE

TO

OW

NE

RS

OF

PAR

EN

T

Ret

aine

d ea

rnin

gsO

ther

equ

ity in

tere

stSh

are

capi

tal


2017

2016

2017

2016

Cas

h flo

ws f

rom

ope

ratin

g ac

tiviti

es:

Cas

h flo

ws f

rom

inve

stin

g ac

tiviti

es:

Net

inco

me

bef

ore

tax

$1,5

83,5

58

$1,8

02,7

83

Acq

uis

itio

n o

f fi

nan

cial

ass

ets

at f

air

val

ue

thro

ugh p

rofi

t or

loss

$(2

3,8

67)

$-

Adju

stm

ent

to r

eco

nci

le n

et i

nco

me

bef

ore

tax

to

net

cas

h p

rovid

ed b

y o

per

atin

g a

ctiv

itie

s:P

roce

eds

from

dis

posa

l of

avai

lable

-for-

sale

fin

anci

al a

sset

s38,7

80

-

Dep

reci

atio

n e

xpen

se466,6

71

435,4

60

Acq

uis

itio

n o

f pro

per

ty, pla

nt

and e

quip

men

t(4

29,5

24)

(361,8

78)

Am

ort

izat

ion e

xpen

se84,3

10

85,9

20

Pro

ceed

s fr

om

dis

posa

l of

pro

per

ty,

pla

nt

and e

quip

men

t3,9

82

3,6

65

Bad

deb

t ex

pen

se1,2

12

-

Incr

ease

in r

efundab

le d

eposi

ts(1

9,9

10)

-

Net

loss

(gai

n)

on f

inan

cial

ass

ets

at f

air

val

ue

thro

ugh p

rofi

t or

loss

10,2

05

(6,3

55)

Dec

reas

e in

ref

undab

le d

eposi

ts-

5,4

73

Inte

rest

expen

se59,3

94

71,9

44

Acq

uis

itio

n o

f in

tangib

le a

sset

s(9

7,7

22)

(73,4

92)

Am

ort

izat

ion o

f dis

count

on b

onds

pay

able

-

270

Pro

ceed

s fr

om

dis

posa

l of

inta

ngib

le a

sset

s-

167

Inte

rest

in

com

e(7

8,4

05)

(66,8

68)

Incr

ease

in p

repay

men

ts f

or

busi

nes

s fa

cili

ties

(63,5

07)

(19,5

60)

Div

iden

d i

nco

me

(342)

(2,2

64)

Div

iden

ds

rece

ived

342

2,2

64

Com

pen

sati

on c

ost

ari

sing f

rom

shar

e-bas

ed p

aym

ent

pla

ns

24,9

91

36,4

30

Net

cas

h flo

ws u

sed

in in

vest

ing

activ

ities

(591,4

26)

(443,3

61)

(Gai

n)

loss

on d

isposa

l of

pro

per

ty, pla

nt

and e

quip

men

t(1

,806)

3,3

78

Loss

on d

isposa

l of

inves

tmen

t1,2

20

-

Loss

on i

mpai

rmen

t of

finan

cial

ass

ets

3,2

55

-

Ch

ang

es i

n o

per

atin

g a

sset

s an

d l

iabil

itie

s:C

ash

flow

s fro

m fi

nanc

ing

activ

ities

:C

urr

ent

finan

cial

ass

ets

at f

air

val

ue

thro

ugh p

rofi

t or

loss

-

22,8

64

Dec

reas

e in

short

-ter

m l

oan

s(2

58,9

56)

(497,1

81)

Note

s re

ceiv

able

, net

352,5

41

1,2

32,1

46

Dec

reas

e in

guar

ante

e dep

osi

ts r

ecei

ved

(2,0

25)

(4,4

74)

Acc

ounts

rec

eivab

le, net

(430,2

14)

(1,8

27,5

32)

Dec

reas

e in

lea

se p

ayab

le(1

3,9

69)

(14,1

58)

Oth

er r

ecei

vab

le, net

132,1

44

(135,3

69)

Cas

h d

ivid

ends

pai

d(1

,020,2

63)

(936,3

22)

Inven

tori

es(5

54,8

60)

(138,0

18)

Acq

uis

itio

n o

f new

shar

es i

n a

subsi

dia

ry n

ot

in p

roport

ionat

e to

ow

ner

ship

inte

rest

491

13,8

63

Pre

pay

men

ts(3

9,7

01)

(47,0

83)

Exer

cise

of

emply

ee s

tock

opti

ons

149,0

03

-

Oth

er c

urr

ent

asse

ts(3

5,4

20)

(59,9

43)

Net

cas

h flo

ws u

sed

in fi

nanc

ing

activ

ities

(1,1

45,7

19)

(1,4

38,2

72)

Curr

ent

finan

cial

lia

bil

itie

s at

fai

r val

ue

thro

ugh p

rofi

t or

loss

1,6

03

(14,8

13)

Eff

ect

of

exch

ange

rate

chan

ges

on c

ash a

nd c

ash e

quiv

alen

ts(4

3,1

72)

(255,1

27)

Note

s pay

able

-

(18,9

40)

Net

incr

ease

in c

ash a

nd c

ash e

quiv

alen

ts762,8

22

356,6

83

Acc

ounts

pay

able

1,4

62,6

78

774,1

60

Cas

h a

nd c

ash e

quiv

alen

ts a

t beg

innin

g o

f per

iod

5,7

21,3

41

5,3

64,6

58

Oth

er p

ayab

le(1

26,9

31)

451,3

55

Cas

h a

nd c

ash e

quiv

alen

ts a

t en

d o

f per

iod

$6,4

84,1

63

$5,7

21,3

41

Curr

ent

pro

vis

ions

(48,5

19)

107,8

35

Oth

er c

urr

ent

liab

ilit

ies

(39,6

39)

82,4

29

Net

def

ined

ben

efit

lia

bil

itie

s(3

,227)

(1,7

78)

Cas

h in

flow

gen

erat

ed fr

om o

pera

tions

2,8

24,7

18

2,7

88,0

11

Inte

rest

rec

eived

86,8

30

57,9

48

Inte

rest

pai

d(6

0,5

11)

(70,8

89)

Inco

me

taxes

pai

d(3

07,8

98)

(281,6

27)

Net

cas

h pr

ovid

ed b

y op

erat

ing

activ

ities

2,5

43,1

39

2,4

93,4

43

The

acco

mpan

yin

g n

ote

s ar

e an

inte

gra

l par

t of

the

conso

lidat

ed f

inan

cial

sta

tem

ents

.

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

)

Eng

lish

Tra

nsla

tion

of C

onso

lidat

ed F

inan

cial

Sta

tem

ents

Ori

gina

lly Is

sued

in C

hine

se

SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

SC

ON

SOL

IDA

TE

D S

TA

TE

ME

NT

S O

F C

ASH

FL

OW

SFo

r th

e ye

ars e

nded

31

Dec

embe

r 20

17 a

nd 2

016


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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended 31 December 2017 and 2016

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

1. History and organization

Sercomm Corporation (“the Company”) was incorporated on 29 July 1992 under the laws of the

Republic of China (R.O.C.). The Company is a worldwide manufacturer of broadband and

wireless networking equipment which engages mainly in the software and firmware development

of broadband networking.

The Company’s common shares were traded on the Taipei Exchange of the R.O.C. in May 1999,

and its shares were publicly listed and traded on the Taiwan Stock Exchange (TSE) in December

2007. The Company’s registered office and the main business location are at 8F, No.3-1, Park

St., Nangang Dist., Taipei City, Taiwan (R.O.C.)

2. Date and procedures of authorization of financial statements for issue

The consolidated financial statements of the Company and its subsidiaries (“the Group”) were

authorized for issue in accordance with a resolution of the Board of Directors’ meeting on 12

March 2018.

3. Newly issued or revised standards and interpretations

(1) Changes in accounting policies resulting from applying for the first time certain standards and

amendments

The Group applied for the first time International Financial Reporting Standards,

International Accounting Standards, and Interpretations issued, revised or amended which are

endorsed by Financial Supervisory Commission (“FSC”) and become effective for annual

periods beginning on or after 1 January 2017. The nature and the impact of each new standard

and amendment on the Group is immaterial.

(2) Standards or interpretations issued, revised or amended, which are endorsed by FSC, but not

yet adopted by the Group at the date of issuance of the Group’s financial statements are listed

below.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(a) IFRS 15 “Revenue from Contracts with Customers”

The core principle of the new Standard is for companies to recognize revenue to depict

the transfer of promised goods or services to customers in amounts that reflect the

consideration to which the company expects to be entitled in exchange for those goods or

services. An entity recognizes revenue in accordance with that core principle by applying

the following steps:

Step 1: Identify the contract(s) with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

The new Standard includes a cohesive set of disclosure requirements that would result in

an entity providing users of financial statements with comprehensive information about

the nature, amount, timing and uncertainty of revenue and cash flows arising from the

entity's contracts with customers. The Standard is effective for annual periods beginning

on or after 1 January 2018.

(b) IFRS 9“Financial Instruments”

The IASB has issued the final version of IFRS 9, which combines classification and

measurement, the expected credit loss impairment model and hedge accounting. The

standard will replace IAS 39 Financial Instruments: Recognition and Measurement and

all previous versions of IFRS 9 Financial Instruments (which include standards issued on

classification and measurement of financial assets and liabilities and hedge accounting).

Classification and measurement: Financial assets are measured at amortized cost, fair

value through profit or loss, or fair value through other comprehensive income, based on

both the entity’s business model for managing the financial assets and the financial asset’s

contractual cash flow characteristics. Financial liabilities are measured at amortized cost

or fair value through profit or loss. Furthermore there is requirement that ‘own credit risk’

adjustments are not recognized in profit or loss.

Impairment: Expected credit loss model is used to evaluate impairment. Entities are

required to recognize either 12-month or lifetime expected credit losses, depending on

whether there has been a significant increase in credit risk since initial recognition.




Hedge accounting: Hedge accounting is more closely aligned with risk management

activities and hedge effectiveness is measured based on the hedge ratio.

The new standard is effective for annual periods beginning on or after 1 January 2018.

Consequential amendments on the related disclosures also become effective for annual

periods beginning on or after 1 January 2018.

(c) IFRS 10“Consolidated Financial Statements” and IAS 28“Investments in Associates and Joint Ventures” — Sale or Contribution of Assets between an Investor and its Associate or Joint Ventures

The amendments address the inconsistency between the requirements in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures, in dealing with the loss of control of a subsidiary that is contributed to an

associate or a joint venture. IAS 28 restricts gains and losses arising from contributions

of non-monetary assets to an associate or a joint venture to the extent of the interest

attributable to the other equity holders in the associate or joint ventures. IFRS 10 requires

full profit or loss recognition on the loss of control of the subsidiary. IAS 28 was amended

so that the gain or loss resulting from the sale or contribution of assets that constitute a

business as defined in IFRS 3 between an investor and its associate or joint venture is

recognized in full. IFRS 10 was also amended so that the gains or loss resulting from the

sale or contribution of a subsidiary that does not constitute a business as defined in IFRS

3 between an investor and its associate or joint venture is recognized only to the extent of

the unrelated investors’ interests in the associate or joint venture.

In addition, the effective date of the amendments has been postponed indefinitely, but

early adoption is allowed.

(d) IAS 12“Income Taxes” — Recognition of Deferred Tax Assets for Unrealized Losses

The amendments clarify how to account for deferred tax assets for unrealized losses. The

amendments are effective for annual periods beginning on or after 1 January 2017.

(e) Disclosure Initiative — Amendment to IAS 7 “Statement of Cash Flows”:

The amendments relate to changes in liabilities arising from financing activities and to

require a reconciliation of the carrying amount of liabilities at the beginning and end of

the period. The amendments are effective for annual periods beginning on or after 1

January 2017.




(f) IFRS 15 “Revenue from Contracts with Customers” — Clarifications to IFRS 15

The amendments clarify how to identify a performance obligation in a contract, determine

whether an entity is a principal or an agent, and determine whether the revenue from

granting a license should be recognized at a point in time or over time. The amendments

are effective for annual periods beginning on or after 1 January 2018.

(g) IFRS 2 “Shared-Based Payment” — Amendments to IFRS 2

The amendments contain (1) clarifying that vesting conditions (service and non-market

performance conditions), upon which satisfaction of a cash-settled share-based payment

transaction is conditional, are not taken into account when estimating the fair value of the

cash-settled share-based payment at the measurement date. Instead, these are taken into

account by adjusting the number of awards included in the measurement of the liability

arising from the transaction, (2) clarifying if tax laws or regulations require the employer

to withhold a certain amount in order to meet the employee’s tax obligation associated

with the share-based payment, such transactions will be classified in their entirety as

equity-settled share-based payment transactions if they would have been so classified in

the absence of the net share settlement feature, and (3) clarifying that if the terms and

conditions of a cash-settled share-based payment transaction are modified, with the result

that it becomes an equity-settled share-based payment transaction, the transaction is

accounted for as an equity-settled transaction from the date of the modification. The

equity-settled share-based payment transaction is measured by reference to the fair value

of the equity instruments granted at the modification date and is recognized in equity, on

the modification date, to the extent to which goods or services have been received. The

liability for the cash-settled share-based payment transaction as at the modification date

is derecognized on that date. Any difference between the carrying amount of the liability

derecognized and the amount recognized in equity on the modification date is recognized

immediately in profit or loss. The amendments are effective for annual periods beginning

on or after 1 January 2018.

(h) Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts — Amendments to IFRS 4

The amendments help to resolve issues arising from the different effective dates for IFRS

9 “Financial Instruments” (1 January 2018) and the new insurance contracts standard

about to be issued by the IASB (still to be decided, but not before 1 January 2020). The

amendments allow entities issuing insurance contracts within the scope of IFRS 4 to

mitigate certain effects of applying IFRS 9 “Financial Instruments” before the IASB’s

new insurance contracts standard becomes effective. The amendments introduce two

approaches: an overlay approach and a temporary exemption. The overlay approach

allows an entity applying IFRS 9 to remove from profit or loss the effects of some of the

accounting mismatches that may occur from applying IFRS 9 before the new insurance

contracts standard is applied. The temporary exemption enables eligible entities to defer

the implementation date of IFRS 9 until 2021 (these entities that defer the application of

IFRS 9 will continue to apply IAS 39).




(i) Transfers of Investment Property — Amendments to IAS 40

The amendments relate to the transfers of investment property. The amendments clarify

that a change in use occurs when the property meets, or ceases to meet, the definition of

investment property and there is evidence of the change in use, the entity should transfer

property into and out of investment property accordingly. A mere change in

management’s intentions for the use of a property does not provide evidence of a change

in use. The amendments are effective for annual periods beginning on or after 1 January

2018.

(j) Improvements to International Financial Reporting Standards (2014-2016 cycle):

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

The amendments revise and amend transition requirements relating to certain standards

and delete short-term exemptions under Appendix E for first-time adopter. The

amendments are effective for annual periods beginning on or after 1 January 2018.

IFRS 12 “Disclosure of Interests in Other Entities” The amendments clarify that the disclosure requirements in IFRS 12, other than those in

paragraphs B10–B16, apply to an entity’s interests that are classified as held for sale or

discontinued operations. The amendments are effective for annual periods beginning on

or after 1 January 2017.

IAS 28“Investments in Associates and Joint Ventures”

The amendments clarify that when an investment in an associate or a joint venture is held

by, or is held indirectly through, an entity that is a venture capital organization, or a

mutual fund, unit trust and other qualifying entities including investment-linked insurance

funds, the entity may elect to measure that investment at fair value through profit or loss

in accordance with IFRS 9 “Financial Instruments” on an investment-by-investment

basis. Besides, if an entity that is not itself an investment entity has an interest in an

associate or joint venture that is an investment entity, the entity may, when applying the

equity method, elect to retain the fair value measurement applied by that investment entity

associate or joint venture to the investment entity associate's or joint venture's interests in

subsidiaries on an investment-by-investment basis. The amendments are effective for

annual periods beginning on or after 1 January 2018.




(k) IFRIC 22 “Foreign Currency Transactions and Advance Consideration”

The interpretation clarifies that when applying paragraphs 21 and 22 of IAS 21 “The

Effects of Changes in Foreign Exchange Rates”, in determining the spot exchange rate to

use on initial recognition of the related asset, expense or income (or part of it) on the

derecognition of a non-monetary asset or non-monetary liability relating to advance

consideration, the date of the transaction is the date on which an entity initially recognizes

the non-monetary asset or non-monetary liability arising from the advance consideration.

If there are multiple payments or receipts in advance, then the entity must determine a

date of the transactions for each payment or receipt of advance consideration. The

interpretation is effective for annual periods beginning on or after 1 January 2018.

The abovementioned standards and interpretations issued by IASB and endorsed by FSC so

that they are applicable for annual periods beginning on or after 1 January 2018. Apart from

the potential impact of the standards and interpretations listed under (a), (b), (e), and (f) which

is described below, all other standards and interpretations have no material impact on the

Group:

(a) IFRS 15“Revenue from Contracts with Customers” (including Amendments to IFRS 15

“Clarifications to IFRS 15 Revenue from Contracts with Customers”)

The Group elected to recognize the cumulative effect of initially applying IFRS 15 at the

date of initial application (1 January 2018). The Group also elected to apply this standard

retrospectively only to contracts that are not completed contracts at the date of initial

application.

The Group’s principal activities consist of the sale of goods and rendering of services.

The impacts arising from the adoption of IFRS 15 on the Group are summarized as

follows:

A. The Group currently recognizes revenue from sale of goods based on the timing when

significant risk and rewards of ownership are transferred to a customer, depending on

the terms and conditions of the sales contracts or purchase orders. Generally there are

two situations as follows:

a. When the goods are loaded on board at the port of shipment

b. When the goods are delivered and received by the buyer’s warehouse




The timing of recognition, as defined in IAS 18, is when the seller has transferred to

the buyer the significant risks and rewards of ownership, when the amount of revenue

and cost can be measured reliably, when it is probable to receive the promised

consideration, and when the seller retains no continuing managerial involvement to the

goods. The timing stated above was similar to the requirements of IFRS 15, which

requires that the Group shall recognize revenue when (or as) the Group satisfies a

performance obligation by transferring a promised good to a customer. We therefore

evaluated that there was immaterial impact on revenue recognition from sale of goods.

B. In accordance with IFRS 15, more extensive disclosure would have to be made.

(b) IFRS 9 “Financial Instruments”

The Group elects not to restate prior periods in accordance with IFRS 9 at the date of

initial application (1 January 2018). The adoption of IFRS 9 has the following impacts

on the Group:

A. Classification and measurement of financial assets

a. Available-for-sale financial assets – equity instrument investments measured at cost

The assessment will be based on the facts and circumstances that existed as at the

date of initial application, according to IFRS 9:

(a) Available-for-sale financial assets mandatorily measured at fair value: the cash

flow characteristics of the preferred stocks invested in unlisted foreign

companies are not entirely for principle payments and for interests of

outstanding principle. On the date of initial application, the Group will

reclassify NT$60,110 thousand from available-for-sale financial assets.

(b) Assigned as available-for-sale financial assets measured at other

comprehensive income: the common stocks invested in unlisted domestic

companies were not held-for-trading investments. On the date of initial

application, the Group will reclassify NT$10 thousand from available-for-sale

financial assets.

b. Available-for-sale financial assets – funds investments measured at fair value

Stocks measured at fair value NT$23,632 thousand were invested in unlisted

companies, which was not different from the book value. The Group will reclassify

available-for-sale financial assets to financial assets measured at fair value through

other comprehensive income.




c. Available-for-sale financial assets – de-recognition of equity investments measured

at fair value

Upon de-recognition of equity investments currently classified as available-for-sale

measured at fair value, the accumulated gains or losses previously recognized in

other comprehensive income was recycled to profit or loss from equity. However,

under IFRS 9, subsequent fair value changes of the aforementioned equity

investments are recognized in other comprehensive income and cannot be recycled

to profit or loss. Upon de-recognition, the accumulated amounts in other

component of equity is reclassified to retained earnings (reclassification to profit or

loss is not allowed).

d. Impairment of financial assets

This is applicable to financial assets not measured at fair value through profit or

loss. In accordance with IFRS 9, a loss allowance for debt instruments is

measured using the expected credit loss model, whereas trade receivables or

contract assets that result from transactions that are within the scope of IFRS 15 is

measured using the simplified approach (provision matrix). The aforementioned

requirements on impairment is different from the current incurred loss model and

have no material impact on the Group.

e. Hedge accounting

Amendments on general hedge accounting make entity’s risk management and

hedge accounting more consistent. The amendments allow parts of or groups of

items composed of non-financial items to be hedge items and there is no 80% to

125% threshold of highly effective hedged items. Also, the amendments introduce

a new concept that the Group can rebalance hedge ratio between the hedged items

and the hedging instruments when the goal of risk management is unchanged.

B. Others

Consequential amendments on the related disclosures in IFRS 7 were also made as a

result of the application of IFRS 9, which included the disclosure requirements related

to the initial application of IFRS 9. Therefore more extensive disclosure would have

to be made.

(e) Disclosure Initiative — Amendment to IAS 7 “Statement of Cash Flows”

Additional disclosure of a reconciliation of the carrying amount of liabilities arising from

financing activities at the beginning and end of the period would be required.




(3) Standards or interpretations issued, revised or amended, by IASB but not yet endorsed by FSC

at the date of issuance of the Group’s financial statements are listed below.

(a) IFRS 16“Leases”

The new standard requires lessees to account for all leases under a single on-balance sheet

model (subject to certain exemptions). Lessor accounting still uses the dual classification

approach: operating lease and finance lease. The Standard is effective for annual periods

beginning on or after 1 January 2019.

(b) IFRIC 23 “Uncertainty Over Income Tax Treatments”

The Interpretation clarifies application of recognition and measurement requirements in

IAS 12 “Income Taxes” when there is uncertainty over income tax treatments. The

Interpretation is effective for annual periods beginning on or after 1 January 2019.

(c) IFRS 17 “Insurance Contracts”

IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant

accounting aspects (including recognition, measurement, presentation and disclosure

requirements). The core of IFRS 17 is the General (building block) Model, under this

model, on initial recognition, an entity shall measure a group of insurance contracts at the

total of the fulfilment cash flows and the contractual service margin. The fulfilment

cash flows comprise of the following:

A. estimates of future cash flows;

B. Discount rate: an adjustment to reflect the time value of money and the financial risks

related to the future cash flows, to the extent that the financial risks are not included

in the estimates of the future cash flows; and

C. a risk adjustment for non-financial risk.

The carrying amount of a group of insurance contracts at the end of each reporting period

shall be the sum of the liability for remaining coverage and the liability for incurred

claims.

Other than the General Model, the standard also provides:

A. a specific adaptation for contracts with direct participation features (the Variable Fee

Approach)

B. a simplified approach (Premium Allocation Approach) mainly for short-duration

contracts.

IFRS 17 is effective for annual periods beginning on or after 1 January 2021.




(d) IAS 28“Investment in Associates and Joint Ventures” — Amendments to IAS 28

The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate

or joint venture that form part of the net investment in the associate or joint venture before

it applies IAS 28, and in applying IFRS 9, does not take account of any adjustments that

arise from applying IAS 28. The amendment is effective for annual reporting periods


(e) Prepayment Features with Negative Compensation (Amendments to IFRS 9)

The amendment allows financial assets with prepayment features that permit or require a

party to a contract either to pay or receive reasonable compensation for the early

termination of the contract, to be measured at amortized cost or at fair value through other

comprehensive income. The amendment is effective for annual reporting periods


(f) Improvements to International Financial Reporting Standards (2015-2017 cycle):

IFRS 3 “Business Combinations” The amendments clarify that an entity that has joint control of a joint operation shall

remeasure its previously held interest in a joint operation when it obtains control of the

business. The amendments are effective for annual periods beginning on or after 1

January 2019.

IFRS 11 “Joint Arrangements” The amendments clarify that an entity that participates in, but does not have joint control

of, a joint operation does not remeasure its previously held interest in a joint operation

when it obtains joint control of the business. The amendments are effective for annual

periods beginning on or after 1 January 2019.

IAS 12 “Income Taxes”

The amendments clarify that an entity shall recognize the income tax consequences of

dividends in profit or loss, other comprehensive income or equity according to where the

entity originally recognized those past transactions or events. The amendments are

effective for annual periods beginning on or after 1 January 2019.

IAS 23 “Borrowing Costs” The amendments clarify that an entity should treats as part of general borrowings any

borrowing made specifically to obtain an asset when the asset is ready for its intended use

or sale. The amendments are effective for annual periods beginning on or after 1 January

2019.




(g) Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)

The amendments clarify that when a change in a defined benefit plan is made (such as

amendment, curtailment or settlement, etc.), the entity should use the updated

assumptions to remeasure its net defined benefit liability or asset. The amendments are

effective for annual periods beginning on or after 1 January 2019.

The abovementioned standards and interpretations issued by IASB have not yet endorsed by

FSC at the date when the Group’s financial statements were authorized for issue, the local

effective dates are to be determined by FSC. As the Group is still currently determining the

potential impact of the standards and interpretations listed under (a)~(b) and (d)~(f), it is not

practicable to estimate their impact on the Group at this point in time. All other standards and

interpretations have no material impact on the Group.

4. Summary of significant accounting policies

(1) Statement of compliance

The consolidated financial statements of the Group for the years ended 31 December 2017

and 2016 have been prepared in accordance with the Regulations Governing the Preparation

of Financial Reports by Securities Issuers (“the Regulations”) and International Financial

Reporting Standards, International Accounting Standards, and Interpretations developed by

the International Financial Reporting Interpretations Committee or the former Standing

Interpretations Committee as endorsed by the FSC.

(2) Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for

financial instruments that have been measured at fair value. The consolidated financial

statements are expressed in thousands of New Taiwan Dollars (“NTD”) unless otherwise

stated.

(3) Basis of consolidation

Preparation principle of consolidated financial statement

Control is achieved when the Group is exposed, or has rights, to variable returns from its

involvement with the investee and has the ability to affect those returns through its power over

the investee. Specifically, the Group controls an investee if and only if the Group has:

(a) power over the investee (i.e. existing rights that give it the current ability to direct the

relevant activities of the investee)

(b) exposure, or rights, to variable returns from its involvement with the investee, and

(c) the ability to use its power over the investee to affect its returns




When the Group has less than a majority of the voting or similar rights of an investee, the

Group considers all relevant facts and circumstances in assessing whether it has power over

an investee, including:

(a) the contractual arrangement with the other vote holders of the investee

(b) rights arising from other contractual arrangements

(c) the Group’s voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances

indicate that there are changes to one or more of the three elements of control.

Subsidiaries are fully consolidated from the acquisition date, being the date on which the

Company obtains control, and continue to be consolidated until the date that such control

ceases. The financial statements of the subsidiaries are prepared for the same reporting period

as the parent company, using uniform accounting policies. All intra-group balances, income

and expenses, unrealized gains and losses and dividends resulting from intra-group

transactions are eliminated in full.

A change in the ownership interest of a subsidiary, without a change of control, is accounted

for as an equity transaction.

Total comprehensive income of the subsidiaries is attributed to the owners of the parent and

to the non-controlling interests even if this results in the non-controlling interests having a

deficit balance.

If the Company loses control of a subsidiary, it:

(a) derecognizes the assets (including goodwill) and liabilities of the subsidiary;

(b) derecognizes the carrying amount of any non-controlling interest;

(c) recognizes the fair value of the consideration received;

(d) recognizes the fair value of any investment retained;

(e) recognizes any surplus or deficit in profit or loss; and

(f) reclassifies the parent’s share of components previously recognized in other

comprehensive income to profit or loss.




The consolidated entities are listed as follows:

Percentage of ownership (%)

Investor Subsidiary Main businesses

31 December

2017

31 December

2016 Note

The Company Sercomm USA Inc. (Note b) Consulting and customer

service of IT products in

local market

100% 100% a

The Company Sercomm Trading Co. Ltd. Investment holding 100% 100%

The Company Shukuan Investment Ltd. Investment activity 100% 100% a

The Company Sercomm France SARL Consulting and customer


local market

100% 100% a

The Company Sercomm Deutschland GmbH Consulting and customer


local market

100% 100% a

The Company Sercomm Japan Corp. Sales of IT products 100% 100% a

The Company Sercomm Russia Limited

Liability Company

Sales of IT products 100% 100% a

Sercomm Trading Co. Ltd. Zealous Investments Ltd. Investment holding 100% 100%

Sercomm Trading Co. Ltd. Smart Trade Inc. Investment holding 100% 100%

Zealous Investments Ltd. Sernet Technology (Suzhou)

Limited

Manufacture, research and

development of routers,

communication products,

Wlan products

100% 100%

Zealous Investments Ltd. Hawxeye Inc. (Note b and c) Provide computer learning

technology on video

object analysis

embedded on IP camera

55% 28% a

Smart Trade Inc. Dwnet Technology (Suzhou)

Limited

Manufacture of routers,


Wlan products; sales and

after-sales service

100% 100%

Sercomm France SARL Sercomm Italia SRL Consulting and customer


local market

100% 100% a

Sernet Technology

(Suzhou)Limited

Suzhou Hua-Yi

Communications Co., Ltd.

Sale of routers,


Wlan products

100% 100% a

Sernet Technology

(Suzhou) Limited

Suzhou Femtel


Sale of communication

products

100% 100% a

Sercomm USA Inc.

(Note b)

Hawxeye Inc. (Note b and c) Provide computer learning

technology on video

object analysis

embedded on IP camera

- 28% a

Suzhou Femtel

Communications

Co., Ltd.

Nanjing Femtel


Sale of communication

products; R&D center of

software; after-sales

service

100% 100% a




Note a: This is an immaterial subsidiary for which the consolidated financial statements are

not reviewed by the company’s independent auditors.

Note b: For the purpose of reorganization, the 28% ownership of Hawxeye Inc. which was

previously owned by Sercomm USA Inc., was transferred to Zealous Investment Ltd.

in March 2017.

Note c: Hawxeye Inc. issued new shares on 2017, however the Group did not purchase any

of the new shares, consequently the ownership interest in Hawxeye Inc. was reduced

from 56% to 55%.

(4) Foreign currency transactions

The Group’s consolidated financial statements are presented in NTD, which is also the

Company’s functional currency. Each entity in the Group determines its own functional

currency and items included in the financial statements of each entity are measured using that

functional currency.

Transactions in foreign currencies are initially recorded by the Group entities at their

respective functional currency rates prevailing at the date of the transaction. Monetary assets

and liabilities denominated in foreign currencies are retranslated at the functional currency

closing rate of exchange ruling at the reporting date. Non-monetary items measured at fair

value in a foreign currency are translated using the exchange rates at the date when the fair

value is determined. Non-monetary items that are measured at historical cost in a foreign

currency are translated using the exchange rates as at the dates of the initial transactions.

All exchange differences arising on the settlement of monetary items or on translating

monetary items are taken to profit or loss in the period in which they arise except for the

following:

(a) Exchange differences arising from foreign currency borrowings for an acquisition of a

qualifying asset to the extent that they are regarded as an adjustment to interest costs are

included in the borrowing costs that are eligible for capitalization.

(b) Foreign currency items within the scope of IAS 39 Financial Instruments: Recognition and Measurement are accounted for based on the accounting policy for financial

instruments.




(c) Exchange differences arising on a monetary item that forms part of a reporting entity’s

net investment in a foreign operation is recognized initially in other comprehensive

income and reclassified from equity to profit or loss on disposal of the net investment.

When a gain or loss on a non-monetary item is recognized in other comprehensive income,

any exchange component of that gain or loss is recognized in other comprehensive income.

When a gain or loss on a non-monetary item is recognized in profit or loss, any exchange

component of that gain or loss is recognized in profit or loss.

(5) Translation of financial statements in foreign currency

Each foreign operation of the Company determines its own functional currency and items

included in the financial statements of each foreign operation are measured at that functional

currency. While preparing the Company’s financial statements, the assets and liabilities of

foreign operations are translated into NT$ at the closing rate of exchange prevailing at the

reporting date and their income and expenses are translated at an average rate for the period.

The exchange differences arising on the translation are recognized in other comprehensive

income. On the disposal of a foreign operation, the cumulative amount of the exchange

differences relating to that foreign operation, recognized in other comprehensive income and

accumulated in the separate component of equity, is reclassified from equity to profit or loss

when the gain or loss on disposal is recognized. The partial disposals are accounted for as

disposals when the partial disposal involves the loss of control of a subsidiary that includes a

foreign operation and when the retained interest after the partial disposal of an interest in a

joint arrangement or a partial disposal of an interest in an associate that includes a foreign

operation is a financial asset that includes a foreign operation.

On the partial disposal of a subsidiary that includes a foreign operation that does not result in

a loss of control, the proportionate share of the cumulative amount of the exchange differences

recognized in other comprehensive income is re-attributed to the non-controlling interests in

that foreign operation. In partial disposal of an associate or joint arrangement that includes a

foreign operation that does not result in a loss of significant influence or joint control, only

the proportionate share of the cumulative amount of the exchange differences recognized in

other comprehensive income is reclassified to profit or loss.

Any goodwill and any fair value adjustments to the carrying amounts of assets and liabilities

arising from the acquisition of a foreign operation are treated as assets and liabilities of the

foreign operation and expressed in its functional currency.




(6) Current and non-current distinction

An asset is classified as current when:

(a) The Group expects to realize the asset, or intends to sell or consume it, in its normal

operating cycle

(b) The Group holds the asset primarily for the purpose of trading

(c) The Group expects to realize the asset within twelve months after the reporting period

(d) The asset is cash or cash equivalent unless the asset is restricted from being exchanged or

used to settle a liability for at least twelve months after the reporting period.

All other assets are classified as non-current.

A liability is classified as current when:

(a) The Group expects to settle the liability in its normal operating cycle

(b) The Group holds the liability primarily for the purpose of trading

(c) The liability is due to be settled within twelve months after the reporting period

(d) The Group does not have an unconditional right to defer settlement of the liability for at

least twelve months after the reporting period. Terms of a liability that could, at the

option of the counterparty, result in its settlement by the issue of equity instruments do

not affect its classification.

All other liabilities are classified as non-current.

(7) Cash and cash equivalents

Cash and cash equivalents comprises cash on hand, demand deposits and short-term, highly

liquid time deposits (including ones that have maturity within 12 months) or investments that

are readily convertible to known amounts of cash and which are subject to an insignificant

risk of changes in value.

(8) Financial instruments

Financial assets and financial liabilities are recognized when the Group becomes a party to

the contractual provisions of the instrument.

Financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement are recognized initially at fair value plus or minus, in the case

of investments not at fair value through profit or loss, directly attributable transaction costs.




(a) Financial assets

The Group accounts for regular way purchase or sales of financial assets on the trade date.

Financial assets of the Group are classified as financial assets at fair value through profit

or loss, held-to-maturity investments, available-for-sale financial assets and loans and

receivables. The Group determines the classification of its financial assets at initial

recognition.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading

and financial assets designated upon initial recognition at fair value through profit or loss.

A financial asset is classified as held for trading if:

i. it is acquired or incurred principally for the purpose of selling or repurchasing it in

the near term;

ii. on initial recognition it is part of a portfolio of identified financial instruments that

are managed together and for which there is evidence of a recent actual pattern of

short-term profit-taking; or

iii. it is a derivative (except for a derivative that is a financial guarantee contract or a

designated and effective hedging instrument).

If a contract contains one or more embedded derivatives, the entire hybrid (combined)

contract may be designated as a financial asset at fair value through profit or loss; or a

financial asset may be designated as at fair value through profit or loss when doing so

results in more relevant information, because either:

i. it eliminates or significantly reduces a measurement or recognition inconsistency; or

ii. a group of financial assets, financial liabilities or both is managed and its performance

is evaluated on a fair value basis, in accordance with a documented risk management

or investment strategy, and information about the group is provided internally on that

basis to the key management personnel.

Financial assets at fair value through profit or loss are measured at fair value with changes

in fair value recognized in profit or loss. Dividends or interests on financial assets at

fair value through profit or loss are recognized in profit or loss (including those received

during the period of initial investment). If financial assets do not have quoted prices in

an active market and their fair value cannot be reliably measured, then they are classified

as financial assets measured at cost on balance sheet and carried at cost net of accumulated

impairment losses, if any, as at the reporting date.




Available-for-sale financial assets

Available-for-sale investments are non-derivative financial assets that are designated as

available-for-sale or those not classified as financial assets at fair value through profit or

loss, held-to-maturity financial assets, or loans and receivables.

Foreign exchange gains and losses and interest calculated using the effective interest

method relating to monetary available-for-sale financial assets, or dividends on an

available-for-sale equity instrument, are recognized in profit or loss. Subsequent

measurement of available-for-sale financial assets at fair value is recognized in equity

until the investment is derecognized, at which time the cumulative gain or loss is

recognized in profit or loss.

If equity instrument investments do not have quoted prices in an active market and their

fair value cannot be reliably measured, then they are classified as financial assets

measured at cost on balance sheet and carried at cost net of accumulated impairment

losses, if any, as at the reporting date.

Held-to-maturity financial assets

Non-derivative financial assets with fixed or determinable payments and fixed maturities

are classified as held-to-maturity when the Group has the positive intention and ability to

hold it to maturity, other than those that are designated as available-for-sale, classified as

financial assets at fair value through profit or loss, or meet the definition of loans and

receivables.

After initial measurement held-to-maturity financial assets are measured at amortized cost

using the effective interest method, less impairment. Amortized cost is calculated by

taking into account any discount or premium on acquisition and fee or transaction costs.

The effective interest method amortization is recognized in profit or loss.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable

payments that are not quoted in an active market other than those that the Group upon

initial recognition designates as available for sale, classified as at fair value through profit

or loss, or those for which the holder may not recover substantially all of its initial

investment.

Loans and receivables are separately presented on the balance sheet as receivables or debt

instrument investments for which no active market exists. After initial measurement,

such financial assets are subsequently measured at amortized cost using the effective

interest rate method, less impairment. Amortized cost is calculated by taking into

account any discount or premium on acquisition and fee or transaction costs. The

effective interest method amortization is recognized in profit or loss.




Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a

financial asset other than the financial assets at fair value through profit or loss is

impaired. A financial asset is deemed to be impaired if, and only if, there is objective

evidence of impairment as a result of one or more loss events that has occurred after the

initial recognition of the asset and that loss event has an impact on the estimated future

cash flows of the financial asset. The carrying amount of the financial asset impaired,

other than receivables impaired which are reduced through the use of an allowance

account, is reduced directly and the amount of the loss is recognized in profit or loss.

A significant or prolonged decline in the fair value of an available-for-sale equity

instrument below its cost is considered a loss event.

Other loss events include:

i. significant financial difficulty of the issuer or obligor; or

ii. a breach of contract, such as a default or delinquency in interest or principal payments;

or

iii. it becoming probable that the borrower will enter bankruptcy or other financial

reorganisation; or

iv. the disappearance of an active market for that financial asset because of financial

difficulties.

For held-to-maturity financial assets and loans and receivables measured at amortized

cost, the Group first assesses individually whether objective evidence of impairment

exists individually for financial asset that are individually significant, or collectively for

financial assets that are not individually significant. If the Group determines that no

objective evidence of impairment exits for an individually assessed financial asset,

whether significant or not, it includes the asset in a group of financial assets with similar

credit risk characteristics and collectively assesses them for impairment. If there is

objective evidence that an impairment loss has been incurred, the amount of the loss is

measured as the difference between the assets carrying amount and the present value of

estimated future cash flows. The present value of the estimated future cash flows is

discounted at the financial assets original effective interest rate. If a loan has a variable

interest rate, the discount rate for measuring any impairment loss is the current effective

interest rate. Interest income is accrued based on the reduced carrying amount of the

asset, using the rate of interest used to discount the future cash flows for the purpose of

measuring the impairment loss. Receivables together with the associated allowance are

written off when there is no realistic prospect of future recovery. If, in a subsequent

year, the amount of the estimated impairment loss increases or decreases because of an

event occurring after the impairment was recognized, the previously recognized

impairment loss is increased or reduced by adjusting the allowance account. If a future

write-off is later recovered, the recovery is credited to profit or loss.




Receivables together with the associated allowance are written off when there is no

realistic prospect of future recovery. If, in a subsequent year, the amount of the

estimated impairment loss increases or decreases because of an event occurring after the

impairment was recognized, the previously recognized impairment loss is increased or

reduced by adjusting the allowance account. If a future write-off is later recovered, the

recovery is credited to profit or loss.

In the case of equity investments classified as available-for-sale, where there is evidence

of impairment, the cumulative loss - measured as the difference between the acquisition

cost and the current fair value, less any impairment loss on that investment previously

recognized in profit or loss - is removed from other comprehensive income and

recognized in profit or loss. Impairment losses on equity investments are not reversed

through profit or loss; increases in their fair value after impairment are recognized directly

in other comprehensive income.

In the case of debt instruments classified as available-for-sale, the amount recorded for

impairment is the cumulative loss measured as the difference between the amortized cost

and the current fair value, less any impairment loss on that investment previously

recognized in profit or loss. Future interest income continues to be accrued based on the

reduced carrying amount of the asset, using the rate of interest used to discount the future

cash flows for the purpose of measuring the impairment loss. The interest income is

recognized in profit or loss. If, in a subsequent year, the fair value of a debt instrument

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 is reversed through

profit or loss.

Derecognition of financial assets

A financial asset is derecognized when:

i. The rights to receive cash flows from the asset have expired

ii. The Group has transferred the asset and substantially all the risks and rewards of the

asset have been transferred

iii. The Group has neither transferred nor retained substantially all the risks and rewards

of the asset, but has transferred control of the asset.

On derecognition of a financial asset in its entirety, the difference between the carrying

amount and the consideration received or receivable including any cumulative gain or

loss that had been recognized in other comprehensive income, is recognized in profit or

loss.




(b) Financial liabilities and equity

Classification between liabilities or equity

The Group classifies the instrument issued as a financial liability or an equity instrument

in accordance with the substance of the contractual arrangement and the definitions of a

financial liability, and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an

entity after deducting all of its liabilities. The transaction costs of an equity transaction

are accounted for as a deduction from equity (net of any related income tax benefit) to the

extent they are incremental costs directly attributable to the equity transaction that

otherwise would have been avoided.

Compound instruments

The Group evaluates the terms of the convertible bonds issued to determine whether it

contains both a liability and an equity component. Furthermore, the Group assesses if

the economic characteristics and risks of the put and call options contained in the

convertible bonds are closely related to the economic characteristics and risk of the host

contract before separating the equity element.

For the liability component excluding the derivatives, its fair value is determined based

on the rate of interest applied at that time by the market to instruments of comparable

credit status. The liability component is classified as a financial liability measured at

amortized cost before the instrument is converted or settled.

For the embedded derivative that is not closely related to the host contract (for example,

if the exercise price of the embedded call or put option is not approximately equal on each

exercise date to the amortized cost of the host debt instrument), it is classified as a liability

component and subsequently measured at fair value through profit or loss unless it

qualifies for an equity component. The equity component is assigned the residual

amount after deducting from the fair value of the instrument as a whole the amount

separately determined for the liability component. Its carrying amount is not

remeasured in the subsequent accounting periods. If the convertible bond issued does

not have an equity component, it is accounted for as a hybrid instrument in accordance

with the requirements under IAS 39 Financial Instruments: Recognition and Measurement.




Transaction costs are apportioned between the liability and equity components of the

convertible bond based on the allocation of proceeds to the liability and equity

components when the instruments are initially recognized.

On conversion of a convertible bond before maturity, the carrying amount of the liability

component being the amortized cost at the date of conversion is transferred to equity.

Financial liabilities

Financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as financial liabilities at fair value through profit or loss or

financial liabilities measured at amortized cost upon initial recognition.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for

trading and financial liabilities designated upon initial recognition as at fair value through

profit or loss. A financial liability is classified as held for trading if:

i. it is acquired or incurred principally for the purpose of selling or repurchasing it in

the near term;

ii. on initial recognition it is part of a portfolio of identified financial instruments that

are managed together and for which there is evidence of a recent actual pattern of

short-term profit-taking; or

iii. it is a derivative (except for a derivative that is a financial guarantee contract or a

designated and effective hedging instrument).

If a contract contains one or more embedded derivatives, the entire hybrid (combined)

contract may be designated as a financial liability at fair value through profit or loss; or a

financial liability may be designated as at fair value through profit or loss when doing so

results in more relevant information, because either:

i. it eliminates or significantly reduces a measurement or recognition inconsistency; or

ii. a group of financial assets, financial liabilities or both is managed and its performance

is evaluated on a fair value basis, in accordance with a documented risk management

or investment strategy, and information about the group is provided internally on that

basis to the key management personnel.




Gains or losses on the subsequent measurement of liabilities at fair value through profit

or loss including interest paid are recognized in profit or loss.

If the financial liabilities at fair value through profit or loss do not have quoted prices in

an active market and their fair value cannot be reliably measured, then they are classified

as financial liabilities measured at cost on balance sheet and carried at cost as at the

reporting date.

Financial liabilities at amortized cost

Financial liabilities measured at amortized cost include interest bearing loans and

borrowings that are subsequently measured using the effective interest rate method after

initial recognition. Gains and losses are recognized in profit or loss when the liabilities

are derecognized as well as through the effective interest rate method amortization

process.

Amortized cost is calculated by taking into account any discount or premium on

acquisition and fees or transaction costs.

Derecognition of financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged

or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on

substantially different terms, or the terms of an existing liability are substantially modified

(whether or not attributable to the financial difficulty of the debtor), such an exchange or

modification is treated as a derecognition of the original liability and the recognition of a

new liability, and the difference in the respective carrying amounts and the consideration

paid, including any non-cash assets transferred or liabilities assumed, is recognized in

profit or loss.

(c) Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the

balance sheet if, and only if, there is a currently enforceable legal right to offset the

recognized amounts and there is an intention to settle on a net basis, or to realize the assets

and settle the liabilities simultaneously.




(9) Derivative financial instrument

The Group uses derivative financial instruments to hedge its foreign currency risks and interest

rate risks. A derivative is classified in the balance sheet as financial assets or liabilities at

fair value through profit or loss (held for trading) except for derivatives that are designated

effective hedging instruments which are classified as derivative financial assets or liabilities

for hedging.

Derivative financial instruments are initially recognized at fair value on the date on which a

derivative contract is entered into and are subsequently remeasured at fair value. Derivatives

are carried as financial assets when the fair value is positive and as financial liabilities when

the fair value is negative. Any gains or losses arising from changes in the fair value of

derivatives are taken directly to profit or loss, except for the effective portion of cash flow

hedges, which is recognized in equity.

Derivatives embedded in host contracts are accounted for as separate derivatives and recorded

at fair value if their economic characteristics and risks are not closely related to those of the

host contracts and the host contracts are not held for trading or designated at fair value though

profit or loss. These embedded derivatives are measured at fair value with changes in fair

value recognized in profit or loss.

(10) Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in

an orderly transaction between market participants at the measurement date. The fair value

measurement is based on the presumption that the transaction to sell the asset or transfer the

liability takes place either:

(a) In the principal market for the asset or liability, or

(b) In the absence of a principal market, in the most advantageous market for the asset or

liability

The principal or the most advantageous market must be accessible to by the Group.

The fair value of an asset or a liability is measured using the assumptions that market

participants would use when pricing the asset or liability, assuming that market participants

in their economic best interest.




A fair value measurement of a non-financial asset takes into account a market participant’s

ability to generate economic benefits by using the asset in its highest and best use or by selling

it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which

sufficient data are available to measure fair value, maximizing the use of relevant observable

inputs and minimizing the use of unobservable inputs.

(11) Hedge accounting

The Group uses derivative financial instruments to hedge for:

(a) Classified in the balance sheet as financial assets or liabilities at fair value through profit

or loss (Fair value hedge)

(b) Assets or liabilities recognized, and highly expected transaction related to cash flow (Cash

flow hedge)

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

(a) Fair value hedge

Changes in fair value of derivative financial instruments are recognized in profit or loss.

The change in the fair value of the hedged item attributable to the hedged risk is recorded

as a part of the carrying amount of the hedged item and is also recognized in the profit or

loss.

For fair value hedges relating to items carried at amortized cost, the adjustment to carrying

amount is amortized through the profit or loss over the remaining term to maturity.

Effective interest rate amortization may begin as soon as an adjustment exists and shall

begin no later than when the hedged item ceases to be adjusted for changes in its fair

value attributable to the risk being hedged. If the hedged item is derecognized, the

unamortized fair value is recognized immediately in profit or loss.

When an unrecognized firm commitment is designated as a hedged item, the cumulative

changes in the fair value of firm commitment attributable to the hedged risk is recognized

as assets or liabilities and the corresponding gains or losses are recognized in profit or

loss.




(b) Cash flow hedge

The gain or loss from effective hedge portion of the hedging instruments is recognized in

equity and the ineffective portion is recognized in profit and loss.

When the hedged transaction affects profit or loss, the amount recognized in equity will

be transferred to profit or loss. When the hedged item is a non-financial asset or liability,

the amount recognized in equity will be transferred to the original carrying amount of the

non-financial asset or liability.

If the forecast transaction or firm commitment is no longer expected to occur, the

cumulative gain or loss previously recognized in equity is reclassified to profit or loss.

If the hedging instrument expires, or is sold, terminated or exercised without replacement

or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss

previously recognized in equity remains in equity until the forecast transaction or firm

commitment affects profit or loss.

(12) Inventories

Inventories are valued at lower of cost and net realizable value item by item.

Costs incurred in bringing each inventory to its present location and condition are accounted

for as follows:

Raw materials - Purchase cost on a first in, first out basis.

Finished goods and work in progress - Cost of direct materials and labor and a proportion of

manufacturing overheads based on normal operating

capacity but excluding borrowing costs.

Net realizable value is the estimated selling price in the ordinary course of business, less

estimated costs of completion and the estimated costs necessary to make the sale.

(13) Investments accounted for using the equity method

The Group’s investment in its associate is accounted for using the equity method other than

those that meet the criteria to be classified as held for sale. An associate is an entity over

which the Group has significant influence.




Under the equity method, the investment in the associate or an investment in a joint venture

is carried in the balance sheet at cost and adjusted thereafter for the post-acquisition change

in the Group’s share of net assets of the associate or joint venture. After the interest in the

associate or joint venture is reduced to zero, additional losses are provided for, and a liability

is recognized, only to the extent that the Group has incurred legal or constructive obligations

or made payments on behalf of the associate or joint venture. Unrealized gains and losses

resulting from transactions between the Group and the associate or joint venture are eliminated

to the extent of the Group’s related interest in the associate or joint venture.

When changes in the net assets of an associate or a joint venture occur and not those that are

recognized in profit or loss or other comprehensive income and do not affects the Group’s

percentage of ownership interests in the associate or joint venture, the Group recognizes such

changes in equity based on its percentage of ownership interests. The resulting capital

surplus recognized will be reclassified to profit or loss at the time of disposing the associate

or joint venture on a prorate basis.

When the associate or joint venture issues new stock, and the Group’s interest in an associate

or a joint venture is reduced or increased as the Group fails to acquire shares newly issued in

the associate or joint venture proportionately to its original ownership interest, the increase or

decrease in the interest in the associate or joint venture is recognized in Additional Paid in

Capital and Investment accounted for using the equity method. When the interest in the

associate or joint venture is reduced, the cumulative amounts previously recognized in other

comprehensive income are reclassified to profit or loss or other appropriate items. The

aforementioned capital surplus recognized is reclassified to profit or loss on a pro rata basis

when the Group disposes the associate or joint venture.

The financial statements of the associate are prepared for the same reporting period as the

Group. Where necessary, adjustments are made to bring the accounting policies in line with

those of the Group.

The Group determines at each reporting date whether there is any objective evidence that the

investment in the associate or an investment in a joint venture is impaired in accordance with

IAS 39 Financial Instruments: Recognition and Measurement. If this is the case the Group

calculates the amount of impairment as the difference between the recoverable amount of the

associate or joint venture and its carrying value and recognizes the amount in the ‘share of

profit or loss of an associate’ in the statement of comprehensive income in accordance with

IAS 36 Impairment of Assets. In determining the value in use of the investment, the Group

estimates:

(a) Its share of the present value of the estimated future cash flows expected to be generated

by the associate or joint venture, including the cash flows from the operations of the

associate and the proceeds on the ultimate disposal of the investment; or

(b) The present value of the estimated future cash flows expected to arise from dividends to

be received from the investment and from its ultimate disposal.




Because goodwill that forms part of the carrying amount of an investment in an associate or

an investment in a joint venture is not separately recognized, it is not tested for impairment

separately by applying the requirements for impairment testing goodwill in IAS 36 Impairment of Assets.

Upon loss of significant influence over the associate or joint venture, the Group measures and

recognizes any retaining investment at its fair value. Any difference between the carrying

amount of the associate or joint venture upon loss of significant influence and the fair value

of the retaining investment and proceeds from disposal is recognized in profit or loss.

Furthermore, if an investment in an associate becomes an investment in a joint venture or an

investment in a joint venture becomes an investment in an associate, the entity continues to

apply the equity method and does not remeasure the retained interest.

(14) Property, plant and equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and

accumulated impairment losses, if any. Such cost includes the cost of dismantling and

removing the item and restoring the site on which it is located and borrowing costs for

construction in progress if the recognition criteria are met. Each part of an item of property,

plant and equipment with a cost that is significant in relation to the total cost of the item is

depreciated separately. When significant parts of property, plant and equipment are required

to be replaced in intervals, the Group recognized such parts as individual assets with specific

useful lives and depreciation, respectively. The carrying amount of those parts that are

replaced is derecognized in accordance with the derecognition provisions of IAS 16 Property, plant and equipment. When a major inspection is performed, its cost is recognized in the

carrying amount of the plant and equipment as a replacement if the recognition criteria are

satisfied. All other repair and maintenance costs are recognized in profit or loss as incurred.

Depreciation is calculated on a straight-line basis over the estimated economic lives of the

following assets:

Buildings and structures 36 56 years

Machinery and equipments 4 10 years

Molding equipments 3 5 years

Research and development equipments 4 6 years

Office equipment and other facilities 1 6 years

Leased assets 36 51 years




An item of property, plant and equipment and any significant part initially recognized is

derecognized upon disposal or when no future economic benefits are expected from its use or

disposal. Any gain or loss arising on derecognition of the asset is recognized in profit or

loss.

The assets’ residual values, useful lives and methods of depreciation are reviewed at each

financial year end and adjusted prospectively, if appropriate.

(15) Leases

Group as a lessee

Finance leases which transfer to the Group substantially all the risks and benefits incidental

to ownership of the leased item, are capitalized at the commencement of the lease at the fair

value of the leased property or, if lower, at the present value of the minimum lease payments.

Lease payments are apportioned between finance charges and reduction of the lease liability

so as to achieve a constant rate of interest on the remaining balance of the liability. Finance

charges are recognized in profit or loss.

A leased asset is depreciated over the useful life of the asset. However, if there is no

reasonable certainty that the Group will obtain ownership by the end of the lease term, the

asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are recognized as an expense on a straight-line basis over the lease

term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and benefits of

ownership of the asset are classified as operating leases. Initial direct costs incurred in

negotiating an operating lease are added to the carrying amount of the leased asset and

recognized over the lease term on the same basis as rental income. Rental revenue generated

from operating lease is recognized over the lease term using the straight line method.

Contingent rents are recognized as revenue in the period in which they are earned.

(16) Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of

intangible assets acquired in a business combination is its fair value as at the date of

acquisition. Following initial recognition, intangible assets are carried at cost less any

accumulated amortization and accumulated impairment losses, if any. Internally generated

intangible assets, excluding capitalized development costs, are not capitalized and expenditure

is reflected in profit or loss for the year in which the expenditure is incurred.




The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortized over the useful economic life and assessed for

impairment whenever there is an indication that the intangible asset may be impaired. The

amortization period and the amortization method for an intangible asset with a finite useful

life is reviewed at least at the end of each financial year. Changes in the expected useful life

or the expected pattern of consumption of future economic benefits embodied in the asset is

accounted for by changing the amortization period or method, as appropriate, and are treated

as changes in accounting estimates.

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment

annually, either individually or at the cash-generating unit level. The assessment of

indefinite life is reviewed annually to determine whether the indefinite life continues to be

supportable. If not, the change in useful life from indefinite to finite is made on a prospective

basis.

Gains or losses arising from derecognition of an intangible asset are measured as the

difference between the net disposal proceeds and the carrying amount of the asset and are

recognized in profit or loss when the asset is derecognized.

Research and development costs

Research costs are expensed as incurred. Development expenditures, on an individual

project, are recognized as an intangible asset when the Group can demonstrate:

(a) The technical feasibility of completing the intangible asset so that it will be available for

use or sale

(b) Its intention to complete and its ability to use or sell the asset

(c) How the asset will generate future economic benefits

(d) The availability of resources to complete the asset

(e) The ability to measure reliably the expenditure during development

Following initial recognition of the development expenditure as an asset, the cost model is

applied requiring the asset to be carried at cost less any accumulated amortization and

accumulated impairment losses. During the period of development, the asset is tested for

impairment annually. Amortization of the asset begins when development is complete and

the asset is available for use. It is amortized over the period of expected future benefit.




Patents

Patents are amortized on a straight-line basis for useful life (5 years).

Computer software and product testing costs

The cost of computer software and product testing costs are amortized on a straight-line basis

over the estimated useful life (2 to 5 years).

A summary of the policies applied to the Group’s intangible assets is as follows:

Development costs Patents Computer software

Product testing

costs

Useful lives Finite Finite Finite Finite

Amortization

method used

Amortized over the

period of expected

future sales from the

related project on a

straight-line basis

Amortized on a

straight- line basis

over the economic

useful life

Amortized on a

straight-line basis

over the estimated

useful life

Amortized on a

straight- line basis

over the estimated

useful life

Internally generated

or acquired

Internally generated Internally

generated

Acquired Acquired

(17) Impairment of non-financial assets

The Group assesses at the end of each reporting period whether there is any indication that an

asset in the scope of IAS 36 Impairment of Assets may be impaired. If any such indication

exists, or when annual impairment testing for an asset is required, the Group estimates the

asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-

generating unit’s (“CGU”) fair value less costs to sell and its value in use and is determined

for an individual asset, unless the asset does not generate cash inflows that are largely

independent of those from other assets or groups of assets. Where the carrying amount of an

asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written

down to its recoverable amount.

For assets excluding goodwill, an assessment is made at each reporting date as to whether

there is any indication that previously recognized impairment losses may no longer exist or

may have decreased. If such indication exists, the Group estimates the asset’s or cash-

generating unit’s recoverable amount. A previously recognized impairment loss is reversed

only if there has been an increase in the estimated service potential of an asset which in turn

increases the recoverable amount. However, the reversal is limited so that the carrying

amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount

that would have been determined, net of depreciation, had no impairment loss been recognized

for the asset in prior years.




A cash generating unit, or groups of cash-generating units, to which goodwill has been

allocated is tested for impairment annually at the same time, irrespective of whether there is

any indication of impairment. If an impairment loss is to be recognized, it is first allocated

to reduce the carrying amount of any goodwill allocated to the cash generating unit (group of

units), then to the other assets of the unit (group of units) pro rata on the basis of the carrying

amount of each asset in the unit (group of units). Impairment losses relating to goodwill

cannot be reversed in future periods for any reason.

An impairment loss of continuing operations or a reversal of such impairment loss is

recognized in profit or loss.

(18) Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as

a result of a past event, it is probably that an outflow of resources embodying economic

benefits will be required to settle the obligation and a reliable estimate can be made of the

amount of the obligation. Where the Group expects some or all of a provision to be

reimbursed, the reimbursement is recognized as a separate asset but only when the

reimbursement is virtually certain. If the effect of the time value of money is material,

provisions are discounted using a current pre-tax rate that reflects the risks specific to the

liability. Where discounting is used, the increase in the provision due to the passage of time

is recognized as a finance cost.

Maintenance warranties

A provision is recognized for expected warranty claims on products sold, based on past

experience, management’s judgments and other known factors.

Sales returns and allowances

A provision has been recognized for sales returns and allowances based on past experience

and other known factors.

The liability to pay a levy is recognized progressively if the obligating event occurs over a

period of time.

(19) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset

that necessarily takes a substantial period of time to get ready for its intended use or sale are

capitalized as part of the cost of the respective assets. All other borrowing costs are expensed

in the period they occur. Borrowing costs consist of interest and other costs that an entity

incurs in connection with the borrowing of funds.




(20) Post-employee benefits

All regular employees of the Company and its domestic subsidiaries are entitled to a pension

plan that is managed by an independently administered pension fund committee. Fund assets

are deposited under the committee’s name in the specific bank account and hence, not

associated with the Company and its domestic subsidiaries. Therefore fund assets are not

included in the Group’s consolidated financial statements. Pension benefits for employees

of the overseas subsidiaries and the branches are provided in accordance with the respective

local regulations.

For the defined contribution plan, the Company and its domestic subsidiaries will make a

monthly contribution of no less than 6% of the monthly wages of the employees subject to the

plan. The Company recognizes expenses for the defined contribution plan in the period in

which the contribution becomes due. Overseas subsidiaries and branches make contribution

to the plan based on the requirements of local regulations.

Post-employment benefit plan that is classified as a defined benefit plan uses the Projected

Unit Credit Method to measure its obligations and costs based on actuarial assumptions. Re-

measurements, comprising of the effect of the actuarial gains and losses, the effect of the asset

ceiling (excluding net interest) and the return on plan assets, excluding net interest, are

recognized as other comprehensive income with a corresponding debit or credit to retained

earnings in the period in which they occur. Past service costs are recognized in profit or loss

on the earlier of:

(a) the date of the plan amendment or curtailment, and

(b) the date that the Group recognizes restructuring-related costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or

asset, both as determined at the start of the annual reporting period, taking account of any

changes in the net defined benefit liability (asset) during the period as a result of contribution

and benefit payment.

Pension cost for an interim period is calculated on a year-to-date basis by using the actuarially

determined pension cost rate at the end of the prior financial year, adjusted and disclosed for

significant market fluctuations since that time and for significant curtailments, settlements, or

other significant one-off events.




(21) Share-based payment transactions

The cost of equity-settled transactions between the Group and employees is recognized based

on the fair value of the equity instruments granted. The fair value of the equity instruments

is determined by using an appropriate pricing model.

The cost of equity-settled transactions is recognized, together with a corresponding increase

in other capital reserves in equity, over the period in which the performance and/or service

conditions are fulfilled. The cumulative expense recognized for equity-settled transactions

at each reporting date until the vesting date reflects the extent to which the vesting period has

expired and the Group’s best estimate of the number of equity instruments that will ultimately

vest. The income statement expense or credit for a period represents the movement in

cumulative expense recognized as at the beginning and end of that period.

No expense is recognized for awards that do not ultimately vest, except for equity-settled

transactions where vesting is conditional upon a market or non-vesting condition, which are

treated as vesting irrespective of whether or not the market or non-vesting condition is

satisfied, provided that all other performance and/or service conditions are satisfied.

Where the terms of an equity-settled transaction award are modified, the minimum expense

recognized is the expense as if the terms had not been modified, if the original terms of the

award are met. An additional expense is recognized for any modification that increases the

total fair value of the share-based payment transaction, or is otherwise beneficial to the

employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it vested on the date of

cancellation, and any expense not yet recognized for the award is recognized immediately.

This includes any award where non-vesting conditions within the control of either the entity

or the employee are not met. However, if a new award is substituted for the cancelled award,

and designated as a replacement award on the date that it is granted, the cancelled and new

awards are treated as if they were a modification of the original award, as described in the

previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the

computation of diluted earnings per share.

The cost of restricted stocks issued is recognized as salary expense based on the fair value of

the equity instruments on the grant date, together with a corresponding increase in other capital

reserves in equity, over the vesting period. The Group recognized unearned employee salary

which is a transitional contra equity account; the balance in the account will be recognized as

salary expense over the passage of vesting period.




(22) Revenue recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to

the Group and the revenue can be reliably measured. Revenue is measured at the fair value

of the consideration received or receivable. The following specific recognition criteria must

also be met before revenue is recognized:

Sale of goods

Revenue from the sale of goods is recognized when all the following conditions have been

satisfied:

(a) the significant risks and rewards of ownership of the goods have passed to the buyer;

(b) neither continuing managerial involvement nor effective control over the goods sold have

been retained;

(c) the amount of revenue can be measured reliably;

(d) it is probable that the economic benefits associated with the transaction will flow to the

entity; and

(e) the costs incurred in respect of the transaction can be measured reliably.

Interest income

For all financial assets measured at amortized cost (including loans and receivables and held-

to-maturity financial assets) and available-for-sale financial assets, interest income is recorded

using the effective interest rate method and recognized in profit or loss.

Dividends

Revenue is recognized when the Group’s right to receive the payment is established.

(23) Income taxes

Income tax expense (income) is the aggregate amount included in the determination of profit

or loss for the period in respect of current tax and deferred tax.

Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the

amount expected to be recovered from or paid to the taxation authorities, using the tax rates

and tax laws that have been enacted or substantively enacted by the end of the reporting period.

Current income tax relating to items recognized in other comprehensive income or directly in

equity is recognized in other comprehensive income or equity and not in profit or loss.




The 10% surtax on undistributed retained earnings is recognized as income tax expense in the

subsequent year when the distribution proposal is approved by the Shareholders’ meeting.

Deferred tax

Deferred tax is provided on temporary differences at the reporting date between the tax bases

of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except:

(a) Where the deferred tax liability arises from the initial recognition of goodwill or of an

asset or liability in a transaction that is not a business combination and, at the time of the

transaction, affects neither the accounting profit nor taxable profit or loss.

(b) In respect of taxable temporary differences associated with investments in subsidiaries,

associates and interests in joint arrangements, where the timing of the reversal of the

temporary differences can be controlled and it is probable that the temporary differences

will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carry forward of

unused tax credits and unused tax losses, to the extent that it is probable that taxable profit

will be available against which the deductible temporary differences, and the carry forward of

unused tax credits and unused tax losses can be utilized, except:

(a) Where the deferred tax asset relating to the deductible temporary difference arises from

the initial recognition of an asset or liability in a transaction that is not a business

combination and, at the time of the transaction, affects neither the accounting profit nor

taxable profit or loss.

(b) In respect of deductible temporary differences associated with investments in

subsidiaries, associates and interests in joint arrangements, deferred tax assets are

recognized only to the extent that it is probable that the temporary differences will reverse

in the foreseeable future and taxable profit will be available against which the temporary

differences can be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in

the year when the asset is realized or the liability is settled, based on tax rates and tax laws

that have been enacted or substantively enacted at the reporting date. The measurement of

deferred tax assets and deferred tax liabilities reflects the tax consequences that would follow

from the manner in which the Group expects, at the end of the reporting period, to recover or

settle the carrying amount of its assets and liabilities. Deferred tax relating to items

recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are

recognized in correlation to the underlying transaction either in other comprehensive income

or directly in equity. Deferred tax assets are reassessed at each reporting date and are

recognized accordingly.




Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists

to set off current income tax assets against current income tax liabilities and the deferred taxes

relate to the same taxable entity and the same taxation authority.

Interim period income tax expense is calculated and disclosed by applying the applicable tax

rate to expected total annual earnings; in other words, applying estimated annual effective tax

rate to interim period’s pre-tax income.

(24) Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The consideration

transferred, the identifiable assets acquired and liabilities assumed are measured at acquisition

date fair value. For each business combination, the acquirer measures any non-controlling

interest in the acquiree either at fair value or at the non-controlling interest’s proportionate

share of the acquiree’s identifiable net assets. Acquisition-related costs are accounted for as

expenses in the periods in which the costs are incurred and are classified under administrative

expenses.

When the Group acquires a business, it assesses the assets and liabilities assumed for

appropriate classification and designation in accordance with the contractual terms, economic

circumstances and pertinent conditions as at the acquisition date. This includes the

separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquisition date fair value of the

acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the

acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at the

acquisition-date fair value. Subsequent changes to the fair value of the contingent

consideration which is deemed to be an asset or liability, will be recognized in accordance

with IAS 39 Financial Instruments: Recognition and Measurement either in profit or loss or

as a change to other comprehensive income. However, if the contingent consideration is

classified as equity, it should not be remeasured until it is finally settled within equity.

Goodwill is initially measured as the amount of the excess of the aggregate of the

consideration transferred and the non-controlling interest over the net fair value of the

identifiable assets acquired and the liabilities assumed. If this aggregate is lower than the

fair value of the net assets acquired, the difference is recognized in profit or loss.




After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill acquired in a business combination is, from the acquisition date, allocated to each

of the Group’s cash-generating units that are expected to benefit from the combination,

irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Each unit or group of units to which the goodwill is so allocated represents the lowest level

within the Group at which the goodwill is monitored for internal management purpose and is

not larger than an operating segment before aggregation.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit

is disposed of, the goodwill associated with the operation disposed of is included in the

carrying amount of the operation. Goodwill disposed of in this circumstance is measured

based on the relative recoverable amounts of the operation disposed of and the portion of the

cash-generating unit retained.

5. Significant accounting judgments, estimates and assumptions

The preparation of the Group’s consolidated financial statements require management to make

judgments, estimates and assumptions that affect the reported amounts of revenues, expenses,

assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period.

However, uncertainty about these assumption and estimate could result in outcomes that require a

material adjustment to the carrying amount of the asset or liability affected in future periods.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the

reporting date, that have a significant risk of causing a material adjustment to the carrying amounts

of assets and liabilities within the next financial year are discussed below.

(1) Fair value of financial instruments

Where the fair value of financial assets and financial liabilities recorded in the balance sheet

cannot be derived from active markets, they are determined using valuation techniques

including the income approach (for example the discounted cash flow model) or market

approach. Changes in assumptions about these factors could affect the reported fair value of

the financial instruments. Please refer to Note 12 for more details.

(2) Pension benefits

The cost of post-employment benefit and the present value of the pension obligation under

defined benefit pension plans are determined using actuarial valuations. An actuarial

valuation involves making various assumptions. These include the determination of the

discount rate and future salary increases. Please refer to Note 6.(15) for more details.




(3) Share-based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to

the fair value of the equity instruments at the date at which they are granted. Estimating fair

value for share-based payment transactions requires determining the most appropriate

valuation model, which is dependent on the terms and conditions of the grant. This estimate

also requires determining the most appropriate inputs to the valuation model including the

expected life of the share option, volatility and dividend yield and making assumptions about

them. The assumptions and models used for estimating fair value for share-based payment

transactions are disclosed in Note 6.(17).

(4) Revenue recognition - Sales returns and allowance

The Group estimates sales returns and allowance based on historical experience and other

known factors at the time of sale, which reduces the operating revenue. Please refer to Note

6.(13) for more details.

(5) Income tax

Uncertainties exist with respect to the interpretation of complex tax regulations and the

amount and timing of future taxable income. Given the wide range of international business

relationships and the long-term nature and complexity of existing contractual agreements,

differences arising between the actual results and the assumptions made, or future changes to

such assumptions, could necessitate future adjustments to tax income and expense already

recorded. The Group establishes provisions, based on reasonable estimates, for possible

consequences of audits by the tax authorities of the respective counties in which it operates.

The amount of such provisions is based on various factors, such as experience of previous tax

audits and differing interpretations of tax regulations by the taxable entity and the responsible

tax authority. Such differences of interpretation may arise on a wide variety of issues

depending on the conditions prevailing in the respective Group company's domicile.

Deferred tax assets are recognized for all carry forward of deductible temporary differences

to the extent that it is probable that taxable profit will be available or there are sufficient

taxable temporary differences against which the deductible temporary differences can be

utilized. The amount of deferred tax assets determined to be recognized is based upon the

likely timing and the level of future taxable profits and taxable temporary differences together

with future tax planning strategies. Please refer to Note 6.(23) for more details.




(6) Inventories

Estimates of net realisable value of inventories take into consideration that inventories may

be damaged, become wholly or partially obsolete, or their selling prices have declined. The

estimates are based on the most reliable evidence available at the time the estimates are made.

Please refer to Note 6.(7) for more details.

(7) Accounts receivables–estimation of impairment loss

The Group considers the estimation of future cash flows when there is objective evidence

showed indications of impairment. The amount of the loss is measured as the difference

between the asset's carrying amount and the present value of estimated future cash flows

(excluding future credit losses that have not been incurred) discounted at the financial asset's

original effective interest rate. However, as the impact from the discounting of short-term

receivables is not material, the impairment of short-term receivables is measured as the

difference between the asset's carrying amount and the estimated undiscounted future cash

flows. Where the actual future cash flows are lower than expected, a material impairment loss

may arise. Please refer to Note 6.(6) for more details.

6. Contents of significant accounts

(1) Cash and cash equivalents

As at

31 December

2017

31 December

2016

Cash on hand $2,644 $2,775

Checking accounts and demand deposits 1,989,841 1,761,408

Time deposits 4,318,904 3,898,143

Cash equivalents-Bank’s acceptance bill 172,774 59,015

Total $6,484,163 $5,721,341

The Cash equivalents is Bank’s acceptance bill that have maturity within 3 months.




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

Non- current financial assets at fair value through profit or loss:

As at

31 December

2017

31 December

2016

Designated financial assets at fair value through profit or loss:

Convertible bonds $24,121 $-

Financial liabilities at fair value through profit or loss:

As at

31 December

2017

31 December

2016

Held for trading:

Derivatives not designated as hedging instruments

Forward foreign exchange contracts $8,032 $457

Cross currency swap contracts 4,574 -

Total $12,606 $457

(a) The Group entered into forward exchange contracts and cross currency swap contracts to

sell and buy various forward foreign currencies to hedge exchange rate risk and interest

rate risk of export proceeds and loans. However, these forward exchange contracts and

cross currency swap contracts are not accounted for under hedge accounting.

(b) The unexpired contracts are as follows:

As at 31 December 2017

Currency Contract Period Contract Amount

Forward foreign

exchange contracts

Buy USD / Sell NTD 2017.10.17-2018. 01.23 USD 10,000 thousand

Forward foreign

exchange contracts

Buy USD/Sell RUB 2017. 12.04-2018. 01.26 USD 1,440 thousand

Forward foreign

exchange contracts

Buy USD/ Sell CNY 2017. 12.12-2018. 03.05 USD 21,450 thousand

Cross currency swap

contracts

Buy USD/Sell NTD 2017. 10.17-2018. 03.19 USD 15,000 thousand


Currency Contract Period Contract Amount

Forward foreign

exchange contracts

Buy USD/Sell RUB 2016.12.12-2017.02.10 USD 920 thousand




(c) For the years ended 31 December 2017 and 2016, the Group recognized a gain (loss) of

designated financial assets or liabilities at fair value through profit or (loss) of NT$

(10,459) thousand and NT$6,355 thousand, respectively.

(d) For the year ended 31 December 2017, the Group recognized gain on valuation of

designated financial assets at fair value through profit or loss on convertible bonds of

NT$254 thousand.

(e) Financial assets held for trading were not pledged.

(3) Non-current available-for-sale financial assets

As at

31 December

2017

31 December

2016

Stocks $7,444 $47,444

Adjustments for change in value 16,188 13,079

Net amount $23,632 $60,523

For the years ended 31 December 2017, the Group recognized disposal loss in amount of

NT$1,220 thousand on disposal of available-for-sale financial assets.

Available-for-sale financial assets were not pledged.

(4) Non-current financial assets measured at cost

As at

31 December

2017

31 December

2016


Stocks $63,375 $63,375

Less: Accumulated impairment (3,255) -

Total $60,120 $63,375

The fair value of the above investments in unlisted entities are not reliably measurable as the

variability in the range of reasonable fair value measurements is significant for the instrument

and the probabilities of the various estimates within the range cannot be reasonably assessed

and used when measuring fair value. Therefore these investments are measured at cost.

The financial assets measured at cost were not pledged.




(5) Notes receivables

As at

31 December

2017

31 December

2016

Notes receivable arising from operating activities $912,670 $1,265,211

Less: allowance for doubtful debts - -

Total $912,670 $1,265,211

Notes receivables were not pledged.

(6) Accounts receivable

As at

31 December

2017

31 December

2016

Accounts receivable $6,296,867 $5,866,655

Less: allowance for doubtful debts (9,219) (8,025)

Total $6,287,648 $5,858,630

Accounts receivable were not pledged.

Accounts receivable are generally on 30-210 day terms. The movements in the provision for

impairment of accounts receivable are as follows (please refer to Note 12 for credit risk

disclosure):

Individually

impaired

Collectively

impaired Total

As at 1 January 2017 $- $8,025 $8,025

Charge/reversal for the current period - 1,212 1,212

Write off - - -

Exchange differences - (18) (18)

As at 31 December 2017 $- $9,219 $9,219

As at 1 January 2016 $- $8,855 $8,855

Charge/reversal for the current period - - -

Write off - (710) (710)

Exchange differences - (120) (120)

As at 31 December 2016 $- $8,025 $8,025




Aging analysis of accounts receivable that are past due as at the end of the reporting period

but not impaired is as follows:

Neither past

due nor

Past due but not impaired

As at impaired <=30 days 31~90 days 91~180 days 181~360 days Total

31 December 2017 $6,132,471 $117,945 $9,923 $- $27,309 $6,287,648

31 December 2016 5,514,824 302,638 18,029 17,017 6,122 5,858,630

The Group entered into accounts receivable factoring agreements (without recourse) with

several financial institutes in Taiwan. Under the agreements, the Group has surrendered

control over the receivable to the factors. The factors had fully paid out the sales proceeds and

assumed substantially all risks of collection as receivable were transferred.

As of 31 December 2017 and 31 December 2016, trade receivables derecognized were as

follows:


The Factor (Transferee)

Interest

rate

Trade receivables

derecognized

(USD$’000)

Cash

withdrawn

(USD$’000)

Unutilized

(USD$’000)

Credit line

($’000)

DBS Bank (Taiwan) 1.40~2.64 $40,880 $(36,287) $4,593 USD 72,000



Interest

rate

Trade receivables

derecognized

(USD$’000)

Cash

withdrawn

(USD$’000)

Unutilized

(USD$’000)

Credit line

($’000)

DBS Bank (Taiwan) 1.06~1.90 $30,790 $(26,000) $4,790 USD 72,000

TaiShin Bank - 2 - 2 USD 500

Total $30,792 $(26,000) $4,792




The details of accounts receivable derecognized as follows:

As at


31 December

2017

31 December

2016

DBS Bank (Taiwan) $137,103 $154,602

Taishin Bank - 75

Total $137,103 $154,677

(7) Inventories

As at

31 December

2017

31 December

2016

Raw materials and supplies $2,534,129 $2,149,248

Work in progress 507,696 576,645

Finished goods 3,020,004 2,781,076

Total $6,061,829 $5,506,969

The cost of inventories recognized in expenses amounts to NT$33,572,160 thousand and

NT$31,333,006 thousand for the years ended 31 December 2017 and 2016, including the

write-down of inventories of NT$200,721 thousand and NT$77,001 thousand, respectively.

No inventories were pledged.

(8) Other financial assets

As at

31 December

2017

31 December

2016

Trust asset $166,794 $165,219

Description of the trust assets, please refer to Note 9.

No other financial assets were pledged.




(9) Property, plant and equipment

Land Buildings

Machinery

and

equipment

Research and

development

equipment

Office and

other

equipment Leased assets

Construction

in progress Total

Cost:

As at 1 January 2017 $433,008 $1,388,124 $2,122,715 $607,103 $429,420 $290,341 $6,982 $5,277,693

Additions - - 218,583 104,723 82,350 - 23,868 429,524

Disposals - - (13,361) (18,945) (17,707) - - (50,013)

Transfers - - 378 34,361 21,419 - (6,890) 49,268

Exchange differences - (10,547) (24,538) (4,273) (1,590) - (92) (41,040)

As at 31 December 2017 $433,008 $1,377,577 $2,303,777 $722,969 $513,892 $290,341 $23,868 $5,665,432

As at 1 January 2016 $382,089 $1,399,574 $2,141,447 $548,559 $336,961 $290,341 $2,606 $5,101,577

Additions - - 168,321 91,903 97,049 - 4,605 361,878

Disposals - - (21,110) (9,049) (12,014) - - (42,173)

Transfers 50,919 65,561 (1,244) (310) 13,413 - - 128,339

Exchange differences - (77,011) (164,699) (24,000) (5,989) - (229) (271,928)

As at 31 December 2016 $433,008 $1,388,124 $2,122,715 $607,103 $429,420 $290,341 $6,982 $5,277,693

Depreciation and

impairment:

As at 1 January 2017 $- $199,735 $1,141,772 $387,402 $227,528 $55,566 $- $2,012,003

Depreciation - 32,544 277,424 84,604 67,945 4,154 - 466,671

Disposals - - (18,868) (18,378) (10,591) - - (47,837)

Exchange differences - (1,599) (9,424) (2,140) (922) - - (14,085)

As at 31 December 2017 $- $230,680 $1,390,904 $451,488 $283,960 $59,720 $- $2,416,752

As at 1 January 2016 $- $178,120 $968,517 $342,510 $180,416 $51,411 $- $1,720,974

Depreciation - 33,972 275,755 72,414 49,164 4,155 - 435,460

Disposals - - (15,576) (9,049) (10,505) - - (35,130)

Transfers - 853 (1,183) (69) 13,089 - - 12,690

Exchange differences - (13,210) (85,741) (18,404) (4,636) - - (121,991)

As at 31 December 2016 $- $199,735 $1,141,772 $387,402 $227,528 $55,566 $- $2,012,003

Net carrying amount as at:

31 December 2017 $433,008 $1,146,897 $912,873 $271,481 $229,932 $230,621 $23,868 $3,248,680

31 December 2016 $433,008 $1,188,389 $980,943 $219,701 $201,892 $234,775 $6,982 $3,265,690

The Company rented the Nankang Software Industrial Park office by capital lease, please refer

to Note 6.(14).

No property, plant and equipment were pledged.




(10) Intangible assets

Computer

software

Development

costs Patents Goodwill

Total

Cost:

As at 1 January 2017 $327,513 $198,071 $- $49,715 $575,299

Addition-internal development - 23,470 - - 23,470

Addition-acquired separately 63,707 - 10,545 - 74,252

Exchange differences (930) - - (656) (1,586)

As at 31 December 2017 $390,290 $221,541 $10,545 $49,059 $671,435

As at 1 January 2016 $293,239 $165,585 $- $54,502 $513,326

Addition-internal development - 32,486 - - 32,486

Addition-acquired separately 41,006 - - - 41,006

Disposals (445) - - - (445)

Exchange differences (6,287) - - (4,787) (11,074)

As at 31 December 2016 $327,513 $198,071 $- $49,715 $575,299

Amortization and impairment:

As at 1 January 2017 $162,242 $127,450 $- $- $289,692

Amortization 62,886 20,440 984 - 84,310

Exchange differences (118) - - - (118)

As at 31 December 2017 $225,010 $147,890 $984 $- $373,884

As at 1 January 2016 $114,704 $91,601 $- $- $206,305

Amortization 50,070 35,849 - - 85,919

Disposals (278) - - - (278)

Exchange differences (2,254) - - - (2,254)

As at 31 December 2016 $162,242 $127,450 $- $- $289,692

Net carrying amount as at:

31 December 2017 $165,280 $73,651 $9,561 $49,059 $297,551

31 December 2016 $165,271 $70,621 $- $49,715 $285,607

Amortization expense of intangible assets under the statement of comprehensive income:

For the years ended

31 December

2017 2016

Operating costs $23,507 $22,907

Operating expenses $60,803 $63,012




(11) Short-term borrowings

As at

31 December

2017

31 December

2016

Unsecured bank loans $1,876,361 $2,135,317

Interest Rates (%) 0.47%~4.35% 0.47%~3.97%

The Group’s unused short-term lines of credits amounted to NT$7,702,197 thousand and

NT$8,898,813 thousand, as at 31 December 2017 and 2016, respectively.

(12) Current derivative financial assets (liabilities) for hedging

The balance for the periods as follows:

As at

31 December

2017

31 December

2016

Derivative financial assets for hedging $- $341,619

Derivative financial liabilities for hedging 217,162 -

Total $217,162 $341,619

(a) The Group entered into the foreign currency option contracts and foreign currency

forward contracts primarily for the purpose of hedging highly probable forecast

transactions denominated in foreign currency, which are expected to occur during the next

12 months. Amounts accumulated in “other comprehensive income” as of 31 December

2017 are reclassified into profit or loss in the periods when the hedged asset acquired or

the hedged liability assumed affects profit or loss. The Group has assessed that the effect

of profit or loss arising from ineffective cash flow hedge was insignificant as the Group

was mostly effective in executing the hedge transactions for the years ended 31 December

2017 and 2016. The Group entered into derivative financial instruments contracts with

financial institutions with good credit quality. The maximum exposure to credit risk at

the balance sheet date is the carrying amount of the derivative financial instruments for

hedging.




(b) Cash flow hedges

Hedged item

Derivative

instruments

designated as

hedges

Fair value of

derivative

instruments

designated as

hedges

Period of

anticipated cash

flow

Period of gain (loss)

expected to be

recognized in statements

of comprehensive

income

2017/12/31 Expected

transactions

Forward foreign

exchange contracts

$(217,612) 2018/01~2018/12 2018/01~2018/12

2016/12/31 Expected

transactions

Forward foreign

exchange contracts

$341,619 2017/01~2017/12 2017/01~2017/12

Amounts accumulated in “other comprehensive income” as of 31 December 2017 and

2016 are reclassified into profit or loss in the periods when the hedged asset acquired or

the hedged liability assumed affects profit or loss. The amounts transferred from other

comprehensive income to profit or loss for the years ended 31 December 2017 and 2016

were NT$33,707 thousand and NT$230,700 thousand, respectively.

(c) The unexpired contracts are as follow:


Currency Expected Cash Flow Period Nominal Amount

Forward foreign exchange

contracts Sell EUR/Buy USD 2018.01.19-2018.12.24 EUR 113,000 thousand


Currency Expected Cash Flow Period Nominal Amount

Forward foreign exchange

contracts Sell EUR/Buy USD 2017.01.13-2017.12.22 EUR 119,000 thousand

(13) Current provisions

Maintenance

warranties

Sales returns and

allowances Total

As at 1 January 2017 $9,554 $159,185 $168,739

Arising during the period 1,009 112,133 113,142

Utilized (978) (165,136) (166,114)

Exchange difference (19) (2,792) (2,811)

As at 31 December 2017 $9,566 $103,390 $112,956




Maintenance

warranties

Sales returns and

allowances Total

As at 1 January 2016 $9,823 $58,345 $68,168

Arising during the period 415 179,551 179,966

Utilized (549) (71,582) (72,131)

Exchange difference (135) (7,129) (7,264)

As at 31 December 2016 $9,554 $159,185 $168,739

Maintenance warranties

A provision is recognized for expected warranty claims on products sold, based on past

experience, management’s judgment and other known factors.

Sales returns and allowances

A provision has been recognized for sales returns and allowances based on past experience

and other known factors. The provision is recognized and the corresponding entry is made

against operating revenue at the time of sales.

(14) Lease payable

The Group signed a contract with Industrial Development Bureau, Ministry of Economic

Affairs to lease an office space in Nankang Software Industrial Park on 15 August 2003.

These capital lase expire on various dates from August 2003 to August 2023. The annual

lease payment is adjusted according to Industrial Development Bureau’s prescribed rental rate

yearly. The prescribed rental rate is adjusted annually based on the interest rate of long-term

loan and annual base on Consumer Price Index. In addition, the Group has bargain purchase

option within the lease term. Future minimum lease payments under financial lease together

with the present value of the net minimum lease payments are as follows:

As at

31 December 2017 31 December 2016

Minimum

payments

Present

value of

payments

Minimum

payments

Present

value of

payments

Not later than one year $16,298 $13,647 $16,298 $13,378

Later than one year and not later than five years 65,193 57,395 65,193 56,261

Later than five years 67,547 56,836 83,846 72,208

Total minimum lease payments 149,038 127,878 165,337 141,847

Less: finance charges on finance lease (21,160) - (23,490) -

Present value of minimum lease payments $127,878 $127,878 $141,847 $141,847

Current $13,647 $13,378

Non-current 114,231 128,469




(15) Post-employment benefits

Defined contribution plan

The Company and its domestic subsidiaries adopt a defined contribution plan in accordance

with the Labor Pension Act of the R.O.C. Under the Labor Pension Act, the Company and

its domestic subsidiaries will make monthly contributions of no less than 6% of the

employees’ monthly wages to the employees’ individual pension accounts. The Company

and its domestic subsidiaries have made monthly contributions of 6% of each individual

employee’s salaries or wages to employees’ pension accounts.

Subsidiaries located in the People’s Republic of China will contribute social welfare benefits

based on a certain percentage of employees’ salaries or wages to the employees’ individual

pension accounts.

Pension benefits for employees of overseas subsidiaries and branches are provided in

accordance with the local regulations.

Expenses under the defined contribution plan for the years ended 31 December 2017 and 2016

were NT$233,681 thousand and NT$223,413 thousand, respectively.

Defined benefits plan

The Company and its domestic subsidiaries adopt a defined benefit plan in accordance with

the Labor Standards Act of the R.O.C. The pension benefits are disbursed based on the units

of service years and the average salaries in the last month of the service year. Two units per

year are awarded for the first 15 years of services while one unit per year is awarded after the

completion of the 15th year. The total units shall not exceed 45 units. Under the Labor

Standards Act, the Company and its domestic subsidiaries contribute an amount equivalent to

2% of the employees’ total salaries and wages on a monthly basis to the pension fund

deposited at the Bank of Taiwan in the name of the administered pension fund committee.

Before the end of each year, the Company and its domestic subsidiaries assess the balance in

the designated labor pension fund. If the amount is inadequate to pay pensions calculated for

workers retiring in the same year, the Company and its domestic subsidiaries will make up the

difference in one appropriation before the end of March the following year.

The Ministry of Labor is in charge of establishing and implementing the fund utilization plan




in accordance with the Regulations for Revenues, Expenditures, Safeguard and Utilization of

the Labor Retirement Fund. The pension fund is invested in-house or under mandating, based

on a passive-aggressive investment strategy for long-term profitability. The Ministry of

Labor establishes checks and risk management mechanism based on the assessment of risk

factors including market risk, credit risk and liquidity risk, in order to maintain adequate

manager flexibility to achieve targeted return without over-exposure of risk. With regard to

utilization of the pension fund, the minimum earnings in the annual distributions on the final

financial statement shall not be less than the earnings attainable from the amounts accrued

from two-year time deposits with the interest rates offered by local banks. Treasury Funds

can be used to cover the deficits after the approval of the competent authority. As the Company

does not participate in the operation and management of the pension fund, no disclosure on

the fair value of the plan assets categorized in different classes could be made in accordance

with paragraph 142 of IAS 19. The Group expects to contribute NT$4,333 thousand to its

defined benefit plan during the 12 months beginning after 31 December 2017.

The average duration of the defined benefits plan obligation as at 31 December 2017 and 2016

will expire on 2028.

Pension costs recognized in profit or loss for the years ended 31 December 2017 and 2016:

For the years ended

31 December

2017 2016

Current period service costs $443 $435

Interest income of net defined benefit liabilities 741 838

Total $1,184 $1,273

Changes in the defined benefit obligation and fair value of plan assets are as follows:

As at

31 December

2017

31 December

2016

1 January

2016

Defined benefit obligation at 1 January $134,218 $124,202 $118,105

Plan assets at fair value (76,408) (71,259) (68,818)

Other non-current liabilities - Accrued $57,810 $52,943 $49,287

pension liabilities recognized on the

consolidated balance sheets




Reconciliation of liability of the defined benefit plan is as follows:

As at

Defined benefit

obligation

Fair value of

plan assets

Benefit

liability

As at 1 January 2016 $118,105 $(68,818) $49,287

Current period service costs 435 - 435

Net interest expense (income) 2,008 (1,170) 838

Subtotal 2,443 (1,170) 1,273

Remeasurements of the net defined benefit

liability (asset):

Actuarial gains and losses arising from

changes in financial assumptions 3,867 - 3,867

Experience adjustments 1,035 532 1,567

Subtotal 4,902 532 5,434

Payments from the plan (1,248) 1,248 -

Contributions by employer - (3,051) (3,051)

As at 31 December 2016 124,202 (71,259) 52,943

Current period service costs 443 - 443

Net interest expense (income) 1,738 (997) 741

Subtotal 2,181 (997) 1,184

Remeasurements of the net defined benefit

liability (asset):

Actuarial gains and losses arising from

changes in financial assumptions 3,941 - 3,941

Experience adjustments 3,894 260 4,154

Subtotal 7,835 260 8,095

Payments from the plan - - -

Contributions by employer - (4,412) (4,412)

As at 31 December 2017 $134,218 $(76,408) $57,810

The following significant actuarial assumptions are used to determine the present value of the

defined benefit obligation:

As at

31 December

2017

31 December

2016

Discount rate 1.10% 1.40%

Expected rate of salary increases 3.00% 3.00%




A sensitivity analysis for significant assumption as at 31 December 2017 and 2016 is, as

shown below:

Effect on the defined benefit obligation

2017 2016

Increase

defined benefit

obligation

Decrease

defined benefit

obligation

Increase

defined benefit

obligation

Decrease

defined benefit

obligation

Discount rate increase by 0.25% $- $3,295 $- $3,234

Discount rate decrease by 0.25% 3,411 - 3,353 -

Future salary increase by 0.25% 3,006 - 2,983 -

Future salary decrease by 0.25% - 2,924 - 2,898

The sensitivity analyses above are based on a change in a significant assumption (for example:

change in discount rate or future salary), keeping all other assumptions constant. The

sensitivity analyses may not be representative of an actual change in the defined benefit

obligation as it is unlikely that changes in assumptions would occur in isolation of one another.

There was no change in the methods and assumptions used in preparing the sensitivity

analyses compared to the previous period.

(17) Equities

(a) Ordinary share

The Company’s authorized capital was NT$2,500,000 thousand as at 31 December 2017

and 31 December 2016. The Company’s issued capital was NT$2,456,538 thousand and

NT$2,429,198 thousand as at 31 December 2017 and 31 December 2016, respectively,

each at a par value of NT$10. The Company has issued 245,654 thousand and 242,920

thousand common shares as at 31 December 2017 and 31 December 2016, respectively.

Each share has one voting right and a right to receive dividends.

The employee share options issued in 2015 had been converted by optionees into 2,734

thousand ordinary shares during the year ended 31 December 2017. As a result, the

capital increased by $27,340 thousand. As of 31 December 2017, all 2,734 thousand

ordinary shares have been approved by the relevant authority.

The fourth and fifth issue of domestic unsecured convertible bonds of the Company had

been converted by bond holders into 1,792 thousand ordinary shares during the year

ended 31 December 2016. As a result, the capital increased by NT$17,920 thousand. As

of 31 December 2016, the issuance had been approved by the relevant authority.




(b) Capital surplus

According to the Company Act, the capital reserve shall not be used except for making

good the deficit of the company. When a company incurs no loss, it may distribute the

capital reserves related to the income derived from the issuance of new shares at a

premium or income from endowments received by the company. The distribution could

be made in cash or in the form of dividend shares to its shareholders in proportion to the

number of shares being held by each of them.

(c) Retained earnings and dividend policies

According to the Company’s Articles of Incorporations, current year’s earnings, if any,

shall be distributed in the following order:

a. Payment of all taxes and dues;

b. Offset prior years’ operation losses;

c. Set aside 10% of the remaining amount after deducting items (a) and (b) as legal

reserve;

d. Set aside or reverse special reserve in accordance with law and regulations; and

e. The distribution of the remaining portion, if any, will be recommended by the Board

of Directors and resolved in the shareholders’ meeting.

The policy for dividend distribution should reflect factors such as current and future

investment environment, fund requirements, domestic and international competition and

capital budgets, as well as the benefit of stockholders, share bonus equilibrium, and long-

term financial planning etc. It could be paid in cash or the form of share dividends.

Accordingly, at least 10% of the dividends must be paid in the form of cash.

According to the Company Act, the Company needs to set aside amount to legal reserve

unless where such legal reserve amounts to the total authorized capital. The legal

reserve can be used to make good the deficit of the Company. When the Company

incurs no loss, it may distribute the portion of legal serve which exceeds 25% of the paid-

in capital by issuing new shares or by cash in proportion to the number of shares being

held by each of the shareholders.

Following the adoption of TIFRS, the FSC on 6 April 2012 issued Order No. Financial-

Supervisory-Securities-Corporate-1010012865, which sets out the following provisions

for compliance:




On a public company's first-time adoption of the TIFRS, for any unrealized revaluation

gains and cumulative translation adjustments (gains) recorded to shareholders’ equity that

the company elects to transfer to retained earnings by application of the exemption under

IFRS 1, the company shall set aside an equal amount of special reserve. Following a

company’s adoption of the TIFRS for the preparation of its financial reports, when

distributing distributable earnings, it shall set aside to special reserve, from the profit/loss

of the current period and the undistributed earnings from the previous period, an amount

equal to “other net deductions from shareholders’ equity for the current fiscal year,

provided that if the company has already set aside special reserve according to the

requirements in the preceding point, it shall set aside supplemental special reserve based

on the difference between the amount already set aside and other net deductions from

shareholders’ equity. For any subsequent reversal of other net deductions from

shareholders’ equity, the amount reversed may be distributed.

As of 1 January 2017 and 2016, special reserve set aside for the first-time adoption of

TIFRS both amount to NT$131,678 thousand. Furthermore, the Company did not

reverse special reserve to retained earnings during the years ended 31 December 2017

and 2016 as results of the use, disposal or reclassification of related assets.

The distributions of earnings for 2016 was approved through the stockholders’ meeting

on 22 June 2017, while the distribution of earnings for 2017 was approved through the

Board of Directors’ meeting on 12 March 2018. The details of distribution are as

follows:

Appropriation of earnings Dividend per share (NT$)

2017 2016 2017 2016

Legal reserve $131,187 $146,165

Common stock cash dividend 921,202 1,020,263 $3.75 $4.20

Please refer to Note 6.(20) for details on employees’ compensation and remuneration to

directors and supervisors.

(d) Non-controlling interests

For the years ended

31 December

2017 2016

Beginning Balance $(1,896) $(1,432)

Net loss attributable to non-controlling interests (23,710) (6,359)

Other comprehensive income attributable to non-controlling

interests:

Exchange differences on translation of foreign operations 508 169

Changes in subsidiaries’ ownership - 5,726

Ending Balance $(25,098) $(1,896)




(17) Share-based payment plans

Certain employees of the Group are entitled to share-based payment as part of their

remunerations; services are provided by the employees in return for the equity instruments

granted. These plans are accounted for as equity-settled share-based payment transactions.

Share-based payment plan for employees of the parent entity

On 25 May 2015 the Company was authorized by the Securities and Futures Bureau of the

Financial Supervisory Commission, Executive Yuan, to issue employee stock options with a

total number of 100,000 units. Each unit entitles an optionee to subscribe to 100 share of the

Company’s common stock. Settlement upon the exercise of the options will be made

through the issuance of new shares by the Company. An optionee may exercise the options

in accordance with certain schedules as prescribed by the plan starting 2 years from the date

of grant.

The fair value of the share options is estimated at the grant date using a binomial option

pricing-model, taking into account the terms and conditions upon which the share options

were granted.

The exercise price of the option was set at the closing price of the subsidiary’s common share

on the grant date. The contractual term of each option granted is ten years. There are no

cash settlement alternatives. The Group does not have a past practice of cash settlement for

these employee share options.

The relevant details of the aforementioned share-based payment plan are as follows:

Date of grant

Total number of share options

granted (thousand units)

Exercise price of share options (NT$)

(Note)

27 May 2015 10,000 54.5

Note: The exercise prices have been adjusted to reflect the change of outstanding shares (i.e.

the share issued for cash, the appropriation of earnings, issuance of new shares in

connection with merger, or issuance of new shares of other companies) in accordance

with the plan.




The compensation cost was recognized under the fair value method and the Black-Scholes

Option pricing model was used to estimate the fair value of options granted. Assumptions

used in calculating the fair value are disclosed as follows:

Factors

Expected dividends yields 4.79%

Expected volatility 27.79%

Risk-free interest rate 1.17%~1.31%

Weighted-average expected life 6.375 years

The expected life of the share options is based on historical date and current expectations and

is not necessarily indicative of exercise patterns that may occur. The expected volatility

reflects the assumption that the historical volatility over a period similar to the life of the

options is indicative of future trends, which may also not necessarily be the actual outcome.

The following table contains further details on the aforementioned share-based payment plan:


2017 2016

Number of share

options

outstanding

(in thousands)

Weighted average

exercise price of

share options

(NT$)

Number of share

options

outstanding

(in thousands)

Weighted average

exercise price of

share options

(NT$)

Outstanding at beginning of period 10,000 57.6 100,000 60.60

Granted - - - -

Forfeited - - - -

Exercised (2,734) 54.5 - -

Expired - - - -

Outstanding at end of period 7,266 54.5 100,000 57.60

Exercisable at end of period 7,266 -

Weighted-average fair value of options

granted during the period (NTD)

$-

$-

The weighted-average stock price was NT$80.09 when the exercise date of the options

exercised for the year ended 31 December 2017.

The number of options outstanding was as follows:




31 December 2017

Outstanding Stock Options

31 December 2016

Outstanding Stock Options

Authorization date

Range of

exercise

price

(NTD)

Option

(thousand

units)

Weighted-average

remaining

contractual life

(years)

Option

(thousand

units)

Weighted-average

remaining

contractual life

(years)

2015.05.27 54.5 7,266 3.875 10,000 4.875

(b) The expenses recognized for share-based payment plans for the years ended 31 December

2017 and 2016 were NT$24,991 thousand and NT$36,430 thousand, respectively.

(18) Operating revenue

For the years ended

31 December

2017 2016

Sale of goods $38,985,950 $37,103,788

Less: Sales returns, discounts and allowances (385,947) (409,097)

Other operating revenues - 7,043

Total $38,600,003 $36,701,734

(19)Operating leases

Operating lease commitments - Group as lessee

The Group has entered into commercial leases on certain building and items of machinery.

These leases have an average life of one to five years with no renewal option included in the

contracts. There are no restrictions placed upon the Group by entering into these leases.

Future minimum rentals payable under non-cancellable operating leases as at 31 December

2017 and 31 December 2016 are as follows:

As at

31 December

2017

31 December

2016

Not later than one year $128,146 $27,808

Later than one year and not later than five years 323,300 103,352

Later than five years 138,589 9,578

Total $590,035 $140,738




The expenses recognized for operating leases are as follows:

For the years ended

31 December

2017 2016

Future minimum rentals payable $79,973 $68,422

(20) Summary statement of employee benefits, depreciation and amortization expenses by function

during the years ended 31 December 2017 and 2016:


2017 2016

Operating

costs

Operating

expenses

Total

amount

Operating

costs

Operating

expenses

Total

amount

Employee benefits expense

Salaries $813,559 $1,757,381 $2,570,940 $812,668 $1,881,361 $2,694,029

Labor and health insurance 26,491 88,250 114,741 27,212 80,581 107,793

Pension 100,076 134,789 234,865 94,607 130,079 224,686

Other employee benefits expense 77,802 83,785 161,587 79,212 82,493 161,705

Depreciation 304,515 162,156 466,671 223,685 211,775 435,460

Amortization 23,507 60,803 84,310 22,907 63,013 85,920

According to the Articles of Incorporation, 12%-18% of profit of the current year is

distributable as employees’ compensation and no higher than 2.5% of profit of the current

year is distributable as remuneration to directors and supervisors. However, the company's

accumulated losses shall have been covered. The Company may, by a resolution adopted by

a majority vote at a meeting of Board of Directors attended by two-thirds of the total number

of directors, have the profit distributable as employees’ compensation in the form of shares or

in cash; and in addition thereto a report of such distribution is submitted to the shareholders’

meeting. Information on the Board of Directors’ resolution regarding the employees’

compensation and remuneration to directors and supervisors can be obtained from the “Market

Observation Post System” on the website of the TWSE.




Based on profit of the year ended 31 December 2017, the Company estimated the amounts of

the employees’ compensation and remuneration to directors and supervisors for the year ended

31 December 2017 to be 15.36% of profit of the current year and 1.67% of profit of the current

year, respectively, recognized as employee benefits expense. As such, employees’

compensation and remuneration to directors and supervisors for the year ended 31 December

2017 amount to NT$260,294 thousand and NT$34,706 thousand, respectively. A resolution

was passed at a Board of Directors meeting held on 12 March 2018 to distribute NT$266,139

thousand and NT$28,861 thousand in cash as employees’ compensation and remuneration to

directors and supervisors of 2017, respectively.

A resolution was passed at a Board of Directors meeting held on 27 March 2017 to distribute

NT$299,638 thousand and NT$40,362 thousand in cash as employees’ compensation and

remuneration to directors and supervisors of 2016, respectively. No material differences

exist between the estimated amount and the actual distribution of the employee bonuses and

remuneration to directors and supervisors for the year ended 31 December 2016.

(21) Non-operating income and expenses

(a) Other income

For the years ended

31 December

2017 2016

Interest income $78,405 $66,868

Dividends income 342 2,264

Rental income 1,025 1,131

Others 27,936 24,204

Total $107,708 $94,467

(b) Other gains and losses

For the years ended

31 December

2017 2016

Gain (loss) on financial assets at fair value through

profit or loss

$(10,205) $6,355

Gain (loss) on disposal of property, plant and equipment 1,806 (3,378)

Gain on disposal of investment (1,220) -

Loss on impairment of financial assets measured at cost (3,255) -

Foreign exchange gain (loss), net 15,926 8,738

Other (2,012) (2,095)

Total $1,040 $9,620




(c) Finance costs

For the years ended

31 December

2017 2016

Interest on borrowings from bank $56,696 $61,104

Interest on finance lease 2,698 2,975

Interest on notes discounted - 7,865

Interest on bonds payable - 270

Total $59,394 $72,214

(22) Components of other comprehensive income

For the year ended 31 December 2017

Arising

during the

period

Reclassified

adjustments

during the

period

Transferred to

the carrying

amount of

hedged items

Other

comprehensive

income,

before tax

Income tax

relating to

components of

other

comprehensive

income

Other

comprehensive

income, net

of tax

Not to be reclassified to profit or

loss in subsequent periods:

Remeasurements of defined

benefit plans

$(8,095) $- $- $(8,095) $1,376 $(6,719)

To be reclassified to profit or loss

in subsequent periods:

Exchange differences resulting from

translating the financial statements

of a foreign operation

(45,154) - - (45,155) (5,239) (50,394)

Unrealized gains (losses) from

available-for-sale financial assets

1,889 1,220 - 3,109 - 3,109

Gains (losses) on effect portion of

cash flow hedges

(540,518) - (33,707) (574,225) 55,077 (519,148)

Total of other comprehensive income $(591,878) $1,220 $(33,707) $(624,366) $51,214 $(573,152)





Arising

during the

period

Reclassified

adjustments

during the

period

Transferred to

the carrying

amount of

hedged items

Other

comprehensive

income,

before tax

Income tax

relating to

components of

other

comprehensive

income

Other

comprehensive

income, net

of tax

Not to be reclassified to profit or

loss in subsequent periods:

Remeasurements of defined

benefit plans

$(5,434) $- $- $(5,434) $924 $(4,510)

To be reclassified to profit or loss

in subsequent periods:

Exchange differences resulting from

translating the financial statements

of a foreign operation

(409,025) - - (409,025) 20,868 (388,157)

Unrealized gains (losses) from

available-for-sale financial assets

726 - - 726 - 726

Gains (losses) on effect portion of

cash flow hedges

468,789 - (230,700) 238,089 (55,077) 183,012

Total of other comprehensive income $55,056 $- $(230,700) $(175,644) $(33,285) $(208,929)

(23) Income tax

A. The major components of income tax expense (income) are as follows:

Income tax expense (income) recognized in profit or loss

For the years ended

31 December

2017 2016

Current income tax expenses (income):

Current income tax charge $319,762 $379,974

Adjustments in respect of current income tax of prior periods (50,074) (4,242)

Deferred tax expenses (income):

Deferred tax expenses (income) relating to origination

and reversal of temporary differences

29,214 (18,227)

The expenses (income) recognized in the period for

previously unrecognized tax loss, tax credit or

temporary difference of prior periods

(9,609) (10,017)

Write-down of deferred tax assets 6,107 -

Total income tax expenses $295,400 $347,488




Income tax relating to components of other comprehensive income

For the years ended

31 December

2017 2016

Deferred tax expense (income):

Actuarial gains (losses) on defined benefits plan $(1,376) $(924)

Exchange differences resulting from translating the

financial statements of a foreign operation

5,239 (20,868)

Gains (losses) on effect portion of cash flow hedges (55,077) 55,077

Income tax relating to components of other comprehensive income $(51,214) $33,285

B. Reconciliation between tax expense and the product of accounting profit multiplied by

applicable tax rates is as follows:

For the years ended

31 December

2017 2016

Accounting profit before tax from continuing operations $1,583,558 $1,802,783

Tax at the domestic rates applicable to profits in the country

concerned

$269,205 $306,473

Effect of different tax rates applicable to the Company and

its subsidiaries

137,040 130,881

Tax effect of revenues exempt from taxation (30,402) (34,085)

Tax effect of expenses not deductible for tax purposes 17,919 9,527

Tax effect of deferred tax assets/liabilities (30,157) (29,895)

10 % surtax on undistributed retained earnings 29,072 22,876

Adjustments in respect of current income tax of prior periods (50,073) (4,242)

Others (47,204) (54,047)

Total income tax expense recognized in profit or loss $295,400 $347,488




C. Deferred tax assets (liabilities) relate to the following:


Beginning

balance as at

1 January

2017

Deferred tax

income

(expense)

recognized in

profit or loss

Deferred tax

income

(expense)

recognized in

other

comprehensive

income

Exchange

differences

Ending

balance as at

31 December

2017

Temporary differences

Loss on valuation of financial assets $78 $2,450 $- $22 $2,550

Gain on valuation of financial assets - (44) - - (44)

Loss on impairment of financial assets - 553 - - 553

Depreciation difference for tax purpose (1,973) 56 - 27 (1,890)

Allowance for inventory valuation losses 25,903 13,702 - (212) 39,393

Intangible assets – research and development costs (12,293) (228) - - (12,521)

Accrued expenses and bonus 231,723 (8,973) - (592) 222,158

Provisions – sales return and allowance 34,697 (15,984) - (698) 18,015

Provisions – maintenance warranties 1,736 5 - (3) 1,738

Amortization of discount on bonds payable 6,107 (6,107) - - -

Non-current liability – Defined benefit Liability 9,000 (549) 1,376 - 9,827

Unrealized foreign exchange (gains) losses (4,542) 11,565 - - 7,023

Unrealized (gains) losses on cash flow hedges (58,076) 2,999 55,077 - -

Investments accounted for under the equity method (15,799) (25,122) (5,239) - (46,160)

Others (26) (35) - 1 (60)

Deferred tax income/ (expense) $(25,712) $51,214 $(1,455)

Net deferred tax assets/(liabilities) $216,535 $240,582

Reflected in balance sheet as follows:

Deferred tax assets $309,244 $301,257

Deferred tax liabilities $(92,709) $(60,675)





Beginning

balance as at

1 January

2016

Deferred tax

income

(expense)

recognized in

profit or loss

Deferred tax

income

(expense)

recognized in

other

comprehensive

income

Exchange

differences

Ending

balance as at

31 December

2016

Temporary differences

Depreciation difference for tax purpose $(2,227) $61 $- $193 $(1,973)

Valuations of financial assets (1,061) 1,092 - 47 78

Allowance for inventory valuation losses 24,111 3,530 - (1,738) 25,903

Intangible assets – research and development costs (12,577) 284 - - (12,293)

Accrued expenses and bonus 197,421 40,179 - (5,877) 231,723

Provisions – sales return and allowance 11,894 24,209 - (1,406) 34,697

Provisions – maintenance warranties 1,793 (23) - (34) 1,736

Amortization of discount on bonds payable 6,107 - - - 6,107

Non-current liability – Defined benefit Liability 8,379 (303) 924 - 9,000

Unrealized foreign exchange (gains) losses (1,216) (3,326) - - (4,542)

Unrealized (gains) losses on cash flow hedges (2,999) - (55,077) - (58,076)

Investments accounted for under the equity method - (36,667) 20,868 - (15,799)

Others 766 (792) - - (26)

Deferred tax income/ (expense) $28,244 $(33,285) $(8,815)

Net deferred tax assets/(liabilities) $230,391 $216,535

Reflected in balance sheet as follows:

Deferred tax assets $250,471 $309,244

Deferred tax liabilities $(20,080) $(92,709)

Unrecognized deferred tax liabilities relating to the investment in subsidiaries

The Group did not recognize total deferred tax liability for taxes that would be payable on

the unremitted earnings of the Group’s overseas subsidiaries, as the Group has determined

that undistributed profits of its subsidiaries will not be distributed in the foreseeable future

except that 30% of undistributed profits of Sercomm Trading Co., Ltd. will be distributed

from 2016. As at 31 December 2017 and 2016, the taxable temporary differences associated

with investment in subsidiaries, for which deferred tax liabilities have not been recognized,

aggregated to NT$539,387 thousand and NT$468,993 thousand, respectively.




D. Imputation credit information

As at

31 December

2017 31 December

2016 Balances of imputation credit amounts $210,001 $182,340

The actual creditable ratio for 2016 were 10.89%. For 2016 imputation credit ratio for

individual stockholders residing in R.O.C is half of the original ratio according to the

Article 66-6 of Income Tax Act. On 18 January 2018, the Logislative Yuan passed

amendments to the Income Tax Act and announced by the President on 7 February 2018,

that the imputation credit ratio will no longer be used.

The Company’s earnings generated in the year ended 31 December 1997 and prior years

have been fully appropriated.

E. The assessment of income tax returns

As of 31 December 2017, the assessment of the income tax returns of the Company and its

subsidiaries is as follows:

The assessment of income tax returns

The Company Assessed and approved up to 2015 expect 2014

Subsidiary-Shukuan Investment Ltd. Assessed and approved up to 2015

(24) Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable

to ordinary equity holders of the parent entity by the weighted average number of ordinary

shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to

ordinary equity holders of the parent entity (after adjusting for interest on the convertible

preference shares) by the weighted average number of ordinary shares outstanding during the

year plus the weighted average number of ordinary shares that would be issued on conversion

of all the dilutive potential ordinary shares into ordinary shares.




For the years ended

31 December

2017 2016

A. Basic earnings per share

Profit attributable to ordinary equity holders of the Company

(in thousand NT$)

$1,311,868 $1,461,654

Weighted average number of ordinary shares outstanding for

basic earnings per share (in thousands)

243,616 242,647

Basic earnings per share (NT$) $5.38 $6.02

B. Diluted earnings per share


(in thousand NT$)

$1,311,868 $1,461,654

Add: Interest expense from convertible bonds (in thousand NT$) - 270


after dilution (in thousand NT$)

$1,311,868 $1,461,924

Weighted average number of ordinary shares outstanding

for basic earnings per share (in thousands)

243,616 242,647

Effect of dilution:

Employee bonus-stock (in thousands) 4,355 4,410

Employee stock options (in thousands) 2,322 2,467

Convertible bonds (in thousands) - 273

Weighted average number of ordinary shares outstanding

after dilution (in thousands)

250,293 249,797

Diluted earnings per share (NT$) $5.24 $5.85

There have been no other transactions involving ordinary shares or potential ordinary shares

between the reporting date and the date the financial statements were authorized for issue.




(25) Changes in parent’s interest in subsidiaries

Acquisition of new shares in a subsidiary not in proportionate to ownership interest

Hawxeye Inc. issued new shares on 2017, however the Group did not purchase any of the new

shares, consequently the ownership interest in Hawxeye Inc. was reduced to 55%. The Group

received additional cash from issuing new shares in the amount of NT$393 thousand. The

carrying amount of Hawxeye Inc.’s net assets (excluding goodwill on the original acquisition)

was NT$(54,223) thousand. The following is a schedule of interest reduced in Hawxeye Inc.

including increase in the Company’s non-controlling interest:

Additional cash received from the issuance of new shares $393

Decrease in non-control interest 98

Difference recognized in capital surplus within equity $491

Hawxeye Inc. issued new shares on 1 November 2016, however the Group did not purchase

any of the new shares, consequently the ownership interest in Hawxeye Inc. was reduced to

56%. The Group received additional cash from issuing new shares in the amount of

NT$13,863 thousand. The carrying amount of Hawxeye Inc.’s net assets (excluding

goodwill on the original acquisition) was NT$12,100 thousand. The following is a schedule

of interest reduced in Hawxeye Inc. including increase in the Company’s non-controlling

interest:

Additional cash received from the issuance of new shares $(13,863)

Increase in non-control interest 5,726

Difference recognized in capital surplus within equity $(8,137)

7. Related party transactions

Key management personnel compensation

For the years ended

31 December

2017 2016

Short-term employee benefits $179,475 $170,463

Post-employment benefits 1,907 2,017

Share-based Payment 36,430 36,430

Total $217,812 $208,910




8. Assets pledged as security

The following table lists assets of the Group pledged as security:

Carrying amount

Assets pledged for security

31 December

2017

31 December

2016 Secured liabilities

Guarantee deposits paid fixed-

term deposit and cash

$8,728 $6,498 Custom duty guarantee and

performance guarantee

9. Commitments and contingencies

(1) The Company signed an agreement with an overseas customer. The agreement provided that

the overseas customer was required to pay a fee according to the License Royalty Rate

prescribed in the agreement and the Company shall be liable for any third party infringement

claims. The amount received as calculated by the License Royalty Rate has been deposited in

trust fund set up by the Company. As at 31 December 2017, the Company recognized the trust

fund as other financial assets-noncurrent and other current liabilities amounting to

NT$166,794 thousand (including interest revenue of NT$9,085 thousand) and NT$157,709

thousand, respectively.

(2) As at 31 December 2017, the amounts of Performance Letter of Guarantee issued by bank for

the purpose of the research project of Industrial Development Bureau, Ministry of Economic

Affairs and shipment guarantee were NT$40,192 thousand and EUR 2,627 thousand.

10. Losses due to major disasters

None.

11. Significant subsequent events

On 18 January 2018, the Legislative Yuan passed amendments and announced by the President on

7 February 2018 to the Income Tax Act. The amendments raised the corporate income tax rate for

companies from 17% to 20%. After the change of the tax rate, the deferred tax assets and deferred

tax liability will be increased by NT$34,043 thousand and NT$10,363 thousand, respectively.




12. Financial instruments

(1) Categories of financial instruments

As at

31 December

2017

31 December

2016

Financial assets

Financial assets at fair value through profit or loss:

Designated financial assets at fair value though profit or loss $24,121 $-


Measured at fair value 23,632 60,523

Measured at cost 60,120 63,375

Subtotal 83,752 123,898

Loans and receivables:

Cash and cash equivalents (exclude cash on hand) 6,481,519 5,718,566

Notes receivable, net 912,670 1,265,211

Accounts receivable, net 6,287,648 5,858,630

Other receivables 339,523 481,667

Other financial assets 166,794 165,219

Guarantee deposits paid 48,534 25,718

Subtotal 14,236,688 13,523,011

Derivative financial assets for hedging - 341,619

Total $14,344,561 $13,980,528

As at

31 December

2017

31 December

2016

Financial liabilities


Held for trading $12,606 $457

Financial liabilities at amortized cost:

Short-term borrowings 1,876,361 2,135,317

Accounts payable 11,467,382 10,004,704

Other payables 3,032,039 3,159,598

Lease obligations payable 127,878 141,847

Guarantee deposits received 4,254 6,279

Subtotal 16,507,914 15,447,745

Derivative financial liabilities for hedging 217,162 -

Total $16,737,682 $15,448,202




(2) Financial risk management objectives and policies

The Group’s principal financial risk management objective is to manage the market risk, credit

risk and liquidity risk related to its operating activates. The Group identifies measures and

manages the aforementioned risks based on the Group’s policy and risk appetite.

The Group has established appropriate policies, procedures and internal controls for financial

risk management. Before entering into significant transactions, due approval process by the

Board of Directors and Audit Committee must be carried out based on related protocols and

internal control procedures. The Group complies with its financial risk management policies

at all times.

(3) Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will

fluctuate because of the changes in market prices. Market prices comprise currency risk,

interest rate risk and other price risk.

In practice, it is rarely the case that a single risk variable will change independently from other

risk variable, there are usually interdependencies between risk variables. However the

sensitivity analysis disclosed below does not take into account the interdependencies between

risk variables.

Foreign currency risk

The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the

Group’s operating activities (when revenue or expense are denominated in a different currency

from the Group’s functional currency) and the Group’s net investments in foreign subsidiaries.

The Group has certain foreign currency receivables to be denominated in the same foreign

currency with certain foreign currency payables, therefore natural hedge is received. The

Group also uses forward contracts to hedge the foreign currency risk on certain items

denominated in foreign currencies. Hedge accounting is not applied as they did not qualify

for hedge accounting criteria. Furthermore, as net investments in foreign subsidiaries are for

strategic purposes, they are not hedged by the Group.

The foreign currency sensitivity analysis of the possible change in foreign exchange rates on

the Group’s profit is performed on significant monetary items, derivatives financial instrument

and hedge activities denominated in foreign currencies as at the end of the reporting period.

The Group’s foreign currency risk is mainly related to the volatility in the exchange rates for

USD. The information of the sensitivity analyses is as follows:

When NTD strengthens/weakens against USD by 1%, the profit for the years ended 31

December 2017 and 2016 is increased/decreased by NT$406 thousand and increased/

decreased NT$1,550 thousand, respectively.




Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument

will fluctuate because of changes in market interest rates. The Group’s exposure to the risk

of changes in market interest rates relates primarily to the Group’s loans and receivables at

variable interest rates, bank borrowings with fixed interest rates and variable interest rates.

Most of the Group’s bank borrowings at variable rate were denominated in USD, and some

of which are hedged by cross currency swap contracts.

The interest rate sensitivity analysis is performed on items exposed to interest rate risk as at

the end of the reporting period, including investments and borrowings with variable interest

rates. At the reporting date, a change of 10 basis points of interest rate in a reporting period

could cause the profit for the years ended 31 December 2017 and 2016 to increase/decrease

by NT$347 thousand and increase/decrease by NT$162 thousand, respectively.

Commodity price risk

The Group’s commodity price risk is caused by the fluctuation of foreign currency rate arising

from taking overseas orders. Due to the volatile fluctuation of the currency rate, the Board of

Directors has developed strategies for lowering commodity price risk. The Group uses forward

foreign exchange contracts, forward foreign option contracts and range forward foreign

exchange contracts to hedge aforementioned risk of currency rate based on the forecast of the

future requirement of orders, which the Group expects highly possible to take. Hedge

accounting applies to these financial assets.

After the Group considers the effect of hedge accounting, a change of 1% in currency rate in

a reporting period could cause the equity for the years ended 31 December 2017 and 2016 to

increase/decrease by NT$2,172 thousand and increase/decrease by NT$3,416 thousand,

respectively.

Equity price risk

The Group’s listed and unlisted equity securities are susceptible to market price risk arising

from uncertainties about future values of the investment securities. The Group’s listed and

unlisted equity securities are classified as available-for-sale both. The Group manages the

equity price risk through diversification and placing limits on individual and total equity

instruments. Reports on the equity portfolio are submitted to the Group’s senior

management on a regular basis. The Group’s Board of Directors reviews and approves all

equity investment decisions.




An increase/decrease of 1% in the value of the equity securities classified as available-for-

sale would only impact equity but would not have an effect on profit or loss. For the years

ended 31 December 2017 and 2016, an increase/decrease of 1% in the price of the equity

securities classified as available-for-sale could cause the equity to increase/decrease by NT$0

thousand and NT$332 thousand, respectively.

(4) Credit risk management

Credit risk is the risk that a counterparty will not meet its obligations under a contract, leading

to a financial loss. The Group is exposed to credit risk from operating activities (primarily

for accounts receivables and notes receivables) and from its financing activities, including

bank deposits and other financial instruments.

Customer credit risk is managed by each business unit subject to the Group’s established

policy, procedures and control relating to customer credit risk management. Credit limits

are established for all customers based on their financial position, rating from credit rating

agencies, historical experience, prevailing economic condition and the Group’s internal rating

criteria etc. Certain customer’s credit risk will also be managed by taking credit enhancing

procedures, such as requesting for prepayment or insurance.

As of 31 December 2017 and 2016, amounts receivables from top ten customers represent

67% and 68% of the total accounts receivables of the Group, respectively. The credit

concentration risk of other accounts receivables is insignificant.

Credit risk from balances with banks and other financial instruments is managed by the

Group’s treasury in accordance with the Group’s policy. The Group only transacts with

counterparties approved by the internal control procedures, which are banks and financial

institutions, companies and government entities with good credit rating and with no significant

default risk. Consequently, there is no significant credit risk for these counter parties.

(5) Liquidity risk management

The Group’s objective is to maintain a balance between continuity of funding and flexibility

through the use of cash and cash equivalents, highly liquid equity investments, bank

borrowings, convertible bonds and finance leases. The table below summarizes the maturity

profile of the Group’s financial liabilities based on the contractual undiscounted payments and

contractual maturity. The payment amount includes the contractual interest. The undiscounted

payment relating to borrowings with variable interest rates is extrapolated based on the

estimated interest rate yield curve as of the end of the reporting period.




Non-derivative financial instruments

Less than

1 year 2 to 3 years 4 to 5 years > 5 years Total


Short-term borrowings $1,880,552 $- $- $- $1,880,552

Accounts payable 11,467,382 - - - 11,467,382

Other payables 3,032,039 - - - 3,032,039

Lease obligations payable 16,298 32,597 32,596 67,547 149,038

Less than

1 year 2 to 3 years 4 to 5 years > 5 years Total


Short-term borrowings $2,140,591 $- $- $- $2,140,591

Accounts payable 10,004,704 - - - 10,004,704

Other payables 3,159,598 - - - 3,159,598

Lease obligations payable 16,298 32,597 32,596 83,846 165,337

Derivative financial instruments

Less than 1 year


Inflows $-

Outflows (229,768)

Net $(229,768)

Less than 1 year


Inflows $-

Outflows (457)

Net $(457)

The table above contains the undiscounted net cash flows of derivative financial instruments.




(6) Fair values of financial instruments

A. the methods and assumptions applied in determining the fair value of financial instruments:

Fair value is the price that would be received to sell an asset or paid to transfer a liability

in an orderly transaction between market participants at the measurement date. The

following methods and assumptions were used by the Group to measure or disclose the fair

values of financial assets and financial liabilities:

a. The carrying amount of cash and cash equivalents, accounts receivables, accounts

payable and other current liabilities approximate their fair value due to their short

maturities.

b. For financial assets and liabilities traded in an active market with standard terms and

conditions, their fair value is determined based on market quotation price (including

listed equity securities, beneficiary certificates, bonds and futures etc.) at the reporting

date.

c. Fair value of equity instruments without market quotations (including private placement

of listed equity securities, unquoted public company and private company equity

securities) are estimated using the market method valuation techniques based on

parameters such as prices based on market transactions of equity instruments of identical

or comparable entities and other relevant information (for example, inputs such as

discount for lack of marketability, P/E ratio of similar entities and Price-Book ratio of

similar entities).

d. Fair value of debt instruments without market quotations, bank loans, bonds payable

and other non-current liabilities are determined based on the counterparty prices or

valuation method. The valuation method uses DCF method as a basis, and the

assumptions such as the interest rate and discount rate are primarily based on relevant

information of similar instrument (such as yield curves published by the Taipei

Exchange, average prices for Fixed Rate Commercial Paper published by Reuters and

credit risk, etc.)

e. The fair value of derivatives which are not options and without market quotations, is

determined based on the counterparty prices or discounted cash flow analysis using

interest rate yield curve for the contract period. Fair value of option-based derivative

financial instruments is obtained using the counterparty prices or appropriate option

pricing model (for example, Black-Scholes model) or other valuation method (for

example, Monte Carlo Simulation).




B. Fair value of financial instruments measured at amortized cost

Other than cash and cash equivalents, accounts receivables, accounts payable and other

current liabilities whose carrying amount approximate their fair value, the fair value of the

Group’s financial assets and financial liabilities measured at amortized cost is listed in the

table below:

Carrying amount as at

31 December

2017

31 December

2016

Financial liabilities:

Lease obligations payable $127,878 $141,847

Fair value as at

31 December

2017

31 December

2016

Financial liabilities:

Lease obligations payable $149,038 $165,337

C. Fair value measurement hierarchy for financial instruments

Please refer to Note 12.(8) for fair value measurement hierarchy for financial instruments

of the Group.

(7) Derivative financial instruments

The Group has entered into forward foreign exchange contracts and cross currency swap

contracts, which are not applicable to hedge accounting, for the purpose of managing

transaction risk due to changes in foreign currencies. Please refer to Note 6.(2).

The Group has entered into forward foreign exchange contracts, which are applicable to hedge

accounting, for the purpose of hedging future cash flow fluctuations and risk due to changes

in foreign currencies. Please refer to Note 6.(12).




(8) Fair value measurement hierarchy

A. Fair value measurement hierarchy

All asset and liabilities for which fair value is measured or disclosed in the financial

statements are categorized within the fair value hierarchy, based on the lowest level input

that is significant to the fair value measurement as a whole. Level 1, 2 and 3 inputs are

described as follows:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or

liabilities that the entity can access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for

the asset or liability, either directly or indirectly.

Level 3 – Unobservable inputs for the asset or liability.

For assets and liabilities that are recognized in the financial statements on a recurring basis,

the Group determines whether transfers have occurred between levels in the hierarchy by

re-assessing categorization at the end of each reporting period.

B. Fair value measurement hierarchy of the Group’s assets and liabilities

The Group does not have assets that are measured at fair value on a non-recurring basis.

Fair value measurement hierarchy of the Group’s assets and liabilities measured at fair

value on a recurring basis is as follows:


Level 1 Level 2 Level 3 Total

Assets at fair value

Financial assets at fair value through profit or loss:

Convertible bonds $- $- $24,121 $24,121


Stock - - 23,632 23,632

Liabilities at fair value


Forward foreign exchange contracts - 8,032 - 8,032

Cross currency swap contracts - 4,574 - 4,574

Derivative financial liabilities for hedging

Forward foreign exchange contracts - 217,162 - 217,162






Assets at fair value

Derivative financial assets for hedging:

Forward foreign exchange contracts $- $341,619 $- $341,619

Available-for-sale financial assets:

Stock 34,851 - 25,672 60,523

Liabilities at fair value


Forward foreign exchange contracts - 457 - 457

Transfers between Level 1 and Level 2 during the period

During the years ended 31 December 2017 and 2016, there were no transfers between Level

1 and Level 2 fair value measurements.

Reconciliation for fair value measurements in Level 3 of the fair value hierarchy for

movements during the period is as follows:

Reconciliation of financial assets measured at fair value of Level 3:

At fair value

through profit or

loss Available-for-sale

Convertible bonds Stock

Beginning balances as at 1 January 2017 $- $25,672

Acquisition for the year ended 31 December 2017 23,867 -

Total profits and losses recognized for the year ended 31

December 2017:

Amount recognized in profit or loss (presented in

“other profit or loss”)

254

-

Amount recognized in OCI (presented in “unrealized

gains (losses) from available-for-sale financial

assets”)

-

(2,040)

Ending balances as at 31 December 2017 $24,121 $23,632

Available-for-sale

Stock

Beginning balances as at 1 January 2016 $27,687

Total profits and losses recognized for the year ended 31 December 2016:

Recognized in OCI (presented in “unrealized gains (losses) from available-

for-sale financial assets”)

(2,015)

Ending balances as at 31 December 2016 $25,672




Information on significant unobservable inputs to valuation

Description of significant unobservable inputs to valuation of recurring fair value

measurements categorized within Level 3 of the fair value hierarchy is as follows:


Valuation

techniques

Significant

unobservable

inputs

Quantitative

information

Relationship

between inputs

and fair value

Sensitivity of the input to fair

value

Financial assets

Available-for-sale:

Stocks Market approach Discount for

lack of

marketability

15%~30% The higher the

discount for lack

of marketability,

the lower the fair

value of the stocks

5% increase (decrease) in the

discount for lack of marketability

would result in (decrease)

increase in the Group’s equity by

NT$1,390 thousand

Convertible bonds Market approach volatility 40.85% The higher

(lower) the

volatility, the

lower (higher)

the fair value


volatility would result in decrease

by NT$1,279 thousand / increase

NT$1,918 thousand in the

Group’s profit or loss


Valuation

techniques

Significant

unobservable

inputs

Quantitative

information

Relationship

between inputs

and fair value

Sensitivity of the input to fair

value

Financial assets

Available-for-sale:

Stocks Market approach discount for lack

of marketability

15%~30% The higher the

discount for lack

of marketability,

the lower the fair

value of the stocks


discount for lack of marketability

would result in (decrease)

increase in the Group’s equity by

NT$1,510 thousand

Valuation process used for fair value measurements categorized within Level 3 of the fair

value hierarchy

The Group’s Financial and Accounting Department is responsible for validating the fair

value measurements and ensuring that the results of the valuation are in line with market

conditions, based on independent and reliable inputs which are consistent with other

information, and represent exercisable prices. The Department analyses the movements in

the values of assets and liabilities which are required to be re-measured or re-assessed as

per the Group’s accounting policies at each reporting date.




C. Fair value measurement hierarchy of the Group’s assets and liabilities not measured at fair

value but for which the fair value is disclosed



Financial liabilities not measured at fair value

but for which the fair value is disclosed:

Lease obligations payables $- $- $149,038 $149,038


Financial liabilities not measured at fair value

but for which the fair value is disclosed:

Lease obligations payables $- $- $165,337 $165,337

(9) Significant assets and liabilities denominated in foreign currencies

Information regarding the significant assets and liabilities denominated in foreign currencies

is listed below:

(Unit: Foreign currency: thousands, NTD: thousands)


Foreign currencies Exchange rate NTD

Financial assets-monetary items

Cash and cash equivalents RMB $343,446 4.5835 $1,574,198

Cash and cash equivalents USD 123,105 29.8480 3,674,432

Notes receivable RMB 198,694 4.5835 910,723

Accounts receivable USD 95,507 29.8480 2,850,685

Accounts receivable EUR 20,751 35.6743 740,270

Accounts receivable RMB 542,644 4.5835 2,487,209

Other receivables USD 5,394 29.8480 160,995

Other receivables RMB 15,091 4.5835 69,172

Financial liabilities-monetary items

Short term borrowings USD 30,000 29.8480 895,440

Short term borrowings EUR 25,000 35.6743 891,428

Accounts payable RMB 228,943 29.8480 6,833,479

Accounts payable USD 930,275 4.5835 4,263,951

Other payables RMB 192,021 4.5835 880,135





Foreign currencies Exchange rate NTD

Financial assets-monetary items

Cash and cash equivalents RMB $225,652 4.6448 $1,048,108

Cash and cash equivalents USD 117,494 32.2790 3,792,576

Notes receivable RMB 272,156 4.6448 1,264,108

Accounts receivable USD 93,639 32.2790 3,022,582

Accounts receivable EUR 20,965 33.9172 711,085

Accounts receivable RMB 446,026 4.6448 2,071,698

Other receivables USD 5,592 32.2790 180,516

Other receivables RMB 35,140 4.6448 163,219

Financial liabilities-monetary items

Short term borrowings USD 37,500 32.2790 1,210,463

Short term borrowings EUR 25,000 33.9172 847,500

Accounts payable RMB 1,778,826 4.6448 8,308,731

Accounts payable USD 42,466 32.2790 1,370,762

Other payables RMB 178,656 4.6448 829,821

It is not applicable to disclose the exchange gains or losses for each functional currency due

to the fact that the functional currencies used by the Group’s entities are diverse. The

Group’s gain and loss of foreign currency exchange on monetary financial assets and liabilities

for the years ended 31 December 2017 and 2016 were gain of NT$15,926 thousand and

NT$8,738 thousand, respectively.

The above information is disclosed based on the carrying amount of foreign currency (after

conversion to functional currency).

(10) Capital management

The primary objective of the Group’s capital management is to ensure that it maintains a

strong credit rating and healthy capital ratios in order to support its business and maximize

shareholder value. The Group manages its capital structure and makes adjustments to it, in

light of changes in economic conditions. To maintain or adjust the capital structure, the

Group may adjust dividend payment to shareholders, return capital to shareholders or issue

new shares.




13. Additional disclosure

(1) Information at significant transactions

A. Lending funds to others: Refer to Attachment 1.

B. Providing endorsements or guarantees for others: Refer to Attachment 2.

C. Holding of securities at the end of the period: Refer to Attachment 3.

D. Aggregate purchases or sales of the same securities reaching NT$300 million or 20 percent

of paid-in capital or more: None.

E. Acquisition of real estate reaching NT$300 million or 20 percent of paid-in capital or more:

None.

F. Disposal of real estate reaching NT$300 million or 20 percent of paid-in capital or more:

None.

G. Purchases or sales of goods from or to related parties reaching NT$100 million or 20

percent of paid-in capital or more: Refer to Attachment 4.

H. Accounts receivable from related parties reaching NT$100 million or 20 percent of paid-

in capital or more: Refer to Attachment 5.

I. Trading in derivative instruments: Refer to Notes 6.(2), 6.(12), and 12.

J. Business relationship between the parent and the subsidiaries and between each subsidiary,

and the circumstances and amounts of any significant transactions between them: Refer to

Attachment 6.

(2) Information on investees:

Names, locations, and related information of investees over which Sercomm Corporation

exercises significant influence (excluding information on investment in Mainland China):

Please refer to Attachment 7.




(3) Information on investments in mainland China

A. Investee company name, main businesses and products, total amount of capital, method of

investment, accumulated inflow and outflow of investments from Taiwan, net income

(loss) of investee company, percentage of ownership, investment income (loss), book value

of investments, cumulated inward remittance of earnings and limits on investment in

Mainland China: Please refer to Attachment 8.

B. Directly or indirectly significant transactions through third regions with the investees in

Mainland China, including price, payment terms, unrealized gain or loss, and other events

with significant effects on the operating results and financial condition: Please refer to

Attachment 1, 4, 5, and 6.

14. Segment information

For management purposes, the Group is organized into business units based on its area, products

and services and has two reportable operating segments as follows:

(1) Taiwan: segment engages in R&D Designing, Product Testing and Manufacturing, Repairing,

and Sales of products except for Mainland China. (Including segment revenue, profits and

losses from Taiwan orders, manufactured by subsidiary in Mainland China)

(2) Mainland China: segment engages in R&D Designing, Product Testing and Manufacturing,

Repairing, and Sales of products in Mainland China.

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

making decisions about resource allocation and performance assessment. Segment performance is

evaluated based on operating profit or loss and is measured based on accounting policies consistent

with those in the consolidated financial statements.

Transfer prices between operating segment are on an arm’s length basis in a manner similar to

transactions with third parties.




(1) Information on profit or loss, assets and liabilities of the reportable segments:


Revenue

Taiwan

Segment

Mainland

China

Segment Total segments All other

Adjustments

and

eliminations Consolidated

External customers $28,547,786 $9,267,185 $37,814,971 $785,032 $- $38,600,003

Inter-segment 826,939 25,209,517 26,036,456 182,517 26,218,973 -

Total revenue $29,374,725 $34,476,702 $63,851,427 $967,549 $26,218,973 $38,600,003

Interest revenue $9,477 $83,118 $92,595 $42 $(14,232) $78,405

Interest expense 55,007 18,619 73,626 - (14,232) 59,394

Depreciation and

amortization

235,170 313,883 549,053 1,928 - 550,981

Investment gain 342 - 342 - - 342

Segment profit $1,368,925 $919,888 $2,288,813 $(51,760) $(653,495) $1,583,558

Segment assets $25,100,931 $18,217,251 $43,318,182 $388,846 $(19,515,506) $24,191,522

Segment liabilities $6,757,804 $13,123,736 $19,881,540 $405,675 $(4,912,868) $15,374,347


Revenue

Taiwan

Segment

Mainland

China

Segment Total segments All other

Adjustments

and

eliminations Consolidated

External customers $27,496,617 $8,788,557 $36,285,174 $416,560 $- $36,701,734

Inter-segment 401,096 21,334,976 21,736,072 175,745 (21,911,817) -

Total revenue $27,897,713 $30,123,533 $58,021,246 $592,305 $(21,911,817) $36,701,734

Interest revenue $6,402 $91,664 $98,066 $7 $(31,205) $66,868

Interest expense 45,486 57,933 103,419 - (31,205) 72,214

Depreciation and

amortization

207,036 312,127 519,163 2,216 - 521,379

Investment gain 2,264 - 2,264 - - 2,264

Segment profit $1,591,648 $945,012 $2,536,660 $13,171 $(747,048) $1,802,783

Segment assets $24,233,463 $15,179,017 $39,412,480 $362,604 $(16,936,011) $22,839,073

Segment liabilities $6,525,308 $10,384,785 $16,910,093 $336,126 $(3,052,717) $14,193,502

Revenue from Europe, America and Japan that are operating segments that do not meet the

quantitative thresholds for reportable segments.

Inter-segment revenue are eliminated on consolidation and recorded under the “adjustments

and eliminations” column, all other adjustments and eliminations are disclosed below.




(2) Information on reconciliations of revenue, profit or loss, assets, liabilities and other material

items of reportable segments:

(a) Revenue:

For the years ended

31 December

2017 2016

Total revenue from reportable segments $63,851,427 $58,021,246

Other revenue 967,549 592,305

Elimination of inter-segment revenue (26,218,973) (21,911,817)

Total revenue $38,600,003 $36,701,734

(b) Profit or loss:

For the years ended

31 December

2017 2016

Total profit or loss for reportable segments $2,288,813 $2,536,660

Other profit (loss) (51,760) 13,171

Elimination of inter-segment profit (653,495) (747,048)

Profit before tax from continuing operations $1,583,558 $1,802,783

(c) Assets:

As at

31 December

2017

31 December

2016

Total assets of reportable segments $43,318,182 $39,412,480

Other assets 388,846 362,604

Less: receivables from corporate headquarters (19,515,506) (16,936,011)

Unallocated amounts: 575,924 939,980

Segment assets $24,767,446 $23,779,053




(d) Liabilities:

As at

31 December

2017

31 December

2016

Total liabilities of reportable segments $19,881,540 $16,910,093

Other liabilities 405,675 336,126

Less: payables to corporate headquarters (4,912,868) (3,052,717)

Unallocated amounts 2,166,803 2,228,483

Segment liabilities $17,541,150 $16,421,985

(e) Other material items:


Reportable

segments Adjustments Consolidated

Interest revenue $92,595 $(14,190) $78,405

Interest expenses 73,626 (14,232) 59,394

Depreciation and amortization 549,053 1,928 550,981


Reportable

segments Adjustments Consolidated

Interest revenue $98,066 $(31,198) $66,868

Interest expenses 103,419 (31,205) 72,214

Depreciation and amortization 519,163 2,216 521,379

The reconciling item to adjust capital expenditures for non-current assets is the amount

incurred for the corporate headquarters building, which is not included in segment

information. None of the other adjustments are material.

(3) Geographical information

Revenue from external customers

For the years ended

31 December

2017 2016

America $15,556,022 $19,175,265

Asia 13,627,330 10,267,537

Europe 9,284,213 7,224,659

Other 132,438 34,273

Total $38,600,003 $36,701,734




The revenue information above is based on the location of the customer.

Non-current assets

As at

31 December

2017

31 December

2016

Taiwan $2,417,373 $2,362,569

China 1,880,816 1,930,247

Other 11,406 14,219

Total $4,309,595 $4,307,035

(4) Information about major customers

For the years ended

31 December

2017 2016

A customers from Taiwan segment $11,328,142 $13,099,750

B customers from China segment 5,346,168 6,493,466


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

S(E

xpre

ssed

in T

hous

ands

of N

ew T

aiw

an D

olla

rs U

nles

s Oth

erw

ise

Stat

ed)

Att

achm

ent

1:

Len

din

g f

unds

to o

ther

s fo

r th

e yea

r en

ded

31 D

ecem

ber

2017

Max

imum

Act

ual

Nat

ure

of

Tota

lR

easo

nA

llow

ance

for

Max

imum

Nam

e of

Nam

e of

Rel

ated

bal

ance

for

Endin

gam

ount

Inte

rest

finan

cing

tran

sact

ion

for

doubtf

ul

Loan

lim

itam

ount

avai

lable

Num

ber

finan

cing p

rovid

erco

unte

rpar

tyA

ccount

Par

tyth

e per

iod

bal

ance

pro

vid

edra

teac

tivit

yam

ount

finan

cing

acco

unts

Item

Val

ue

per

enti

tyfo

r la

w

0S

erco

mm

Ser

net

Tec

hnolo

gy (

Suzh

ou)

Oth

er r

ecei

vab

les

Y$916,7

00

$916,7

00

$-

4.0

0%

Note

3(2

)$-

Oper

atin

g$-

-$-

$1,4

50,2

78

$2,9

00,5

57

Co

rpo

rati

on

Lim

ited

-rel

ated

par

tyN

ote

1(2

)N

ote

1

1S

ernet

Dw

net

Tec

hnolo

gy (

Suzh

ou)

Oth

er r

ecei

vab

les

Y1,2

76,6

60

916,7

00

265,8

43

4.3

5%

Note

3(2

)-

Oper

atin

g-

--

3,6

25,6

97

7,2

51,3

94

Tec

hnolo

gy

Lim

ited

-rel

ated

par

tyN

ote

2(3

)N

ote

2(3

)

(Suzh

ou)

Lim

ited

1S

ernet

Nan

jing F

emte

l O

ther

rec

eivab

les

Y45,7

84

$-

-4.3

5%

Note

3(2

)-

Oper

atin

g-

--

3,6

25,6

97

7,2

51,3

94

Tec

hnolo

gy

Com

munic

atio

ns

Co., L

td.

-rel

ated

par

tyN

ote

2(3

)N

ote

2(3

)

(Suzh

ou)

Lim

ited

Acc

ord

ing t

he

Com

pan

y's

Oper

atio

nal

Pro

cedure

s fo

r L

endin

g F

unds

to O

ther

s, a

s fo

llow

s:

Note

1:

The

aggre

gat

e am

ount

of

loan

s to

oth

ers

shal

l not

exce

ed 4

0%

of

its

stock

hold

ers'

eq

uit

y a

s st

ated

in t

he

Com

pan

y's

most

rec

ent

audit

ed o

r re

vie

wed

fin

anci

al s

tate

men

t.

The

loan

lim

it f

or

each

enti

ty d

epen

din

g o

n t

he

purp

ose

of

the

loan

is

as f

oll

ow

s:

(1)

To a

tra

din

g p

artn

er:

The

amount

shal

l not

exce

ed t

he

hig

her

of

the

sale

s or

purc

has

es a

mount

to/

fro

m t

he

trad

ing p

artn

er f

or

the

yea

r as

of

the

tim

e of

the

lendin

g e

ven

t or

for

the

most

rec

ent

yea

r.

(2)

As

short

-ter

m f

inan

cing:

The

amount

shal

l not

exce

ed 2

0%

of

stock

hold

ers'

eq

uit

y a

s st

ated

in i

ts l

ates

t au

dit

ed o

r re

vie

wed

fin

anci

al s

tate

men

t.

(3)

Fin

anci

ng b

etw

een t

he

Com

pan

y's

100%

dir

ectl

y-

or

indir

ectl

y-

hel

d o

ver

seas

inves

tee

is n

ot

lim

ited

to 4

0%

of

stock

hold

er's

equit

y a

s st

ated

in t

he

most

rec

ent

audit

ed o

r re

vie

wed

fin

anci

al s

tate

men

t.

H

ow

ever

the

aggre

gat

e am

ount

shal

l not

exce

ed 1

00%

net

ass

ets.

L

oan

s to

indiv

idual

inves

tee

shal

l not

exce

ed 5

0%

net

ass

ets.

Note

2:

The

aggre

gat

e am

ount

of

loan

s fr

om

subsi

dia

ries

to o

ther

s sh

all

not

exce

ed 4

0%

of

stock

hold

ers'

eq

uit

y a

s st

ated

in t

he

subsi

dia

ry's

or

the

Com

pan

y's

most

rec

ent

audit

ed o

r re

vie

wed

fin

anci

al s

tate

men

t, w

hic

hev

er i

s lo

wer

.

The

loan

lim

it f

or

each

enti

ty d

epen

din

g o

n t

he

purp

ose

of

the

loan

is

as f

oll

ow

s:

(1)

To a

tra

din

g p

artn

er:

The

amount

shal

l not

exce

ed t

he

hig

her

of

the

sale

s or

purc

has

es a

mount

to/

fro

m t

he

trad

ing p

artn

er f

or

the

yea

r as

of

the

tim

e of

the

lendin

g e

ven

t or

for

the

most

rec

ent

yea

r.

(2)

As

short

-ter

m f

inan

cing:

The

amount

shal

l not

exce

ed 2

0%

of

the

subsi

dia

ry o

r th

e C

om

pan

y's

sto

ckhold

ers'

eq

uit

y a

s st

ated

in

its

lat

est

fin

anci

al s

tate

men

t.

(3)

Fin

anci

ng b

etw

een t

he

gro

up's

inves

tee

whic

h i

s 100%

dir

ectl

y-

or

indir

ectl

y-

hel

d b

y t

he

par

ent

com

pan

y i

s not

lim

ited

to

the

rati

o a

s st

ated

in t

he

pre

cedin

g p

arag

raph.

H

ow

ever

the

aggre

gat

e am

ount

shal

l not

exce

ed 1

00%

net

ass

ets

as s

tate

d i

n t

he

par

ent

com

pan

y's

most

rec

ent

audit

ed o

r re

vie

wed

fin

anci

al s

tate

men

t. L

oan

s to

indiv

idual

inves

tee

shal

l not

exce

ed 5

0%

net

ass

ets.

Note

3:

(1)T

radin

g p

artn

er :

The

trad

ing a

mounts

ref

er t

o t

he

busi

nes

s tr

ansa

ctio

n a

mounts

wit

hin

the

rece

nt

yea

r bet

wee

n t

he

loan

er c

om

pan

y a

nd

th

e lo

anee

enti

ty.

(2)S

hort

-ter

m f

inan

cing

Ass

ets

ple

dg

ed


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSID

IAR

IES

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

Unl

ess O

ther

wise

Sta

ted)

Att

ach

men

t 2

: P

rovid

ing e

nd

ors

emen

ts o

r gu

aran

tees

fo

r o

ther

s fo

r th

e ye

ar e

nd

ed 3

1 D

ecem

ber

20

17

Nam

e o

f

end

ors

ees

Rel

atio

nsh

ip E

nd

ing b

alan

ce

0S

erco

mm

Ser

com

m R

uss

iaS

ub

sid

iary

$3

,62

5,6

97

$4

,52

6$

4,4

77

$-

$-

0.0

6%

$7

,25

1,3

94

YN

N

Co

rpo

rati

on

Lim

ited

Lia

bil

ity

(No

te)

(US

D 1

50 t

housa

nd)

(US

D 1

50 t

housa

nd)

(US

D -

th

ousa

nd)

(No

te)

Co

mp

any

0S

erco

mm

Ser

com

m J

apan

Su

bsi

dia

ry3

,62

5,6

97

53

,46

05

2,9

80

-

-0

.73

%7

,25

1,3

94

YN

N

Co

rpo

rati

on

Co

rp.

(No

te)

(JP

Y 2

00

,00

0 t

ho

usa

nd

)(J

PY

20

0,0

00

th

ou

san

d)

(JP

Y -

th

ou

san

d)

(No

te)

0S

erco

mm

Ser

net

Tec

hn

olo

gy

Su

bsi

dia

ry3

,62

5,6

97

94

0,8

00

89

5,4

40

-

-1

2.3

5%

7,2

51

,39

4Y

NY

Co

rpo

rati

on

(Su

zho

u)

Lim

ited

(No

te)

(US

D 3

0,0

00 t

housa

nd)

(US

D 3

0,0

00 t

housa

nd)

(US

D -

th

ousa

nd)

(No

te)

0S

erco

mm

Dw

net

Tec

hn

olo

gy

Su

bsi

dia

ry3

,62

5,6

97

1,4

39

,47

51

,41

8,8

43

16

7,3

53

-1

9.5

7%

7,2

51

,39

4Y

NY

Co

rpo

rati

on

(Su

zho

u)

Lim

ited

(No

te)

(US

D 4

6,0

00 t

housa

nd)

(US

D 4

6,0

00 t

housa

nd)

(US

D 1

,000 t

housa

nd)

(No

te)

(RM

B 1

0,0

00

th

ou

san

d)

(RM

B 1

0,0

00

th

ou

san

d)

(RM

B 3

0,0

00

th

ou

san

d)

No

te: A

cco

rdin

g t

he

Co

mp

any's

Op

erat

ion

al P

roce

du

res

for

En

do

rsem

ent

/ gu

aran

tee

pro

vid

ed t

o o

ther

s, t

he

max

imu

m a

mo

un

t p

erm

itte

d t

o a

sin

gle

bo

rro

wer

is

as f

oll

ow

s:

(1

)Th

e am

ou

nts

per

mit

ted

to

mak

e in

en

do

rsem

ents

/gu

aran

tees

to

an

y si

ngle

en

tity

sh

all

no

t ex

ceed

25

% o

f th

e C

om

pan

y's

sto

ckh

old

ers'

eq

uit

y as

sta

ted

in

its

lat

est

fin

anci

al s

tate

men

t;

t

he

tota

l am

ou

nt

shal

l n

ot

exce

ed 5

0%

of

sto

ckh

old

ers'

eq

uit

y a

s st

ated

in

its

lat

est

fin

anci

al s

tate

men

t.

(2

)Th

e re

stri

ctio

n i

n N

ote

(1

) sh

all

no

t ap

ply

to

in

ter-

com

pan

y lo

ans

of

fun

ds

bet

wee

n f

ore

ign

co

mp

anie

s in

wh

ich

th

e C

om

pan

y h

old

s, d

irec

tly

or

ind

irec

tly,

10

0%

of

the

vo

tin

g s

har

es.

H

ow

ever

th

e en

do

rsem

ent

/ gu

aran

tee

amo

un

t sh

ou

ld n

ot

exce

ed 1

00

% n

et a

sset

s.

En

do

rsem

ents

/ g

uar

ante

es p

rovid

ed

to

in

div

idu

al i

nves

tees

sh

ou

ld n

ot

exce

ed 5

0%

net

ass

ets.

(3

)Th

e am

ou

nts

per

mit

ted

to

mak

e in

en

do

rsem

ents

/gu

aran

tees

to

sin

gle

su

bsi

dia

ry s

hal

l n

ot

exce

ed 5

0%

of

the

Co

mp

any'

s st

ock

ho

lder

s' e

qu

ity

as

stat

ed i

n i

ts l

ates

t fi

nan

cial

sta

tem

ent;

the

tota

l am

ou

nt

shal

l n

ot

exce

ed 1

00

% o

f st

ock

ho

lder

s' e

qu

ity

as s

tate

d i

n i

ts l

ates

t fi

nan

cial

sta

tem

ent.

Gu

aran

tee

Pro

vid

ed t

o

Su

bsi

dia

ries

in

Mai

nla

nd

Ch

ina

Per

cen

tage

of

accu

mu

late

d

gu

aran

tee

amo

un

t

to n

et a

sset

s val

ue

fro

m t

he

late

st

fin

anci

al s

tate

men

t

Num

ber

Nam

e o

f

end

ors

ers

En

do

rsee

En

do

rsem

ent

lim

it f

or

a si

ngle

en

tity

Max

imu

m b

alan

ce

for

the

per

iod

Am

ou

nt

of

coll

ater

al

gu

aran

tee/

end

ors

emen

tA

ctu

al a

mo

un

t P

rovid

ed

Lim

it o

f to

tal

gu

aran

tee/

end

ors

emen

t am

ou

nt

Gu

aran

tee

Pro

vid

ed b

y

Par

ent

Co

mp

any

Gu

aran

tee

Pro

vid

ed b

y A

Su

bsi

dia

ry


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSID

IAR

IES

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

Unl

ess O

ther

wis

e St

ated

)

Att

ach

men

t 3

: H

old

ings

of

secu

riti

es a

s of

31

Dec

ember

20

17

Nam

es o

f co

mp

anie

s h

eld

Sec

uri

ties

typ

e an

d n

ame

Fin

anci

al s

tate

men

t ac

cou

nt

Per

cen

tage

of

Note

ow

ner

ship

(%

)

Ser

com

m C

orp

ora

tion

Con

ver

tib

le b

on

ds

Pre

scie

nse

Lim

ited

Ass

oci

ates

Non

-cu

rren

t fi

nan

cial

ass

ets

at f

air

val

ue

500

$19,9

51

-$19,9

51

thro

ugh

pro

fit

or

loss

(GB

P 5

00

th

ou

san

d)

Sik

lu I

nc.

-N

on-c

urr

ent

fin

anci

al a

sset

s at

fai

r val

ue

137

4,1

70

-4,1

70

thro

ugh

pro

fit

or

loss

(US

D 1

37

th

ou

san

d)

Cm

mon s

tock

of

non-l

iste

d c

om

pan

y

TE

CO

Nan

ote

ch C

o.,

Ltd

.-

Non-c

urr

ent

fin

anci

al a

sset

s m

easu

red

at

cost

-

10

-

-

Pre

ferr

ed s

tock

of

non

-lis

ted

com

pan

y

Sik

lu I

nc.

-N

on-c

urr

ent

fin

anci

al a

sset

s m

easu

red

at

cost

2,0

18

60

,11

0-

-

(US

D 2

,00

0 t

hou

san

d)

Shukuan

Inves

tmen

t L

td.

Sto

ck o

f n

on

-lis

ted

com

pan

y-

Non-c

urr

ent

avai

lab

le-f

or-

sale

fin

anci

al a

sset

s747

23,6

32

-23,6

32

Cer

pas

s T

echnolo

gy C

orp

.

Note

: T

he

term

" se

curi

ties

" st

ated

ab

ove

incl

ud

es s

tock

, b

on

ds,

ben

efic

iary

cer

tifi

cate

s, a

nd

rel

ated

sec

uri

ties

der

ived

fro

m t

he

above

whic

h w

ere

des

crib

ed i

n I

AS

39

"fi

nan

cial

In

stru

men

ts:

Rec

ognit

ion

a

nd M

easu

rem

ent"

Per

iod

en

ded

Sh

ares

/un

its

(in

th

ou

san

ds)

Mar

ket

val

ue

or

Net

ass

et v

alu

eB

ook v

alue

Rel

atio

nsh

ip

wit

h t

he

Com

pan

y


Att

ach

men

t 4

: P

urc

has

es o

r sa

les

of

good

s fr

om

or

to r

elat

ed p

arti

es r

each

ing N

T$

10

0 m

illi

on

or

20

% o

f p

aid

-in

cap

ital

or

more

for

the

yea

r en

ded

31

Dec

ember

20

17

Ser

com

m C

orp

ora

tion

Ser

net

Tec

hn

olo

gy

Th

e C

om

pan

y's

su

bsi

dia

ryP

urc

has

es$22,8

61,4

83

68

45

Note

1N

ote

1$(2

,687,3

72)

68

(Su

zhou

) L

imit

ed

Ser

net

Tec

hn

olo

gy

Ser

com

m C

orp

ora

tion

Par

ent

Com

pan

yS

ales

(22,8

61,4

83)

98

45

Note

1N

ote

12,6

87,3

72

65

(Su

zhou

) L

imit

ed

Ser

com

m C

orp

ora

tion

Ser

com

m R

uss

iaT

he

Com

pan

y's

Su

bsi

dia

ryS

ales

(61

5,1

55

)2

10

5N

ote

1N

ote

1155,9

17

4

Lim

ited

Lia

bil

ity

Com

pan

y

Ser

com

m R

uss

iaS

erco

mm

Corp

ora

tion

Par

ent

Com

pan

yP

urc

has

es6

15

,15

59

81

05

Note

1N

ote

1(1

55,9

17)

75

Lim

ited

Lia

bil

ity

Com

pan

y

Ser

net

Tec

hn

olo

gy

Dw

net

Tec

hn

olo

gy

Aff

ilia

te w

ith

th

e sa

me

par

ent

com

pan

yN

ote

2(3

86

,14

0)

21

20

Note

1N

ote

1269,7

49

7

(Su

zhou

) L

imit

ed(S

uzh

ou

) L

imit

ed

Dw

net

Tec

hn

olo

gy

Ser

net

Tec

hn

olo

gy

Aff

ilia

te w

ith

th

e sa

me

par

ent

com

pan

yN

ote

23

86

,14

08

12

0N

ote

1N

ote

1(2

69,7

49)

6

(Su

zhou

) L

imit

ed(S

uzh

ou

) L

imit

ed

Note

1:

Th

e sa

les

pri

ce t

o t

he

above

rela

ted

par

ties

was

det

erm

ined

th

rou

gh

mutu

al a

gre

emen

t b

ased

on t

he

mar

ket

con

dit

ion

s.

T

he

coll

ecti

on p

erio

d f

or

rela

ted p

arti

es w

as m

onth

-end 9

0-2

10 d

ays,

whil

e t

he

term

s fo

r dom

esti

c th

ird p

arty

sal

es w

as n

et 3

0-7

5 d

ays.

The

coll

ecti

on

per

iod

for

over

seas

sal

es w

as n

et 3

0-2

10

day

s.

Note

2:

Ser

net

Tec

hn

olo

gy (

Su

zhou

) L

imit

ed p

rovid

ed p

roce

ssin

g s

ervic

e to

Dw

net

Tec

hn

olo

gy (

Su

zhou

) L

imit

ed.

Ter

mU

nit

pri

ce

SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSID

IAR

IES

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

Unl

ess O

ther

wis

e St

ated

)

Note

Bal

ance

Per

centa

ge

of

tota

l

rece

ivab

les

(pay

able

) (%

)

Purc

has

es

(Sal

es)

Com

pan

yR

elat

ed p

arty

Rel

atio

nsh

ip

Tra

nsa

ctio

ns

Am

ount

Per

centa

ge

of

tota

l

pu

rch

ases

(sal

es)

(%)

Note

s an

d a

ccou

nts

rec

eivab

le

(pay

able

)

Ter

m

Det

ails

of

non

-arm

's

len

gth

tra

nsa

ctio

n

Purc

has

es

(Sal

es)


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

S

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

Unl

ess O

ther

wis

e St

ated

)

Att

achm

ent

5:

Acc

ount

rece

ivab

le f

rom

rel

ated

par

ties

rea

chin

g N

T$100 m

illi

on o

r 20%

of

pai

d-i

n c

apit

al o

r m

ore

as

of

31 D

ecem

ber

2017

Am

ou

nt

Act

ion

adopte

d

for

ov

erd

ue

acco

unts

Ser

net

Tec

hnolo

gy (

Suzh

ou)

Ser

com

mT

he

ult

imat

e par

ent

com

pan

y$2,6

87,3

72

-$

--

$-

$-

Lim

ited

Co

rpo

rati

on

Ser

net

Tec

hnolo

gy (

Suzh

ou)

Dw

net

Tec

hnolo

gy

Aff

ilia

te w

ith t

he

sam

e par

ent

269,7

49

-

-

--

-

Lim

ited

(Suzh

ou)

Lim

ited

com

pan

y

Ser

com

mS

erco

mm

Ru

ssia

Th

e C

om

pan

y's

su

bsi

dia

ry1

55

,91

7

-

-

-

--

Co

rpo

rati

on

Lim

ited

Lia

bil

ity

Co

mp

any

The

nam

e of

the

com

pan

y

Nam

e of

counte

rpar

ty

Over

due

rece

ivab

les

All

ow

ance

for

do

ub

tfu

l

acco

unts

Su

bse

qu

ent

coll

ecti

ons

Turn

over

rate

En

din

g

bal

ance

Rel

atio

nsh

ip


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

S(E

xpre

ssed

in T

hous

ands

of N

ew T

aiw

an D

olla

rs U

nles

s Oth

erw

ise

Stat

ed)

Att

ach

men

t 6

:T

he

bu

sin

ess

rela

tion

ship

bet

wee

n t

he

par

ent

and

th

e su

bsi

dia

ries

an

d b

etw

een

eac

h s

ubsi

dia

ry, an

d t

he

circ

um

stan

ces

and

am

ou

nts

of

any

sign

ific

ant

tran

sact

ion

s bet

wee

n t

hem

for

the

year

en

ded

31

Dec

ember

20

17

0S

erco

mm

Cor p

ora

tion

Ser

com

m F

ran

ce S

AR

L1

Oth

er r

ecei

vab

les

$1

0,7

23

-

-

0S

erco

mm

Cor p

ora

tion

Ser

com

m F

ran

ce S

AR

L1

Com

mis

sion

expen

se4

8,7

17

-

-

0S

erco

mm

Corp

ora

tion

Ser

com

m F

ran

ce S

AR

L1

Oth

er c

urr

ent

asse

ts1

1,6

91

-

-

0S

erco

mm

Corp

ora

tion

Ser

com

m D

euts

chla

nd

Gm

bH

1O

ther

cu

rren

t as

sets

15

,34

0-

-

0

Ser

com

m C

orp

ora

tion

Ser

com

m D

euts

chla

nd

Gm

bH

1O

ther

pay

able

9,3

68

-

-

0S

erco

mm

Cor p

ora

tion

Ser

com

m D

euts

chla

nd

Gm

bH

1C

om

mis

sion

expen

se3

0,1

09

-

-

0S

erco

mm

Corp

ora

tion

Ser

com

m J

apan

Corp

.1

Com

mis

sion

expen

se9

,87

2-

-

0

Ser

com

m C

orp

ora

tion

Ser

com

m J

apan

Corp

.1

Oth

er c

urr

ent

asse

ts2

6,5

06

-

-

0S

erco

mm

Corp

ora

tion

Ser

com

m J

apan

Corp

.1

Sal

es r

even

ue

59

,09

9(n

ote

4)

-

0S

erco

mm

Corp

ora

tion

Ser

com

m J

apan

Corp

.1

Acc

ou

nts

rec

eivab

le4

6,7

73

-

-

0S

erco

mm

Cor p

ora

tion

Ser

com

m R

uss

ia L

imit

ed L

iabil

ity

Com

pan

y1

Acc

ou

nts

rec

eivab

le1

55

,91

7-

1

%0

Ser

com

m C

or p

ora

tion

Ser

com

m R

uss

ia L

imit

ed L

iab

ilit

y C

om

pan

y1

Oth

er r

ecei

vab

le5

2,9

70

-

-

0S

erco

mm

Corp

ora

tion

Ser

com

m R

uss

ia L

imit

ed L

iabil

ity

Com

pan

y1

Oth

er c

urr

ent

asse

ts2

8,0

33

-

-

0S

erco

mm

Corp

ora

tion

Ser

com

m R

uss

ia L

imit

ed L

iabil

ity

Com

pan

y1

Sal

es r

even

ue

61

5,1

55

(note

4)

2%

0S

erco

mm

Corp

ora

tion

Ser

com

m U

SA

In

c.1

Oth

er p

ayab

le8

,58

7-

-

0

Ser

com

m C

orp

ora

tion

Ser

com

m U

SA

In

c.1

Com

mis

sion

expen

se8

3,9

46

-

-

0S

erco

mm

Cor p

ora

tion

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Pu

rch

ase

22

,86

1,4

83

-

60

%0

Ser

com

m C

orp

ora

tion

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Sal

es r

even

ue

88

,91

2(n

ote

4)

-

0S

erco

mm

Corp

ora

tion

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Acc

ou

nts

pay

ble

2,6

87

,37

3-

1

1%

0S

erco

mm

Corp

ora

tion

Dw

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Sal

es r

even

ue

20

,17

8(n

ote

4)

-

0S

erco

mm

Cor p

ora

tion

Dw

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Acc

ou

nts

rec

eivab

le1

9,2

29

-

-

0S

erco

mm

Corp

ora

tion

Dw

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Acc

ou

nts

pay

ble

23

,76

5-

-

0

Ser

com

m C

orp

ora

tion

Dw

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

ed1

Purc

has

e4

2,6

87

-

-

0S

erco

mm

Corp

ora

tion

Haw

xey

e In

c.1

Inta

ngib

le A

sset

s1

5,4

40

-

-

1S

erco

mm

US

A I

nc.

Haw

xe y

e In

c.3

Acc

ou

nts

rec

eivab

le1

1,9

30

-

-

1S

erco

mm

US

A I

nc.

Haw

xey

e In

c.3

Sal

es r

even

ue

3,9

85

(note

4)

-

2S

ern

et T

ech

nolo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Acc

ou

nts

rec

eivab

le2

69

,74

9-

1

%2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Oth

er r

ecei

vab

les

29

4,4

80

-

1%

2S

ern

et T

ech

nolo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Pro

cess

ing r

even

ue

38

6,1

40

-

1%

2S

ern

et T

ech

nolo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Rep

airs

rev

enu

e6

,84

9-

-

2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Ren

t re

ven

ue

8,3

50

-

-

2S

ern

et T

ech

nolo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Pu

rch

ase

1,7

65

,97

2-

7

%2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Acc

ou

nts

pay

ble

1,1

52

,62

5-

5

%2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edD

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

ed3

Inte

rest

rev

enu

e1

3,4

00

-

-

2S

ern

et T

ech

nolo

gy

(Su

zhou

) L

imit

edS

uzh

ou

Fem

tel

Co

mm

un

icat

ion

s C

o., L

td.

3A

ccou

nts

rec

eivab

le7

,27

6-

-

2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edS

uzh

ou

Fem

tel

Co

mm

un

icat

ion

s C

o., L

td.

3C

om

mis

sion

expen

se4

,40

3-

-

2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edN

anji

ng F

emte

l C

om

mu

nic

atio

ns

Co., L

td.

3O

ther

cu

rren

t as

sets

22

,91

8-

-

2

Ser

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edN

anji

ng F

emte

l C

om

mu

nic

atio

ns

Co., L

td.

3S

ervic

e fe

es8

,49

9-

-

3

Dw

net

Tec

hn

olo

gy

(Su

zhou

) L

imit

edS

uzh

ou

Fem

tel

Co

mm

un

icat

ion

s C

o., L

td.

3A

ccou

nts

rec

eivab

le1

7,5

42

-

-

3D

wn

et T

ech

nolo

gy

(Su

zhou

) L

imit

edS

uzh

ou

Fem

tel

Com

mu

nic

atio

ns

Co., L

td.

3S

ales

rev

enu

e1

9,2

30

(note

4)

-

Note

1:

Th

e C

om

pan

y an

d i

ts s

ubsi

dia

ries

are

cod

ed a

s fo

llow

s:1

.Th

e C

om

pan

y is

cod

ed 0

.2

.Th

e su

bsi

dia

ries

sh

ou

ld b

e co

ded

con

secu

tivel

y beg

inn

ing f

rom

"1

" in

th

e ord

er p

rese

nte

d i

n t

he

table

above.

Note

2:

Tra

nsa

ctio

ns

are

cate

gori

zed

as

foll

ow

s:1

. T

he

par

ent

com

pan

y to

su

bsi

dia

ry.

2. S

ubsi

dia

ry t

o p

aren

t co

mpan

y.3

. S

ubsi

dia

ry t

o s

ubsi

dia

ry.

Note

3:

Th

e per

cen

tage

wit

h r

espec

t to

th

e co

nso

lid

ated

ass

et/r

even

ues

for

tran

sact

ion

s of

bal

ance

sh

eet

item

s ar

e bas

ed o

n e

ach

ite

ms

bal

ance

at

per

iod

-en

d. F

or

pro

fit

or

loss

ite

ms,

cu

mu

lati

ve

bal

ance

s ar

e use

d a

s bas

is.

Note

4:

Th

e sa

les

pri

ce t

o t

he

above

rela

ted

par

ties

was

det

erm

ined

th

rou

gh

mu

tual

agre

emen

t bas

ed o

n t

he

mar

ket

con

dit

ion

s. T

he

coll

ecti

on

per

iod

for

thir

d p

arty

was

mon

th-e

nd

90

-21

0 d

ays,

wh

ile

the

t

erm

s fo

r d

om

esti

c sa

les

was

net

30

-75

day

s. T

he

coll

ecti

on

per

iod

for

over

seas

sal

es w

as n

et 3

0-2

10

day

s.

Ter

ms

Per

cen

tage

of

con

soli

dat

ed o

per

atin

g

reven

ues

or

con

soli

dat

ed

tota

l as

sets

No.

(Note

1)

Nam

e of

rela

ted

par

ties

Cou

nte

rpar

ty

Nat

ure

of

rela

tion

ship

(Note

2)

Acc

ou

nt

Am

ou

nt


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

S

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

Unl

ess O

ther

wis

e St

ated

)

Att

achm

ent

7:

For

those

who d

irec

tly o

r in

dir

ectl

y h

ave

maj

or

infl

uen

ce o

r co

ntr

ol

over

the

inves

tee

com

pan

y

Endin

gB

egin

nin

gS

har

esP

erce

nta

ge

of

Book

bal

ance

bal

ance

(in t

housa

nds)

ow

ner

ship

val

ue

Ser

com

m C

orp

ora

tion

Ser

com

m U

SA

Inc.

Cal

iforn

ia,

Am

eric

aC

onsu

ltin

g a

nd c

ust

om

er s

ervic

e

of

IT p

roduct

$20,7

39

$20,7

39

650

100

$21,7

21

$1,6

93

$1,6

93

Subsi

dia

ry

Ser

com

m T

radin

g C

o.

Ltd

.S

amoa

Inves

tmen

t hold

ing

1,4

71,1

86

1,4

71,1

86

46,8

00

100

5,1

95,2

40

647,0

65

647,0

65

Subsi

dia

ry

Shukuan

Inves

tmen

t L

td.

Tai

pei

, T

aiw

anIn

ves

tmen

t ac

tivit

y56,2

98

56,2

98

2,8

00

100

33,1

21

238

238

Subsi

dia

ry

Ser

com

m J

apan

Corp

.T

okyo,

Japan

Sal

es o

f IT

pro

duct

s157,7

21

157,7

21

10

100

(15,4

45)

(16,1

41)

(16,1

41)

Subsi

dia

ry

Ser

com

m F

rance

SA

RL

Par

is,

Fra

nce

Consu

ltin

g a

nd c

ust

om

er s

ervic

e

of

IT p

roduct

4,0

04

4,0

04

100

100

10,3

74

1,4

24

1,4

24

Subsi

dia

ry

Ser

com

m D

euts

chla

nd G

mbH

Düss

eldorf

, G

erm

any

Consu

ltin

g a

nd c

ust

om

er s

ervic

e

of

IT p

roduct

3,7

27

3,7

27

100

100

3,3

61

1,4

33

1,4

33

Subsi

dia

ry

Ser

com

m R

uss

ia L

imit

ed

Lia

bil

ity C

om

pan

y

Russ

iaS

ales

of

IT p

roduct

s10

10

10

100

19,2

52

6,8

89

6,8

89

Subsi

dia

ry

Pre

scie

nse

Lim

ited

London,

UK

Des

ign,

rese

arch

and a

ppli

cati

on

of

smar

thom

e pla

tform

tec

hnolo

gy

-

-

3,3

33

25

-

-

-

Ass

oci

ates

Ser

com

m T

radin

g C

o.

Ltd

.Z

ealo

us

Inves

tmen

ts L

td.

Sam

oa

Inves

tmen

t hold

ing

989,3

58

989,3

58

30,9

56

100

4,1

06,2

76

443,2

69

443,2

69

Subsi

dia

ry

Sm

art

Tra

de

Inc.

Sam

oa

Inves

tmen

t hold

ing

481,8

29

481,8

29

16,0

00

100

1,0

88,8

02

203,7

96

203,7

96

Subsi

dia

ry

Ser

com

m F

rance

SA

RL

Ser

com

m I

tali

a S

RL

Ital

yC

onsu

ltin

g a

nd c

ust

om

er s

ervic

e

of

IT p

roduct

388

388

10

100

1,6

32

577

577

Subsi

dia

ry

Ser

com

m U

SA

Inc.

Haw

Xey

e In

c.C

alif

orn

ia,

Am

eric

aP

rovis

ion o

f te

chnolo

gy o

n v

ideo

obje

ct a

nal

ysi

s-

12,1

74

-

--

(5

3,3

74)

(1,4

22)

Subsi

dia

ry

(Note

)(N

ote

)

Zea

lous

Inves

tmen

ts L

td.

Haw

Xey

e In

c.C

alif

orn

ia,

Am

eric

aP

rovis

ion o

f te

chnolo

gy o

n v

ideo

obje

ct a

nal

ysi

s24,3

48

12,1

74

800

55

(30,7

92)

(53,3

74)

(28,2

42)

Subsi

dia

ry

(Note

)(N

ote

)

Note

: F

or

the

purp

ose

of

reorg

aniz

atio

n,

the

ow

ner

ship

of

Haw

Xey

e In

c.,

whic

h w

as p

revio

usl

y o

wned

by S

erco

mm

US

A I

nc.

, w

as t

ransf

erre

d t

o Z

ealo

us

Inves

tim

ents

Ltd

. in

Mar

ch 2

017.

Note

Inves

tmen

t

inco

me

(loss

)

reco

gniz

ed

Bal

ance

as

of

31 D

ecem

ber

2017

Inves

tor

com

pan

yIn

ves

tee

com

pan

yM

ain b

usi

nes

ses

and

pro

duct

s

Ori

gin

al i

nves

tmen

t am

ount

Ad

dre

ss

Net

inco

me

(loss

) of

the

inves

tee


SER

CO

MM

CO

RPO

RA

TIO

N A

ND

SU

BSI

DIA

RIE

S

(Exp

ress

ed in

Tho

usan

ds o

f New

Tai

wan

Dol

lars

Unl

ess O

ther

wise

Sta

ted)

Att

achm

ent

8:

Info

rmat

ion o

n M

ainla

nd C

hin

a in

ves

tmen

ts

Outf

low

Infl

ow

Ser

net

Tec

hnolo

gy

(Suzh

ou)

Lim

ited

Man

ufa

ctu

re,

rese

arch

an

d

dev

elo

pm

ent

of

rou

ters

,

com

munic

atio

n p

roduct

s, W

lan

pro

duct

s; R

&D

cen

ter

of

soft

war

e

$9

33

,25

2In

ves

tmen

t in

cash

$9

12

,69

8$

-$

-$

91

2,6

98

$5

41

,36

21

00

%$

54

1,3

62

$4

,00

2,9

94

$-

(US

D 2

9,9

00

th

ou

san

d)

(No

te 1

)(U

SD

28

,90

0 t

ho

usa

nd

)(U

SD

28

,90

0 t

ho

usa

nd

)(N

ote

5)

(No

te 5

)

Dw

net

Tec

hnolo

gy

(Suzh

ou)

Lim

ited

Man

ufa

ctu

re o

f ro

ute

rs,

com

munic

atio

n p

roduct

s, W

lan

pro

duct

s; s

ales

and a

fter

-sal

es

serv

ice

48

1,8

29

Inves

tmen

t in

cash

48

1,8

29

-

-

48

1,8

29

20

3,7

96

10

0%

20

3,7

96

1,0

88

,80

1

-

(US

D 1

6,0

00

th

ou

san

d)

(No

te 2

)(U

SD

16

,00

0 t

ho

usa

nd

)(U

SD

16

,00

0 t

ho

usa

nd)

(No

te 5

)(N

ote

5)

Suzh

ou H

ua-

Yi

Com

munic

atio

ns

Co

., L

td

Sal

e of

route

rs,

com

munic

atio

n

pro

duct

s, W

lan p

roduct

s2

,45

4In

ves

tmen

t in

cash

-

-

-

-

(21

)1

00

%(2

1)

1,9

43

-

(RM

B 5

00

th

ou

san

d)

(No

te 3

)

Suzh

ou F

emte

l

Com

munic

atio

ns

Co

., L

td.

Sal

e of

com

munic

atio

n p

roduct

s32,5

99

Inves

tmen

t in

cash

-

-

-

-

(22

,05

1)

10

0%

(22

,05

1)

(32

,99

8)

-

(RM

B 6

,50

0 t

ho

usa

nd

)(N

ote

3)

Nan

jing F

emte

l

Com

munic

atio

ns

Co

., L

td.

Sal

e of

com

munic

atio

n p

roduct

s;

R&

D c

ente

r o

f so

ftw

are;

aft

er-

sale

s se

rvic

e

12

,53

8In

ves

tmen

t in

cash

-

-

-

-

(12

,42

6)

10

0%

(12

,42

6)

(18

,96

9)

-

(RM

B 2

,50

0 t

ho

usa

nd

)(N

ote

4)

Unli

mit

ed(N

ote

6)

Note

1:

The

Com

pan

y es

tabli

shed

Ser

com

m T

radin

g C

o.

Ltd

. in

a t

hir

d r

egio

n.

Th

e C

om

pan

y re

inves

ted i

n Z

ealo

us

Inves

tmen

ts L

td.

(th

rou

gh

Ser

com

m T

rad

ing

Co

. L

td.)

an

d t

hen

in

ves

ted

in

Mai

nla

nd

Ch

ina.

Note

2:

The

Com

pan

y es

tabli

shed

Ser

com

m T

radin

g C

o.

Ltd

. in

th

e th

ird

reg

ion

. T

he

Co

mp

any

rein

ves

ted

Sm

art

Tra

de

Inc.

(th

rou

gh S

erco

mm

Tra

din

g C

o.

Ltd

.) a

nd

th

en i

nves

ted

in

Mai

nla

nd

Ch

ina.

Note

3:

Indir

ect

inves

tmen

t th

rough S

ernet

Tec

hnolo

gy

(Suzh

ou)

Lim

ited

.

Note

4:

Indir

ect

inves

tmen

t th

rough S

uzh

ou F

emte

l C

om

munic

atio

ns

Co.,

Lim

ited

.

Note

5:

Am

ount

was

rec

ogniz

ed b

ased

on t

he

audit

ed f

inan

cial

sta

tem

ents

.

Note

6:

The

Com

pan

y's

inves

tmen

t in

Mai

nla

nd C

hin

a is

not

subje

ct t

o a

n u

pper

lim

it a

s it

is

dee

med

corp

ora

te o

per

atio

ns

hea

dquar

ters

as

it c

om

pli

ed w

ith t

he

Exam

inat

ion S

tandar

ds

of

Inves

tmen

ts a

nd T

echnic

al C

ooper

atio

n i

n t

he

Mai

nla

nd C

hin

a ar

ea p

ubli

s he

In

ves

tmen

t C

om

mis

sion,

MO

EA

.

Acc

um

ula

ted

inw

ard

rem

itta

nce

of

earn

ing

s as

of

31

Dec

emb

er

20

17

Inves

tmen

t fl

ow

s

Acc

um

ula

ted o

utf

low

of

inves

tmen

t fr

om

Tai

wan

as o

f

31 D

ecem

ber

2017

Inves

tmen

t

inco

me

(lo

ss)

reco

gn

ized

Car

ryin

g

val

ue

as o

f

31

Dec

emb

er

20

17

Per

cen

tag

e o

f

ow

ner

ship

Net

inco

me

(lo

ss)

of

inves

tee

com

pan

y

Met

ho

d o

f

inves

tmen

t

Acc

um

ula

ted i

nves

tmen

t in

Mai

nla

nd

Upper

lim

it o

n i

nves

tmen

t

$1

,39

4,5

27

(U

SD

44

,90

0 t

ho

usa

nd

)

Inves

tmen

t am

ounts

auth

ori

zed b

y In

ves

tmen

t

Com

mis

sion,

MO

EA

$1

,40

7,5

75

(U

SD

45

,14

4

tho

usa

nd

)

Chin

a as

of

31 D

ecem

ber

2017

Acc

um

ula

ted o

utf

low

of

inves

tmen

t fr

om

Tai

wan

as o

f

1 J

anu

ary

20

17

Inves

tee

com

pan

yM

ain b

usi

nes

ses

and p

roduct

sT

ota

l am

ount

of

pai

d-i

n c

apit

al

leer t o shareholders - sercomm · 002 | 2017 annual report design zentrum nordrhein westfalen in...

Documents