Gintech Energy Corporation and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2010 and 2009 and Independent Auditors’ Report
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders Gintech Energy Corporation We have audited the accompanying consolidated balance sheets of Gintech Energy Corporation (the “Company”) and its subsidiaries (collectively referred to as the “Group”) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the Group’s financial position as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, and accounting principles generally accepted in the Republic of China. As described in Note 3, effective on January 1, 2009, the Group adopted the newly revised Statement of Financial Accounting Statements (“SFAS”) No. 10 - “Accounting for Inventories”.
March 4, 2011 Notice to Readers The accompanying consolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors’ report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors’ report and consolidated financial statements shall prevail. Also, as stated in Note 2 to the consolidated financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English. -1-
GINTECH ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars)
ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 4, 22 and 26) Available-for-sale financial assets (Notes 2, 6 and 22) Accounts receivable, net (Notes 2, 7, 22 and 26) Accounts receivable - related parties (Notes 2, 7, 22 and 23) Other receivables (Note 22) Inventories (Notes 2, 3 and 8) Prepaid expense Prepayments (Notes 23 and 25) Deferred income tax assets (Notes 2 and 19) Restricted assets (Notes 22, 24, 25 and 26) Other current assets Total current assets INVESTMENTS Investments accounted for by the equity method (Notes 2 and 9) Financial assets carried at cost (Notes 2, 10 and 22)
2010 Amount
2009 Amount
%
%
LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 3,473,962 3,480 2,309,975
14 9
$ 2,780,403 5,188 1,854,522
12 8
114 19,067 1,681,286 102,084 1,145,748 172,028 622,413 4,425
7 5 1 3 -
42,414 1,663,842 72,928 1,120,604 67,067 433,737 788
7 1 5 2 -
9,534,582
39
8,041,493
35
13,750 31,800
-
-
-
45,550
-
-
-
CURRENT LIABILITIES Short-term loans (Notes 12, 22 and 26) Notes payable (Note 22) Accounts payable (Notes 22 and 26) Accounts payable - related parties (Notes 22 and 23) Income tax payable (Note 19) Accrued expenses (Notes 13 and 22) Other payables (Notes 14, 22 and 26) Receipts in advance Long-term debt - current portion (Notes 15, 22 and 24) Other current liabilities Total current liabilities LONG-TERM LIABILITIES Long-term debt (Notes 15, 22, 24 and 26) OTHER LIABILITIES Guarantee deposits received (Note 22) Total liabilities
Total investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 11 and 24) Cost Land Buildings Machinery and equipment Transportation equipment Office equipment Leasehold improvements Other equipment Total cost Less: Accumulated depreciation Construction-in-progress and prepayments for equipment Total property, plant and equipment INTANGIBLE ASSETS (Note 2) OTHER ASSETS Refundable deposits (Notes 22 and 25) Deferred charges (Note 2) Deferred income tax assets (Notes 2 and 19) Other assets - other (Notes 23 and 25) Total other assets TOTAL
235,835 1,674,561 8,278,889 8,600 75,422 126,166 241,214 10,640,687 (2,525,685) 1,587,957
1 7 34 1 1 44 (10) 6
1,512,110 7,264,959 6,245 64,020 107,335 200,218 9,154,887 (1,437,565) 1,132,683
7 31 1 39 (6) 5
9,702,959
40
8,850,005
38
6,367
-
7,193
-
1,920,292 30,804 45,822 3,178,143
8 13
1,951,470 23,717 132,574 4,144,896
8 1 18
5,175,061
21
6,252,657
27
$ 24,464,519
100
$ 23,151,348
100
SHAREHOLDERS’ EQUITY (Notes 2, 6, 16, 17 and 19) Capital stock Common stock Advance receipts for common stock Total capital stock Capital surplus Additional paid-in capital Employee stock options Total capital surplus Retained earnings Legal reserve Special reserve Unappropriated earnings Total retained earnings Unrealized loss on financial instruments Total shareholders' equity
TOTAL
The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 4, 2011)
-2-
2010 Amount
2009 Amount
%
$ 1,782,841 565,088 49 248,547 1,116,798 63,994 7,919 1,254,000 7,342
7 3 1 5 5 -
5,046,578
$
%
949,361 920 1,649,085 63,519 344,463 386,275 6,393 1,077,000 7,129
4 7 1 2 5 -
21
4,484,145
19
1,694,678
7
5,204,000
23
260,204
1
205,248
1
7,001,460
29
9,893,393
43
3,221,922 340 3,222,262
13 13
3,181,335 5,434 3,186,769
14 14
8,719,536 2,869 8,722,405
36 36
8,699,431 17,012 8,716,443
37 37
244,590 5,779 5,274,043 5,524,412 (6,020)
1 21 22 -
237,540 5,779 1,115,736 1,359,055 (4,312)
1 5 6 -
17,463,059
71
13,257,955
57
$ 24,464,519
100
$ 23,151,348
100
GINTECH ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2010 Amount OPERATING REVENUES (Notes 2 and 23) Sales Sales returns Sales allowance
$ 28,240,395 (32,868) (41,072)
Net sales
2009 Amount
%
100 -
$ 15,889,076 (152,883) (14,170)
%
101 (1) -
28,166,455
100
15,722,023
100
22,887,662
81
15,169,421
97
5,278,793
19
552,602
3
231,712 423,775 93,641
1 2 -
118,574 267,183 65,918
1 2 -
749,128
3
451,675
3
4,529,665
16
100,927
-
NONOPERATING INCOME AND GAINS Exchange gain, net (Notes 2 and 5) Interest income Miscellaneous income (Notes 17 and 23)
130,087 4,563 13,904
-
105,370 5,300 35,385
1 -
Total nonoperating income and gains
148,554
-
146,055
1
80,447 40,100 1,430 -
-
168,557 39,748 491 1,359
1 -
121,977
-
210,155
1
4,556,242
16
36,827
-
231,501
1
(33,670)
-
4,324,741
15
OPERATING COSTS (Notes 8, 20 and 23) GROSS PROFIT OPERATING EXPENSES (Notes 20, 23 and 25) Selling expenses General and administrative expenses Research and development expenses Total operating expenses OPERATING INCOME
NONOPERATING EXPENSES AND LOSSES Interest expense (Notes 2 and 11) Financial expenses Loss on disposal of assets (Note 2) Loss on sale of investments, net Miscellaneous expenses Total nonoperating expenses and losses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (BENEFIT) (Notes 2 and 19) NET INCOME
$
-3-
$
70,497 (Continued)
GINTECH ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2010 Amount ATTRIBUTABLE TO Consolidated net income attributable to parent company Minority interest income CONSOLIDATED NET INCOME
2009 Amount
%
%
$
4,324,741 -
15 -
$
70,497 -
-
$
4,324,741
15
$
70,497
-
2010
2009
Before Income Tax
After Income Tax
Before Income Tax
After Income Tax
BASIC EARNINGS PER SHARE (Note 21)
$ 14.15
$ 13.43
$
0.14
$
0.27
DILUTED EARNINGS PER SHARE (Note 21)
$ 13.84
$ 13.14
$
0.14
$
0.27
The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 4, 2011)
-4-
(Concluded)
GINTECH ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars) Capital Stock Advance Receipts for Common Stock Common Stock BALANCE, JANUARY 1, 2009
$
Appropriation of the 2008 earnings (Note 17) Legal reserve Special reserve Stock dividends
1,491,648
$
4,125
Capital Surplus Additional Employee Stock Paid-in-Capital Options $
5,115,014
$
12,088
Retained Earnings Legal Reserve $
46,677
Special Reserve $
300
718,429
-
-
-
190,863 -
5,479 -
13,978
-
50,600
-
-
-
950,000
-
3,530,705
-
-
-
-
-
4,924
7,280
1,309
3,112
Change in unrealized loss on available-for-sale financial assets
-
-
Net income for the year ended December 31, 2009
-
Transfer of employee bonuses to common stock Issuance of common stock for cash Compensation recognized for employee stock options Options exercised
BALANCE, DECEMBER 31, 2009 Appropriation of the 2009 earnings (Note 17) Legal reserve Cash dividends Stock dividends Compensation recognized for employee stock options Options exercised
Unappropriated Earnings $
1,960,010
(5,779)
Total $
8,624,083
-
-
-
-
64,578
-
-
-
4,480,705
-
-
-
-
4,924
-
-
-
-
-
11,701
-
-
-
-
-
1,467
1,467
-
-
-
-
-
70,497
-
70,497
3,181,335
5,434
8,699,431
17,012
237,540
5,779
1,115,736
31,877
-
-
-
7,050 -
-
-
-
-
1,362
-
-
-
-
1,362
(15,505)
-
-
-
-
8,216
8,710
(5,094)
20,105
-
-
-
-
-
-
Net income for the year ended December 31, 2010
-
-
-
-
-
-
4,324,741
3,221,922
$
340
$
8,719,536
The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 4, 2011)
-5-
$
2,869
$
244,590
$
5,779
(4,312)
(7,050) (127,507) (31,877)
-
$
$
(190,863) (5,479) (718,429)
Change in unrealized loss on available-for-sale financial assets
BALANCE, DECEMBER 31, 2010
Unrealized Loss on Financial Instruments
$
5,274,043
-
(1,708) $
(6,020)
13,257,955
(127,507) -
(1,708) 4,324,741 $ 17,463,059
GINTECH ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars)
2010
CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation Amortization Provision for doubtful accounts Compensation cost of employee stock options Loss on sale of investment Loss on disposal of assets Deferred income tax benefit Net changes in operating assets and liabilities Accounts receivable Accounts receivable - related parties Other receivables Inventories Prepaid expense Prepayments Other current assets Notes payable Accounts payable Accounts payable - related parties Income tax payable Accrued expenses Other payables Receipts in advance Other current liabilities
$ 4,324,741
2009
$
70,497
1,091,980 19,683 1,362 1,430 (18,209)
760,510 14,165 36,250 4,924 491 (109,427)
(455,453) (114) 23,347 13,197 (29,156) 941,609 (3,637) (920) (1,083,997) 49 185,028 772,335 (70,721) 1,526 213
(1,081,034) 42,941 819,437 (25,524) 744,590 967 920 401,285 8,000 126,745 70,756 (54,082) 709
5,714,293
1,833,120
CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of financial assets carried at cost Acquisition of investments accounted for by equity method Proceeds of the disposal of financial assets carried at cost Decrease (increase) in restricted assets Acquisition of property, plant and equipment Acquisition of intangible assets Decrease in refundable deposits Increase in deferred charges Revenue in insurance claims of property, plant and equipment
(31,800) (13,750) (188,676) (2,197,388) (4,579) 537 (21,901) -
(83,613) 163,122 626,661 (1,946,576) (5,127) 1,639,106 (9,155) 5,421
Net cash provided by (used in) investing activities
(2,457,557)
Net cash provided by operating activities
-6-
389,839 (Continued)
GINTECH ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars)
2010
CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term loans Decrease in long-term debt Increase (decrease) in guarantee deposits received Share issuance for cash Cash dividends Options exercised
$
2009
833,480 (3,332,322) 54,956 (127,507) 8,216
$
(2,563,177)
Net cash used in financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid Interest paid Deduct: Capitalized amount Interest (excluding amounts capitalized) Income tax paid
2,060,871
2,780,403
719,532
$ 3,473,962
$ 2,780,403
$
$
$ $
NON-CASH INVESTING AND FINANCING ACTIVITIES Refundable deposits transferred to prepayments Refundable deposits transferred to raw materials Long-term debt - current portion Prepayments transferred to overdue receivable Accrued stock bonus to employees transferred to common stock and capital surplus - additional paid-in capital ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT Increase in property, plant and equipment Add: Payables for construction and equipment (recorded as other payables), beginning of year Add: Obligations under capital leases, beginning of year Deduct: Payables for construction and equipment (recorded as other payables), end of year Acquisition of property, plant and equipment
(162,088)
693,559
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR
(961,359) (3,539,000) (154,135) 4,480,705 11,701
107,164 (17,742) 89,422 64,726
$ $
198,596 (3,912) 194,684 67,824
$ $ 30,641 $ 1,254,000 $ -
$ 501,300 $ 22,247 $ 1,077,000 $ 18,211
$
$
-
64,578
$ 1,945,828
$ 1,726,215
315,450 -
535,587 224
(63,890) $ 2,197,388
(315,450) $ 1,946,576
The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 4, 2011)
-7-
(Concluded)
GINTECH ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)
1. ORGANIZATION AND OPERATIONS Gintech Energy Corporation (“the Company”) was incorporated on August 10, 2005. The Company was in its development stage from August 10, 2005 to July 31, 2006. Starting from August 1, 2006, mainly in the manufacturing and selling of solar cells and materials. The Company’s shares have been listed on the Taiwan Stock Exchange (“TSE”) since November 2, 2007. Gintech Material Corporation (“Gintech Material”) was incorporated in December 2005, and is a wholly-owned subsidiary of the Company to engage mainly in the manufacturing and selling of various electronic materials. Gintech Material has not yet commenced business as of December 31, 2010. Apos Energy Corporation (“Apos Energy”) was incorporated in September 2008, and is a wholly-owned subsidiary of the Company to engage mainly in generating and delivering of electricity, manufacturing of electricity distribution plant and various electronic materials, and international trading. The Company and its consolidated subsidiaries, hereinafter referred to as the “Group” had 1,632 and 1,222 employees as of December 31, 2010 and 2009, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of all direct subsidiaries of Gintech Energy. The consolidated entities as of December 31, 2010 and 2009 were as follows: Investor Gintech Energy Corporation
Investee
Main Business
Gintech Material
Manufacturing and selling of various electronic materials Manufacturing and selling of various electronic materials
Apos Energy
% of Ownership 2010 2009 100
100
100
100
All significant intercompany balances and transactions were eliminated upon consolidation. Basis of Presentation The consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (“ROC”). Under these guidelines and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts, allowance for loss on inventories, depreciation of property, plant and equipment, income tax, amortization of intangible assets and deferred charges, loss on assets impairment, pension cost, provision for product warranties, bonuses to employees, directors and supervisors, etc. Actual results may differ from these estimates.
-8-
The consolidated financial statements were originally presented in more than one set of Chinese reports. For the convenience of readers, the consolidated financial statements have been translated into English from the original Chinese version prepared and used in the ROC. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. However, these consolidated financial statements do not include the English translation of the additional footnote disclosures that are not required under ROC generally accepted accounting principles but are required by the Securities and Futures Bureau (“SFB”) for their oversight purposes. The Group’s significant accounting policies are summarized as follows: Current/Noncurrent Assets and Liabilities Current assets include cash, cash equivalents, and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. All other assets such as property, plant and equipment and intangible assets are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent. Financial Assets and Liabilities at Fair Value through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (“FVTPL”) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Group recognizes a financial asset or a financial liability on its balance sheet when the Group becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Group has lost control of its contractual rights over the financial asset. Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. At each balance sheet date subsequent to initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in profit or loss. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability. Fair values of financial assets at the balance sheet date are determined as follows: financial assets without quoted prices in an active market - at values determined using valuation techniques. Available-for-sale Financial Assets Available-for-sale financial assets are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are remeasured at fair value, with changes in fair value recognized in equity until the financial assets are disposed of, at which time, the cumulative gain or loss previously recognized in equity is included in profit or loss for the year. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. The recognition and derecognition of available-for-sale financial assets are the same with those of financial assets at FVTPL. Fair values of financial assets at the balance sheet date are determined as follows: Publicly traded stocks - at closing prices.
-9-
Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are not recognized as investment income but are recorded as an increase in the number of shares. The total number of shares subsequent to the increase is used for recalculation of cost per share. An impairment loss is recognized when there is objective evidence that the financial asset is impaired. Any subsequent decrease in impairment loss for an equity instrument classified as available-for-sale is recognized directly in equity. If the fair value of a debt instrument classified as available-for-sale subsequently increases as a result of an event which occurred after the impairment loss was recognized, the decrease in impairment loss is reversed to profit. Revenue Recognition, Trade Receivables and Allowance for Doubtful Accounts Revenue from sales of goods is recognized when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, primarily upon shipment, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Group and the customers for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest. An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts receivable. The Group assesses the probability of collections of accounts receivable by examining the aging analysis of the outstanding receivables and current trends in the credit quality of its customers as well as its internal credit policies. Inventories Inventories consist of materials, raw materials, supplies, finished goods and work-in-process. Inventories were stated at the lower of cost or net realizable value. Inventory write-downs are made item by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date. Investments Accounted for by the Equity Method Investments in which the Group holds 20 percent or more of the investees’ voting shares or exercises significant influence over the investees’ operating and financial policy decisions are accounted for by the equity method. Profits from downstream transactions with an equity-method investee are eliminated in proportion to the Group’s percentage of ownership in the investee; however, if the Group has control over the investee, all the profits are eliminated. Profits from upstream transactions with an equity-method investee are eliminated in proportion to the Group’s percentage of ownership in the investee.
- 10 -
Financial Assets Carried At Cost Investments in equity instruments with no quoted prices in an active market and with fair values that cannot be reliably measured, such as non-publicly traded stocks and stocks traded in the Emerging Stock Market, are measured at their original cost. The accounting treatment for dividends on financial assets carried at cost is the same with that for dividends on available-for-sale financial assets. An impairment loss is recognized when there is objective evidence that the asset is impaired. A reversal of this impairment loss is disallowed. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets. Major additions and improvements to property, plant and equipment are capitalized, while costs of repairs and maintenance are expensed currently. Depreciation is provided on a straight-line basis over estimated useful lives as follows: buildings - 20-50 years; machinery and equipment - 3-10 years; transportation equipment - 3-5 years; office equipment - 3 years; leasehold improvements - 2-20 years; and other equipment - 2-9 years. Property, plant and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. The related cost and accumulated depreciation of property, plant and equipment are derecognized from the balance sheet upon its disposal. Any gain or loss on disposal of the asset is included in nonoperating gains or losses in the year of disposal. Intangible Assets Intangible assets acquired are initially recorded at cost and are amortized on a straight-line basis over their estimated useful lives. Computer software is amortized over 3 years. Deferred Charges Deferred charges, which are mainly construction - related, is stated at cost and amortized on a straight-line basis over 3 to 5 years. Impairment of Assets If the recoverable amount of an asset (mainly property, plant and equipment, intangible assets, deferred charges and investments accounted for by the equity method) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. If an impairment loss subsequently reverses, the carrying amount of the asset is increased accordingly, but the increased carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. Share-based Compensation Employee stock options granted between January 1, 2004 and December 31, 2007 were accounted for under the interpretations issued by the Accounting Research and Development Foundation (“ARDF”). The Group adopted the fair value method, under which compensation cost was recognized on a straight-line basis over the vesting period.
- 11 -
Employee stock options granted on or after January 1, 2008 are accounted for under SFAS No. 39 “Accounting for Share-based Payment”. Under the statement, the value of the stock options granted, which is equal to the best available estimate of the number of stock options expected to vest multiplied by the grant-date fair value, is expensed on a straight-line basis over the vesting period, with a corresponding adjustment to capital surplus - employee stock options. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates. Pension Cost Contributions made under a defined contribution plan are recognized as pension cost during the year in which employees render services. Income Tax The Group applies the intra-year and inter-year allocations methods to its income tax, whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. Tax credits for purchases of machinery, equipment and technology, research and development expenditures, and personnel training expenditures are recognized using the flow-through method. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings. Foreign Currencies Non-derivative foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange differences arising from settlement of foreign-currency assets and liabilities are recognized in profit or loss. At the balance sheet date, foreign-currency monetary assets and liabilities are revalued using prevailing exchange rates and the exchange differences are recognized in profit or loss.
Reclassifications Certain accounts in the consolidated financial statements as of and for the year ended December 31, 2009 have been reclassified to conform to the presentation of the consolidated financial statements as of and for the year ended December 31, 2010.
- 12 -
3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Accounting for Inventories On January 1, 2009, the Group adopted the newly revised SFAS No. 10, “Accounting for Inventories”. The main revisions are (1) inventories are stated at the lower of cost or net realizable value, and inventories are written down to net realizable value item-by-item except when the grouping of similar or related items is appropriate; (2) unallocated overheads are recognized as expenses in the period in which they are incurred; and (3) abnormal costs, write-downs of inventories and any reversal of write-downs are recorded as cost of goods sold for the period.
4. CASH AND CASH EQUIVALENTS December 31 2010 Cash on hand Cash in banks Checking deposits Saving deposits Time deposits Foreign saving deposits
$
2009 450
$
430
1,380 2,338,535 800,000 333,597
1,927 1,687,173 205,186 885,687
$ 3,473,962
$ 2,780,403
As of December 31, 2010 and 2009, time deposits of NT dollar with interest rates of 0.52%-0.64% and 0.10%, respectively.
5. FINANCIAL INSTRUMENTS AT FVTPL The Company entered into derivative contracts during the year ended December 31, 2010 to manage exposures due to exchange rate fluctuations. The financial risk management objective of the Company is to minimize risks due to changes in fair value or cash flows. Net loss of $119,875 thousand on forward exchange contracts for the year ended December 31, 2010. There were no outstanding exchange contracts as of December 31, 2010 and were not enter into derivative contracts during the year ended December 31, 2009.
6. AVAILABLE-FOR-SALE FINANCIAL ASSETS December 31 2010 Domestic quoted stocks Formosa Sumco Technology Co., Ltd.
$
3,480
2009
$
5,188
As of December 31, 2010 and 2009, the unrealized loss of financial instruments was $6,020 thousand and $4,312 thousand.
- 13 -
7. ACCOUNTS RECEIVABLE AND OVERDUE RECEIVABLE, NET December 31
Accounts receivable Less: Allowance for doubtful accounts
Accounts receivable - related parties Less: Allowance for doubtful accounts
Overdue receivable Less: Allowance for doubtful accounts
2010
2009
$ 2,328,014 18,039
$ 1,872,561 18,039
$ 2,309,975
$ 1,854,522
$
114 -
$
-
$
114
$
-
$
67,430 67,430
$
67,430 67,430
$
-
$
-
Movements of allowances for doubtful accounts were as follows: December 31 2010
2009
Accounts Receivable
Overdue Receivable
Accounts Receivable
Overdue Receivable
Balance, beginning of year Add : Provision for doubtful accounts Deduct: Reversal of provision for doubtful accounts
$
$
$
$
Balance, end of year
$
18,039
67,430
-
49,219
-
-
18,039
18,211
-
-
-
-
18,039
$
67,430
$
18,039
$
67,430
8. INVENTORIES December 31 2010 Materials Raw materials Supplies and spare parts Work in process Finished goods
$
233 476,430 266,116 566,821 371,686
$ 1,681,286
2009 $
2,379 424,415 167,877 259,849 809,322
$ 1,663,842
The cost of inventories recognized as cost of goods sold in the years ended December 31, 2010 and 2009 was $22,887,662 thousand and $15,169,421 thousand, respectively, which included $47,550 thousand and $59,930 thousand, respectively, due to write-downs of inventories.
- 14 -
9. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD The Company’s investments accounted for by the equity method as of December 31, 2010 and 2009 was summarized as follows: December 31 2010
2009
Carrying Amount
% of Ownership
$ 13,750
22
% of Ownership
Carrying Amount
Utech Solar $
-
-
As of December 31, 2010, the Company acquired 1,000 thousand shares for $13,750 thousand, and accounted for this investment by the equity method, representing 22% of its total common shares.
10. FINANCIAL ASSETS CARRIED AT COST December 31 2010 Asia Global Venture Capital II Co., Ltd.
2009
$ 31,800
$
-
The above equity investments, which had no quoted prices in an active market and had fair values that could not be reliably measured, were carried at cost. In January 2010, the Company acquired 10% equity interest in Asia Global Venture Capital II Co., Ltd. for US$1,000 thousand (NT$31,800 thousand).
11. PROPERTY, PLANT AND EQUIPMENT December 31 2010
2009
Accumulated depreciation Buildings Machinery and equipment Transportation equipment Office equipment Leasehold improvements Other equipment
$
189,858 2,121,385 3,276 46,250 55,775 109,141
$ 2,525,685
$
114,108 1,177,242 2,120 31,652 47,561 64,882
$ 1,437,565
As of December 31, 2010 and 2009, depreciation of property, plant and equipment amounted to $1,091,980 thousand and $760,510 thousand, respectively. In August 2010, the Company acquired land and building from Gen Ding Construction Corp. for $299,980 thousand, and the amount was fully settled.
- 15 -
Information on capitalized interest was as follows: 2010
2009
Total interest
$
98,189
$
172,469
Capitalized interest (recognized as construction-in-progress and prepayments for equipment)
$
17,742
$
3,912
Capitalization interest rates
1.63%-1.93%
2.17%-2.27%
Collaterals for the bank loans are shown in Note 24.
12. SHORT-TERM LOANS December 31 Amount Credit loan US Dollar EURO Dollar NT Dollar
2010 Interest Rate %
$ 1,696,147 86,694 -
0.9609-1.22 1.55 -
$ 1,782,841
Amount $
899,361 50,000
$
949,361
2009 Interest Rate % 1.12-2.55 1.40
13. ACCRUED EXPENSES December 31 2010 Bonuses to employees, remunerations to directors and supervisors Salaries and bonuses Import/export Interest Others
$
2009
661,685 274,627 81,533 8,999 89,954
$
7,851 156,546 43,247 17,974 118,845
$ 1,116,798
$
344,463
14. OTHER PAYABLES December 31 2010 Payables for construction and equipment Others
- 16 -
2009
$
63,890 104
$ 315,450 70,825
$
63,994
$ 386,275
15. LONG-TERM DEBT December 31 2010 NT$4.5 billion Syndicated loan NT$4.85 billion Syndicated loan NT$0.6 billion Syndicated loan Less: Current portion
$
429,000 2,337,500 182,178 (1,254,000)
$ 1,694,678
2009 $ 1,881,000 4,400,000 (1,077,000) $ 5,204,000
The Company entered into the foregoing syndicated loan for fulfilling working capital requirements and commitments under some raw materials and equipment supply agreements. The Syndicated Loan Agreements require the Company to meet the following financial covenants: On July 4, 2007, the Company entered into a long-term syndicated loan agreement led by First Commercial Bank and jointly lent by 12 domestic banks (the “2007 Agreement”). Then the Company entered into first supplemental agreement on June 27, 2008. The 2007 Agreement provides for a $4.5 billion secured revolving credit facility. As of December 31, 2010, the used credits were as follows: Item 1
Less:
Total Credit Line
Used Credit Line
$
$
429,000
429,000
2
1,500,000
-
3
640,000
-
Current portion
$ 2,569,000
Credit Period
Interest Rate
Repayment Term
For 5 years from the first drawdown date of July 20, 2007 of Item 2 below; no revolving.
2.0000%
For 5 years from the first drawdown date of July 20, 2007; revolving on a 90-days basis. For 5 years from the first drawdown date of July 20, 2007 of Item 2 above; revolving on a 90-days basis
-
Initial repayment on April 20, 2009; subsequent repayments in 14 installments payable quarterly. Repayment in full upon end of credit period.
-
The credit line will subsequently be decreased evenly over 5 periods starting July 20, 2010.
(429,000) $
-
As of December 31, 2009, the used credits were as follows:
Less:
Item
Total Credit Line
Used Credit Line
1
$ 1,281,000
$ 1,281,000
2
1,500,000
-
3
800,000
600,000
Current portion
$ 3,581,000
Credit Period
Interest Rate
Repayment Term
For 5 years from the first drawdown date of July 20, 2007 of Item 2 below; no revolving.
1.0825%-1.7072%
For 5 years from the first drawdown date of July 20, 2007; revolving on a 90-days basis. For 5 years from the first drawdown date of July 20, 2007 of Item 2 above; revolving on a 90-days basis.
-
Initial repayment on April 20, 2009; subsequent repayments in 14 installments payable quarterly. Repayment in full upon end of credit period.
(732,000) $ 1,149,000
- 17 -
1.1184%-2.0000%
The credit line will subsequently be decreased evenly over 5 periods starting July 20, 2010.
According to the syndicated loan agreement, the Company shall maintain the following financial covenants in respect of its annual and semi-annual financial statements: The Company should maintain the following financial ratios, based on its annual and semi-annual financial statements, starting 2007: a. The ratio of current assets to current liabilities should not be less than 100%; b. The ratio of the aggregate of its total liabilities to its net assets should not exceed 130% in 2007 and should not exceed 100% starting 2008; c. The interest coverage ratio should not be less than 400%; and d. Tangible net assets should not be less $3 billion. On June 6, 2008, the Company entered into a long-term syndicated loan agreement led by First Commercial Bank and jointly lent by 12 domestic banks (the “2008 Agreement”). The 2008 Agreement provides for a $4.85 billion secured revolving credit facility. As of December 31, 2010, the used credits were as follows:
Less:
Item
Total Credit Line
Used Credit Line
1
$ 2,337,500
$ 2,337,500
2
2,100,000
-
Current portion
$ 4,437,500
Credit Period
Interest Rate
Repayment Term
2.0000%
-
Initial repayment due 2 years from the first drawdown date; subsequent repayments in 13 installments payable quarterly. The credit line will subsequently be decreased evenly over 5 periods at end of year 3 from the first drawdown date, i.e., August 25, 2008.
Interest Rate
Repayment Term
For 5 years from the first drawdown date of August 25, 2008; no revolving.
1.1522%-2.0000%
For 5 years from the first drawdown date of August 25, 2008 of item 1 above; revolving on a 90-days basis.
1.1691%-2.0000%
Initial repayment due 2 years from the first drawdown date; subsequent repayments in 13 installments payable quarterly. The credit line will subsequently be decreased evenly over 5 periods at end of year 3 from the first drawdown date, i.e., August 25, 2008.
For 5 years from the first drawdown date of August 25, 2008; no revolving.
For 5 years from the first drawdown date of August 25, 2008 of item 1 above; revolving on a 90-days basis.
(825,000) $ 1,512,500
As of December 31, 2009, the used credits were as follows:
Less:
Item
Total Credit Line
Used Credit Line
1
$ 2,750,000
$ 2,300,000
2
2,100,000
2,100,000
Current portion
$ 4,850,000
Credit Period
(345,000) $ 4,055,000
- 18 -
According to the syndicated loan agreement, the Company shall maintain the following financial covenants in respect of its annual and semi-annual financial statements: The Company should maintain the following financial ratios, based on its annual and semi-annual financial statements, starting with the period from 2008: a. The ratio of current assets to current liabilities should not be less than 100%; b. The ratio of the aggregate of its total liabilities to its net assets should not exceed 100% staring 2008; c. The interest coverage ratio should not be less than 400%; and d. Tangible net assets should not be less than $10 billion. On August 11, 2009, the Company entered into a long-term syndicated loan agreement led by First Commercial Bank and Land Bank of Taiwan (the “2009 Agreement”). The 2009 Agreement provides for a $0.6 billion secured revolving credit facility. As of December 31, 2010, the used credits were as follows: Item 1
Less:
Total Credit Line
Used Credit Line
$
$
600,000
-
Current portion $
600,000
182,178
Credit Period For 3 years from the first drawdown date of August 21, 2009.
Interest Rate
Repayment Term
1.1630%
Repayment in full upon end of credit period.
Interest Rate
Repayment Term
-
Repayment in full upon end of credit period.
$
182,178
As of December 31, 2009, the used credits were as follows: Item 1
Less:
Total Credit Line
Used Credit Line
$
$
600,000
-
Current portion $
600,000
-
Credit Period For 3 years from the first drawdown date of August 21, 2009.
$
-
According to the syndicated loan agreement, the Company shall maintain the following financial covenants in respect of its annual and semi-annual financial statements: The Company should maintain the following financial ratios, based on its annual and semi-annual financial statements, starting with the period from 2009: a. The ratio of current assets to current liabilities should not be less than 100%; b. The ratio of the aggregate of its total liabilities to its net assets should not exceed 150% in 2009 and should not exceed 120% starting 2010; c. The interest coverage ratio should not be less than 400% starting 2010; and d. Tangible net assets should not be less than $8.5 billion in 2009 and should not less than $10 billion starting 2010. On August 2, 2010, the Company entered into a long-term syndicated loan agreement led by First Commercial Bank and jointly lent by 10 domestic banks. The Agreement provides for a $6.5 billion secured revolving credit facility. As of December 31, 2010, the used credit line was $0. - 19 -
The collaterals for the long-term syndicated loans are shown in Note 24. The Company’s ex-director, Chung-Hsing Kuo, had guaranteed the 2006 Agreement, and the collaterals for the 2006 agreement had been released of distress since June 23, 2009.
16. SHAREHOLDERS’ EQUITY Common Stock Under the Company’s Articles of Incorporation, the authorized shares was 500,000 thousand shares (including 10,000 thousand shares for employee stock options), with $10 par value. As of December 31, 2010, the Company’s issued capital was $3,221,922 thousand. Capital Surplus Under the Company Law, capital surplus can only be used to offset a deficit. However, the capital surplus from shares issued in excess of par (additional paid-in capital from issuance of common shares) and donations may be capitalized, which however is limited to a certain percentage of the Company’s paid-in capital and once a year. Also, the capital surplus from long-term investments may not be used for any purpose. The bonus to employees of $64,578 thousand for 2008 was approved in the shareholders’ meeting. Of the approved amount, $64,578 thousand, representing 1,398 thousand common shares which was determined by fair value, would be distributed by common stock. The difference between par value and fair value of $50,600 thousand was accounted for as “capital surplus - additional paid-in capital” as of December 31, 2010 and 2009, respectively. Employee Stock Option Plan As an incentive to employees’ loyalty to the Company and to retain excellent professional personnel, the Company’s Employee Stock Option Plan was approved by the SFB in October 2006 (the “2006 Plan”). The maximum number of options authorized to be granted under the 2006 Plan was 2,000 thousand with each option eligible to subscribe for one common share when exercisable. Under the terms of the 2006 Plan, the options are granted at an exercise price which shall not be less than the audited net worth of the Company or equal to the par value of the common shares. During the term of the 2006 Plan, if the Company is in a public-listed status, its exercise price shall not be less than the closing price of the Company’s common shares listed on the TSE on the grant date. The options of the 2006 Plan are valid for four years, during its term of the Plan, the options are not allowed to be transferred, except for those left to a descendant. The options are exercisable at certain percentages subsequent to the second anniversary of the grant date as below, except for employees who may elect to discontinue their participation in the 2006 Plan. a. Options are exercisable at 50% subsequent to the second anniversary of the grant date. b. Options are exercisable at 100% subsequent to the third anniversary of the grant date. On October 5, 2006 and August 21, 2007, 1,119 thousand options and 881 thousand options, respectively, were granted to qualified employees of the Company. The exercise price will be adjusted for the effect of changes of common shares, such as cash issues of shares, retained earnings issues of shares, additional paid-in capital issues of shares, merger or accepted other new shares, shares spin-off and cash issues for overseas depositary receipts, etc, on a pro rata basis.
- 20 -
Information about employee stock options was as follows: 2010 Number of Options (In Thousands) Balance, beginning of year Options exercised Options forfeited Options expired
626 (443) (115) (15)
2009
Weightedaverage Exercise Price (NT$) $ 19.41 18.53 -
Number of Options (In Thousands) 1,403 (777) -
Weightedaverage Exercise Price (NT$) $ 22.33 15.06 -
Balance, end of year
53
21.10
626
19.41
Options exercisable, end of year
53
-
348
-
The weighted-average stock price at the date of exercise for stock options exercised during the years ended December 31, 2010 and 2009 were $89.33 and $67.09. Information about outstanding options as of December 31, 2010 and 2009 was as follows: December 31 2010 Range of Exercise Price
2009
Weighted-average Remaining Contractual Life (Years)
$21.1
0.58
Weighted-average Remaining Contractual Life (Years)
Range of Exercise Price $10.0 21.7
0.75 1.58
The Company calculated the fair value of each option on the grant date using the Black-Scholes option pricing model and recognized the compensation expense of $1,362 thousand and $4,924 thousand for the years ended December 31, 2010 and 2009. Unrealized Loss on Financial Instruments For the years ended December 31, 2010 and 2009, movements of unrealized loss on financial instruments were as follows: 2010
2009
Balance, beginning of year Fair value change in shareholders’ equity
$ (4,312) (1,708)
$ (5,779) 1,467
Balance, end of year
$ (6,020)
$ (4,312)
17. EARNINGS APPROPRIATION Under the Company’s Articles of Incorporation, as amended by the shareholders in their meeting on June 10, 2009, the Company should make appropriations from its net income less any deficit in the following order: a. Tax payment;
- 21 -
b. Settle any prior period’s deficit; c. 10% should be set aside as legal reserve; d. Appropriation or reversed special reserve; e. The dividend of preferred stock; f. Bonus rate to employees should not less than 3%, if stock dividends are distributed, the target employees should include the employees of the subsidiary who meet certain criteria. g. Remuneration to directors and supervisors should not exceed 3%. h. The remaining should include the accumulated unappropriated earnings generated from prior years and the earnings appropriation should be proposed by the Board of Directors and approved by the shareholders’ meeting. To meet its operating needs as well as to maximize shareholders’ profit, the Company will distribute dividends based on the budget for future capital expenditures and its financing needs. Stock dividends should be at least 10% of the total dividends. Under the Company’s Articles of Incorporation, as amended by the shareholders in their meeting on June 25, 2010, the Company should make appropriations from its net income less any deficit in the following order: a. Tax payment; b. Settle any prior period’s deficit; c. 10% should be set aside as legal reserve; d. Appropriation or reversed special reserve; e. The dividend of preferred stock; f. Bonus rate to employees should not less than 3%, if stock dividends are distributed, the target employees should include the employees of the subsidiary who meet certain criteria. g. Remuneration to directors and supervisors should not exceed 3%. h. The remaining should include the accumulated unappropriated earnings generated from prior years and the earnings appropriation should be proposed by the Board of Directors and approved by the shareholders’ meeting. To meet its operating needs as well as to maximize shareholders’ profit, the Company will distribute dividends based on the budget for future capital expenditures and its financing needs. Cash dividends should be at least 10% of the total dividends.
- 22 -
For the year ended December 31, 2010, the bonus to employees was $583,840 thousand, and remuneration to directors and supervisors was $77,845 thousand. The bonus to employees and remuneration to directors and supervisors represented 15% and 2%, respectively, of net income (net of the bonus, remuneration and legal reserve). For the year ended December 31, 2009, the bonus to employees was $6,345 thousand, and remuneration to directors and supervisors was $1,269 thousand. The bonus to employees and remuneration to directors and supervisors represented 10% and 2%, respectively, of net income (net of the bonus, remuneration and legal reserve). Material differences between such estimated amounts and the amounts proposed by the Board of Directors in the following year are adjusted for in the current year. If the actual amounts subsequently resolved by the shareholders differ from the proposed amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If a share bonus is resolved to be distributed to employees, the number of shares is determined by dividing the amount of the share bonus by the closing price (after considering the effect of cash and stock dividends) of the shares of the day immediately preceding the shareholders’ meeting. Consolidated subsidiary - when Gintech Material has earnings within a period, it should use these earnings to pay tax and to settle any prior period’s deficit. 10% of the remaining earnings should be set aside as legal reserve. The allocation of earnings is proposed by the board of directors and resolved by the shareholders in their meeting, and the bonus rate to employees should not below 3%. Consolidated subsidiary - when Apos Energy has earnings within a period, it should use these earnings to pay tax and to settle any prior period’s deficit. 10% of the remaining earnings should be set aside as legal reserve. The allocation of earnings is proposed by the board of directors and resolved by the shareholders in their meeting, and the bonus rate to employees should not below 1%. Based on a directive issued by the SFB, an amount equal to the net debit balance of certain shareholders’ equity accounts (including unrealized loss on financial instruments) shall be transferred from unappropriated earnings to a special reserve. Any special reserve appropriated may be reversed to the extent of the decrease in the net debit balance. The appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends and bonuses for the portion in excess of 50% of the paid-in capital if the Company has no unappropriated earnings and the reserve balance has exceeded 50% of the Company’s paid-in capital. The Company Law also prescribes that, when the reserve has reached 50% of the Company’s paid-in capital, up to 50% of the reserve may be transferred to capital. Except for non-ROC resident shareholders, all shareholders receiving the dividends are allowed a tax credit equal to their proportionate share of the income tax paid by the Company. The appropriations of earnings for 2009 and 2008 had been approved in the shareholders’ meetings on June 25, 2010 and June 10, 2009, respectively. The appropriations and dividends per share were as follows: Appropriation of Earnings For Year For Year 2009 2008 Legal reserve Special reserve Cash dividends Stock dividends
$
7,050 127,507 31,877
- 23 -
$ 190,863 5,479 718,429
Dividends Per Share For Year For Year 2009 2008 $ 0.4 0.1
$ 4.0
The bonus to employees and the remuneration to directors and supervisors for 2009 and 2008 approved in the shareholders’ meeting on June 25, 2010 and June 10, 2009, respectively, were as follows: Years Ended December 31 2009
2008
Cash Bonus to employees Remuneration to directors and supervisors
$
Stock
6,345
$
1,269
Cash -
$
-
Stock -
$ 64,578
24,217
-
The number of shares of 1,398 thousand for 2008 was determined by dividing the amount of share bonus by the closing price (after considering the effect of cash and stock dividends) of the day immediately preceding the shareholders’ meeting. Years Ended December 31
Amounts approved in shareholders’ meetings Amounts recognized in respective financial statements
2009 Remuneration to Directors Bonus to and Employee Supervisors
2008 Remuneration to Directors Bonus to and Employee Supervisors
$
1,269
$ 64,578
$ 24,217
1,269
85,888
34,355
6,345
$
6,345 $
-
$
-
$ (21,310)
$ (10,138)
The differences between the approved amounts of the bonus to employees and the remuneration to directors and supervisors and the accrual amounts reflected in the financial statements for the year ended December 31, 2008 were primarily due to changes in estimates had been adjusted in profit for the year ended December 31, 2009. Information about the bonus to employees, directors and supervisors is available on the Market Observation Post System website of the Taiwan Stock Exchange. The appropriations of earnings of consolidated subsidiary - Apos Energy for 2009 had been approved in the shareholders’ meetings on June 30, 2010. The appropriations and dividends per share were as follows: For Year 2009 Appropriation Dividends Per of Earnings Share Accumulated deficit Legal reserve
$
313 132
$
-
18. PENSION PLAN The Labor Pension Act (the “Act”), provides for a pension mechanism, which is deemed a defined contribution plan. Based on the Act, the rate of the Group’s monthly contributions to employees’ individual pension accounts is at 6% of monthly salaries. The Group’s monthly contributions to employees’ pension accounts for the years ended December 31, 2010 and 2009 amounted to $36,061 thousand and $29,015 thousand, which was recognized as pension cost.
- 24 -
19. INCOME TAX According to the Income Tax Law, the rate for income tax is 17%, and the operating losses carryforward extends to ten years; an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings. Provision for income tax in 2010 and 2009 was as follows: 2010 Income tax payable Deferred income tax Adjustments for prior years’ tax
2009
$ 247,610 (18,209) 2,100
$
64,117 (109,427) 11,640
$ 231,501
$ (33,670)
In May 2010, the Legislative Yuan passed the amendment of Article 5 of the Income Tax Law, which reduces a profit-seeking enterprise’s income tax rate from 20% to 17%, effective January 1, 2010. The Group recalculated its deferred tax assets and liabilities in accordance with the amended Article and recorded the resulting difference as a deferred income tax benefit or expense. Deferred income tax assets and liabilities were as follows: December 31 2010 Current Deferred income tax assets Investment tax credits Unrealized loss on provision of inventories Unrealized loss provision of doubtful accounts Unrealized foreign exchange losses Others
$
Less: Valuation allowance Deferred income tax liabilities Unrealized loss from intercompany transactions
Noncurrent Deferred income tax assets Investment tax credits Depreciation difference between audit and tax issue Loss carryforwards Others Less: Valuation allowance
- 25 -
2009
82,913 53,550 11,463 5,967 23,874 177,767 5,732 172,035
$
(7)
53,490 8,134 9,534 3 71,161 4,067 67,094 (27)
$ 172,028
$
$ 138,340 12,544 1,077 310 152,271 106,449
$ 370,967 5,675 1,176 365 378,183 245,609
$
$ 132,574
45,822
67,067
As of December 31, 2010, profits attributable to the following expansion and construction projects were exempted from income tax for a five-year period: Year of Occurrence 2007 2008
Expansion of Construction Project
Tax-exemption Year
Solar cells and solar modules Solar cells and solar modules
2007.01.01-2011.12.31 2008.06.01-2013.05.31
Loss carryforwards as of December 31, 2010 comprised of: Gintech Material
Loss Year 2008 2009 2010
Loss Carryforwards Amount
Unused Amount
$
2,754 3,124 458
$
468 531 78
$
6,336
$
1,077
Expiry Year 2018 2019 2020
As of December 31, 2010, investment tax credits comprised of:
Regulation Statute for Upgrading Industries Statute for Upgrading Industries
Item Purchase of machinery and equipment Purchase of machinery and equipment
Total Creditable Amount
Remaining Creditable Amount
$ 228,701
$
Expiry Year
82,913
2012
138,340
138,340
2013
$ 367,041
$ 221,253
The tax authorities have examined income tax returns of the Group’s as follows: Year Gintech Energy Gintech Material Apos Energy
2008 2008 2008
Information about integrated income tax was as follows: Year Ended December 31, 2010 Gintech Gintech Energy Material Apos Energy Balance of the imputed credit account The imputed credit ratio Unappropriated earnings (accumulated deficit) from 1998
$
98,502 6.58%
$
$ 5,274,043
$
- 26 -
(8,765)
$
442 43.18%
$
1,024
Year Ended December 31, 2009 Gintech Gintech Energy Material Apos Energy $
Balance of the imputed credit account The imputed credit ratio Unappropriated earnings (accumulated deficit) from 1998
51,618 10.33%
$
$ 1,115,736
$
(8,306)
$
1 33.33%
$
1,319
For distribution of earnings generated after January 1, 1998, the ratio for the imputation credits allocated to shareholders of the Group is based on the balance of the ICA as of the date of dividend distribution. The expected creditable ratio for the 2010 earnings may be adjusted, depending on the ICA balance on the date of dividend distribution. Under the Income Tax Law of the ROC, the income tax credit from dividends and earnings (except the 10% additional income tax levied on distributable earnings) distributed by ROC firms cannot be used to reduce the withheld taxes on net dividends and net earnings of nonresident individuals and firms with no domicile in the ROC.
20. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES
Personnel Salary Pension Meals Welfare Insurance Others
Depreciation Amortization
Classified as Operating Costs
2010 Classified as Operating Expenses
Total
Classified as Operating Costs
2009 Classified as Operating Expenses
Total
$1,290,311 31,189 26,197 2,358 54,530 397
$ 281,358 4,872 2,252 23,104 7,224 259
$1,571,669 36,061 28,449 25,462 61,754 656
$ 655,889 24,611 19,474 1,228 41,378 772
$ 153,836 4,404 1,986 10,748 6,302 221
$ 809,725 29,015 21,460 11,976 47,680 993
$1,404,982
$ 319,069
$1,724,051
$ 743,352
$ 177,497
$ 920,849
$1,057,765 $ 16,676
$ $
$1,091,980 $ 19,683
$ 739,349 $ 11,639
$ $
$ 760,510 $ 14,165
34,215 3,007
21,161 2,526
21. EARNINGS PER SHARE Year Ended December 31, 2010 Number of Amounts (Numerator) Shares EPS (NT$) Before After (Denominator) Before After Income Tax Income Tax (In Thousands) Income Tax Income Tax Basic EPS Employee stock options Bonus to employees
$ 4,556,146 -
$ 4,324,741 -
322,023 199 6,992
$ 14.15
$ 13.43
Diluted EPS
$ 4,556,146
$ 4,324,741
329,214
$ 13.84
$ 13.14
- 27 -
Year Ended December 31, 2009 Number of Amounts (Numerator) Shares EPS (NT$) Before After (Denominator) Before After Income Tax Income Tax (In Thousands) Income Tax Income Tax Basic EPS Employee stock options Bonus to employees
$
36,387 -
$
70,497 -
260,962 896 687
$
0.14
$
0.27
Diluted EPS
$
36,387
$
70,497
262,545
$
0.14
$
0.27
The Company presumes that the bonus to employees will be settled in shares and the resulting potential shares will be included in the weighted average number of shares outstanding used in the calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of bonus by the closing price of the shares at the balance sheet date. Such dilutive effect of the potential shares should be included in the calculation of diluted EPS until the shareholders resolve the number of shares to be distributed to employees at their meeting in the following year. The weighted average number of shares outstanding for EPS calculation has been retroactively adjusted for the issuance of employee stock bonuses distributed out of earnings for the year ended December 31, 2009 and stock dividends.
22. FINANCIAL INSTRUMENTS a. Fair values of financial instruments December 31 2010
2009
Carrying Value
Fair Value
Carrying Value
Fair Value
$ 3,473,962
$ 3,473,962
$ 2,780,403
$ 2,780,403
3,480
3,480
5,188
5,188
2,329,156 622,413 31,800 14,152
2,329,156 622,413 14,152
1,896,936 433,737 14,688
1,896,936 433,737 14,688
1,782,841
1,782,841
949,361
949,361
1,745,929
1,745,929
2,380,743
2,380,743
2,948,678 260,204
2,948,678 260,204
6,281,000 205,248
6,281,000 205,248
Financial assets Cash and cash equivalents Available-for-sale financial assets Receivables (including accounts receivable, accounts receivable from related parties, and other receivables) Restricted assets Financial assets carried at cost Refundable deposits Financial liabilities Short-term loans Payables (including notes payables, accounts payable, accounts payable to related parties, accrued expenses and other payables) Long-term debt (including current portion) Guarantee deposits received
- 28 -
b. Methods and assumptions used to estimate the fair values of financial instruments were as follows: 1) The carrying amounts of the following short-term financial instruments approximated their fair values because of their short maturities: Cash and cash equivalents, receivables, restricted assets, refundable deposits, short-term loans, payables and guarantee deposits received. 2) Available-for-sale financial assets are based on their quoted market prices in an active market. For those instruments with no quoted market prices, their fair values are determined using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants to price financial instruments. 3) Financial assets carried at cost are investments in unquoted shares, which have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values. Therefore, no fair value is presented. 4) Fair value of long-term debt is measured at their book values because of the floating interest rates. c. Fair values of financial assets using based on quoted market prices or valuation techniques were as follows: Quoted Market Prices December 31 2010 2009
Available-for-sale financial assets
$
3,480
$
5,188
Valuation Techniques December 31 2010 2009
$
-
$
-
d. Valuation losses arising from changes in fair value of financial instruments determined using valuation techniques were $119,875 thousand for the year ended December 31, 2010. e. As of December 31, 2010 and 2009, financial assets exposed to fair value interest rate risk (time deposits) amounted to $1,041,362 thousand and $477,919 thousand, respectively, financial liabilities exposed to fair value interest rate risk (partial short-term loan) amounted to $1,387,773 thousand and $875,784 thousand, respectively, and financial assets exposed to cash flow interest rate risk (saving deposits and foreign saving deposits) amounted to $3,053,183 thousand and $2,733,864 thousand, respectively, financial liabilities exposed to cash flow interest rate risk (including partial short-term loans, current portion of long-term debt, and long-term debt) amounted to $3,343,746 thousand and $6,354,577 thousand, respectively. f. Financial risk: 1) Market price risk The Group primarily invested in available-for-sale financial assets. The fluctuations in equity price would result in changes in fair value. 2) Credit risk Credit risk represents the loss that would be incurred by the Group if the counter-parties breach on contracts, which might be affected by the condition of credit risk concentration, factors, contract amount, accounts receivable, and deposit.
- 29 -
In order to reduce its credit risk, the Group evaluates its customers’ financial conditions. As of December 31, 2010, the Group had the condition of credit risk concentration because approximately eight-one percent of the accounts receivable were derived from eight major customers, and approximately seventy-two percent of the prepayments were paid to four major suppliers, one hundred percent of other assets were from five suppliers and approximately ninety-nine percent of the refundable deposits was from one major supplier. 3) Liquidity risk The Group’s operating funds are deemed sufficient to meet the cash flow demand, therefore, liquidity risk is not considered to be significant. 4) Cash flow interest rate risk The Group’s short-term and long-term debts are floating-rate loans. When the market interest rate increases by one percentage point, the Group’s cash outflow will increase by $33,437 thousand a year.
23. RELATED-PARTY TRANSACTIONS a. Related parties and their relationships with the Company Related Party
Relationship with the Company
Eversol Corp.
The Company’s director is also the chairman of Eversol Corp.
b. Significant transactions with related parties: 1) Receivables from related parties December 31 2010 Related Party
Amount $
Eversol Corp.
114
2009 % to Total 100
% to Total
Amount $
-
-
2) Payables to related parties December 31 2010 Related Party
Amount $
Eversol Corp.
49
2009 % to Total 100
% to Total
Amount $
-
-
3) Prepayments/other assets - other December 31 2010 Related Party Eversol Corp.
Amount Prepayments Other assets - other - 30 -
$ 3,022 $ 1,209,177
2009 % to Total 38
Amount $ 14,970 $ 1,304,594
% to Total 1 31
4) Sales Years Ended December 31 2010 2009 % to Amount Amount Total
Related Party $
Eversol Corp.
17,725
-
-
Years Ended December 31 2010 2009 % to Amount Amount Total
% to Total
-
$
% to Total
Terms of sales from related parties were similar to those from third parties. 5) Purchase
Related Party Eversol Corp.
$ 1,013,862
5
$
330,147
3
Terms of purchases from related parties were similar to those from third parties. 6) Others The Company provides consulting services on establishment of plant to Eversol Corp. For the year ended December 31, 2009, the Company charged $54 thousand for the services provided based on the actual hours incurred. The amount charged is accounted for as other income. c. Compensation of directors, supervisors and management personnel: Years Ended December 31 2010 2009 Salaries Bonus Bonuses to employees
$
23,705 77,845 153,360
$
23,417 1,269 332
$ 254,910
$
25,018
24. PLEDGED ASSETS The Company’s assets pledged as collateral for bank loans, import for raw materials were as follows: December 31 2010 Restricted assets Time deposits Savings deposits
$
Property, plant and equipment, net Buildings Machinery and equipment Other equipment
- 31 -
241,362 381,051 622,413
2009 $
272,733 161,004 433,737
998,172 4,984,305 7,745 5,990,222
1,052,284 2,736,822 11,326 3,800,432
$ 6,612,635
$ 4,234,169
25 COMMITMENTS AND CONTINGENCIES In July 2006, the Company entered into a purchase agreement with Supplier A. Under this agreement, the Company will purchase solar wafers from January 1, 2009 to December 31, 2018. Besides, the two companies agreed that the deposits which should be paid by installments during 2009. According to the agreement, the Company was entitled to offset payments for goods, against the deposits since January 1, 2009. As of December 31, 2010, the Company had paid deposits of EUR8,311 thousand (NT$403,441 thousand) which were transferred to prepayments and other assets - other. In October 2006, the Company entered into a purchase agreement with Supplier B. According to the agreement, the Company will purchase solar wafers from August 1, 2007 to July 31, 2017 for an amount under the agreement. In addition, the Company entered into a supplemental purchase agreement in October 2007. The Company will purchase solar wafers for a total amount under the supplement. Therefore, the Company entered into another supplemental purchase agreement in September 2009, and should maintain a deposit amounted to US$60,900 thousand. As of December 31, 2010, the Company had paid deposits amounted to US$58,290 thousand (NT$1,906,140 thousand) which was recorded as deposits. The Company also offer time deposits to banks which amounted to US$1,400 thousand, and NT$180,000 thousand as collateral for import raw materials, and was recorded as restricted assets, please refer to Note 24. In August 2007 and December 2007, the Company entered into purchase agreements with Company C. According to the agreement, the purchase amount rights and obligations for the 4th quarter of 2007 to 4th quarter of 2009 specified in the purchasing agreement signed between Company C and Supplier D will be transferred to the Company. According to the agreements, the Company shall prepay for the purchases. As of December 31, 2010, the Company had prepaid US$29,202 thousand (NT$956,673 thousand) for purchases from Supplier D. The amount prepaid was recorded as prepayments and other assets - other. In May 2008, the Company entered into a purchase agreement with Supplier E. Under this agreement, the Supplier E will supply solar wafers to the Company between July 1, 2008 and June 30, 2014. In addition, Supplier E agreed to lower the unit price later on, and the Company should make prepayments for the purchases. As of December 31, 2010, the Company had prepaid US$16,424 thousand (NT$521,950 thousand) for the purchases. The amount prepaid was recorded as prepayments and other assets - other. In June 2008, the Company entered into a purchase agreement with Supplier F. Under this agreement, the Supplier F will supply solar wafers to the Company between June 11, 2008 and December 31, 2014. As of December 31, 2010, the Company had prepaid US$20,496 thousand (NT$654,417 thousand) for the purchases. The amount prepaid was recorded as prepayments and other assets - other. In June 2008, the Company entered into a purchase agreement with Supplier G. Under this agreement, the Company will buy solar wafers from the supplier between July 1, 2009 and December 31, 2015. In July 2008, the Company entered into a purchase agreement with Supplier H. Under this agreement, the supplier will supply solar wafers to the Company between January 1, 2009 and January 1, 2017, and the Company should make prepayments for the purchases. In addition, Supplier H agreed to lower the unit price later on, with the unit price to be lowered quarterly. As of December 31, 2010, the Company had prepaid US$37,418 thousand (NT$1,212,199 thousand) for the purchases. The amount prepaid was recorded as prepayments and other assets - other. As of December 31, 2010, the Company had entered into contracts for purchases of property, plant and equipment amounted to $4,130,746 thousand.
- 32 -
The Company’s office and factory, operating lease, and the deposits was $6,348 thousand. As of December 31, 2010, the Company’s operating lease commitments on its office and factory premises were as follows: Year
Amount $
2011 2012 2013 2014 2015 and thereafter
32,871 27,223 22,921 22,503 118,224
$ 223,742 During the Company’s capital increase in 2009, the Company issued 65,000 thousand new common shares for cash (hereinafter, this share issuance is referred to as “capital increase”). On the registration of the capital increase, the Company publicly announced and call upon each subscriber to pay up, declaring that in case of default of payment within the stipulated period their right shall be forfeited. The period for paying subscriptions to the Company was from October 23, 2009 to October 30, 2009 (the “subscription period”). During the subscription period, some of the original shareholders of the Company did not inform the Company of their intent to make a subscription nor did they make a subscription payment through the bank designated by the Company to accept subscription payments. As a result of their failure to make a timely subscription notification and payment, they forfeited their right to subscribe for the shares are forfeited. There was a dispute between the Company and the original shareholders on the shares provision, the compensation for other injuries arising from the provisions of the default and the impossibility of the performance. The Securities and Futures Investors Protection Center thus filed a lawsuit with the Shihlin District Court on April 15, 2010 to ask the Company for the preceding paragraph. The Company appointed the lawyer to act for this lawsuit. As of March 4, 2011, there had been no further hearing nor had a court decision been made. Thus, the potential amount of losses could not be estimated adequately. On October 7, 2010, a certain foreign customer applied for conciliation to the Shihlin District Court to ask the Company meet the sales contract. However, no conciliation could be reached. Thus, the foreign customer filed a lawsuit with the Shihlin District Court. The Company appointed a lawyer to act for this lawsuit. As of March 4, 2011, there had been no further hearing nor had a court decision been made. Thus, the potential amount of losses could not be estimated adequately.
26. OTHER The significant financial assets and liabilities denominated in foreign currencies were as follows: (In Thousands:
Foreign Currency/New Taiwan Dollars)
December 31 Foreign Currencies
2010 Exchange Rate
New Taiwan Dollars
30.363 40.568 0.3732
$ 2,237,588 466,501 30
Foreign Currencies
2009 Exchange Rate
New Taiwan Dollars
31.99 46.10 0.3472
$ 1,843,725 537,217 452,768
Financial assets Monetary items USD EUR JPY
$
73,694 11,499 82
$
57,629 11,653 1,304,054
(Continued)
- 33 -
December 31 Foreign Currencies
2010 Exchange Rate
New Taiwan Dollars
30.363 40.568 0.3732
$ 2,234,703 97,762 57,058
Foreign Currencies
2009 Exchange Rate
New Taiwan Dollars
31.99 46.10 0.3472
$ 2,427,536 147,778 86,865
Financial liabilities Monetary items USD EUR JPY
$
73,920 2,412 152,888
$
75,890 3,206 250,186
(Concluded)
27. SEGMENT INFORMATION Industry Segment Information No business segments information is presented as the Group is mainly engaged in the manufacturing and selling of solar cells and materials. Geographical Information No geographical segments information is presented as the Group does not have any overseas operations. Export Sales Information Export revenues were as follows: 2010 Asia Europe America
2009
$ 13,725,552 11,284,324 1,507,673
$
6,924,747 7,038,088 40,837
$ 26,517,549
$ 14,003,672
Major Customers Sales to major customers were as follows: 2010 Customer
Amount
I J K L M
$
- 34 -
2009 % to Total
Amount
% to Total
5,890,703 4,120,925 -
21 15 -
$
2,242,591 1,686,922 1,528,178
14 11 10
$ 10,011,628
36
$
5,457,691
35
