opto tech corporation financial statements and report of independentaccountants … ·...

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OPTO TECH CORPORATION

FINANCIAL STATEMENTS

AND REPORT OF INDEPENDENT ACCOUNTANTS

MARCH 31, 2012 AND 2011

For the convenience of readers and for information purpose only, the auditors’ report and the accompanying financial

statements have been translated into English from the original Chinese version prepared and used in the Republic of China.

In the event of any discrepancy between the English version and the original Chinese version or any differences in the

interpretation of the two versions, the Chinese-language auditors’ report and financial statements shall prevail.

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Report of Independent Accountants Translated from Chinese

(12)PWCR12000017

To the Board of Directors and Stockholders of Opto Tech Corporation

We have reviewed the accompanying balance sheets of Opto Tech Corporation as of March 31, 2012 and

2011, and the related statements of income and of cash flows for the three-month periods then ended. These

financial statements are the responsibility of the Company’s management. Our responsibility is to express a

conclusion on these financial statements based on our reviews.

Except as discussed in the following paragraph, we conducted our reviews in accordance with the

Statement of Auditing Standards No. 36, “Review of Financial Statements” in the Republic of China. A review

consists principally of inquiries of company personal and analytical procedures applied to financial data. It is

substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective

of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do

not express such an opinion.

The Company’s long-term investments accounted for under the equity method and the amounts and

information disclosed in Note 11 as of March 31, 2012 and 2011 were based on the investees’ financial

statements which were not reviewed by independent accountants. As of March 31, 2012 and 2011, these

long-term investments amounted to $1,341,479 thousand and $1,115,503 thousand, representing 11.86% and

9.34% of total assets, respectively. The related investment loss were $3,455 thousand and $22,037 thousand for

the three-month periods then ended.

Based on our reviews, except for the effect on the financial statements of such adjustments, if any, as

might have been determined to be necessary had the financial statements of these investee companies been

reviewed by independent accountants as explained in the preceding paragraph, we are not aware of any material

modifications that should be made to the financial statements referred to above to be in conformity with the

“Rules Governing the Preparation of Financial Statements by Securities Issuers” and generally accepted

accounting principles in the Republic of China.

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We have also reviewed the consolidated financial statements of Opto Tech Corporation and its subsidiaries

(not presented herein) as of and for the three-month period ended March 31, 2011. In our report dated May 9,

2011, we issued a qualified conclusion on the consolidated financial statements since the financial statements of

the investee companies were not reviewed by independent accountants. The consolidated financial statements of

Opto Tech Corporation and its subsidiaries as of and for the three-month period ended March 31, 2012 have not

yet been reviewed by independent accountants.

PricewaterhouseCoopers, Taiwan

April 26, 2012

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

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

2012 2011 2012 2011

ASSETS LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Assets Current LiabilitiesCash and cash equivalents (Note 4(1)) 2,484,357$ 2,645,113$ Short-term loans (Note 4(10)) 735,188$ 746,284$Financial assets at fair value through profit or loss - current (Note 4(2)) 171,526 321,002 Financial liabilities at fair value through profit or loss - current (Note 4(2)) - 482Notes receivable - net 15,369 21,217 Notes payable 15,885 22,833Accounts receivable - net (Note 4(3)) 1,667,718 2,021,620 Accounts payable 589,400 740,926Accounts receivable - related parties - net (Note 5) 166,425 154,115 Accounts payable - related parties (Note 5) 651,936 786,677Other receivables (Note 4(18)) 18,284 14,373 Income tax payable (Note 4(18)) 29,806 17,103Other receivables - related parties (Note 5) - 113 Accrued expenses (Note 5) 337,831 313,637Other financial assets - current (Note 6) 27,500 73,036 Other payables 82,917 108,770Inventories - net (Note 4(4)) 1,150,580 1,282,823 Unearned revenue collected in advance (Note 5) 50,370 8,941Prepaid expenses 24,080 4,369 Long-term liabilities - current portion (Note 4(11)) 1,140,264 656,361Prepayments 13,668 6,921 Other current liabilities 22,869 19,063Deferred income tax assets - current (Note 4(18)) 45,581 48,410 Total current liabilities 3,656,466 3,421,077Other current assets 4,235 2,240

Total current assets 5,789,323 6,595,352 Long-term LiabilityLong-term loans (Notes 4(11), 6 and 7) 289,412 1,182,817

Funds and Investments 289,412 1,182,817Available-for-sale financial assets - non-current (Note 4(5)) 44,943 71,056Financial assets carried at cost - non-current (Note 4(6)) 539,117 564,564 Other LiabilitiesLong-term investments - accounted for under the equity method (Note 4(7)) 1,341,479 1,115,503 Accrued pension liabilities (Note 4(12)) 143,009 148,991Total funds and investments 1,925,539 1,751,123 Guarantee deposits 60 48

Other liabilities - others 18,025 15,491

Property, Plant and Equipment (Notes 4(8) and 6) Total other liabilities 161,094 164,530Cost TOTAL LIABILITIES 4,106,972 4,768,424

Buildings 1,709,789 1,708,936Machinery 3,862,921 3,378,150 Stockholders' EquityUtility facilities 976,898 961,549 CapitalPollution prevention equipment 577,709 627,897 Common stock (Notes 4(13)(17)) 5,456,621 5,490,051Transportation equipment 5,241 5,241 Capital Reserves (Note 4(14))Office equipment 49,336 47,811 Paid-in capital in excess of par 313,140 315,058Other equipment 1,559,328 1,422,010 Additional paid-in capital - treasury stock transactions (Note 4(16)) 60,256 60,625

Cost and revaluation increments 8,741,222 8,151,594 Capital reserve from long-term investments 173,980 106,560Less: Accumulated depreciation 5,839,901)( 5,455,096)( Capital reserve from employee stock options (Note 4(17)) 140,880 89,343

Accumulated impairment 9,295)( 9,314)( Retained EarningsConstruction in progress and prepayments for equipment 327,967 458,739 Legal reserve 216,841 148,030Total property, plant and equipment 3,219,993 3,145,923 Special reserve 115,018 42,914

Unappropriated earnings (Notes 4(15)(18)) 817,566 1,094,425Other Adjustments to Stockholders' Equity

Intangible asset Cumulative translation adjustments 43,722 3,596Deferred pension costs (Note 4(12)) 1,964 2,182 Unrecognized pension cost (Note 4(12)) 78,296)( 93,124)(

Unrealized gain or loss on available-for-sale financial assets (Note 4(5)) 26,113)( 61,013)(Other assets Treasury stock (Note 4(16)) 26,699)( 26,699)(

Idle assets (Note 4(9)) 43,015 108,058 TOTAL STOCKHOLDERS' EQUITY 7,206,916 7,169,766Deposits out 16,559 10,422Deferred expenses 27,852 22,686 Commitments and Contingent Liabilities (Note 7)Deferred income tax assets - non-current (Note 4(18)) 289,643 302,444Total other assets 377,069 443,610

TOTAL ASSETS 11,313,888$ 11,938,190$ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,313,888$ 11,938,190$

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

OPTO TECH CORPORATIONBALANCE SHEETS

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)MARCH 31,

(Unaudited)

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STATEMENTS OF INCOMEFOR THE THREE-MONTH PERIODS ENDED MARCH 31

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR EARNINGS PER SHARE AMOUNTS)(Unaudited)

2012 2011


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Operating Revenues

Sales revenue $ 1,527,216 $ 1,817,074

Sales returns ( 23,079) ( 15,508)

Sales discounts ( 11,645) ( 17,922)

Net sales revenue (Note 5) 1,492,492 1,783,644

Other operating revenues 58,391 81,342

Total operating revenues 1,550,883 1,864,986

Operating Costs

Cost of goods sold (Notes 4(4)(20) and 5) ( 1,248,148) ( 1,468,041)

Other operating costs ( 37,553) ( 43,450)

Total operating costs ( 1,285,701) ( 1,511,491)

Gross profit 265,182 353,495

Unrealized gain from intercompany transactions ( 909) ( 647)

Realized gain from intercompany transactions 869 4,125

Gross profit, net 265,142 356,973

Operating Expenses (Note 4(20))

Selling expenses ( 26,429) ( 54,153)

General and administrative expenses ( 107,362) ( 122,615)

Research and development expenses ( 51,446) ( 50,374)

Total operating expenses ( 185,237) ( 227,142)

Operating income 79,905 129,831

Non-operating income and gains

Interest income 3,141 2,465

Dividend income 8,940 10,581

Gain on sale of investments - 1,493

Gain on valuation of financial assets 296 307

Miscellaneous income 3,817 1,992

Total non-operating income and gains 16,194 16,838

Non-operating expenses and losses

Interest expense ( 8,407) ( 7,301)

Investment loss accounted for under the equity method (Note 4(7)) ( 3,455) ( 22,037)

Loss on disposal of property, plant and equipment ( 12) ( 772)

Foreign exchange loss ( 7,853) ( 286)

Financing charges ( 1,441) ( 1,519)

Depreciation of idle assets ( 8) ( 12)

Loss on valuation of financial liabilities - ( 442)

Miscellaneous losses - ( 3)

Total non-operating expenses and losses ( 21,176) ( 32,372)

Income before income tax 74,923 114,297

Income tax expense (Note 4(18)) ( 12,845) ( 35,171)

Net income $ 62,078 $ 79,126

Before Tax Af t e r Ta x Before Tax Af t e r Ta x

Basic earnings per share (in dollars) (Note 4(19))

Net income $ 0.14 $ 0.11 $ 0.21 $ 0.14

Diluted earnings per share (in dollars) (Note 4(19))

Net income $ 0.14 $ 0.11 $ 0.21 $ 0.14

Pro forma information based on the assumption that the Company’s

shares held by its subsidiary are not treated as treasury stocks:

Net income $ 78,411 $ 65,566 $ 114,851 $ 79,680

Basic earnings per share (in dollars)

Net income $ 0.14 $ 0.12 $ 0.21 $ 0.15

Diluted earnings per share (in dollars)

Net income $ 0.14 $ 0.12 $ 0.21 $ 0.14

OPTO TECH CORPORATIONSTATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED MARCH 31,(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

(Unaudited)

2012 2011

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CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 62,078 $ 79,126

Adjustments to reconcile net income to net cash provided

by (used in) operating activities

(Recovery of) bad debts expense ( 3,251) 20,446

Depreciation of property, plant and equipment 97,477 124,911

Depreciation of idle assets 8 12

Amortization 5,859 3,919

Investment loss accounted for under equity method 3,455 22,037

(Gain) loss on valuation of financial assets and liabilities ( 296) 135

Gain on price recovery of inventories ( 378) ( 10,227)

Reclassification to financing charges from deferred expenses 375 413

Gain on sale of investments - ( 1,493)Loss on disposal of property, plant and equipment( including idle assets) 12 772

Compensation cost of employee stock options 12,734 13,705

Changes in assets and liabilities

(Increase) decrease in:Financial assets at fair value through profit or loss -current - ( 20,000)

Notes receivable – net 25,676 3,241

Notes receivable – related parties – net - 489

Accounts receivable – net ( 108,972) ( 157,663)

Accounts receivable – related parties – net 7,658 12,668

Other receivables 9,293 7,651

Other receivables – related parties - ( 113)

Inventories 133,772 77,937

Prepaid expenses ( 21,063) ( 1,483)

Prepayments ( 1,310) 4,034

Other current assets ( 1,528) 827

Deferred income tax assets 12,577 35,171

Increase (decrease) in:

Notes payable ( 1,877) ( 1,877)

Accounts payable 24,633 ( 190,424)

Accounts payable – related parties ( 68,636) ( 11,718)

Accrued expenses 14,007 ( 54,699)

Other payables ( 64,941) 11,835

Unearned revenue collected in advance 15,302 ( 18,650)

Other current liabilities ( 12,074) ( 1,348)

Accrued pension liabilities 901 ( 98)

Deferred credit - gain from intercompany transactions 40 ( 3,478)

Other liabilities 17,115 -

Net cash provided by (used in) operating activities 158,646 ( 53,942)

(Continued)

OPTO TECH CORPORATIONSTATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE THREE-MONTH PERIODS ENDED MARCH 31,(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

(Unaudited)

2012 2011


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CASH FLOWS FROM INVESTING ACTIVITIES

Decrease in restricted cash and cash equivalents $ 2,216 $ 68,434

Proceeds from disposal of financial assets carried at cost - 10,189

Acquisition of property, plant and equipment ( 61,271) ( 189,936)Proceeds from disposal of property, plant and equipment(including idle assets) - 190

(Increase) decrease in deposits out ( 5,276) 21

Increase in deferred expenses ( 4,707) ( 2,214)

Net cash used in investing activities ( 69,038) ( 113,316)

CASH FLOWS FROM FINANCING ACTIVITIES

Increase in short-term loans 19,970 245,010

Decrease in long-term loans (including long-term loans maturingwithin one year) ( 268,659) ( 87,808)

Increase (decrease) in guarantee deposits 2 ( 2)

Purchase of treasury stock ( 28,184) -

Net cash (used in) provided by financing activities ( 276,871) 157,200

Net decrease in cash and cash equivalents ( 187,263) ( 10,058)

Cash and cash equivalents at beginning of period 2,671,620 2,655,171

Cash and cash equivalents at end of period $ 2,484,357 $ 2,645,113

Supplemental disclosures of cash flow information

Interest paid $ 9,122 $ 7,961

Less: Interest capitalized ( 841) ( 867)

Interest paid (net of interest capitalized) $ 8,281 $ 7,094

Income tax paid $ - $ -

Investing and financing activities not affecting cash flows

Long-term liabilities maturing within one year $ 1,140,264 $ 656,361

Reclassification of property, plant and equipment to deferredexpenses $ 735 $ 1,650

Retirement of treasury stocks $ 28,184 $ -

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NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,

EXCEPT AS OTHERWISE INDICATED)

(Unaudited)

1. HISTORY AND ORGANIZATION

Opto Tech Corporation (the “Company”) was incorporated as a company limited by shares under the

provisions of the Company Law of the Republic of China (R.O.C.) on December 21, 1983. The

shares of the Company have been traded on the Taiwan Stock Exchange since May 2, 1995. The

Company is primarily engaged in the manufacture and sales of semiconductor components as well

as research and development, design, manufacture and sales of systems products. As of March 31,

2012, the Company had 1,378 employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements of the Company are prepared in accordance with the “Rules

Governing the Preparation of Financial Statements by Securities Issuers” and generally accepted

accounting principles in the Republic of China. The Company’s significant accounting policies are

summarized below:

1)Translation of financial statements of foreign subsidiaries

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars using the

exchange rates prevailing at the balance sheet date. Equity accounts are translated at historical

rates except for beginning retained earnings, which is carried forward from prior year’s balance.

Dividends are translated at the rates prevailing at the date of declaration. Profit and loss accounts

are translated at weighted-average rates during the year. The resulting translation differences are

included in “cumulative translation adjustments” under stockholders’ equity.

2)Foreign currency transactions

A. Transactions denominated in foreign currencies are translated into functional currency at the

spot exchange rates prevailing at the transaction dates. Exchange gains or losses due to the

difference between the exchange rate on the transaction date and the exchange rate on the date

of actual receipt and payment are recognized in current year’s profit or loss.

B. Receivables, other monetary assets and liabilities denominated in foreign currencies are

translated at the spot exchange rates prevailing at the balance sheet date. Exchange gains or

losses are recognized in profit or loss.

C. At the end of the period, foreign currency non-monetary assets and liabilities at fair value

through profit or loss are evaluated at the spot exchange rates prevailing at the balance sheet

date. Any exchange gain or loss resulting from the evaluation shall be recognized in current

period’s profit or loss. Conversely, foreign currency non-monetary assets and liabilities at fair

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value through stockholders’ equity are evaluated at the spot exchange rates prevailing at the

balance sheet date. Any exchange gain or loss resulting from the evaluation shall be

recognized in stockholders’ equity. However, non-monetary items that are measured not based

on the fair value are evaluated using the historical exchange rates at the date of the transaction.

3) Criteria for classifying current or non-current assets and liabilities

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

are classified as non-current assets:

a) Assets arising from operating activities that are expected to be realized or consumed, or

are intended to be sold within the normal operating cycle;

b) Assets held mainly for trading purposes;

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

d) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that

are to be exchanged or used to pay off liabilities more than twelve months after the

balance sheet date.

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

they are classified as non-current liabilities:

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

normal operating cycle;

b) Liabilities arising mainly from trading activities;

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

d) Liabilities for which the repayment date cannot be extended unconditionally to more than

twelve months after the balance sheet date.

4) Cash and cash equivalents

Cash equivalents represent highly liquid investments that meet the following requirements:

A. Readily convertible to cash; and

B. With maturities less than three months and which are subject to insignificant risk of changes in

value resulting from fluctuations in interest rates.

The Company’s statement of cash flows is prepared on the basis of cash and cash equivalents.

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

A. Financial assets and financial liabilities at fair value through profit or loss are recognized and

derecognized using trade date accounting and are recognized initially at fair value.

B. These financial assets and financial liabilities are subsequently remeasured and stated at fair

value and the gain or loss is recognized in profit or loss. The fair value of open-end mutual

funds is based on the net asset value at the balance sheet date.

6)Available-for-sale financial assets

A. Available-for-sale financial assets are recognized and derecognized using trade date

accounting and are initially stated at fair value plus transaction costs that are directly

attributable to the acquisition of the financial asset.

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B. The financial assets are remeasured and stated at fair value, and the gain or loss is recognized

in equity, until the financial asset is derecognized, at which time the cumulative gain or loss

previously recognized in equity shall be recognized in profit or loss. The fair values of listed

stocks and OTC stocks are based on the closing prices quoted in the Taiwan Stock Exchange

and the GreTai Securities Market at the balance sheet date.

C. If there is any objective evidence that the financial asset is impaired, the cumulative loss that

had been recognized directly in equity shall be transferred from equity to profit or loss. When

the fair value of an equity instrument subsequently increases, impairment losses recognized

previously in profit or loss shall be reversed and recognized as adjustments in equity.

7) Financial assets carried at cost

A. Investment in unquoted equity instruments is recognized or derecognized using trade date

accounting and is stated initially at its fair value plus transaction costs that are directly

attributable to the acquisition of the financial asset.

B. If there is any objective evidence that the financial asset is impaired, the impairment loss is

recognized in profit or loss. Such impairment loss shall not be reversed when the fair value of

the asset subsequently increases.

8) Notes, accounts and other receivables

A. Notes and accounts receivable are claims resulting from the sale of goods or service. Claims

other than notes and accounts receivable are classified as other receivables. Upon initial

recognition, notes, accounts and other receivables are recognized at fair values. In subsequent

periods, they are measured at amortized cost using the effective interest method less

accumulated impairment.

B. At each balance sheet date, the Company assessed whether objective evidence of impairment

exists individually for financial assets that are individually significant, and individually or

collectively for financial assets that are not individually significant. If there is objective

evidence that an impairment loss has been incurred, the amount of the loss is recognized and

measured as the difference between the asset’s carrying amount and the present value of

estimated future cash flow discounted at the financial asset’s original effective interest rate. If,

in a subsequent period, the amount of the impairment loss decreases and the decrease can be

related objectively to an event occurring after the impairment was recognized, the previously

recognized impairment loss shall be reversed. The reversal shall not result in a carrying

amount of the financial asset that exceeds what the amortized cost would have been had the

impairment not been recognized at the date the impairment is reversed. The amount of

reversal shall be recognized in profit or loss.

9) Inventories

The perpetual inventory system is adopted for inventory recognition. Inventories are stated at cost.

The cost is determined using the weighted-average method. Fixed manufacturing costs are

allocated on the basis of the normal capacity of production equipment. At the end of period,

inventories are evaluated at the lower of cost or net realizable value, and the individual item

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approach is used in the comparison of cost and net realizable value. The calculation of net

realizable value is based on the estimated selling price in the normal course of business, net of

estimated costs of completion and estimated selling expenses. Allowance for slow moving items is

provided when necessary.

10) Long-term equity investments accounted for under the equity method

A.Long-term equity investments in which the Company holds more than 20% of the investee

company’s voting shares or has the ability to exercise significant influence on the investee’s

operational decisions are accounted for under the equity method. The excess of the initial

investment cost over the acquired net asset value of the investee attributable to goodwill is no

longer amortized, effective January 1, 2006. Retrospective adjustment of the amount of

goodwill amortized in previous year(s) is not required.

B.Long-term equity investments in which the Company holds more than 50% of the voting

shares of the investees or has significant control ability on the investees’ operations are

accounted for under the equity method and included in the quarterly consolidated financial

statements.

C.Effective January 1, 2005, if the Company has the control ability over the investees, the

Company recognizes all the losses incurred by such entities that will not be covered by other

stockholders. When the operations of such investees become profitable, the Company

recognizes the profits until the amount of losses previously recognized by the Company is

fully recovered.

D.The unrealized gains (losses) on the downstream transactions between the Company and the

investees accounted for under the equity method are eliminated at period-end according to the

Company’s percentage of shareholding in these investees. Where the Company has

controlling power over the investees, the unrealized gains (losses) are eliminated in full

amount and are recognized only when they are realized. Additionally, the unrealized gains

(losses) on the upstream transactions and sidestream transactions between the Company and

the investees accounted for under the equity method are eliminated based on the Company’s

equivalent percentage of shareholding in these investees.

E. Exchange differences arising from translation of the financial statements of overseas investee

companies accounted for under the equity method are recorded as “cumulative translation

adjustments” under stockholders’ equity.

F. The accounting policy on impairment of long-term investments accounted for under the equity

method is described in Note 2(13).

11) Property, plant and equipment

A.Property, plant and equipment are stated at cost. Interests incurred on the loans used to bring

the assets to the condition and location necessary for their intended uses are capitalized.

B.Depreciation is provided under the straight-line method based on the assets’ estimated

economic service lives. The estimated useful lives are 30~50 years for buildings and 3~10

years for the other property, plant and equipment.

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C.Major improvements and renewals are capitalized and depreciated accordingly. Maintenance

and repairs are expensed as incurred.

D.Property, plant and equipment that are idle or have no value in use are reclassified to “other

assets” at the lower of the fair value less costs to sell or book value. The resulting difference is

included in current operations. Depreciation provided on these assets is charged to

non-operating expense.

E. The accounting policy on impairment of property, plant and equipment is described in Note

2(13).

12) Deferred assets

Deferred assets, which mainly consist of telephone line installation, mold, computer software

expenses and expenses related to commercial papers, are amortized on a straight-line basis over

their estimated useful lives of 2~21 years.

13) Impairment of non-financial assets

A.The Company recognizes impairment loss when there is indication that the recoverable

amount of an asset is less than its carrying amount. The recoverable amount is the higher of

the fair value less costs to sell or value in use. The fair value less costs to sell is the amount

obtainable from the sale of the asset in an arm’s length transaction after deducting any direct

incremental disposal costs. The value in use is the present value of estimated future cash flows

to be derived from continuing use of the asset and from its disposal at the end of its useful life.

When the impairment no longer exists, the impairment loss recognized in prior years shall be

recovered.

B. The recoverable amount of goodwill shall be evaluated periodically. Impairment loss will be

recognized whenever there is indication that the recoverable amount of these assets is less

than their respective carrying amount. Impairment loss on goodwill is not recoverable in the

following years.

14) Warranty

Warranty is estimated based on historical experience. Service warranty expense is included in

the current year’s operating expense. The liability is classified into current and non-current

based on the period of the warranty.

15) Pension plan

A.Under the defined benefit pension plan, net periodic pension costs are recognized in

accordance with the actuarial calculations. Net periodic pension costs include service cost,

interest cost, expected return on plan assets, and amortization of unrecognized net transition

obligation and gains or losses on plan assets. Unrecognized net transition obligation is

amortized on a straight-line basis over 25 years. Under the defined contribution pension plan,

net periodic pension costs are recognized as incurred.

B.Minimum pension liabilities in the interim financial statements are adjusted in accordance

with the net periodic pension cost and funds contributed.

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16) Income tax

A.Inter-period and intra-period income taxes are allocated in accordance with the R.O.C. SFAS

No. 22, “Accounting for Income Taxes”. Over or under provision of prior years’ income tax

liabilities is included in the current period’s income tax.

B. Investment tax credits arising from expenditures incurred on acquisitions of equipment or

technology, research and development, employees’ training, and equity investments are

recognized in the year the related expenditures are incurred.

C.An additional 10% tax is levied on the unappropriated retained earnings and is recorded as

income tax expense in the year the stockholders resolve to retain the earnings.

D.When a change in the tax laws is enacted, the deferred tax liability or asset should be

recomputed accordingly in the period of change. The difference between the new amount and

the original amount, that is, the effect of changes in the deferred tax liability or asset, should

be recognized as an adjustment to income tax expense (benefit) for income from continuing

operations in the current period.

17) Treasury stock

A.When the Company acquires its outstanding shares as treasury stock, the cost is debited as

“treasury stock” and recognized as a reduction to stockholders’ equity. The cost of treasury

stock is accounted for on a weighted-average basis.

B.Upon disposal of the treasury stock, if the disposal price exceeds the cost of the treasury stock,

the difference is credited to “capital reserve – treasury stock”. If the disposal price is less than

the cost, the difference is debited to the capital reserve arising from the treasury stock of the

same class. Where the capital reserve is insufficient to cover the difference, the remaining

amount is charged against retained earnings.

C.Upon the registration of cancellation, a credit to “treasury stock” and a debit to “common

stock” and “capital reserve-additional paid-in capital in excess of par” is recognized, which is

in proportion to shareholding. Except for the book value sum of “common stock” and “capital

reserve-additional paid-in capital in excess of par”, the related gain is credited to “capital

reserve-treasury stock transaction” and any loss is offset against this capital reserve account.

However, when the balance of this capital reserve account is insufficient to offset the loss,

then the remaining amount is charged against retained earnings.

D.The Company’s shares held by its subsidiaries are accounted for as treasury stock.

18) Share-based payment - employee compensation plan

A.The employee stock options granted from January 1, 2004 through December 31, 2007 are

accounted for in accordance with EITF 92-070, EITF 92-071 and EITF 92-072 “Accounting

for Employee Stock Options” as prescribed by the Accounting Research and Development

Foundation, R.O.C., dated March 17, 2003. Under the share-based employee compensation

plan, compensation cost is recognized using the intrinsic value method and pro forma

disclosures of net income and earnings per share are prepared in accordance with the R.O.C.

SFAS No. 39, “Accounting for Share-based Payment”.

～ 14 ～

B.For the grant date of the share-based payment agreements set on or after January 1, 2008, the

Company shall measure the services received during the vesting period by reference to the fair

value of the equity instruments granted and account for those amounts as payroll expenses

during that period.

19) Employees’ bonuses and directors’ and supervisors’ remuneration

Effective January 1, 2008, pursuant to EITF 96-052 of the Accounting Research and

Development Foundation, R.O.C., dated March 16, 2007, “Accounting for Employees’ Bonuses

and Directors’ and Supervisors’ Remuneration”, the costs of employees’ bonuses and directors’

and supervisors’ remuneration are accounted for as expenses and liabilities, provided that such

recognition is required under legal or constructive obligation and the amounts can be estimated

reasonably. However, if the accrued amounts for employees’ bonuses and directors’ and

supervisors’ remuneration are different from the actual distributed amounts resolved by the

stockholders at their annual stockholders’ meeting subsequently, the differences shall be

recognized as gain or loss in the following year. In addition, according to EITF 97-127 of the

Accounting Research and Development Foundation, R.O.C., dated March 31, 2008, “Criteria for

Listed Companies in Calculating the Number of Shares of Employees’ Stock Bonus”, the

Company calculates the number of shares of employees’ stock bonus based on the closing price

of the Company's common stock at the previous day of the stockholders’ meeting held in the

year following the financial reporting year, and after taking into account the effects of ex-rights

and ex-dividends.

20) Revenues, costs and expenses

Revenues are recognized when the earning process is substantially completed and are realized or

realizable. Costs and expenses are recognized as incurred.

21) Use of estimates

The preparation of financial statements in conformity with generally accepted accounting

principles requires management to make estimates and assumptions that affect the amounts of

assets and liabilities and the disclosures of contingent assets and liabilities at the date of the

financial statements and the amounts of revenues and expenses during the reporting period.

Actual results could differ from those assumptions and estimates.

22) Settlement date accounting

If an entity recognizes financial assets using settlement date accounting, any change in the fair

value of the asset to be received during the period between the trade date and the settlement date

is recognized in profit or loss for financial assets or liabilities classified as at fair value through

profit or loss.

23) Interim financial reporting

In accordance with R.O.C SFAS No. 23, “Interim Financial Reporting”, the pension plan

information is not required in preparing the interim financial statements.

24) Operating segments

A.The information of operating segments is consistent with that of internal management reports

～ 15 ～

provided to the chief operating decision-marker. The chief operating decision-maker is

responsible for allocating resources to and evaluating the performance of the operating

segments. The chief operating decision-marker of the Company is the Board of Directors.

B. In accordance with R.O.C SFAS No. 41, “Operating Segments”, segment information is

required to be disclosed in the consolidated financial statements. However, segment

information is not required in the separate financial statements.

3. CHANGES IN ACCOUNTING PRINCIPLES

1)Notes receivable, accounts receivable and other receivables

Effective January 1, 2011, the Company adopted the amendments to R.O.C. SFAS No. 34,

“Financial Instruments: Recognition and Measurement”. The losses on impairment are incurred if

there is objective evidence of impairment. This change in accounting principle had no effect on

net income and earnings per share for the three-month period ended March 31, 2011.

2) Operating Segments

Effective January 1, 2011, the Company adopted the amendments to R.O.C. SFAS No. 41,

“Operating Segments”, which replaced R.O.C. SFAS No. 20, “Segment Reporting”. Segment

information for the prior year shall be restated when the Company adopts the standard for the first

time. This change in accounting principle had no effect on net income and earnings per share for

the three-month period ended March 31, 2011.

4. DETAILS OF SIGNIFICANT ACCOUNTS

1) Cash and cash equivalents

March 31,

2012 2011

Cash on hand $ 100 $ 100

Checking and demand deposits 861,150 886,413

Time deposits 1,021,107 1,233,600

Cash equivalents - Resale bonds 602,000 525,000

$ 2,484,357 $ 2,645,113

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

March 31,

2012 2011

Current items：

Financial assets held for trading

Funds $ 170,000 $ 320,000

Adjustment of financial assets held for trading

Funds 1,396 917

Forward exchange contracts 130 85

$ 171,526 $ 321,002

Adjustment of financial liabilities held for trading

Currency swap $ - $ 482

～ 16 ～

3) Accounts receivable

March 31,

2012 2011

Accounts receivable $ 1,796,345 $ 2,195,437

Less: Allowance for doubtful accounts ( 128,627) ( 173,817)

$ 1,667,718 $ 2,021,620

4) Inventories

March 31, 2012

Cost

Allowance forobsolescenceand market

value decline Carrying value

Raw materials $ 638,557 ($ 205,004) $ 433,553

Supplies 185,283 ( 13,297) 171,986

Work in process 231,522 ( 10,042) 221,480

Semi-finished goods 141,966 ( 43,865) 98,101

Finished goods 267,833 ( 42,373) 225,460

$ 1,465,161 ($ 314,581) $ 1,150,580

March 31, 2011

Cost

Allowance forobsolescenceand market

value decline Carrying value

Raw materials $ 690,763 ($ 188,986) $ 501,777

Supplies 184,159 ( 13,973) 170,186

Work in process 209,701 ( 584) 209,117

Semi-finished goods 165,357 ( 39,985) 125,372

Finished goods 326,805 ( 50,434) 276,371

$ 1,576,785 ($ 293,962) $ 1,282,823

The related expenses and losses of inventories are as follows:

For the three-month periods endedMarch 31,

2012 2011

Cost of goods sold $ 1,248,525 $ 1,478,580

Gain on price recovery of inventories ( 378) ( 10,227)

Others 1 ( 312)

$ 1,248,148 $ 1,468,041

～ 17 ～

5) Available-for-sale financial assets

March 31,

2012 2011

Non-current items:

Listed (OTC) stocks

United Radiant Technology Corp. $ 71,056 $ 132,069

Adjustment of available-for-sale financialassets ( 26,113) ( 61,013)

$ 44,943 $ 71,056

6) Financial assets carried at cost

March 31,

2012 2011

Non-current items:

Unlisted stocks

Nichia Corp. $ 379,252 $ 379,252

Lu Zhu Development Co., Ltd. 101,516 126,963

Giga Epitaxy Technology Corp. 33,000 33,000

Shin-Etsu Opto Electronic Co., Ltd. 20,000 20,000

Formosa Industrial Computing, Inc. 5,349 5,349

$ 539,117 $ 564,564

The above investments were measured at cost since these have no quoted prices and their fair

value cannot be measured reliably.

7) Long-term investments accounted for under the equity method

A. Information of long-term investments as of March 31, 2012 and 2011 are summarized below:

March 31, 2012 March 31, 2011

Investee company

Carrying

amount

% of

ownership

Carrying

amount

% of

ownership

OPTO Technology International

Group Co., Ltd. $ 836,293 100.00% $ 686,628 100.00%

Viking Tech Corporation 153,920 8.32% 132,934 8.29%

Jyu Shin Investment Co., Ltd. 265,663 100.00% 225,519 100.00%

Ho Chung Investment Co., Ltd. 83,802 100.00% 70,422 100.00%

Source Ever limited 1,801 100.00% - 100.00%

$ 1,341,479 $ 1,115,503

～ 18 ～

B. Investment income (loss) accounted for under the equity method for the three-month periods

ended March 31, 2012 and 2011 is set forth below:


Investee company 2012 2011

OPTO Technology International

Group Co., Ltd. ($ 9,345) ($ 18,812)

Viking Tech Corporation 5,316 -

Jyu Shin Investment Co., Ltd. ( 1,050) ( 7,046)

Ho Chung Investment Co., Ltd. 1,671 3,821

Source Ever limited ( 47) -

($ 3,455) ($ 22,037)

C. The investment income (loss) of the above investees accounted for under the equity method

for the three-month periods ended March 31, 2012 and 2011, was based on their financial

statements for the corresponding periods, which were not reviewed by independent auditors.

D. In April 2008, the Company invested in Jyu Shin Investment Co., Ltd., a 100% owned

subsidiary, by contributing 6,200 thousand shares of Viking Tech Corporation. As a result, the

Company’s direct ownership percentage in Viking Tech Corporation was reduced to below

20%. However, as Jyu Shin Investment Co., Ltd. owns the 6,200 thousand shares of Viking

Tech Corporation, the total ownership percentage in Viking Tech Corporation had 18.38%. As

a result of the significant influence, the Company’s investment in Viking Tech Corporation is

accounted for under the equity method.

8) Property, plant and equipment

March 31, 2012

Asset Initial costAccumulateddepreciation

Accumulatedimpairment Carrying value

Buildings $ 1,709,789 ($ 631,420) ($ 59) $ 1,078,310

Machinery 3,862,921 ( 2,566,507) ( 9,055) 1,287,359

Utility facilities 976,898 ( 842,849) - 134,049

Pollution prevention facilities 577,709 ( 526,969) - 50,740

Transportation equipment 5,241 ( 4,154) ( 64) 1,023

Office equipment 49,336 ( 38,104) ( 19) 11,213

Other equipment 1,559,328 ( 1,229,898) ( 98) 329,332

Construction in progress andprepayments for equipment 327,967 - - 327,967

$ 9,069,189 ($5,839,901) ($ 9,295) $ 3,219,993

～ 19 ～

March 31, 2011

Asset Initial costAccumulateddepreciation


Buildings $ 1,708,936 ($ 585,255) ($ 59) $ 1,123,622

Machinery 3,378,150 ( 2,304,435) ( 9,074) 1,064,641

Utility facilities 961,549 ( 822,463) - 139,086

Pollution prevention facilities 627,897 ( 569,760) - 58,137

Transportation equipment 5,241 ( 3,566) ( 64) 1,611

Office equipment 47,811 ( 30,899) ( 19) 16,893

Other equipment 1,422,010 ( 1,138,718) ( 98) 283,194

Construction in progress andprepayments for equipment 458,739 - - 458,739

$ 8,610,333 ($5,455,096) ($ 9,314) $ 3,145,923

Interest capitalized to property, plant and equipment amounted to $841 and $867 for the

three-month periods ended March 31, 2012 and 2011, respectively.

9) Idle assets

March 31, 2012

CostAccumulateddepreciation


Machinery $ 1,351,834 ($ 317,754) ($ 991,065) $ 43,015

March 31, 2011

CostAccumulateddepreciation


Machinery $ 1,351,834 ($ 317,711) ($ 926,065) $ 108,058

10) Short-term loans

March 31,

2012 2011

Unsecured loans $ 735,188 $ 746,284

Interest rate 0.84%-2.56% 0.83%-2.01% `

～ 20 ～

11) Long-term loans

March 31,

Bank Credit line Period 2012 2011Syndicated loans with 8 financial

institutions including TaishinInternational Bank $ 2,000,000

2008.02.15~

2013.03.06 $ 1,043,793 $ 1,463,178

Chinatrust Commercial Bank850,000

2011.03.29~

2016.03.29 385,883 181,000

Yuanta Commercial Bank200,000

2009.05.26~

2012.05.26 - 125,000

Ta Chong Bank200,000

2009.10.01~

2011.10.01 - 70,000

1,429,676 1,839,178

Less: Current portion ( 1,140,264) ( 656,361)

$ 289,412 $ 1,182,817

A. On February 15, 2008, the Company signed a mortgage contract with a credit limit of $2

billion with 8 banks, including Taishin International Bank, and paid the loans used for plants

and commercial papers to Taiwan Cooperative Bank. At the same time, the Company

transferred the mortgaged assets, which was originally pledged to Taiwan Cooperative Bank,

to the 8 banks including Taishin International Bank.

B. Pursuant to the syndicated loan facility agreement entered into by the Company with Taishin

International Bank and 7 other banks, the Company is required to maintain certain financial

ratios at agreed rates during the period of the syndicated loan facility agreement. Please refer

to Note 7.

C. Please refer to Note 6 for details of the collateral.

12) Pension plans

A. The Company has a non-contributory and funded defined benefit pension plan in accordance

with the Labor Standards Law, covering all regular employees. Under the defined benefit

pension plan, two units are accrued for each year of service for the first 15 years and one unit

for each additional year thereafter, subject to a maximum of 45 units. Pension benefits are

based on the number of units accrued and the average monthly salaries and wages of the last 6

months prior to retirement. The Company contributes monthly an amount equal to 7.84% of

the employees’ monthly salaries and wages to the retirement fund deposited with Bank of

Taiwan. The pension costs under the defined benefit pension plan for the three-month periods

ended March 31, 2012 and 2011 were $5,750 and $7,939, respectively. The fund balance with

Bank of Taiwan was $234,549 and $219,461 as of March 31, 2012 and 2011, respectively.

B. Effective July 1, 2005, the Company established a funded defined contribution pension plan

(the “New Plan”) under the Labor Pension Act. Employees have the option to be covered

under the New Plan. Under the New Plan, the Company contributes monthly an amount based

on 6% of the employees’ monthly salaries and wages to the employees’ individual pension

accounts at the Bureau of Labor Insurance. The benefits accrued are portable when

employment is terminated. The pension costs under the defined contribution pension plan for

the three-month periods ended March 31, 2012 and 2011 were $7,061 and $6,986,

respectively.

～ 21 ～

13) Common stock

On June 16, 2009, the Company’s stockholders during their meeting resolved to increase its

capital by cash infusion through the private equity method. With the price per share of $21.5, the

Company issued 18,708 thousand shares and raised $402,221, and set the record date on July 31,

2009. With the price per share of $20.5, the Company issued 1,000 thousand shares and issued

$20,500 and set the record date on June 8, 2010. The rights and obligations of the common stocks

issued is the same with those that have been issued for the restriction of ownership transfer.

Additionally, the common stocks cannot be applied for listing unless they have been turned over

for three years and applied for initial public offerings. As of March 31, 2012, the Company’s

authorized capital was $10,000,000, and paid-in capital was $5,456,621, consisting of 545,662

thousand shares of common stock with a par value of $10 (in dollars) per share.

14) Capital reserve

A. Pursuant to the R.O.C. Company Law, capital reserve arising from paid-in capital in excess of

par value on issuance of common stocks and donations can be used to cover accumulated

deficit or to issue new stocks or cash to shareholders in proportion to their share ownership,

provided that the Company has no accumulated deficit. Further, the R.O.C. Securities and

Exchange Law requires that the amount of capital reserve to be capitalized mentioned above

should not exceed 10% of the paid-in capital each year. Capital reserve should not be used to

cover accumulated deficit unless the legal reserve is insufficient.

B. For detailed information on capital reserve from employee stock options, please see Note 4

(17).

15) Retained earnings

A. Under the Company’s Articles of Incorporation, the current year’s earnings, if any, shall first

be distributed as follows:

1) Offset prior years’ operating losses.

2) 10% of the remaining amount shall be set aside as legal reserve, unless the accumulated

legal reserve equals the total capital of the Company.

3) Appropriation of the remainder shall be proposed by the Board of Directors and resolved

by the stockholders.

4) Bonus distributed to the employees and shareholders, and remuneration paid to the

directors and supervisors should account for 15%, 80% and 5%, respectively, of the total

distributed amount.

B. The Company operates in the high-tech industry and its business life cycle is in the growth

stage. In view of its capital expenditure demand and comprehensive financial plan for

continuous development, the Company issues both stock and cash dividends. The proportion

of dividends to be distributed in stocks and cash is determined based on the Company’s rate of

growth and capital expenditures. However, the amount of cash dividends shall not be lower

than 20% of the dividends distributed.

～ 22 ～

C. Pursuant to the regulation of the Financial Supervisory Commission, Executive Yuan, R.O.C.,

if there are any negative stockholders’ equity items recorded by the Company, such as

unrealized losses on the decline in market value of available-for-sale financial assets,

cumulative translation adjustments, and unrecognized pension cost (except for treasury stock),

the Company is required to set aside a special reserve from the current after-tax net income

and the unappropriated retained earnings accumulated for previous years with an amount

equal to the total amount of the negative items. For the negative stockholders’ equity items

which occurred in previous years, the special reserve is set aside from the previous years’

unappropriated retained earnings. Additionally, if the market value of the Company’s shares

held by its subsidiaries is less than their book value, an amount equal to the Company’s

proportionate share of the difference should also be set aside as special reserve. If there is a

subsequent recovery in the market value, a reversal based on the Company’s equity interest

should be made to the special reserve.

D. Except for covering accumulated deficit or issuing new stocks or cash to shareholders in

proportion to their share ownership, the legal reserve shall not be used for any other purpose.

The use of legal reserve for the issuance of stocks or cash to shareholders in proportion to

their share ownership is permitted, provided that the balance of the reserve exceeds 25% of

the Company’s paid-in capital.

E. The appropriation of 2011 earnings had been proposed by the Board of Directors on March 28,

2012 and the appropriation of 2010 earnings had been resolved at the stockholders’ meeting

on June 17, 2011. Details are summarized below:

2011 2010

Amount

Dividendsper share

(in dollars) Amount

Dividendsper share

(in dollars)

Legal reserve $ 45,342) $ 68,811

Special reserve ( 24,147) 572,104

Cash dividends 1329,403 $ 0.60 549,006 $ 1.00

Total $ 350,598) $ 689,921

As of April 26, 2012, the appropriation of 2011 earnings had not been approved by the

stockholders. Information on the appropriation of the Company’s earnings as resolved by the

Board of Directors and approved by the stockholders will be posted in the “Market

Observation Post System” at the website of the Taiwan Stock Exchange.

F. The estimated amounts of employees’ bonus for the three-month periods ended March 31,

2012 and 2011 were $13,368 and $13,829, and directors’ and supervisors’ remuneration for

the three-month periods ended March 31, 2012 and 2011 were $4,456 and $4,609,

respectively based on 15% and 5% (as prescribed by the Company’s Articles of Incorporation)

of net income for the three-month periods ended March 31, 2012, after taking into account the

legal reserve and other factors. The calculation of shares of stock bonus distributed is based

on the closing price of the Company’s common stock at the previous day of the 2013

stockholders’ meeting after taking into account the effects of ex-rights and ex-dividends. The

～ 23 ～

estimated amounts of employees’ bonus and directors’ and supervisors’ remuneration are

recognized as operating expenses for the three-month period ended March 31, 2012. However,

if the estimated amounts are different from the amounts approved by the stockholders

subsequently, the difference is recognized as gain or loss in 2013.

16) Treasury stock

A. The treasury stock information for the three-month periods ended March 31, 2012 and 2011

are set forth below:

For the three-month period ended March 31, 2012

Purpose of Treasury Stock

Number ofShares, Beginning

of Period Addition Reduction

Number ofShares, End of

Period(1)The Company’s shares held by its

subsidiary1,107

- - 1,107

(2)To maintain the Company’s creditrating and shareholders’ equity - 2,526 ( 2,526) -

1,107 2,526 ( 2,526) 1,107


Purpose of Treasury Stock

Number ofShares, Beginning

of Period Addition Reduction

Number ofShares, End of

PeriodThe Company’s shares held by itssubsidiary 1,107 - - 1,107

B. Pursuant to the R.O.C. Securities and Exchange Law, the number of shares bought back as

treasury stock should not exceed 10% of the number of the Company’s issued and outstanding

shares and the amount bought back should not exceed the sum of retained earnings, paid-in

capital in excess of par value and realized capital reserve. As of March 31, 2012, the shares

bought back as treasury stock amounted to $28,184, and were all subsequently retired.

C. Pursuant to the R.O.C. Securities and Exchange Law, treasury stock should not be pledged as

collateral and is not entitled to dividends before it is reissued to the employees.

D. Pursuant to the R.O.C. Securities and Exchange Law, treasury stocks should be reissued to the

employees within 3 years and shares not reissued within the three-year period are to be retired.

Treasury shares to enhance the Company’s credit rating and stockholders’ equity should be

retired within 6 months of acquisition.

E. As of March 31, 2012 and 2011, the total number of the Company’s shares held by its

subsidiary, Ho Chung Investment Co., Ltd., was both 1,107 thousand shares with an average

book value of $24.11 (in dollars) per share, and fair value of $14.45 and $21.30 (in dollars)

per share, respectively.

17) Employee stock options

On November 29, 2007 and August 9, 2010, as a result of setting up rules for the employee stock

options for the years 2007 and 2010, the Company issued 10,000 and 15,000 thousands units of

employee stock options on December 21, 2007 and August 26, 2010, respectively. Each unit

could buy one share, and the exercise price is based on the closing price of the Company’s

common stock quoted in the Taiwan Stock Exchange and GreTai Securities Market at the issued

～ 24 ～

date. The exercise price under the stock-based employee compensation plan is based on the

closing price of the Company’s common stock at the grant date and is subject to adjustments due

to changes in the number of common shares and issuance of cash dividends. The vesting period of

the Company’s employee stock option plan is 7 years. The employees may exercise the stock

options in installment within a period of 2 years after the stock options are granted. The Company

recognized compensation costs under the stock-based employee compensation plan for the

three-month periods ended March 31, 2012 and 2011, amounting to $12,734 and $13,705,

respectively.

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

For the three-month periods ended March 31,2012 2011

Stock optionsNo. of shares(in thousands)

Weighted-average

exercise price(in dollars)

No. of shares(in thousands)

Weighted-average


Options outstanding atbeginning of year 20,437 $ 22.79 21,978 $ 24.15

Options exercised - - - -

Options revoked ( 359) ( 233)

Options outstanding atend of period 20,078 21,745

Options exercisable atend of period 7,516 6,203

B. Details of the employee stock options outstanding as of March 31, 2012 and 2011 are set forth

below:

Stock options outstanding as atMarch 31, 2012

Stock options exercisable as atMarch 31, 2012

Range ofexercise price

(in dollars)No. of shares(in thousands)

Weighted-averageexpectedremaining

vesting period(in years)

Weighted-average



Weighted-average


$ 26.20 7,478 2.75 $ 26.20 7,516 $ 26.20

20.80 12,600 5.75 20.80 - 20.80

Stock options outstanding as atMarch 31, 2011

Stock options exercisable as atMarch 31, 2011

Range ofexercise price

(in dollars)No. of shares(in thousands)

Weighted-averageexpectedremaining

vesting period(in years)

Weighted-average



Weighted-average


$ 27.70 8,190 3.75 $ 27.70 6,203 $ 27.70

22.00 13,555 6.75 22.00 - 22.00

～ 25 ～

On July 6, 2011, the Board of Directors of the Company approved the issuance of employee

stock options authorized in 2007 and 2010. The exercise prices were adjusted from $27.7 and

$22 to $26.2 and $20.8, on August 1, 2011.

C. The following sets forth the pro forma net income and earnings per share based on the

assumption that the compensation cost is accounted for using the fair value method for the

stock options granted (amended) on or after January 1, 2007:


2012 2011INet income Net income stated in the

statement of income $ 62,078 $ 79,126

Pro forma net income $ 62,078 $ 78,810

Basic earningsper share(EPS)(in dollars)

EPS stated in the statementof income

$ 0.11 $ 0.14

Pro forma EPS $ 0.11 $ 0.14

Diluted EPS(in dollars)

EPS stated in the statementof income $ 0.11 $ 0.14

Pro forma EPS $ 0.11 $ 0.14

For the stock options granted (amended) on or after January 1, 2007 with the compensation

cost accounted for using the fair value method, their fair value on the grant date is estimated

using the Black-Scholes option-pricing model. The weighted-average parameters used in the

estimation of the fair value are as follows:


2012 2011

Risk-free interest rate 1.1858%~2.77% 1.1858%~2.77%

Expected vesting period 2.75~5.75 years 3.75~6.75 years

Expected price volatility 44.40%~48.88% 44.40%~48.88%

Dividend yield rate 0.00% 0.00%

～ 26 ～

18) Income tax

A. The income tax refundable and income tax expense are reconciled as follows:


2012 2011

Income tax expense from continuing operations $ 12,845 $ 35,171

(Less) add : Net change in deferred income taxassets ( 12,577) ( 35,171)

Prepaid and withholding taxesfrom foreign income which willnot be realized ( 268) -

Prepaid and withholding taxes ( 1,832) ( 2,372)

Income tax payable for previousyears 29,806 17,103

$ 27,974 $ 14,731

Income tax payable $ 29,806 $ 17,103

Income tax refundable, shown as “otherreceivables” ($ 1,832) ($ 2,372)

B. Deferred income tax assets and liabilities

March 31,

2012 2011

Deferred income tax assets – current $ 96,364 $ 103,553

Deferred income tax assets – non-current 372,962 443,549

Valuation allowance ( 134,102) ( 196,248)

$ 335,224 $ 350,854

～ 27 ～

C. Details of temporary differences, loss carryforwards and investment tax credits resulting in

deferred income tax assets and liabilities are as follows:

March 31,

2012 2011

Amount Tax effect Amount Tax effect

Current items:

Unrealized gains on sales toaffiliated companies $ 909 $ 154 $ 647 $ 110

Unrealized losses onforeign exchangetransactions 7,353 1,250 29,980 5,097

Unrealized gains onvaluation of financialassets and liabilities ( 1,526) ( 259) ( 520) ( 88)

Loss on inventory valuedecline 290,608 49,403 269,990 45,898

Over provision ofallowance for bad debts 236,709 40,241 279,454 47,507

Service warranty expense 32,794 5,575 29,581 5,029

Less: Valuation allowance ( 50,783) ( 55,143)

$ 45,581 $ 48,410

Non-current items:

Investment loss $ 216,394 $ 36,787 $ 129,934 $ 22,089

Impairment loss 225,677 38,365 168,774 28,691

Net pension costs 57,964 9,854 48,901 8,313

Loss carryforwards 1,238,726 210,584 1,385,386 235,516

Investment tax credits 77,372 148,940

Less: Valuation allowance ( 83,319) ( 141,105)

$ 289,643 $ 302,444

～ 28 ～

D. The Company is eligible for investment tax credits under the Statute for Upgrading Industry.

Details as of March 31, 2012 are as follows:

Year of

approval Qualifying item

Total tax

credits

Unused tax

credits

Final year

tax credits

are due

2008 Research and development $ 35,833 $ 35,833 2012

〞 Machinery and equipment 21,847 21,847 〞

〞 Employees’ training 453 453 〞

$ 58,133 $ 58,133

2009 Research and development $ 9,432 $ 9,432 2013

〞 Machinery and equipment 5,688 5,688 〞

$ 15,120 $ 15,120

2010 Machinery and equipment $ 4,119 $ 4,119 2014

$ 77,372 $ 77,372

E. As of March 31, 2012, losses available to be carried forward were as follows:

Year in whichloss wasincurred

Amountfiled/approved

Losses availableto be

carried forwardUnused loss

carryforwards

Final year lossescan be

carried forward

2003 $ 467,252 $ 79,433 $ 6,455 2013

2004 861,121 146,391 146,391 2014

2005 162,697 27,658 27,658 2015

2008 119,259 20,274 20,274 2018

2009 57,680 9,806 9,806 2019

$ 1,668,009 $ 283,562 $ 210,584

F. As of March 31, 2012, the Company’s income tax returns through 2009 have been assessed

and approved by the Tax Authority.

G. Details of unappropriated retained earnings as of March 31, 2012 and 2011 are summarized

below:

March 31,

2012 2011

On or after January 1, 1998

Earnings subjected to 10% income tax $ 302,065 $ 327,184

Earnings not subjected to 10% income tax 515,501 767,241

$ 817,566 $ 1,094,425

～ 29 ～

H. The Company, in accordance with Regulation No. 273 issued by the R.O.C. Accounting

Research and Development Foundation on December 31, 1998, discloses the following

information:

March 31,

2012 2011

Balance of shareholders account ofdeductible tax $ 9,879 $ 3,040

2011 Expected creditable tax ratio 5.25%

2010 Actual creditable tax ratio 2.68%

I. The Company’s equipment expansion is entitled to a four-year exemption on income tax

under Article 15 of Act for Establishment and Administration of Science Parks prior to

amendment. Details as of March 31, 2012 are as follows:

Approval dateand no.

Date of tax-exempt relatedequipment readyfor production

Tax-exemptperiod

Cost of tax-exemptrelated equipment

Gung-Jung-TzNo. 0950008215 onMarch 31, 2006 March 29, 2006

January 1, 2010 ~December 31, 2013 $ 391,247

～ 30 ～

19) Earnings per share


Weighted-average

outstanding

Net income common shares Earnings per share (in dollars)

Before tax After tax (in thousands) Before tax After tax

Basic earnings per share

Net income attributable tocommon stockholders $ 74,923 $ 62,078 545,397 $ 0.14 $ 0.11

Dilutive effect of commonstock equivalents:

Stock options - - -

Employees’ bonus - - 925

Diluted earnings per share

Net income attributable tocommon stockholders plusdilutive effect of commonstock equivalents $ 74,923 $ 62,078 546,322 $ 0.14 $ 0.11


Weighted-average

outstanding

Net income common shares Earnings per share (in dollars)

Before tax After tax (in thousands) Before tax After tax

Basic earnings per share

Net income attributable tocommon stockholders $ 114,297 $ 79,126 547,898 $ 0.21 $ 0.14

Dilutive effect of commonstock equivalents:

Stock options - - -

Employees’ bonus - - 649

Diluted income per share

Net income attributable tocommon stockholders plusdilutive effect of commonstock equivalents $ 114,297 $ 79,126 548,547 $ 0.21 $ 0.14

～ 31 ～

20) Personnel expenses, depreciation and amortization

Personnel expenses, depreciation and amortization are summarized as follows:


Operating

cost

Operating

expense

Non-operating

expenses and

losses Total

Personnel expenses

Salaries $ 116,701 $ 95,243 $ - $ 211,944

Labor and health

insurance 11,709 5,454 - 17,163

Pension 7,639 5,172 - 12,811

Others 1,801 873 - 2,674

$ 137,850 $ 106,742 $ - $ 244,592

Depreciation $ 86,560 $ 10,917 $ 8 $ 97,485

Amortization $ 3,415 $ 2,444 $ - $ 5,859


Operating

cost

Operating

expense

Non-operating

expenses and

losses Total

Personnel expenses

Salaries $ 132,637 $ 91,301 $ - $ 223,938

Labor and health

insurance 11,915 4,905 - 16,820

Pension 8,520 6,405 - 14,925

Others 2,192 937 - 3,129

$ 155,264 $ 103,548 $ - $ 258,812

Depreciation $ 94,668 $ 30,243 $ 12 $ 124,923

Amortization $ 1,813 $ 2,106 $ - $ 3,919

～ 32 ～

5. RELATED PARTY TRANSACTIONS

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

Names of related parties Relationship with the Company

Ho Chung Investment Co., Ltd. (Ho Chung Investment) Subsidiary of the Company

Jyu Shin Investment Co., Ltd. (Jyu Shin Investment) Subsidiary of the Company

Opto Technology International Group Co., Ltd. (Opto) Subsidiary of the Company

Source Ever Ltd. Subsidiary of the Company

CS Bright Corporation (CSB) Indirect subsidiary of the Company; subsidiaryof Jyu Shin Investment Co., Ltd.

Opto Tech (Cayman) Co., Ltd. (Cayman) Indirect subsidiary of the Company; subsidiaryof Opto

Opto Grand (Cayman) Co., Ltd. (Opto Grand) Indirect subsidiary of the Company; subsidiaryof Opto

Bright Investment International Ltd. (Bright) Indirect subsidiary of the Company; subsidiaryof CSB

Everyung Investment Ltd. (Everyung) Indirect subsidiary of the Company; subsidiaryof Bright

Opto Tech (H.K.) Co., Ltd. (Opto H.K.) Indirect subsidiary of the Company; subsidiaryof Cayman (liquidated in June 2011)

Opto Tech (Macao) Co., Ltd. (Opto Macao) Indirect subsidiary of the Company; subsidiaryof Cayman

Opto Tech (Suzhou) Co., Ltd. (Opto Tech Suzhou) Indirect subsidiary of the Company; subsidiaryof Cayman

Opto Tech Semiconductor (Ningbo) Co., Ltd.(Opto Tech Ningbo)

Indirect subsidiary of the Company; subsidiaryof Opto Grand

Opto Plus Technology Co., Ltd. (Opto Plus) Indirect subsidiary of the Company; subsidiaryof Everyung

Viking Tech Corporation (Viking Tech) Investee of the Company accounted for underthe equity method

United Radiant Technology Corp. (United Radiant) The Company is a director of United Radiant

Oriental System Technology Inc. (OST) The Company is a supervisor of OST, butrecalled in March, 2011.

Shin-Etsu Opto Electronic Co., Ltd. (Shin-Etsu Opto) The Company is a director of Shin-Etsu Opto

Giga Epitaxy Technology Corp. (Giga Epitaxy Tech) The Company is a director of Giga EpitaxyTech

Lu Zhu Development Co., Ltd. (Lu Zhu) The Company is a director of Lu Zhu

Shunag Xin Investment Consulting Co., Ltd.(Shunag Xin)

Shunag Xin is a director of the Company

Lee-tech Co., Ltd. (Lee-tech) Lee-tech is a director of the Company

Nichia Taiwan Corp. Nichia Taiwan Corp. is a director of theCompany

Hitachi, Ltd. Hitachi, Ltd. is a director of the Company

Nichia Corp.Nichia Corp. is the parent company of Nichia

Taiwan Corp.

VML TECHNOLOGIES B.V. (VML)Investee of Ho Chung Investment accounted for

under the equity method

～ 33 ～

2) Significant related party transactions and balances

A. Sales

For the three-month periods ended March 31,

2012 2011

Amount % of net sales Amount % of net sales

Shin-Etsu Opto $ 87,637 6 $ 31,335 2

Nichia Taiwan Corp. 56,500 4 80,702 4

Nichia Corp. 5,937 - - -

Opto Plus 2,279 - 4,341 -

Opto Macao 1,289 - 927 -

Lee-tech 267 - - -

Opto Tech Suzhou 240 - 880 -

VML 51 - 1,419 -

United Radiant - - 54 -

$ 154,200 10 $ 119,658 6

The selling prices charged to the above related parties are not materially different from those

charged to non-related parties. For both periods, the credit terms was 45~136 days for related

parties and 90~150 days for non-related parties.

The unrealized gains (losses) on the transactions between the Company and its affiliated

companies have been eliminated.

B. Purchases

For the three-month periods ended March 31,

2012 2011

Amount% of net

purchases Amount% of net

purchases

Nichia Taiwan Corp. $ 301,804 35 $ 366,979 33

Shin-Etsu Opto 50,462 6 71,047 6

Lee-tech 31,246 4 - -

Nichia Corp. 11,132 1 47,006 4

CSB 10,811 1 5,111 -

Opto Tech Suzhou 1,920 - 537 -

Viking Tech 75 - 61 -

VML - - 3,772 -

$ 407,450 47 $ 494,513 43

The purchase prices charged by the above related parties are not materially different from

those charged by non-related parties. For the three-month periods ended March 31, 2012 and

2011, the credit terms was 60~120 days and 90~120 days, respectively, for the related parties,

and 90~120 days for non-related parties for both periods.

～ 34 ～

C. Accounts receivable

March 31,

2011 2010

Amount% of accounts

receivable Amount% of accounts

receivable

Shin-Etsu Opto $ 92,263 5 $ 32,703 2

Nichia Taiwan Corp. 70,634 4 115,342 5

Opto Plus 2,314 - 4,339 -

VML 694 - 1,167 -

Lee-tech 280 - - -

Opto Tech Suzhou 241 - 882 -

Opto Macao - - 825 -

United Radiant - - 354 -

166,426 9 155,612 7Less: Allowance for doubtful

accounts ( 1) - ( 1,497) -

$ 166,425 9 $ 154,115 7

D. Other receivables

March 31,

2012 2011

Amount% of otherreceivables Amount

% of otherreceivables

CSB $ - - $ 113 1

E. Accounts payable

March 31,

2012 2011

Amount% of accounts

payable Amount% of accounts

payable

Nichia Taiwan Corp. $ 523,252 42 $ 625,438 41

Shin-Etsu Opto 63,244 5 97,772 6

Lee-tech 39,858 3 - -

Nichia Corp. 11,851 1 54,114 4

CSB 11,605 1 5,668 -

Opto Tech Suzhou 1,917 - 445 -

Viking Tech 157 - 97 -

United Radiant 52 - - -

VML - - 3,143 -

$ 651,936 52 $ 786,677 51

～ 35 ～

F. Accrued expenses

March 31,

2012 2011

Amount% of accrued

expenses Amount% of accrued

expenses

Lee-tech $ 484 - $ - -

Nichia Taiwan Corp. 54 - - -

Viking Tech 24 - - -

$ 562 - $ - -

G. Unearned revenue collected in advance

March 31,

2012 2011

Amount

% of unearnedrevenue

collected inadvance Amount

% of unearnedrevenue

collected inadvance

Shin-Etsu Opto $ 244 1 $ - -

Opto Macao 171 - 1,956 22

VML - - 29 -

$ 415 1 $ 1,985 22

H. Loans granted to related parties

Loans granted to related parties as of March 31, 2012 and 2011 are as follows:

March 31,

2012 2011

Opto Tech Suzhou $ 369,500 $ 279,775

Opto Macao 88,680 88,350

CSB 78,868 215,950

Opto Plus 44,340 44,175

$ 581,388 $ 628,250

～ 36 ～

6. PLEDGED ASSETS

The Company’s assets pledged as collateral as of March 31, 2012 and 2011 are as follows:

Carrying value Purpose

March 31, 2012 March 31, 2011 Creditor Bank Type

Buildings $ 937,230 $ 973,608 Taishin InternationalBank and 7 other banks

Long-term loans

Machinery 547,491 331,872 Chinatrust CommercialBank

Long-term loans

Restricted assets –Special account forpayment

10,000 55,536 Taishin InternationalBank and 7 other banks

Long-term loans

Restricted assets –Time deposits

17,500 17,500 Chang Hwa CommercialBank

Lease deposits

$ 1,512,221 $ 1,378,516

7. COMMITMENTS AND CONTINGENT LIABILITIES

A. Please refer to Note 5 for details of the endorsements and guarantees provided to subsidiaries.

B. As of March 31, 2012, the guarantees provided by the Company through banks were as follows:

Guarantor Nature of Guarantee Amount

Chang Hwa Commercial Bank Customs duty $ 20,000

C. As of March 31, 2012, the outstanding letters of credit issued for the importation of raw materials

and machinery were as follows:

Currency Amount

NTD $ 65,586

USD 1,346

JPY 22,150

EUR 42

D. The Company had entered into an agreement to lease land from Hsinchu Science Park for the

period from 1997 to 2029. Total rent payable as of March 31, 2012, are as follows:

Year Amount

2012 $ 11,785

2013 17,678

2014 17,678

2015 17,678

2016 17,678

After 2016 (Note) 46,385

$ 128,882

Note: Total rent payable of $62,835 was discounted based on the standard rate of Bank of Taiwan

of 2.896% as of March 31, 2012.

E. Pursuant to the syndicated loan facility agreement entered into by the Company with Taishin

International Bank and 7 other banks, the Company is required to maintain its current ratio at

100% or above, debt ratio at 150% or below, interest coverage ratio at 300% or above and net

value of tangible assets at $5 billion or above. If the Company breaches the above debt covenants,

～ 37 ～

it is required to propose specific plans for improvement and the related details. However, the

Company may request for a waiver after a resolution by the majority of banks.

F. As of March 31, 2012 and 2011, the promissory notes issued by the Company for loans,

performance guarantee for purchases and loans granted for subsidiaries amounted to $8,489,689

and $10,785,681, respectively.

8. SIGNIFICANT DISASTER LOSS

None.

9. SIGNIFICANT SUBSEQUENT EVENTS

None.

10. OTHERS

1) Financial statement presentation

Certain accounts in the financial statements for the three-month period ended March 31, 2011

were reclassified to conform with the financial statement presentation for the three-month

period ended March 31, 2012.

～ 38 ～

2) The fair values of the financial instruments

March 31, 2012 March 31, 2011

Fair value Fair value

Book value

Quotations in an

active

market

Estimated

using a

valuation

technique Book value

Quotations in an

active

market

Estimated

using a

valuation

technique

Non-derivative financial instruments

Assets

Financial assets with fair values equal to book values $ 4,383,888 $ - $ 4,383,888 $ 4,931,827 $ - $ 4,931,827

Financial assets at fair value through profit or loss 171,396 171,396 - 320,917 320,917 -

Available-for-sale financial assets 44,943 44,943 - 71,056 71,056 -

Financial assets carried at cost 539,117 - - 564,564 - -

Deposits out 16,559 - 16,559 10,422 - 10,422

Liabilities

Financial liabilities with fair values equal to book values 3,576,290 - 3,576,290 3,394,551 - 3,394,551

Long-term loans 289,412 - 289,412 1,182,817 - 1,182,817

Guarantee deposits 60 - 60 48 - 48

Derivative financial instruments

Assets

Financial assets at fair value through profit or loss

Forward exchange contracts 130 130 - 85 85 -

Liabilities

Financial liabilities at fair value through profit or loss

Currency swap contracts - - - 482 482 -

～ 39 ～

The methods and assumptions used to estimate the fair values of the above financial instruments

are summarized below:

A. The fair values of short-term financial instruments were determined based on their carrying

values because of the short maturities of the instruments. This method was applied to cash and

cash equivalents, notes and accounts receivable (including related parties), other receivables

(including related parties), other financial assets – current, other current assets, short-term

loans, notes and accounts payable (including related parties), accrued expenses, other

payables, long-term liabilities with maturity within one year and other current liabilities.

B. Financial assets at fair value through profit or loss belongs to open-end mutual fund, which

was based on the net asset value at the balance sheet date.

C. Since quoted market prices are available for available-for-sale financial assets, the fair values

are determined by the quoted market price.

D. The fair value of deposits out and guarantee deposits is the book value since the amount is

insignificant.

E. The fair value of long-term loans is based on the present value of expected future cash flows.

Since long-term loans have floating interest rates, the carrying value is equivalent to the fair

value.

F. Since quoted market prices are available for derivative financial assets and liabilities, the fair

values are determined by the quoted market price.

3) As of March 31, 2012 and 2011, the financial assets with fair value risk due to the change of

interest amounted to $1,640,607 and $1,776,100, respectively, and the financial liabilities with

fair value risk due to the change of interest were both $0. As of March 31, 2012 and 2011, the

financial assets with cash flow risk due to the change of interest were $755,435 and $806,773,

respectively, and the financial liabilities with cash flow risk due to the change of interest were

$2,164,864 and $2,585,462, respectively.

4) For available-for-sale financial assets, during the three-month periods ended March 31, 2012 and

2011, the amount of gain (loss) recognized directly in equity were $13,945 and ($8,793),

respectively.

5) Procedure of financial risk control and hedge

A. The primary financial products the Company holds in addition to derivative instruments

include bank loans, capital leases and cash and cash equivalents. The Company meets

operating capital needs through these financial instruments. The Company also holds other

financial assets and liabilities, such as accounts receivable and payable resulting from

operating activities.

B. The key risks of the financial instruments of the Company are exchange rate risk, credit risk

and liquidity risk. To meet its risk management objectives, the Company adopts the following

strategies to control financial risk:

～ 40 ～

(A)Exchange rate risk

The Company is exposed to exchange rate risk because some of its purchases and sales

are denominated in foreign currencies. The percentage of foreign currency denominated

purchases and sales over total purchases and sales of the Company are estimated to be

62% and 83%, respectively.

(B) Price risk

The price risk of the Company is low.

(C) Credit risk

Before making trades with third parties, the Company has to follow credit assessment

procedures based on its credit policy, and evaluates the recovery of accounts receivable

and notes receivable continuously.

The credit risk of other financial assets (including cash and cash equivalents, financial

assets at fair value through profit or loss and available-for-sale financial assets) mainly

results from the risk of failing to meet the contract requirements by the counterparty. The

maximum credit risk is equal to the book value.

(D)Liquidity risk

The Company maintains sufficient capital and reaches the objective of flexible use and

stabilization of capital through bank loans and cash and cash equivalents. As of March 31,

2012 and 2011, current loans are 87% and 54% of the total loans, respectively.

～ 41 ～

6) Information of material financial risk

A. The business that the Company is engaged in is related to several non-functional currencies,

and is influenced by the fluctuation of exchange rates. The information of assets and liabilities

denominated in foreign currencies, which are significantly affected by the fluctuation of

exchange rates was as follows:

March 31,

2012 2011Foreigncurrency Exchange rate

Foreigncurrency Exchange rate

Financial Assets

Currency item

USD：NTD $ 58,787 29.460 $ 60,667 29.350

JPY：NTD 1,383,909 0.3572 2,081,132 0.3530Long-term

investments-accounted forunder the equity method

USD：NTD 28,400 29.510 23,355 29.400

Financial Liabilities

Currency item

USD：NTD 38,774 29.560 37,407 29.450

JPY：NTD 1,469,784 0.3612 2,203,145 0.3570

B. Financial investments in equity: Financial assets at fair value through profit or loss – current,

financial assets carried at cost – non-current and

available-for-sale financial assets – non-current.

(A) Market risk

The financial investments in equity of the Company are affected by the change in market

prices. However, the Company has set stop-loss limits and it is expected that there will be

no significant market risk.

As the Company’s financial assets carried at cost are not affected by the change in market

prices, it is expected that there will be no significant market risk.

(B) Credit risk

The Company invests in financial assets at fair value through profit or loss and

available-for-sale financial assets in listed market and GreTai Securities Market or makes

trade through underwriters. In addition, when investing in financial assets at fair value

through profit or loss, available-for-sale financial assets and financial assets carried at

cost, the Company has evaluated the credit standing of the counterparties and does not

expect any non-fulfillment of the terms of the contract. Therefore, the credit risk is low.

(C) Liquidity risk

All financial assets at fair value through profit or loss and available-for-sale financial

assets of the Company have quoted prices in active markets and therefore it is expected

～ 42 ～

that the Company can quickly sell the financial assets in the market at prices close to their

fair values.

There is no active market for financial assets carried at cost of the Company, so the

Company expects to have liquidity risk.

(D) Cash flow risk due to the change of interest

As the Company has no significant interest-bearing assets, cash flows are substantially

independent of changes in market interest rates.

C. Receivables: Notes receivable (including related parties), accounts receivable (including

related parties) and other receivables (including related parties).

(A) Market risk

The receivables of the Company are all due within one year; therefore there is no

significant market risk.

(B) Credit risk

The debtors of the Company have good credit standing. Thus, there is no significant

credit risk.

(C) Liquidity risk

The receivables of the Company are all due within one year; therefore there is no

significant liquidity risk.


The receivables of the Company are all due within one year. Therefore, there is no cash

flow risk due to the change of interest.

D. Loans: Long-term loans (including loans maturing within one year or one operating cycle).

(A) Market risk

The loans of the Company are operating advances with floating interest. Thus, there is no

significant market risk.

(B) Credit risk

None.

(C) Liquidity risk

The working capital of the Company is sufficient to cover the loans, so it expects no

significant liquidity risk.


The loans of the Company are financial instruments with floating interest and therefore

the change in market interest will result in the change in the effective interest of financial

instruments in debts and will result in the fluctuation of future cash flows.

～ 43 ～

7) Information on derivative financial instruments

The transaction of derivative financial instruments as of March 31, 2012 is as follows (in thousand dollars):Terms of transaction Future cash flows

Derivative financialinstruments

Par value, amountof the contract ornominal principal

Date ofcontract

Date ofperformance

Price ofperformance/

agreed exchangerate

Gain recognized for thethree-month period

ended March 31, 2012 Cash outflow Cash inflow

Advanced forwardexchange contracts USD$ 1,000 2012.03.26

2012.03.26~2012.04.19 $ 29.604 $ 74 USD$ 1,000 $ 29,604

Advanced forwardexchange contracts USD 1,000 2012.03.26

2012.03.26~2012.04.26 29.583 56 USD 1,000 29,583

$ 130

～ 44 ～

11. SUPPLEMENTARY DISCLOSURES1) Significant transactions

A. Loans granted during the three-month period ended March 31, 2012:

Number

(Note 1) Creditor Borrower

General

ledger account

Maximum

outstanding

balance

during

the

three-month

period ended

March 31,

2012

Balance at

March 31,

2012

Interest

rate

Nature of

loan

(Note 2)

Amount of

transactions

with the

borrower

Reason for

short-term

financing

Allowance

for doubtful

accounts

(Note 5)

Limit on

loans

granted to

a single

party

(Note 3)

Ceiling on

total loans

granted

(Note 4、6)

Collateral

Item Value

1 CS BrightCorp.

Opto Plus Otherreceivables –related parties

$ 42,970 $ 40,999 - 1 $ 30,584 None $ - None $ - $ 30,584 $ 22,542

Note 1: The numbers filled in for the loans provided by the Company or subsidiaries are as follows:

(1) The Company is “0”.

(2) The subsidiaries are numbered in order starting from “1”.

Note 2: Relationship with the borrower is classified into the following categories:

(1) The borrower having business relationship is numbered as “1”.

(2) The borrower having the needs of short-term financing is numbered as “2”.

Note 3: Limit on loans granted to a single party, which has the needs of short-term financing with the Company should not exceed 5% of the Company’s latest net asset value. Besides, limit on loans granted to a single

party, which has business relationship with the subsidiaries should not exceed total amount that the two sides trade in the recent year.

Note 4: Total amount of loans of the Company should not exceed 10% of the net value of the Company’s latest net asset value, and total amount of loans of the subsidiaries should not exceed 20% of the net values of

the subsidiaries’ latest net asset values.

Note 5: The balance of loans amounting to $40,999, which CS Bright Corp. (the indirect subsidiary of Opto Tech Corp.) granted to Opto Plus (the indirect subsidiary of Opto Tech Corp.) was overdue. In accordance

with EITF 93-036 and EITF 76-069, the parent company’s accounts receivable from its subsidiaries should not be recognized as allowance for doubtful accounts. Instead, the doubtful accounts should be

recognized as investment loss.

Note 6: At first, the amount of loans which CS Bright Corp. (the indirect subsidiary of Opto Tech Corp.) granted to Opto Plus (the indirect subsidiary of Opto Tech Corp.) did not exceed the ceiling on total loans granted.

However, due to disadvantageous operating conditions and decreasing net asset value of CS Bright Corp., the loans granted have exceeded the limit.

～ 45 ～

B. Endorsements and guarantees provided for the three-month period ended March 31, 2012:

Number

(Note 1)Endorser/guarantor

Party beingendorsed/guaranteed

Relationshipwith theendorser/guarantor(Note 2)

Limit onendorsements/

guaranteesprovided for asingle party

(Note 3)

Maximum outstandingendorsement/

guarantee amount duringthe three-month period

endedMarch 31, 2012

Outstandingendorsement/

guarantee amount atMarch 31, 2012

Amount ofendorsements/

guarantees securedwith collateral

Ratio of accumulatedendorsement/

guarantee amount tonet asset value of

the Company

Ceiling on total amountof endorsements/

guarantees provided(Note 3)

0 Opto TechCorp

Opto Tech(Suzhou)Co., Ltd.

3 $ 1,441,383 $ 370,375 $ 369,500 $ - 5.13 $ 3,603,458

0 〞. CS BrightCorporation

3 1,441,383 79,098 78,868 - 1.09 3,603,458

0 〞 Opto Tech(Macao)Co., Ltd.

3 1,441,383 90,975 88,680 - 1.23 3,603,458

0 〞 Opto PlusTechnologyCo., Ltd.

3 1,441,383 45,488 44,340 - 0.62 3,603,458

$ 581,388 8.07

Note 1: The numbers filled in for the endorsements and guarantees provided by the Company or subsidiaries are as follows:

(1) The Company is “0”.

(2) The subsidiaries are numbered in order starting from “1”.

Note 2: Relationship with the endorser/guarantor is classified into the following categories:

(1) Having business relationship.

(2) The Company owns more than 50% voting shares of the endorsed/guaranteed company.

(3) The Company and its subsidiaries jointly own more than 50% voting shares of the endorsed/guaranteed company.

(4) The endorsed/guaranteed company directly or indirectly owns more than 50% voting shares of the endorser/guarantor.

(5) Mutual guarantees in the same trade due to construction undertaking pursuant to the contracts.

(6) Due to joint venture, each shareholder provides guarantees for the company in proportion to its ownership.

Note 3: Under the Company’s “Procedures for Provision of Endorsements and Guarantees”, the Company’s total guarantees and endorsements to others should not exceed 50% of the Company’s net asset value, and

total guarantees and endorsements provided for a single party should not exceed 20% of the Company’s net asset value. The calculation is shown below:

(1) $7,206,916 thousand dollars × 20% ＝ $1,441,383 thousand dollars

(2) $7,206,916 thousand dollars × 50% ＝ $3,603,458 thousand dollars

～ 46 ～

C. Marketable securities held as of March 31, 2012:

For the information of marketable securities, the book value and market value was calculated by exchange rate on March 31, 2012.

As of March 31, 2012

Securities held by

Type ofmarketablesecurities Name of marketable securities

Relationship of thesecurities issuerwith the Company

Generalledger account Number of shares Book value

Ownership(%)

Market value orequity per share

(in dollars) RemarkOpto Tech Corp. Stock United Radiant Technology

CorpThe Company is thedirector of thiscompany.

Available-for-salefinancialassets-non-current

8,881,959 $ 44,943 5.59 $ 44,943 None

〞〞 AXT, Inc. None.〞

124,100 - - - Note 1

$ 44,943

〞〞 Nichia Corp. This company is theparent company ofNichia TaiwanCorp.

Financial assets carriedat cost-non-current

10,000 $ 379,252 0.47 $ 755,363 None

〞〞 Lu Zhu Development Co.,Ltd.

The Company is thedirector of thiscompany.

〞 15,870,370 101,516 6.38 116,965 〞

〞〞 Giga Epitaxy TechnologyCorp.


〞 3,300,000 33,000 4.55 30,228 〞

〞〞 Shin-Etsu Opto ElectronicCo., Ltd.


〞 2,000,000 20,000 10.00 64,500 〞

〞〞 Formosa IndustrialComputing, Inc.

None. 〞 699,826 5,349 4.49 5,626 〞

〞〞 Top Increasing TechnologyCo., Ltd.

None. 〞 10,000,000 - 16.67 - 〞

〞〞 Mentor Data System, Inc. None. 〞 4,509,172 - 19.19 - 〞

〞〞 Pictologic Inc. None. 〞 400,000 - 1.71 2,630 〞

〞〞 LT LIGHTING (TAIWAN)Corp.

None. 〞 119,628 - 1.95 553 Note 2

〞〞 Action Media TechnologiesInc.

None. 〞 75,000 - 1.96 - None

$ 539,117

Note 1: The 124 thousand shares of AXT, Inc. which are owned by the Company, are preferred stocks.

Note 2: On July 4, 2011, Lanyo Technology Co., Ltd was renamed to LT LIGHTING (TAIWAN) Corp.

～ 47 ～


Securities held by




Ownership(%)


(in dollars) RemarkOpto Tech Corp. Stock Opto Technology

International Group Co.,Ltd.

Subsidiary of theCompany

Long-term investmentaccounted for underequity method

33,769,906 $ 836,293 100.00 $ 836,293 Note 1

〞〞 Ho Chung Investment Corp. Subsidiary of theCompany

〞 23,830,000 83,802 100.00 83,802 None

〞〞 Jyu Shin Investment Co., Ltd. Subsidiary of theCompany

〞 12,568,706 265,663 100.00 265,663 〞

Source Ever Limited Subsidiary of theCompany

〞 200,001 1,801 100.00 1,801 Note 2

〞〞 Viking Tech Corpration Investee of theCompany accountfor under the equitymethod

〞 7,209,052 153,920 8.32 206,179 None

Jyu Shin InvestmentCo., Ltd.

Stock CS Bright Corporation Subsidiary of thisCompany


4,993,562 109,125 99.87 109,125 〞

〞〞 Viking Tech Corporation Investee of thisCompanyaccounted for underthe equity method

〞 6,198,000 132,333 7.15 177,263 〞

Ho Chung InvestmentCo., Ltd.

Stock Opto Tech Corp. Parent company ofthis Company

Financial assets at fairvalue through profit orloss - current

1,107,276 16,000 0.20 16,000 〞

〞〞 Viking Tech Corporation Investee of thisCompanyaccounted for underthe equity method


2,526,010 53,933 2.91 72,244 〞

〞〞 VML TECHNOLOGIES B.V. Investee of thisCompanyaccounted for underthe equity method

〞 6,000 248 25.00 248 〞

〞〞 Brilliance Semiconductor,Inc.

None Financial assets carriedat cost-non-current

14,624 - 0.06 - 〞

Note 1: On May 17, 2011 and May 31, 2011, the Company increased its capital by USD 2,000 thousand and USD 3,000 thousand, respectively, through cash infusion to its subsidiary - Opto Technology InternationalGroup Co., Ltd.

Note 2: On May 13, 2011, the Company increased its capital by USD 200 thousand dollars through cash infusion to its subsidiary –Source Ever Limited.

～ 48 ～


Securities held by




Ownership(%)


(in dollars) RemarkCS Bright

CorporationStock Bright Investment

International Ltd.Subsidiary of thisCompany


5,000,000 $ 16,257 100.00 $ 16,257 None

Bright InvestmentInternational Ltd.

Stock Everyung Investment Ltd. Subsidiary of thisCompany


5,000,000 57,254 55.56 57,254 Note 1

Everyung InvestmentLtd.

Stock Opto Plus Technology Co.,Ltd.

Subsidiary of thisCompany


9,000,000 103,057 100.00 103,057 Note 2

Opto TechnologyInternational GroupCo., Ltd.

Stock Opto Tech (Cayman) Co.,Ltd.



9,669,906 135,880 100.00 135,880 Note 3

〞〞 Opto Grand (Cayman) Co.,Ltd.



20,000,000 651,223 100.00 651,223 None

〞〞 Everyung Investment Ltd. Subsidiary of thisCompany


4,000,000 45,803 44.44 45,803 Note 1

Opto Tech (Cayman)Co., Ltd.

Stock Opto Tech (Suzhou) Co., Ltd. Subsidiary of thisCompany


9,000,000 111,545 100.00 111,545 Note 4

〞〞 Opto Tech (Macao) Co., Ltd. Subsidiary of thisCompany


372,028 15,624 100.00 15,624 None

Opto Grand (Cayman)Co., Ltd

Stock Opto Tech Semiconductor(Ningbo) Co., Ltd.



20,000,000 650,808 100.00 650,808 None

Note 1: On June 14, 2011, Opto Technology International Group Co., Ltd. increased its capital by cash infusion amounting to USD 2,000 thousand to Everyung Investment Ltd. and the ownership ratio increased to44.44%.

Note 2: On June 16, 2011, Everyung Investment Ltd. increased its capital by cash infusion amounting to USD 2,000 thousand to its subsidiary - Opto Plus Technology Co.,Ltd.Note 3: On May 31, 2011, Opto Technology International Group Co., Ltd. increased its capital by cash infusion amounting to USD 3,000 thousand to its subsidiary - Opto Tech (Cayman) CO., Ltd.Note 4: On June 14, 2011, Opto Tech (Cayman) CO., Ltd. increased its capital by cash infusion amounting to USD 3,000 thousand to its subsidiary - Opto Tech (Suzhou) Co.,Ltd.

D. Acquisition or sale of the same security with the accumulated cost exceeding $100 million or 20% of the Company’s paid-in capital during the three-month period ended March 31, 2012: None.

E. Acquisition of real estate properties exceeding $100 million or 20% of the Company’s paid-in capital during the three-month period ended March 31, 2012: None.

F. Disposal of real estate properties exceeding $100 million or 20% of the Company’s paid-in capital during the three-month period ended March 31, 2012: None.

～ 49 ～

G. Purchases from or sales to related parties exceeding $100 million or 20% of the Company’s paid-in capital during the three-month period ended March 31, 2012:

Transaction

Differences in transactionterms compared to third

party transactionsNotes/accounts

receivable (payable)

Purchaser/seller Counterparty Relationship with the CompanyPurchases

(sales) Amount

Percentageof

totalpurchases

(sales) Credit term Unit priceCreditterm Balance

Percentage oftotal

notes/accountsreceivable(payable)

Opto Tech Corp. Nichia Taiwan Corp. This company is the director of theCompany

Purchases $ 301,804 35- 120 days Equivalent tonormaltransaction

- ($ 523,252) ( 42)

H. Receivables from related parties exceeding $100 million or 20% of the Company’s paid-in capital during the three-month period ended March 31, 2012: None

I. Derivative financial instruments undertaken during the three-month period ended March 31, 2012: Please refer to Note 10(7)

～ 50 ～

2) Information on investee companies for the three-month period ended March 31, 2012

The information of investee companies was calculated by the exchange rate on March 31, 2012, except for the net income (loss), which was applied the average exchange rate of each month in the first quarter in 2012.

Investee Location Main activities

Initial investment amount Shares held as of March 31, 2012

Net income(loss) of the

investee

Investmentincome(loss)

recognizedby the

Company Remark

Balance

as of03/31/2012

Balance

as of03/31/2011

Number ofshares

Ownership(%) Book value

Opto Tech Corp.holds—

Opto TechnologyInternational GroupCo., Ltd.

CaymanIslands

Holding Company $1,090,254 $1,090,254 33,769,906 100.00 $ 836,293 ($ 9,345) ($ 9,345) Subsidiary ofthe Company

Ho Chung InvestmentCo., Ltd.

Taiwan Investment business 288,300 288,300 23,830,000 100.00 83,802 5,159 1,671 Subsidiary ofthe Company

Jyu Shin InvestmentCo., Ltd.

Taiwan Investment business 125,687 125,687 12,568,706 100.00 265,663 ( 1,050) ( 1,050) Subsidiary ofthe Company

Source Ever Limited B.V.I. International trading 5,725 5,725 200,001 100.00 1,801 ( 47) ( 47) Subsidiary ofthe Company

Viking TechCorporation

Taiwan R&D, Manufacture and Sales of SMD ChipResistor, DIP Power Resistor, High FrequencyCeramic Chip Inductor, SMD Ferrite Inductor,Power Inductor, Capacitor Integrated PassiveDevices

291,301 291,301 7,209,052 8.32 153,920 40,603 5,316 Long-terminvestmentaccount for

under equitymethod

～ 51 ～




investee

Investmentincome(loss)

recognizedby the

Company Remark

Balance

as of03/31/2012

Balance

as of03/31/2011

Number ofshares


Ho Chung InvestmentCo., Ltd. holds—

VMLTECHNOLOGIESB.V.

Holland Manufacture and Design of system products $ 37,436 $ 37,436 6,000 25.00 $ 248 $ 368 $ 92 Long-terminvestment

accounted forunder equity

method



45,468 45,468 2,526,010 2.91 53,933 40,603 1,845 Long-terminvestment


method

Jyu Shin InvestmentCo., Ltd. holds—

CS Bright Corporation Taiwan Manufacture and Sales of Displays, SMDLamps and other LED related products

50,170 50,170 4,993,562 99.87 109,125 ( 5,591) ( 5,584) ) Indirectsubsidiary ofthe Company



78,651 78,651 6,198,000 7.15 132,333 40,603 4,528 Long-terminvestment


methodCS Bright Corporationholds—

Bright InvestmentInternational Ltd.

B.V. I. Investment business 168,421 168,421 5,000,000 100.00 16,257 ( 2,478) ( 508) Indirectsubsidiary

～ 52 ～




investee

Investmentincome (loss)recognized bythe Company Remark

Balance

as of03/31/2012

Balance

as of03/31/2011

Number ofshares


Bright InvestmentInternational Ltd. holds—

Everyung Investment Ltd. Samoa Investment business $ 168,421 $ 168,421 5,000,000 55.56 $ 57,254 ($ 4,462) ($ 2,478) Indirectsubsidiary

Everyung Investment Ltd.holds—

Opto Plus Technology Co.,Ltd.

China Manufacture and Sales of LED and ElectronicProducts

287,341 287,341 9,000,000 100.00 103,057 ( 4,462) ( 4,462) Indirectsubsidiary

Opto TechnologyInternational Group Co.,Ltd. holds—

(Note 1)

Opto Tech (Cayman) Co.,Ltd.

Cayman Islands Holding Company 316,203 316,203 9,669,906 100.00 135,880 ( 8,445) ( 8,445) Indirectsubsidiary(Note 2)

Opto Grand (Cayman) Co.,Ltd.

Cayman Islands Holding Company 651,721 651,721 20,000,000 100.00 651,223 1,180 1,180 Indirectsubsidiary

Everyung Investment Ltd. B.V.I Investment business 118,920 118,920 4,000,000 44.44 45,803 ( 4,462) ( 1,984) Indirectsubsidiary(Note 3)

Opto Tech (Cayman) Co.,Ltd. holds—

Opto Tech (Suzhou) Co.,Ltd.

China Research, Design and Manufacture of LED Display,Wireless Communication Equipment and relatedparts

294,708 294,708 9,000,000 100.00 111,545 ( 8,685) ( 8,685) Indirectsubsidiary(Note 4)

Opto Tech (Macao) Co.,Ltd.

Macao International trading 4,096 4,096 372,028 100.00 15,624 456 456 Indirectsubsidiary

Opto Grand (Cayman) Co.,Ltd. holds—

Opto Tech Semiconductor(Ningbo) Co., Ltd.

China Manufacture and Sales of LED and Electronicproducts

651,721 651,721 20,000,000 100.00 650,808 1,191 1,191 Indirectsubsidiary

Note 1: On June 16, 2011, Everyung Investment Ltd. increased its capital by cash infusion amounting to USD 2,000 thousand dollars to its subsidiary - Opto Plus Technology Co., Ltd.

Note 2: On May 31, 2011, Opto Technology International Group Co., Ltd. increased its capital by cash infusion amounting to USD 3,000 thousand dollars to its subsidiary - Opto Tech (Cayman) CO., Ltd.

Note 3: On June 14, 2011, Opto Technology International Group Co., Ltd. increased its capital by cash infusion amounting to USD 2,000 thousand dollars to Everyung Investment Ltd. and the

ownership ratio increased to 44.44%. Therefore, the ownership ratio of Bright Investment International Ltd. to Everyung Investment Ltd. decreased to 55.56%.

Note 4: On June 14, 2011, Opto Tech (Cayman) CO., Ltd. increased its capital by cash infusion amounting to USD 3,000 thousand dollars to its subsidiary - Opto Tech (Suzhou) Co., Ltd.

～ 53 ～

3) Information on Mainland China investments

A. Information on Mainland China investments for the three-month period ended March 31, 2012

Investee inMainland China Main activities Paid-in capital

Investmentmethod

Accumulatedamount of

remittance toMainland China asof January 1, 2012

Amount remittedto Mainland Chinaduring the period

Amountremitted back toTaiwan during

the period

Accumulated amountof remittance to

Mainland China as ofMarch 31, 2012

Ownershipheld by theCompany(direct orindirect)

Investmentincome (loss)recognized bythe Companyfor the period

(Note 2)

Book value ofinvestments in

Mainland Chinaas of March 31,

2012

Accumulatedamount of

investment incomeremitted back to

Taiwan as ofMarch 31, 2012

Opto Tech (Suzhou)Co., Ltd.

Research, Design andManufacture of LEDDisplay, WirelessCommunicationEquipment andrelated parts

$ 294,708 Note 1(2) $ 294,708 $ - $ - $ 294,708 100.00% ($ 8,685) $ 111,545 $ -

Opto TechSemiconductor(Ningbo) Co., Ltd.

Manufacture and Salesof LED andElectronic products

651,721 Note 1(2) 651,721 - - 651,721 100.00% ( 1,191) 650,808 -

Opto PlusTechnology Co.,Ltd.

Manufacture and Salesof LED andElectronic products

287,341 Note 1(2) 287,341 - - 287,341 99.87% ( 4,462) 103,057 -

Note 1: The investment methods are classified into five categories as follows:

(1) Remitting investment funds to the investee company in Mainland China through the third area.

(2) Setting up a company in the third area, which then invested in the investee company in Mainland China.

(3) Through investing in an existing company in the third area, which then invested in the investee company in Mainland China.

(4) Directly investing in the investee company in Mainland China.

(5) Other.

Note 2: The investment income or loss was recognized by indirect weighted ownership based on the financial statements of these investees which were not reviewed by the independent accountants of the parent company for the corresponding

periods.

B. Investments in Mainland China for the three-month period ended March 31, 2012:

Accumulated amount of remittance from Taiwan to MainlandChina as of March 31, 2012

Investment amount approved bythe Investment Commission of the

Ministry of Economic Affairs (MOEA)

Ceiling on investments inMainland China imposed by

the Investment Commission of MOEA

$ 1,233,618 $ 1,234,278 $ 4,324,150

C. The significant events occurring due to investment through the third area and the investees in Mainland China for the three-month period ended March 31, 2012 were as follows:

(1)The Company sold inventories to Opto Tech (Suzhou) Co., Ltd. during the three-month period ended March 31, 2012, amounting to $240, comprising 0.02% of net sales of the Company. As of March 31, 2012, accounts receivable from Opto

Tech (Suzhou) Co., Ltd. was $241, comprising 0.01% of the accounts receivable of the Company. The Company sold finished goods to Opto Plus Technology Co., Ltd., amounting to $2,279, comprising 0.15% of net sales of the Company. As

of March 31, 2012, accounts receivable from Opto Plus Technology Co., Ltd. was $2,314, comprising 0.12% of the accounts receivable of the Company.

(2)The Company purchased semi-finished goods from Opto Tech (Suzhou) Co., Ltd. during the three-month period ended March 31, 2012, amounting to $1,920, comprising 0.22% of net purchases of the Company. As of March 31, 2012,

accounts payable to Opto Tech (Suzhou) Co., Ltd. was $1,917, comprising 0.15% of the accounts payable of the Company.

～ 54 ～

12. SEGMENT INFORMATION

In accordance with R.O.C SFAS No. 41, “Operating Segments”, the information of operatingsegments is disclosed in the Company’s consolidated financial statements.

opto tech corporation financial statements and report of independentaccountants … ·...

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