VIA Technologies, Inc.
Financial Statements for the Years Ended December 31, 2004 and 2003 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders VIA Technologies, Inc.
We have audited the accompanying balance sheets of VIA Technologies, Inc. as of December 31, 2004 and 2003, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended (all expressed in New Taiwan dollars). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VIA Technologies, Inc. as of December 31, 2004 and 2003, and the results of its operations and its 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 mentioned in Note 3, effective December 31, 2004, VIA Technologies, Inc. adopted SFAS No. 35, “Impairment of Assets”. As a result, a decrease in long-term investment under equity method of $1,210,375 thousand and investment loss under equity method of the same amount were recognized in 2004.
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We have also audited the consolidated financial statements of VIA Technologies, Inc. and its subsidiaries for the years ended December 31, 2004 and 2003 (not accompanied herein) and have issued our report, dated April 7, 2005, thereon expressing an unqualified opinion with modification due to the change of consolidated entities of VIA Technologies, Inc. in 2004.
April 7, 2005
Notice to Readers
The accompanying 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 financial statements are those generally accepted and applied in the Republic of China.
For the convenience of readers, 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. 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 financial statements shall prevail. Also, as stated in Note 2 to the financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English.
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BALANCE SHEETS DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars)
2004 2003 2004 2003 ASSETS Amount % Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Amount % Amount %
CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Notes 2 and 4) $ 6,628,773 27 $ 5,750,624 20 Notes payable $ 5,629 - $ 9,459 - Short-term investments (Notes 2 and 5) 215,740 1 18,260 - Accounts payable 3,887,566 16 3,466,466 12 Notes receivable, net (Note 2) 544,575 2 663,570 2 Notes and accounts payable to related parties (Note 24) 819,860 3 313,960 1 Accounts receivable, net (Notes 2 and 6) 1,636,353 7 2,084,095 7 Income tax payable (Notes 2 and 22) 138,332 1 32,689 - Notes and accounts receivable from related parties, net Accrued expenses (Notes 14 and 24) 728,567 3 996,727 3 (Notes 2, 7 and 24) 152,744 1 601,807 2 Current portion of long-term liabilities (Notes 16 and 17) 111,110 1 2,301,196 8 Other financial assets, current (Notes 2, 8, 24 and 27) 170,703 1 624,915 2 Other current liabilities (Notes 15, 24 and 27) 837,846 3 656,172 2 Inventories (Notes 2 and 9) 4,145,441 17 3,404,591 12 Deferred tax asset, current (Notes 2 and 22) 375,247 1 371,264 1 Total current liabilities 6,528,910 27 7,776,669 26 Other current assets (Note 10) 81,012 - 77,344 - LONG-TERM LIABILITIES Total current assets 13,950,588 57 13,596,470 46 Corporate bonds payable (Notes 2 and 16) 1,905,161 8 - - Long-term capital lease liabilities (Notes 2 and 17) 388,890 1 - - LONG-TERM INVESTMENTS (Notes 2, 3 and 11) Long-term investments under equity method 6,627,772 27 11,623,978 39 Total long-term liabilities 2,294,051 9 - - Long-term investments under cost method 229,365 1 537,930 2 OTHER LIABILITIES (Notes 2, 18 and 24) 255,755 1 198,788 1 Total long-term investments 6,857,137 28 12,161,908 41 Total liabilities 9,078,716 37 7,975,457 27 PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 24) Land 962,605 4 942,061 3 STOCKHOLDERS’ EQUITY Buildings and improvements 694,383 3 592,481 2 Common stock (Note 19) 12,704,467 52 12,704,467 43 Machinery and equipment 356,942 1 297,158 1 Stock dividend to be distributed (Note 19) 629,336 2 - - Computer equipment 305,960 1 274,089 1 Capital surplus Research and development equipment 414,308 2 342,028 1 Additional paid-in capital 7,110,445 29 7,739,781 26 Transportation equipment 8,119 - 8,119 - Gain on disposal of property, plant and equipment - - 1,770 - Furniture and fixtures 47,130 - 46,258 - Long-term equity investments (Note 11) 217,529 1 213,035 1 Leased assets - - 43,502 - Retained earnings (Note 19) Leasehold improvements 144,319 1 133,782 1 Legal reserve 1,708,059 7 1,708,059 6 Special reserve 345,501 2 996,057 3 Subtotal 2,933,766 12 2,679,478 9 Accumulated deficit (4,828,078) (20) (253,410) (1) Less accumulated depreciation (1,117,949) (5) (872,100) (3) Unrealized valuation losses on long-term equity investments Prepayments on purchase of equipment, land and buildings 9,634 - 106,164 - (Notes 2 and 11) (33,183) - (59,063) - Cumulative translation adjustments (Note 2) 315,495 1 655,438 2 Property, plant and equipment, net 1,825,451 7 1,913,542 6 Treasury stock (Notes 2, 11 and 20) (2,760,205) (11) (2,040,649) (7)
OTHER ASSETS Total stockholders’ equity 15,409,366 63 21,665,485 73 Leased-out assets (Notes 2, 13 and 24) 565,632 2 573,460 2 Refundable deposits 11,865 - 12,562 - Deferred bond issuance cost (Note 2) 14,325 - - - Deferred charges (Notes 2 and 24) 668,169 3 775,934 3 Deferred tax asset, noncurrent (Notes 2 and 22) 594,915 3 607,066 2
Total other assets 1,854,906 8 1,969,022 7
TOTAL $ 24,488,082 100 $ 29,640,942 100 TOTAL $ 24,488,082 100 $ 29,640,942 100
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated April 7, 2005)
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VIA TECHNOLOGIES, INC.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Except Earnings per Share)
2004 2003 Amount % Amount %
OPERATING REVENUES: (Note 2) Sales $ 20,667,127 106 $ 22,059,900 109 Less Sales returns (187,291) (1) (113,961) (1) Sales discounts (1,054,152) (5) (1,715,128) (8)
Net sales (Note 24) 19,425,684 100 20,230,811 100
Other operating revenues (Note 24) 23,667 - 25,152 -
Total operating revenues 19,449,351 100 20,255,963 100
COST OF OPERATING REVENUES (Note 24) 13,985,854 72 14,809,171 73
GROSS PROFIT 5,463,497 28 5,446,792 27
UNREALIZED PROFIT FROM INTERCOMPANY TRANSACTIONS (87,752) - (12,057) -
REALIZED PROFIT FROM INTERCOMPANY TRANSACTIONS 12,057 - 8,548 -
REALIZED GROSS PROFIT 5,387,802 28 5,443,283 27
OPERATING EXPENSES (Note 24) General and administrative expenses 2,365,853 12 2,794,359 14 Research and development expenses 2,453,949 13 2,404,260 12
Total operating expenses 4,819,802 25 5,198,619 26
INCOME FROM OPERATIONS 568,000 3 244,664 1
NON-OPERATING INCOME Interest income 31,736 - 77,942 - Dividend income 987 - - - Gain on disposal of property, plant and equipment 20,455 - 87,592 1 Gain on sale of investments 462,108 3 399,115 2 Gain on physical inventory 7,307 - - - Rental income (Note 24) 53,917 - 45,297 - Recovery from loss on short-term investments devaluation 14,160 - 426 - Other (Note 24) 289,260 2 212,373 1
Total non-operating income 879,930 5 822,745 4
(Continued)
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VIA TECHNOLOGIES, INC.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Except Earnings per Share)
2004 2003 Amount % Amount %
NON-OPERATING EXPENSES Interest expenses $ 95,801 - $ 196,714 1 Investment losses under equity method (Note 11) 5,380,637 28 2,281,455 11 Other investment losses (Note 11) 130,488 1 34,029 - Loss on disposal of property, plant and equipment 549 - 175 - Loss on physical inventory - - 4,964 - Foreign currency exchange loss 17,899 - 63,585 - Loss on inventory devaluation 697,899 4 152,913 1 Other 27,812 - 15,393 -
Total non-operating expenses 6,351,085 33 2,749,228 13
LOSS BEFORE INCOME TAX (4,903,155) (25) (1,681,819) (8)
INCOME TAX (EXPENSE) BENEFIT (Notes 2 and 22) (77,997) (1) 31,286 -
NET LOSS $ (4,981,152) (26) $ (1,650,533) (8)
Before After Before After Income Tax Income Tax Income Tax Income Tax
BASIC LOSS PER SHARE (Note 23) $(3.78) $(3.84) $(1.28) $(1.26)
DILUTED LOSS PER SHARE (Note 23) $(3.78) $(3.84) $(1.28) $(1.26)
If the Company’s stock held by subsidiaries is not considered as treasury stock:
NET LOSS $(4,903,155) $(4,981,152) $(1,681,819) $(1,650,533)
BASIC LOSS PER SHARE (Note 23) ($3.73) ($3.79) ($1.26) ($1.24)
DILUTED LOSS PER SHARE (Note 23) ($3.73) ($3.79) ($1.26) ($1.24)
The accompanying notes are an integral part of the financial statements. (Concluded)
(With Deloitte & Touche audit report dated April 7, 2005)
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STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars)
Capital Surplus Unrealized Capital Stock Gain on Retained Earnings Valuation Stock Disposal of Unappropriated Losses on Dividend Property, Long-Term Earnings Long-Term Cumulative Common to be Additional Plant and Equity Special (Accumulated Equity Translation Treasury Stock Distributed Paid-in Capital Equipment Investment Legal Reserve Reserve Deficit) Investments Adjustments Stock Total
BALANCE, JANUARY 1, 2003 $ 11,918,540 $ - $ 8,073,500 $ 1,770 $ 245,990 $ 1,663,733 $ - $ 3,554,423 $ (271,923) $ 807,778 $ (1,634,554) $ 24,359,257
Appropriation and distribution of 2002 net income Legal reserve - - - - - 44,326 - (44,326) - - - - Special reserve ------996,057 (996,057) - - - - Cash dividends ------(595,927) - - - (595,927) Stock dividends and transfer of capital surplus and employees bonuses to capital stock 785,927 - (333,719) - - - - (452,208) - - - - Effect of changes of ownership interests in equity method investees - - - - (32,955) - - (68,782) - - 511 (101,226) Recovery of unrealized valuation losses on long-term equity investments ------212,860 - - 212,860 Translation adjustments on long-term equity investments ------(152,340) - (152,340) Net loss for 2003 ------(1,650,533) - - - (1,650,533) Purchase of treasury stock ------(406,606) (406,606)
BALANCE, DECEMBER 31, 2003 12,704,467 - 7,739,781 1,770 213,035 1,708,059 996,057 (253,410) (59,063) 655,438 (2,040,649) 21,665,485
Appropriation and distribution of 2003 net income Capital surplus and special reserve transfer to unappropriated earnings - - - (1,770) - - (650,556) 652,326 - - - - Transfer of capital surplus to capital stock - 629,336 (629,336) ------Employees bonuses ------(190,000) - - - (190,000) Effect of changes of ownership interests in equity method investees - - - - 4,494 - - (55,842) - - 981 (50,367) Recovery of unrealized valuation losses on long-term equity investment ------25,880 - - 25,880 Cumulative translation adjustments ------(339,943) - (339,943) Net loss for 2004 ------(4,981,152) - - - (4,981,152) Purchase of treasury stock ------(720,537) (720,537)
BALANCE, DECEMBER 31, 2004 $ 12,704,467 $ 629,336 $ 7,110,445 $ - $ 217,529 $ 1,708,059 $ 345,501 $ (4,828,078) $ (33,183) $ 315,495 $ (2,760,205) $ 15,409,366
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated April 7, 2005)
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STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars)
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (4,981,152) $ (1,650,533) Depreciation and amortization (including depreciation of leased-out assets) 757,658 1,021,871 Provision for redemption of convertible bonds 68,196 192,875 Gain on sale of long-term investment (410,611) (302,615) Loss on disposal of property, plant and equipment 549 175 Gain on disposal of property, plant and equipment (20,455) (87,592) Costs of property, plant and equipment expensed 3,640 - Amortization of bond issuance costs 1,343 - Investment losses on equity-method investees 5,380,637 2,281,455 Cash dividends on equity-method investees 418,831 30,203 Loss on long-term investment devaluation 130,488 34,029 Gain from redeemed convertible bonds (6,881) (1,987) Accrued pension cost 40,838 40,826 Deferred tax expense (benefit) 8,168 (86,754) Net changes in operating assets and liabilities Notes receivable, net 118,995 1,568,585 Accounts receivable, net 447,742 (763,669) Notes and accounts receivable from related parties, net 449,063 418,148 Other financial assets, current 86,275 221,485 Inventories (740,850) 163,106 Other current assets (3,668) 214,450 Notes payable (3,830) 4,514 Accounts payable 421,100 (161,180) Notes and accounts payable to related parties 505,900 (866,959) Income tax payable 105,643 (99,666) Accrued expenses (268,160) 64,432 Other current liabilities 62,981 44,903 Other liabilities (8,775) (8,775)
Net cash provided by operating activities 2,563,665 2,271,327
CASH FLOWS FROM INVESTING ACTIVITIES Decrease in short-term investments 69,735 5,850,048 Acquisition of property, plant, equipment and leased-out assets (183,219) (561,647) Proceeds from disposal of property, plant, equipment and deferred charges 5,531 8,961 Payment for long-term investments (3,430,739) (1,813,374) Proceeds from sale of long-term investments 2,630,856 556,871 Decrease (increase) in refundable deposits 697 (434) Increase in deferred charges (451,741) (507,937) Increase in deferred bond insurance costs (15,668) - Decrease (increase) in current account with others 367,937 (367,937)
Net cash (used in) provided by investing activities (1,006,611) 3,164,551
(Continued)
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VIA TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars)
2004 2003
CASH FLOWS FROM FINANCING ACTIVITIES Increase in long-term bank loans $ 500,000 $ - Increase in bonds payable 1,900,000 - Decrease in long-term capital lease obligation (12,957) (10,506) Decrease in convertible bonds (2,344,393) (2,749,533) Cash dividends - (595,927) (Decrease) increase in guarantee deposits received (1,018) 2,562 Purchase of treasury stock (720,537) (406,606)
Net cash used in financing activities (678,905) (3,760,010)
NET INCREASE IN CASH AND CASH EQUIVALENTS 878,149 1,675,868
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,750,624 4,074,756
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,628,773 $ 5,750,624
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid during the year Interest $ 427,484 $ 382,171 Income tax $ 33,624 $ 139,345
NONCASH INVESTING AND FINANCING ACTIVITIES Transfer of capital surplus, unappropriated earnings and employees bonuses to capital stock $ 629,336 $ 785,927
Transfer of long-term investments to short-term investments $ 267,215 $ -
Current portion of long-term liabilities $ 111,110 $ 2,301,196
Transfer of long-term investments to other liabilities $ 46,336 $ -
Transfer of deferred credits to gain on disposal of property, plant and equipment $ 20,414 $ 87,592
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT Increase in property, plant, equipment and leased-out assets $ 175,720 $ 394,907 Decrease in payable for acquisition of property, plant and equipment 7,499 166,740
Cash payment $ 183,219 $ 561,647
(Continued)
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VIA TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars)
2004 2003
PURCHASE OF DEFERRED CHARGES Increase in deferred charges $ 387,933 $ 354,699 Decrease in payable for acquisition of deferred charges 63,808 153,238
Cash payment $ 451,741 $ 507,937
BONUSES TO EMPLOYEES AND DIRECTORS’ REMUMERATION Employees bonuses and directors’ remuneration $ 190,000 $ - Add payable due to bonuses to employees and directors’ remuneration, beginning of year 75,975 75,975 Minus payable due to bonuses to employees and directors’ remuneration, end of year (265,975) (75,975)
Cash payment $ - $ -
The accompanying notes are an integral part of the financial statements. (Concluded)
(With Deloitte & Touche audit report dated April 7, 2005)
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VIA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)
1. ORGANIZATION AND OPERATIONS
VIA Technologies, Inc. (the “Company”) was incorporated in September 1992 under the Company Law of the Republic of China to engage in the programming, designing, manufacturing and selling of semiconductors and PC chipsets. In March 1999, the Company’s common stock was officially listed on the Taiwan Stock Exchange.
There are 1,462 and 1,458 employees in the Company at December 31, 2004 and 2003 respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying 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). In preparing financial statements in conformity with these guidelines and principles, the Company is required to make certain estimates and assumptions that could affect the amounts of allowance for doubtful accounts, allowance for inventory devaluation, property depreciation, pension and accrued litigation loss. Actual results could differ from these estimates.
For the convenience of readers, the accompanying 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 financial statements shall prevail. However, the accompanying financial statements do not include English translation of the additional footnote disclosures that are not required under generally accepted accounting principles but are required by the Securities and Futures Bureau (SFB, formerly the “Securities and Futures Commission” before July 1, 2004) for their oversight purposes.
The Company’s significant accounting policies are summarized as follows:
Current and Non-Current Assets and Liabilities
Current assets are those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year, whichever is longer. Current liabilities are obligations reasonably expected to require the use of current assets or the creation of other current liabilities. Obligations for items that have entered the operating cycle should be classified as current liabilities. Assets or liabilities which were excluded from current assets or current liabilities should be classified as non- current assets or non-current liabilities.
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Cash Equivalents
Cash equivalents consist primarily of bankers’ acceptance and commercial paper which are highly liquid investments with a maturity of three months or less at the date of acquisition.
Short-Term Investments
Short-term investments include investments in marketable equity securities and mutual funds, which are carried at the lower of cost or market. The net change on the investment valuation allowance used in the determination of net income is the result of changes in the difference between aggregate costs and market values of investments still held at the respective year end. The cost of investments sold is determined using the moving average method. Stock dividends received are not recognized as income, instead they are reflected as an increase in the number of shares held.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is generally provided for notes and accounts receivable due from unrelated and related parties based on management’s evaluation of the collectibility of individual accounts, past loss experience, and other pertinent factors.
Inventories
Inventories are stated at the lower of cost or market (“LCM”). Cost is determined using the moving average method. Market value is based on replacement cost. The LCM method is applied to each inventory category.
Long-Term Investments
Investments in companies in which the Company’s ownership interest is 20% or more, or where the company can exercise significant influence, are accounted for under the equity method of accounting. Payment in excess of the proportionate net book value, at the time of investment, of the investee accounted for under the equity method is amortized over five years.
All other long-term investments are accounted for under the cost method. Marketable equity securities are valued at the lower of cost or quoted market value. Unrealized losses, if any, are shown as a deduction to stockholders’ equity. Permanent decline in value of investment that is not readily marketable is recognized as a realized loss. The cost of investments sold is determined by the weighted-average method.
Property, Plant and Equipment and Leased-out Assets
Property, plant and equipment are stated at cost less accumulated depreciation. Interest incurred in connection with the purchase or construction of property, plant and equipment is capitalized. Major renewals and betterments are capitalized, while maintenance and repairs are expensed in the period incurred. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited to or charged against income.
Depreciation is provided on a straight-line basis over the estimated service lives of the assets as prescribed in the tax regulations, plus one additional year for salvage value.
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The value of the leased property is the smaller of the following two values; (a) the present value of all future rental payments (less the lessee’s executory costs) plus the bargain purchase price or lessee’s guaranteed residual value, and (b) the leased property’s market value at the inception date of the lease.
Fixed assets rented out, the related costs and accumulated depreciation, are classified as other assets - leased-out assets.
Employee Retirement Plan
The Company established a pension plan covering all eligible employees in accordance with the Labor Standards Law of the Republic of China (“ROC”). Contributions to the plan were made by the Company at 2% of employee salaries and wages. The funds are deposited with the Central Trust of China, a government-designated custodian of pension funds, and are managed by the Company’s Pension Fund Administration Committee. Provision for retirement benefits which has been funded for the years ended December 31, 2004 and 2003 amounted to $18,484 thousand and $20,290 thousand, respectively. The pension fund balances are $106,028 thousand and $86,420 thousand at December 31, 2004 and 2003, respectively.
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 18, “Accounting for Pensions” issued by the Accounting Research and Development Foundation of the ROC.
Deferred Charges
Deferred charges which consist of telephone installation charges, computer software installations and deferred authorization charges are amortized on a straight-line basis over three to five years or authorization period.
Impairment of Tangible and Intangible Assets Excluding Goodwill
At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
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Where an impairment loss subsequently reverses, the carrying amount of the asset (cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Income Tax
The Company adopted the provisions of SFAS No. 22, “Accounting for Income Tax,” which require asset and liability approach to financial accounting and reporting for income tax. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The Company adopted the flow-through method for income tax credits resulting from purchase of equipment, research and development expenditures, investments in equity stock and loss carryforward.
Adjustment of prior years’ income tax is made to current income tax expense in the year the adjustment is made.
Under the Amended Income Tax Law of ROC, the 25% regular corporate income tax and the 20% separate income tax on interest income from short-term investment remain and a 10% additional income tax is levied on distributable earnings earned in 1998 onward that remain undistributed in the following year. Beginning in 1998, every enterprise (except branch, partnership, and not-for-profit organization) is required to maintain an Imputation Credit Account (“ICA”) to keep track of all its income taxes paid and income tax credits received, collectively called Imputation Credit (“IC”), and the allocation of IC to shareholders. When the earnings are distributed as cash or stock dividends to:
(a) resident individual shareholders (“RIS”), the RIS include the dividend income in their taxable income and claim an IC issued by the enterprise as deduction from their income tax payable; (b) non-resident individual or non-resident corporate shareholders (“NRS”), the NRS exclude the dividend income from their taxable income and do not claim an IC; dividends paid to NRS are subject to 20% withholding tax which can be offset by the 10% additional income tax paid on undistributed earnings; (c) resident corporate shareholders (“RCS”), the RCS exclude the dividend income from their taxable income and do not claim the IC as deduction from income tax payable; the IC received is added to the RCS’ own ICA until the IC is allocated to RIS or NRS when the earnings are finally distributed to RIS or NRS.
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Bonds Payable
Bonds were issued at face value and recorded as bonds payable. Each month interest expense is booked at face value multiplied by the stated interest rate. For bonds with purchase back condition, interest is calculated according to purchase back value and recognized as interest expense period by period. The direct and necessary expenses caused by issuing convertible bonds were recorded as issuance expenses and amortized over the period from issuance date to maturity date. When a conversion is requested by a holder of convertible bonds, unamortized issuance expenses, interest payable and recognized interest expense is written off with convertible bonds payable. The exceeding value of bonds to stock face value is recognized as capital surplus.
Treasury Stock
The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 30, “Accounting for Treasury Stock” to account for the Company’s reacquisition of its outstanding shares. Under the provisions of SFAS No. 30, the cost of shares purchased or fair value of shares donated by outside parties is charged to the treasury stock account. If numerous acquisition of blocks of treasury shares are made at different prices, the average costing method is used to identify the cost of the treasury shares at the date of reissuance.
Upon reissuance, the discrepancy between the cost of the treasury shares and the price received is reflected in stockholders’ equity accounts. If the treasury shares are reissued to settle stock warrants, the price received is the sum of the issuance price and the exercise price of the stock warrants.
Revenue Recognition
Revenue from sales of inventories is recognized upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations remain. Product revenues from customers are subject to agreements allowing for limited rights of returns.
Allowance for sales returns is generally based on historical rates of returns, inventory levels in the channel and other pertinent factors.
Stock-Based Employee Compensation Plans
When the grant date of stock-based employee compensation plans is at or after January 1, 2004, the Company will apply the accounting guidelines for stock-based compensation issued by the Accounting Research and Development Foundation of Republic of China. The fair value of option compensation is recorded initially as an asset. This asset is amortized as expense over the service period of the options granted to employees.
Foreign Currency Transactions
Foreign currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused by different foreign exchange rates applied when cash in foreign currency is actually converted into New Taiwan dollars, or when the foreign currency receivables or payables are settled, are credited or charged against income in the period of actual conversion or settlement. Balances of assets and liabilities denominated in foreign currencies are translated at the balance sheet date exchange rate and any resulting gains or losses are credited to or charged against current income.
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Long-term investments denominated in foreign currencies are restated at the balance sheet date exchange rate. Related translation adjustments are reported as a separate component of stockholders’ equity under the caption “cumulative translation adjustments.”
Derivative Financial Instruments
Forward exchange contracts that are designated and effective as a hedge of net foreign asset or liability position is recorded at the contract date exchange rate. The premium or discount on the forward contract, which is the difference between the forward rate and the spot rate on the contract date multiplied by the principal amount of foreign currency, is separately accounted for and amortized to current income over the term of the contract. At year-end, existing forward exchange contracts are restated at the year-end exchange rates, and resulting gains or losses are credited or charged to current income. At closing dates of forward exchange contracts, the difference between the forward rate and the spot rate is credited or charged to current income. Receivables or payables from forward exchange contract are shown on the accompanying balance sheets in net balance. Changes in forward rates with respect to foreign currency options contracts which do not qualify as hedges for financial reporting purposes are reflected directly in income.
Premiums received on short options or paid on long options, which do not qualify as hedges for financial reporting purpose, are included in other current liabilities or other current assets, and are amortized to current income or expense over the term of the contracts by using average method. Gain or loss from the execution of the foreign currency option contracts are credited to or charged against current income. The option contracts are measured at the balance sheet date using the market value, and gain or loss is credited or charged against current income. Receivables and payables generated from the option contracts shall be offset and the net balance will be included in other current assets and other current liabilities.
Asset-Swap contracts, which do not qualify as hedges for financial reporting purpose, are recorded at the contract date interest rate and trade off principal. At closing dates of Asset- Swap contract, the difference between the strike rate and the spot rate, fixed market value and floating market value are credited or charged to current income. Cash equivalents from Asset-Swap contract is shown on the accompanying balance sheets in net balance.
The deposit paid for security credit transactions shall be listed as short sales refundable deposit and memo entries shall be made for the contract portion. The closing market price of balance sheet date of the short sales refundable deposit and un-offset portions shall be adopted. However, if such price is unavailable, the nearest closing market price of the balance sheet date shall be adopted and adjustment shall be made for short sales refundable deposit. The profit and loss due to the execution of contract shall be listed as disposal profit/loss.
The Company enters into interest rate swap transactions to manage exposures to changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to interest income or expense.
Non-Derivative Financial Instruments
The recognition and valuation for non-derivative financial assets and liabilities and its related income or expenses are in accordance with the Company’s accounting policies described herein and accounting principles generally accepted in the Republic of China.
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3. ACCOUNTING PRINCIPLE CHANGES AND EFFECTS
Effective December 31, 2004, the Company adopted SFAS No. 35, “Impairment of Assets”. As a result, a decrease in long-term investment under equity method of $1,210,375 thousand and investment loss under equity method of the same amount were recognized in 2004.
4. CASH AND CASH EQUIVALENTS
2004 2003
Cash on hand $ 430 $ 560 Cash in banks 1,651,136 695,276 Time certificates of deposit 2,192,477 51,075 Cash equivalents - short-term bills 2,784,730 5,003,713
$ 6,628,773 $ 5,750,624
At December 31, 2004 and 2003, interest rates on time certificates of deposit ranged from 0.65% to 2.52% and 1.02%, respectively. At December 31, 2004 and 2003, interest rate on cash equivalents - short-term bills ranged from 0.985% to 1.10% and 0.90% to 0.93%, respectively.
5. SHORT-TERM INVESTMENTS
2004 2003
Mutual fund investments $ 2,223 $ 32,420 Marketable equity securities 213,517 - Less allowance for decline in market value - (14,160)
Short-term investment, net $ 215,740 $ 18,260
6. ACCOUNTS RECEIVABLE
2004 2003
Accounts receivable $ 1,792,420 $ 2,300,048 Less allowance for doubtful accounts (36,257) (33,982) Less allowance for sales returns and discounts (119,810) (181,971)
Accounts receivable, net $ 1,636,353 $ 2,084,095
7. NOTES AND ACCOUNTS RECEIVABLE FROM RELATED PARTIES
2004 2003
Accounts receivable $ 153,937 $ 635,259 Less allowance for doubtful accounts - (2,122) Less allowance for sales returns and discounts (1,193) (31,330)
Notes and accounts receivable from related parties, net $ 152,744 $ 601,807
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8. OTHER FINANCIAL ASSETS, CURRENT
2004 2003
Income tax refunds receivable $ 18,406 $ 5,211 Value-added tax refunds receivable 74,762 122,749 Other receivables (Note 24) 71,719 496,826 Interests receivable 4,664 8 Receivable on forward exchange contracts, net (Note 27) 1,152 121
$ 170,703 $ 624,915
9. INVENTORIES
2004 2003
Resale merchandise $ 11,306 $ 37,254 Finished goods 2,131,650 1,769,289 Work-in-process 2,610,757 1,818,693 Raw materials 736,427 687,256
5,490,140 4,312,492 Less valuation allowance (1,344,699) (907,901)
$ 4,145,441 $ 3,404,591
At December 31, 2004 and 2003, insurance coverage for inventories amounted to $4,378,570 thousand and $3,534,326 thousand, respectively.
10. OTHER CURRENT ASSETS
2004 2003
Prepaid expenses $ 65,293 $ 63,782 Prepayments for purchases - 64 Temporary debits 15,719 13,498
$ 81,012 $ 77,344
11. LONG-TERM INVESTMENTS
2004 2003 Original Carrying Ownership Carrying Ownership Cost Value % Value %
At equity Viabase Co., Ltd. $ 6,130,846 $ 2,753,256 100.00 $ 3,907,078 100.00 Viatech Co., Ltd. 1,562,973 996,383 100.00 1,203,301 100.00 VIA Technologies GmbH 1,433 5,477 100.00 4,478 100.00 Premier Development & Investment (B.V.I.) Co., Ltd. 159,529 135,949 100.00 74,900 100.00 Linkage Technology Co., Ltd. 120,017 83,469 100.00 206,893 100.00
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2004 2003 Original Carrying Ownership Carrying Ownership Cost Value % Value %
VIA Communications, Inc. $ 5,000 $ 5,018 100.00 $ 5,036 100.00 VIA Telecom, Inc. 5,000 5,033 100.00 4,962 100.00 Way-Xing Technologies, Inc 5,000 5,039 100.00 4,986 100.00 VIA -Cyrix Technologies, Inc. 799,976 316,990 99.99 1,494,199 100.00 Way-Hao Investment Corp. 599,940 334,995 99.99 263,171 99.99 Lian-Mei Investment Corp. 599,940 - 99.99 41,120 99.99 Way-Cheng Investment Corp. (formerly Way-Han Investment Corp.) 194,976 468,199 99.99 1,035,410 99.99 Way-Ming Investment Corp. (formerly Way-Tung Investment Corp.) 194,976 506,181 99.99 900,533 99.99 Way-Mao Investment Corp. 98,940 38,234 99.94 87,436 99.99 Way-Shuo Investment Corp. 98,940 - 99.94 46,607 99.99 Vate Technology Co., Ltd. 985,970 362,701 66.28 757,341 65.73 VIA Networking, Inc. 337,000 496,088 49.25 432,159 57.41 VIA Optical Solution, Inc. 999,313 79,618 57.10 794,459 57.10 S3-VIA Inc. 15,485 32 49.90 18 49.90 Way-Lien Technologies, Inc. 29,850 35,110 15.00 21,133 15.00 High Tech Computer Corp. - - - 338,758 3.83 At cost Openfind Information Technology Corporation, Ltd. 63,897 63,897 7.61 63,897 7.61 Global Communication Technology, Inc. 22,455 10,379 5.85 103,284 5.32 Ase Material Inc. - - - 84,000 3.36 North American Venture Fund II Lp. 42,106 3,708 0.43 9,740 2.15 Phoenix Precision Technologies, Inc. 130,784 130,784 1.40 174,598 1.99 Yeh-Chiang Technologies, Corp. 10,583 10,583 0.26 80,267 1.99 Day-Shine Technologies, Inc. 30,457 9,370 0.92 21,500 1.00 Chander Electronic, Corp. 644 644 0.22 644 0.28
$ 13,246,030 $ 6,857,137 $ 12,161,908
In 2003, the Company invested $1,813,374 thousand in Viatech Co., Ltd., Viabase Co., Ltd., Premier Development & Investment (B.V.I.) Co., Ltd., VIA Networking, Inc. and other 7 companies.
In 2004, the Company invested $3,430,739 thousand in Viabase Co., Ltd., Viatech Co., Ltd., Premier Development & Investment (B.V.I.) Co., Ltd., Global Communication Technology, Inc. and Day-Shine Technologies, Inc.
In 2003, the Company sold part of its investment in VIA Testing Technologies, Inc. and High Tech Computer Corp., amounted to $14,207 thousand and $407,772 thousand and recognized $1,682 thousand and $300,933 thousand as gain on sales of such long-term investment, respectively. At December 31, 2003, the Company recognized $117,902 thousand as recovery of unrealized valuation losses on long-term investment because the market price were higher than the costs of Phoenix Precision Technologies, Inc., Yeh-Chiang Technologies Corp. and Chander Electronic, Corp.
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In 2004, the Company sold part of its investment in High Tech Computer Corp., Phoenix Precision Technologies Inc., and Yeh-Chiang Technologies, Corp. amounted to $597,695 thousand, $47,359 thousand and $62,711 thousand, and recognized $414,039 thousand and $3,545 thousand as gain on sales of such long-term investment and $6,973 thousand as loss on sales of such long-term investment, respectively.
In 2003, VIA Networking, Inc. issued additional common stock. Due to the change of ownership interest in investees and due to the decrease in capital surplus and unrealized valuation losses on long-term investment of Way-Han Investment Corp. and Way-Tung Investment Corp. and so forth, the Company proportionately decreased its capital surplus by $32,955 thousand, retained earnings by $68,782 thousand, treasury stock by $511 thousand and unrealized valuation losses on long-term investment by $94,958 thousand.
In 2004, VIA Networking, Inc. issued additional common stock. Due to the changes of ownership interest in investees and due to the increase in capital surplus and unrealized valuation losses on long-term investments of Way-Ming Investment Corp. and Way-Shuo Investment Corp. and so forth, the Company proportionately increased its capital surplus by $4,494 thousand, unrealized valuation losses on long-term investments by $25,880 thousand, treasury stock by $981 thousand and decreased its retained earnings by $55,842 thousand.
For the year ended December 31, 2003 North American Venture Fund II Lp. had loss from its operation. The Company recognized $34,029 thousand as realized valuation losses on long- term investments proportionately.
For the year ended December 31, 2004 North American Venture Fund II, Global Communication Technology, Inc. and Day-Shine Technologies, Inc had loss from their operation. The Company recognized $4,369 thousand, $105,032 thousand and $21,087 thousand as realized valuation losses on long-term investments proportionately. In addition, at December 31, 2004, Viabase Co., Ltd. and Viatech Co., Ltd. decreased their capital stock by $7,594,328 thousand (US$238,963 thousand) and $238,845 thousand (US$7,117 thousand) to make up for past losses, respectively.
Via-Cyrix Technologies, Inc., Lian-Mei Investment Corp. and so on held the Company’s common stock amounted to 16,608,931 shares. The Company proportionately recognized $1,633,062 thousand as its treasury stock (see Note 20).
Effective December 31, 2004, the Company adopted SFAS No. 35 “Impairment of Assets”. As a result, a decrease in long-term investment under equity method of $1,210,375 thousand and investment loss under equity method of the same amount were recognized in 2004 after revaluation.
In accordance with SFAS No. 7 and the “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, the Company prepared consolidated financial statements which included the accounts of the Company, Viabase Co., Ltd. Viatech Co., Ltd., Via-Cyrix Technologies, Inc., Vate Technology Co., Ltd., Way-Cheng Investment Corp., Way-Ming Investment Corp., Way-Hao Investment Corp., Lian-Mai Investment Corp., Way-Shuo Investment Corp., Way-Mao Investment Corp., Via Technologies GmbH, Premier Development & Investment (B.V.I.) Co., Ltd., Via Communication, Inc., Via Telecom, Inc., Way-Xing Technologies, Inc., Linkage Technology Co., Ltd. VIA Optical Solution, Inc., and VIA Networking, Inc. in 2004. In 2003, the consolidated financial statements included the Company and Viabase Co., Ltd., Viatech Co., Ltd, Vai Cyrix Technologies, Inc., Vate Technology Co., Ltd., Way-Cheng Investment Corp., Way-Ming Investment Corp., VIA Optical Solution, Inc. and VIA Networking, Inc. For comparison purpose, the 2003 consolidated financial statements had been restated to include the subsidiaries consolidated in 2004.
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The equity of Lian-Mei Investment Corp. and Way-Shuo Investment Corp. were negative at December 31, 2004. The Company recognized investment losses proportionately and recorded as other liabilities due to continuous financial support to the investee. Equity in net loss of affiliates amounted to $5,380,637 thousand and $2,281,455 thousand in 2004 and 2003, respectively which consisted of the following:
2004 2003
Viatech Co., Ltd. $ (636,563) $ (169,147) Viabase Co., Ltd. (3,778,246) (2,429,628) Via Technologies GmbH 921 833 Premier Development & Investment (B.V.I.) Co., Ltd. (575) (6,730) S3 VIA, Inc. 16 (38) Linkage Technology Co., Ltd. 4,739 5,309 VIA Networking, Inc 80,617 120,545 Via-Cyrix Technologies, Inc. 45,206 51,856 Via-Testing Technologies, Inc. - (177,195) Way-Hao Investment Corp. 39,695 14,243 Lian-Mei Investment Corp. (61,255) (1,662) Way-Cheng Investment Corp. 1,364 238,332 Way-Ming Investment Corp. 83,463 170,406 Way-Mao Investment Corp. (48,735) (27,329) Way-Shuo Investment Corp. (66,065) (42,755) VIA Optical Solution, Inc. (714,841) (83,142) Way-Lien Technologies, Inc. 14,572 1,853 High Tech Computer Corp. 56,101 69,383 VIA Communications, Inc. (18) 37 VIA Telecom, Inc. 71 (38) Vate Technology, Co., Ltd. (401,157) (16,574) Way-Xing Technologies, Inc. 53 (14)
$ (5,380,637) $ (2,281,455)
12. PROPERTY, PLANT AND EQUIPMENT
2004 2003 Accumulated Carrying Carrying Cost Depreciation Value Value
Land $ 962,605 $ - $ 962,605 $ 942,061 Buildings and improvements 694,383 (147,592) 546,791 483,704 Machinery and equipment 356,942 (319,574) 37,368 56,799 Computer equipment 305,960 (211,630) 94,330 122,383 Research and development equipment 414,308 (262,333) 151,975 151,253 Transportation equipment 8,119 (5,991) 2,128 3,385 Furniture and fixtures 47,130 (38,238) 8,892 14,502 Leased assets - - - 19,032 Leasehold improvements 144,319 (132,591) 11,728 14,259 Prepayments on purchase of equipment, land and buildings 9,634 - 9,634 106,164
$ 2,943,400 $ (1,117,949) $ 1,825,451 $ 1,913,542
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The acquisition of land, buildings and improvements, which is primarily used as an office, amounted to $122,446 thousand and $242,496 thousand in 2004 and 2003, respectively.
The Company rented out parts of its land, buildings and improvements to other companies and the carrying value of the related assets had been transferred to leased-out assets (see Note 13).
The Company had no interest capitalization as of December 31, 2004 and 2003.
Insurance coverage of property, plant and equipment, including leased-out assets at December 31, 2004 and 2003 amounted to $930,997 thousand and $1,318,393 thousand, respectively.
13. LEASED-OUT ASSETS
2004 2003 Accumulated Carrying Carrying Cost Depreciation Value Value
Land $ 381,953 $ - $ 381,953 $ 381,953 Buildings and improvements 214,028 (30,349) 183,679 191,507
$ 595,981 $ (30,349) $ 565,632 $ 573,460
The above land and buildings and improvements were rented out to the related parties, Xander International Corp., High Tech Computer Corp., Chander Electronics Corp., VIA Optical Solution Inc., VIA Networking, Inc., and Vate Technology Co., Ltd. (see Note 24).
14. ACCRUED EXPENSES
2004 2003
Salaries & bonuses $ 306,611 $ 246,463 Royalties (Notes 24 and 26) 112,205 449,828 Commission 98,938 25,176 Insurance 12,802 12,434 Advertisement 20,113 33,541 Research and development 3,862 4,917 Interest 20,014 - Professional fees 74,511 140,273 Others 79,511 84,095
$ 728,567 $ 996,727
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15. OTHER CURRENT LIABILITIES
2004 2003
Advance receipts $ 40,570 $ 46,986 Balance payable - machinery and equipment 18,834 26,333 Employees bonuses payable 193,779 3,779 Compensation due to directors and supervisors 72,196 72,196 Option on forward contracts, net (Note 27) - 31 Deferred credits - profit from intercompany transactions 87,752 12,057 Other payables 424,715 494,790
$ 837,846 $ 656,172
On December 31, 2004 and 2003, other payables were primarily sales rebates payable and software expense payables.
On December 31, 2004 and 2003, deferred credits - profit from intercompany transactions were the unrealized profit from intercompany transactions between the Company and its subsidiaries.
16. CORPORATE BONDS PAYABLE
2004 2003
On August 31, 2000 the Company issued unsecured $ 4,300 $ 1,928,800 convertible corporate bonds of $4,300,000 thousand for investments in affiliates and purchases of equipment. The interest rate is zero and the bonds will mature on August 30, 2007. Add provision for redemption of convertible bonds. 861 359,439 On July 27, 2004 the Company issued secured corporate 1,900,000 - bonds of $1,900,000 thousand. The interest rate ranged from 2.40% to 2.50% and the bonds will mature on July 27, 2009. Principal payments are due on third, fourth and fifth years to pay 25%, 25% and 50%, respectively and interest is paid every half year. Less current portion of convertible bonds - (2,288,239)
$ 1,905,161 $ -
Terms and Conditions of Bonds
The bonds will mature at August 30, 2007. The conversion rights of bonds are exercisable by the bondholders at any time on or after three months from the date of issuance and ten days prior to the maturity date.
A bondholder has the right to request the Company to redeem the bonds on July 31, 2003 and July 31, 2004 at 115.76% and 122.71% of par value, respectively.
After two years from issuance date, the Company has the option to call redemption of the bonds and calculate the redemption price at 5%~5.25% yield.
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After three months from the issuance date and forty days prior to the maturity date, if the balance not converted is less than $430,000 (10% of the issuing amount), then the Company has the option to redeem at 5%~5.25% yield.
The initial conversion price was $325.3 per share at the time of issuance. Upon the distribution of stock dividends and the issuance of additional common shares, the conversion price will be adjusted. At December 31, 2004, the conversion price is $118.1 per share.
As at December 31, 2004, the Company had redeemed the bonds amounted to $4,295,700 thousand plus the provision for redemption, requested by the bondholders or the Company purchased from stock market.
17. LONG-TERM LIABILITIES
2004 2003
Long-term capital lease liabilities from Taiwan NewTec $ - $ 12,957 Financial Corporation for lease of machinery. The amount of capital lease is $44,008 thousand, and principal payments are due in 12 equal installments commencing in October 2001. Unescured loan from International Commercial Bank of China Bank. The amount of borrowing is $500,000 thousand and principal payments are due in 9 equal quarterly installments commencing on September 24, 2005. At December 31, 2004, the interest rate was 2.18%. 500,000 - Less current portion of long-term capital lease (111,110) (12,957)
Long-term liabilities $ 388,890 $ -
18. EMPLOYEE PENSION PLAN
The Company has a defined benefit pension plan covering all regular employees in accordance with the Labor Standards Law of the Republic of China.
The Company adopted the provisions of SFAS No. 18, “Accounting for Pension,” which require that pension expense shall be computed on actuarial basis. The following table sets forth the plan’s status at December 31, 2004 and 2003:
Net periodic pension cost for 2004 and 2003 included the following components:
2004 2003
Service cost $ 55,325 $ 55,604 Interest cost on projected benefit obligation 7,133 7,475 Amortization on unrecognized net obligation (10) (10) Expected return on plan assets (3,125) (2,864) Amortization on loss of pension - 911
Net periodic pension cost $ 59,323 $ 61,116
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The following table sets forth the reconciliation between the plan’s funding status and the amount of accrued pension liability recognized at December 31, 2004 and 2003:
2004 2003
Actuarial present value of benefit obligations Nonvested benefits $ (146,624) $ (105,723)
Accumulated benefit obligation (146,624) (105,723) Additional benefits based on future salaries (123,329) (113,761)
Projected benefit obligation (269,953) (219,484) Plan assets at fair value 106,028 86,420
Funded status (163,925) (133,064) Prior unrecognized net assets not yet recognized in net periodic pension cost (182) (192) Unrecognized (gain) loss of pension, net (8,386) 1,601
Accrued pension cost $ (172,493) $ (131,655)
The Company had no vested benefits as of December 31, 2004 and 2003.
Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows:
2004 2003
Weighted-average discount rate 3.25% 3.25% Assumed rate of increase in future compensation 3.00% 3.50% Expected rate of return on plan assets 3.25% 3.25%
19. STOCKHOLDERS’ EQUITY
Capital Stock
The Company’s outstanding common stock at January 1, 2003 amounted to $11,918,540 thousand divided into 1,191,854,000 shares with a par value of $10 each.
In September 2003, the Company declared to distribute stock dividends of $262,208 thousand and $333,719 thousand of capital surplus and $190,000 thousand of employees bonuses to common stock. As a result, the Company’s outstanding common stock at December 31, 2003 amounted to $12,704,467 thousand , divided into 1,270,446,700 common shares with a par value of $10 each.
In June 2004, the meeting of stockholders approved the transfer of capital surplus amounting to $629,336 thousand and employees bonuses amounting to $190,000 thousand to capital stock. The amount to be distributed were accounted for as “stock dividend to be distributed” temporarily except employees bonuses due to the change of the rules. As a result, the Company’s outstanding capital stock at December 31, 2004 was $12,704,467 thousand, dividend into 1, 270,446,700 common shares with a par value of $10 each.
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The Company was approved by SFC to issue employee stock options in accordance with Securities and Exchange Law Article 28.3 within the quantity of 200 thousand in 2001, 20,000 thousand in 2003, 8,000 thousand and 25,000 thousand option units in 2004, with each unit representing 100 shares, one share, one share and one share of common stock, respectively. The Company will issue new common stock for employee stock option exercised by granted employees. For the year ended December 31, 2004, totaling 48,000 thousand option units had been issued to employees and the Company transferred retained earnings and capital surplus to capital stock during 2003, option units has become 49,319 thousand after considering the effect of that transfer. The option holders can exercise the right up to 50% of the granted option units no earlier than two years from the granted date. After three years from the granted day the holders can exercise the right up to 75% of the granted option units. After four years from the granted date, the option holders are eligible to exercise all the option units owned. The option holders should exercise the right within seven years. Other information on stock option rights plan is as follow:
For the Year Ended December 31, 2004 Number of Outstanding Weighted-Average Stock Option Right Exercise Price (thousand) (NT$/Per Share)
Beginning balance 21,319 $44.70 Option granted 28,000 27.80~47.70
Ending balance 49,319 43.18
As of December 31, 2004 the information about the outstanding stock options is as follows:
Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercise Exercisable Average Exercise Exercise Price (thousand) Contractual Life Price (Per Share) (Per Share) Price (Per Share)
$44.70 21,319 4.72 $44.70 10,659 $44.70 47.70 20,000 5.06 47.70 - - 27.80 8,000 5.53 27.80 - - 49,319
The Company uses the intrinsic value method to evaluate compensation cost for employee stock options granted on or after January 1, 2004. The compensation cost recognized for the year ended December 31, 2004 was zero since the stock options were granted at an exercise price equal to the closing price of the Company’s common shares on the measurement dates, Had the Company applied the fair value based method to evaluate compensation cost for employee stock options granted, the assumptions and pro forma results of the Company for the year ended December, 31, 2004 would have been as follows:
Method Black-Scholes Model Assumptions Risk free interest rate 2.28% Expected life (in years) 6 Expected stock price volatility 48.25% Expected dividend yield 5% Net loss Net loss as reported $(4,981,152) Pro forma net loss $(5,076,323)
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Loss per share (EPS) Basic EPS as reported $(3.84) Pro forma basic EPS $(3.91) Diluted EPS as reported $(3.84) Pro forma diluted EPS $(3.91)
Appropriation of Retained Earnings
According to the Company Law and the Company’s Articles of Incorporation, 10% of the Company’s annual earnings, after paying tax and offsetting deficit, if any, shall be appropriated as legal reserve until such reserve equals the amount of common stock. The remaining balance shall be appropriated no more than 1% as directors’ remuneration and no less than 5% as bonuses to employees. The appropriation of retained earnings should be proposed by the board of directors and approved by the stockholders.
The Company engages in the programming, designing, manufacturing and selling of semiconductor and PC chipset and is in the development stage of industry cycle. Under the consideration of whole environment around the Company and the characteristics of industry development, and the intention of pursuing the long-term interests of stockholders, maintaining the operating efficiency, and meeting its capital expenditure budget and the financial goals, the Company would appropriate 30%~100% of unappropriated earnings as stock dividends. The sum of cash dividends will not be more than 70% of total dividends.
If the Company recognized the employees bonuses $190,000 thousand as expenses of 2003, the pro forma loss per share for the year ended 2003 would be $(1.47). (The original loss per share is $(1.32).)
There was no earnings appropriation to be declared due to accumulated deficit of the Company at December 31, 2004.
20. TREASURY STOCK
As of December 31, 2004, the subsidiaries held the Company’s common stocks amounted to 16,608,931 shares and the Company proportionately accounted for $1,633,062. (The original book value amounted to $1,634,043 thousand and due to sale of the stocks owned by investees, the Company proportionately decreased by $981 thousand). The details consisted of the following:
Amount Shares Held Transfer to by the Book Ownership Treasury Market Subsidiaries Value % Stock Price
Via-Cyrix Technologies, Inc. 8,390,037 $ 772,623 99.99 $ 772,600 $ 145,059 Way-Hao Investment Corp. 891,575 93,509 99.99 93,500 15,414 Way-Han Investment Corp. 963,312 99,542 99.99 99,530 16,654 Way-Tung Investment Corp. 860,832 90,290 99.99 90,279 14,882 Lian-Mei Investment Corp. 5,503,175 577,211 99.99 577,153 95,140
16,608,931 $ 1,633,175 $ 1,633,062 $ 287,149
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At September 15, 2003, March 25, 2004, June 7, 2004 and September 21, 2004 the board of directors authorized the repurchase of up to 15,000,000 shares, 10,000,000 shares, 10,000,000 shares and 25,000,000 shares to transfer to employees, at a price ranging from $33.60 to $75.70 per share, $25.20 to $63.20 per share, $21.49 to $47.99 per share and $13.30 to $33.73 per share, during the period from September 16, 2003 to November 15, 2003, March 26 to May 25, 2004, June 8 to August 7, 2004 and September 22 to November 21, 2004, respectively. In addition, when the market price was lower than the minimum repurchase price, the Company allowed to continue repurchasing the common stock.
In accordance with the Securities and Exchange Law, the common stock that a public company repurchased should not exceed 10% of its total outstanding shares. Additionally, the amount that a public company spent for common stock repurchase should not exceed its retained earnings plus additional paid-in capital and realized capital surplus. At December 31, 2004, the Company has repurchased 36,857,000 shares at $1,127,143 thousand, which meets the regulations of the Securities and Exchange Law.
21. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES
2004 2003 Year Cost of Operating Cost of Operating Expenses Total Total Revenues Expenses Revenues Expenses Personnel expense $ 62,222 $ 1,313,739 $ 1,375,961 $ 59,905 $ 1,249,646 $ 1,309,551 Salary 53,822 1,141,434 1,195,256 48,526 1,063,376 1,111,902 Insurance 3,180 67,620 70,800 3,947 76,153 80,100 Pension cost 2,713 56,610 59,323 3,145 57,971 61,116 Other 2,507 48,075 50,582 4,287 52,146 56,433 Depreciation 45,514 208,618 254,132 65,353 211,728 277,081 Amortization 45 495,653 495,698 58 736,905 736,963
22. INCOME TAX
The income tax returns for the years through 2000 have been examined and approved by the tax authority.
The Company is exempt from paying the corporation income tax on certain products for five consecutive years commencing on January 1, 2002.
Income tax payable at December 31, 2004 and 2003 was computed as follows:
2004 2003
Loss before income tax $ (4,903,155) $ (1,681,819) Add Investment losses under equity-method 5,380,637 2,281,455 Loss on long-term investment devaluation 16,445 34,029 Provision for inventory devaluation 436,798 - Unrealized sales allowance 121,003 213,301 Provision for redemption of convertible bonds - 114,130 Unrealized profit from intercompany transaction 87,752 12,057 Less Gain on disposal of short-term investments (462,108) (398,878) Unrealized sales allowance, beginning of year (213,301) (244,975) Realized valuation losses on long-term investments (2,680,968) (2,987,924)
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2004 2003
Unrealized loss on disposal of inventory, beginning of year $ - $ (31,292) Unrealized gain on disposal of property, plant and equipment (20,414) (87,592) Unrealized profit from intercompany transaction, beginning of year (12,057) (8,548) Separate taxable interest (3,261) (2,296) Recovery from loss on short-term investment devaluation (14,160) (426) Realized provision for redemption of convertible bonds (358,578) (301,574) Capitalized expenses (21,061) (24,524) Others (5,489) (4,044)
Estimated taxable income (2,651,917) (3,118,920) Estimated income tax provision (×25%-10) - - Unappropriated earnings additional 10% income tax - 78,846 Less investment, research and development tax credits - (39,423)
Current income tax expense - 39,423 Less prepaid and withheld income tax (936) (6,734)
(Income tax refunds receivable) income tax payable $ (936) $ 32,689
The tax effects of deductible temporary differences and tax credit carryforwards that gave rise to deferred tax assets as of December 31, 2004 and 2003 consisted of the following:
2004 2003
Deferred tax asset Unrealized provision for inventory devaluation $ 336,175 $ 226,975 Unrealized profit from intercompany transaction 21,938 3,014 Unrealized sales allowance 30,251 53,325 Unrealized provision for redemption of convertible bonds 215 89,860 Unrealized pension cost 39,836 29,626 Unrealized gain on disposal of property, plant and equipment 2,595 7,699 Loss carryforward 1,442,962 779,730 Investment tax credits 2,649,383 2,399,346 Others 5,257 5,523
Total deferred income tax assets 4,528,612 3,595,098 Deferred tax liabilities - foreign exchange gain (18,589) -
Subtotal 4,510,023 3,595,098 Less allowance for deferred income tax assets (3,539,861) (2,616,768)
Deferred income tax assets, net 970,162 978,330 Deferred income tax assets, current (375,247) (371,264)
Deferred income tax assets, noncurrent $ 594,915 $ 607,066
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The income tax expense (benefit) for the years ended December 31, 2004 and 2003 consists of the following:
2004 2003
Current income tax expense $ - $ 39,423 Decrease (increase) in deferred income tax assets 8,168 (86,754) Under estimation of prior year’s income tax 69,829 16,045
Income tax expense (benefit) $ 77,997 $ (31,286)
The amounts of investment tax credit and loss carryforward as of December 31, 2003 are as follows:
Investment Loss Expiration Year Tax Credits Carryforward
2005 $ 766,275 $ - 2006 527,046 - 2007 735,401 - 2008 620,661 3,119,931 2009 - 2,651,917
$ 2,649,383 $ 5,771,848
The details of investment tax credit are as follows:
Expiration Year Item Balance Amount Basis
2005 Research and development $ 766,275 $ 1,174,100 Statute for Upgrading Industries Training - 2,454 Statute for Upgrading Industries 2006 Research and development 513,046 654,752 Statute for Upgrading Industries Training - 2,395 Statute for Upgrading Industries Investments in equity stock 14,000 14,000 Statute for Upgrading Industries 2007 Research and development 560,660 560,660 Statute for Upgrading Industries Training 1,606 1,606 Statute for Upgrading Industries Investments in equity stock 173,135 173,135 Statute for Upgrading Industries 2008 Research and development 617,774 617,774 Statute for Upgrading Industries Training 2,887 2,887 Statute for Upgrading Industries
$ 2,649,383
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The related information for the integrated income tax system as of December 31, 2004 and 2003 is disclosed as follows:
2004 2003
Balance of imputation credit account $ 250,138 $ 168,845 Unappropriated earnings attributed to years before 1998 - 21,925 Unappropriated earnings attributed to 1998 and years after (4,828,078) (275,335) Expected creditable ratio for 2004 and 2003 - -
23. LOSS PER SHARE
Basic loss per share before income tax and after income tax are calculated by dividing net loss before income tax of $(4,903,155) thousand and $(1,681,819) thousand and net loss after income tax of $(4,981,152) thousand and $(1,650,533) thousand by the weighted average number of common shares outstanding of 1,296,950,000 shares and 1,314,609,000 shares during 2004 and 2003, respectively. Loss per share of 2003 was calculated after giving retroactive effect of the stock dividend distributions in 2004.
The convertible bonds have no dilution effect to the loss per share of 2004 as the statement of income of the Company reported loss in 2004.
In addition, as of December 31, 2004, the exercise price of employee stock warrants ranged from $27.80 to $47.70 per unit was higher than the common stock market price at $29.43 per share and the employee stock warrants has no dilution effect to the 2004 loss per share as the statement of income of the Company reported loss in 2004.
24. SIGNIFICANT RELATED PARTY TRANSACTIONS
The names and relationships of related parties are as follows:
Related Party Relationship with the Company
First International Company, Inc. (“FIC Inc.”) Chairman of the Board of Directors is one of the immediate family members of the Company’s Chairman of the Board of Directors VIA Technologies GmbH A subsidiary of the Company Viatech Co., Ltd. A subsidiary of the Company Linkage Technology Co., Ltd. A subsidiary of the Company Premier Development & Investment Co., Ltd. A subsidiary of the Company VIA-Cyrix Technologies, Inc. A subsidiary of the Company VIA Optical Solution Inc. A subsidiary of the Company VIA Networking, Inc. A subsidiary of the Company VIA-Testing Technologies, Inc. (see Note) A subsidiary of the Company Vate Technology Co., Ltd. (see Note) A subsidiary of the Company Way-Cheng Investment Corp. (formerly Way- A subsidiary of the Company Han Investment Corp.) Way-Ming Investment Corp. (formerly Way- A subsidiary of the Company Tung Investment Corp.) VIA Communication, Inc. A subsidiary of the Company VIA Telecom Co., Ltd. A subsidiary of the Company Way-Xing Technologies, Inc. A subsidiary of the Company
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Related Party Relationship with the Company
Way-Hao Investment Corp. A subsidiary of the Company Way-Shuo Investment, Corp. A subsidiary of the Company Way-Mao Investment, Corp. A subsidiary of the Company Lian-Mei Investment, Corp. A subsidiary of the Company Viabase Co., Ltd. A subsidiary of the Company VIA Technologies, Inc. (USA) An indirect subsidiary of the Company VIA-Cyrix, Inc. An indirect subsidiary of the Company Centaur Technology, Inc. An indirect subsidiary of the Company VIA Technologies (Europe) Ltd. An indirect subsidiary of the Company VIA Technologies (HK) Inc. Ltd. An indirect subsidiary of the Company VIA Technologies (China) Ltd. An indirect subsidiary of the Company S3 Graphics Co., Ltd. An investee under the equity method VIA Technologies Japan K.K. An investee under the equity method S3 Graphics, Inc. An investee under the equity method S3-VIA, Inc. An investee under the equity method VIA Telecom Co., Ltd. An investee under the equity method High Tech Computer Corp. Chairman of the board of directors is the Company’s chairman of the Board of directors. Chander Electronics Corp. Chairman of the board of directors is the Company’s chairman of the Board of directors. Insight Solution Corp. Chairman of the board of directors is the Company’s chairman of the Board of directors. Xander International Corp. Chairman of the board of directors is the Company’s president. Global Advanced Packaging Technology Co., An entity related to the Company Ltd. Leo System, Inc. An entity related to FIC Inc. Amertek Limited An entity related to FIC Inc. Danriver, Inc. An entity related to FIC Inc. Zircon Technology Co., Ltd. An entity related to FIC Inc.
Note VIA-Testing Technologies, Inc. was merged into Vate Technology Co., Ltd. at November 18, 2003.
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Major transactions with related parties are summarized below:
Sales
Years Ended December 31 2004 2003 % of Total % of Total Related Party Amount Net Sales Amount Net Sales
Amertek Limited $ - - $ 769,831 4 Via Technologies, Inc. (USA) 495,008 3 266,095 1 FIC Inc. 185,701 1 129,278 1 Chander Electronics Corp. 187,742 1 119,987 1 Danriver, Inc. 30,050 - 93,472 - Via Networking, Inc. 1,101 - 72,563 - Via Optical Solution, Inc. - - 20,331 - Zircon Technology Co., Ltd. 49,514 - - - Others 11,726 - 8,941 -
$ 960,842 5 $ 1,480,098 7
Selling prices to related parties, except for some kind of merchandise that are not comparable and Via Technologies, Inc. (USA), are similar with other regular sales. Terms of payment for both related and unrelated parties are similar except for Via Technologies, Inc., Danriver, Inc. and Amertek Limited, which are established at open accounts.
Other Operating Revenue
Years Ended December 31 2004 2003 % of Total % of Total Other Other Operating Operating Related Party Amount Revenue Amount Revenue
VIA Networking, Inc. $ 17,824 75 $ 13,459 54 VIA Optical Solution Inc. 4,844 21 10,223 41 Xander International Corp. 322 1 129 -
$ 22,990 97 $ 23,811 95
The Company, Xander International Corp., Via Optical Solution, Inc., and VIA Networking, Inc. have entered into the technical support and supervision agreement of chipset products effective in July 1999, September 2002 and January 2003, respectively. The technical support revenue accounted based on the agreement was recognized as other operating revenue.
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Leasing - Lessor
Years Ended December 31 2004 2003 % of Total % of Total Rental Rental Related Party Amount Income Amount Income
High Tech Computer Corp. $ 16,203 30 $ 16,203 36 Chander Electronics Corp. 6,228 12 6,228 14 Via Optical Solution Inc. 8,505 16 6,653 14 Xander International Corp. 6,060 11 6,060 13 Via Networking, Inc. 6,138 11 5,942 13 Vate Technology Co., Ltd. 3,048 6 818 2 Others 1,588 3 872 2
$ 47,770 89 $ 42,776 94
The Company rented out part of its land and building and improvements to the related parties. Rental prices were determined based on the prevailing rates in the surrounding area.
Other Income
Years Ended December 31 2004 2003 % of Total % of Total Other Other Related Party Amount Income Amount Income
VIA Networking, Inc. $ 38,658 13 $ 62,163 29 VIA Telecom Co., Ltd. 33,629 12 - - Via-Testing Technologies, Inc. - - 10,853 5 High Tech Computer Corp. 6,000 2 5,700 3 VIA Optical Solution Inc. 8,730 3 3,373 2 Others 1,489 1 2,443 1
$ 88,506 31 $ 84,532 40
The Company, VIA Optical Solution Inc., VIA Telecom Co., Ltd., VIA Networking, Inc., High Tech Computer Corp. and Via-Testing Technologies, Inc. have entered into the management support and supervision agreement. The support revenue accounted based on the agreement was recognized as other income.
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Purchases
Years Ended December 31 2004 2003 % of Total % of Total Net Net Related Party Amount Purchases Amount Purchases
S3 Graphics Co., Ltd. $ 1,159,767 13 $ 980,971 11 Via Networking, Inc. 281,248 3 646,951 7 Danriver, Inc. - - 248,227 3 Others 11,981 - 87,922 1
$ 1,452,996 16 $ 1,964,071 22
Terms of payment for both related and unrelated parties are similar. The specifications of the merchandise bought from Danriver, Inc. are different and purchase prices are not comparable.
Technical Support and Supervision Agreement
Via Technologies, Inc. (USA)
The Company and Via Technologies, Inc. (USA) have entered into the technical support and supervision agreement of chipset products effective on April 1, 1998, under which the Company and Via Technologies, Inc. (USA) will jointly develop certain chipset products, and the agreement had been amended in 2000, 2002, 2003 and 2004.
The Company amended the above technical support and supervision agreement of chipset products on April 1, 2004. The major provisions of the amendment are as follows:
Technical Service Fees: Under this agreement the Company shall pay Via Technologies, Inc. (USA) the technical service fees based on the set of chipset sold. The Company will pay US$0.5 for the first 40,000,000 sets sold and US$0.3 for every chipset sold thereafter. All the service fees shall be due and payable yearly within 60 days after the year-end. The amount of the service fee to be paid shall be limited to US$11,000 per annum.
Term: This agreement became effective on April 1, 2003 and shall be terminated on March 31, 2008.
The technical service fees the Company shall pay to Via Technologies, Inc. (USA) were $369,395 thousand and $396,231 thousand in 2004 and 2003, respectively. As of December 31, 2004 and 2003, $0 and $365,078 thousand are still unpaid, respectively.
Centaur Technology, Inc.
The Company and Centaur Technology, Inc. have entered into the technical support and supervision agreement of central processing units effective on December 1, 1999, under which the Company and Centaur Technology, Inc. will jointly develop certain chipset products on certain terms and conditions. The Company amended the above technical support and supervision agreement of central processing unit on December 1, 2004. The major provision of the amendment are as follows:
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Technical Service Fees: Under this agreement the Company shall pay Centaur Technology, Inc. the technical service fees based on the set of chipset sold. All the service fees shall be due and payable yearly within 60 days after the year-end. The amount of the service fee to be paid under this agreement shall be as follows:
US$5 dollar / set for the first 5,000,000 sets. US$4 dollar / set for the second 5,000,000 sets. US$3 dollar / set for the third 5,000,000 sets and thereafter.
Technical Design Fees: Under this agreement the Company shall pay Centaur Technology, Inc. the technical design fees based on service of design on central processing units.
Term: This agreement became effective on the December 1, 2004 and shall be terminated on November 30, 2008.
The technical service fees the Company shall pay to Centaur Technology, Inc. were $472,118 thousand and $341,980 thousand in 2004 and 2003, respectively. As of December 31, 2004 and 2003, $25,726 thousand and $12,572 thousand are still unpaid, respectively.
Patent Agreement
S3 Graphics Co., Ltd.
The Company and S3 Graphics Co., Ltd. have entered into the patent agreement of graphics chipset products effective on May 1, 2003. The major provisions of the agreement are as follows:
Royalty fees: Under this agreement the Company shall pay the amount computed from quantity of products sold of the Company within 60 days following the end of each calendar quarter.
Term: This agreement became effective on May 1, 2003 and shall be terminated on April 30, 2004. However, it shall be automatically renewed for another calendar year unless terminated by 30 days prior written notice. In 2004, the Company and S3 Graphics Co., Ltd. did not terminate the agreement and the agreement was renewed automatically until April 30, 2005.
The royalty fees the Company shall pay to S3 Graphics Co., Ltd. were $59,260 thousand and $86,383 thousand in 2004 and 2003, respectively. As of December 31, 2004 and 2003, $59,260 thousand and $0 are still unpaid, respectively.
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Commissions
The Company has sales commission agreements with related parties below. Those related parties will offer the Company sales support and information of the Company’s products.
2004 2003 Amount Amount Unpaid as of Unpaid as of December 31, December 31, Amount 2004 Amount 2003
VIA Technologies (HK) Inc. $ 64,035 $ 12,098 $ 53,324 $ 5,172 S3 Graphics, Inc. 80,660 80,624 52,552 1,283 VIA Technologies JAPAN K.K. 31,358 154 39,843 1,036 VIA Technologies GmbH 35,870 3,727 27,881 2,903 VIA Technologies (Europe) Ltd. - - 6,509 -
$ 211,923 $ 96,603 $ 180,109 $ 10,394
Professional Services
Years Ended December 31 2004 2003 % of Total % of Total Professional Professional Related Party Amount Services Amount Services
Insight Solution Corp. $ - - $ 4,963 1 Via-Creating Technologies, Inc. - - 3,800 - Vate Technology Co., Ltd. 26,342 8 - - Others 40 - 1,147 -
$ 26,382 8 $ 9,910 1
Packaging and Testing Expenses
Years Ended December 31 2004 2003 % of Total % of Total Testing Testing Related Party Amount Expenses Amount Expenses
Vate Technology Co., Ltd. $ 574,818 9 $ 477,022 8 Global Advanced Packaging Technology, Co., Ltd. 646,425 11 204,130 3 Via-Testing Technologies, Inc. - - 91,151 2
$ 1,221,243 20 $ 772,303 13
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Outsource Manufacturing Costs
Years Ended December 31 2004 2003 % of Total % of Total Outsource Outsource Manufacturing Manufacturing Related Party Amount Costs Amount Costs
Danriver, Inc. $ 1 - $ 10,191 16 Amertek Limited. - - 3,256 5 Chander Electronics Corp. 6 - 213 -
$ 7 - $ 13,660 21
Research and Development Expenses
Years Ended December 31 2004 2003 % of Total % of Total Research and Research and Development Development Related Party Amount Expenses Amount Expenses
S3 Graphics Co., Ltd. $ - - $ 1,763 - Centaur Technology, Inc. 1,180 - - - VIA Cyrix, Inc. 460 - 585 - VIA Technologies Japan K.K. 1,651 - - - Leo System, Inc. 2,853 - 565 - Xander International Corp. 2,107 - 1,811 - Others 2,996 - 836 -
$ 11,247 - $ 5560 -
Receivables / Payables
December 31 2004 2003 % of Total % of Total Receivables / Receivables / Related Party Amount Payables Amount Payables
Notes and accounts receivable from related parties Via Technologies, Inc. (USA) $ 58,939 2 $ 489,572 14 Danriver, Inc. - - 84,964 3 Amertek Limited - - 41,449 1 FIC Inc. 61,414 2 3,599 - Zircon Technology Co., Ltd. 11,879 1 - - Chander Electronics Corp. 18,803 1 - - Others 2,902 - 15,675 -
$ 153,937 6 $ 635,259 18
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December 31 2004 2003 % of Total % of Total Receivables / Receivables / Related Party Amount Payables Amount Payables
Notes and accounts payable to related parties Vate Technology Inc. $ 66,907 1 $ 140,383 4 VIA Networking, Inc. 102,797 2 110,496 3 Global Advanced Packaging Technology, Co., Ltd. 208,610 5 36,509 1 S3 Graphics Co., Ltd. 428,177 9 6,379 - Others 13,369 1 20,193 -
$ 819,860 17 $ 313,960 8
Other receivable S3 Graphics Co., Ltd. $ - - $ 277,307 56 Vate Technology Co., Ltd. 2,128 3 82,843 17 S3 Graphics, Inc. 905 1 46,977 9 VIA Networking, Inc. 33,727 47 28,142 6 VIA Technologies (China) Ltd. 315 - 10,773 2 VIA Optical Solution Inc. 4,924 7 8,546 2 Centaur Technology, Inc. 698 1 3,899 1 VIA Telecom Co., Ltd. 8,526 12 - - Others 12,121 17 4,205 -
$ 63,344 88 $ 462,692 93
Other receivables at December 31, 2004 from VIA Optical Solution, Inc., VIA Telecom Co., Ltd. and VIA Networking Inc. are the amount of other income and rental income. Other receivables at December 31, 2003 from Vate Technology Co., Ltd., S3 Graphics Co., Ltd. and VIA Technologies (China) Ltd. are the amount of current account with others.
December 31 2004 2003 % of Total % of Total Receivables / Receivables / Related Party Amount Payables Amount Payables
Accrued expenses Via Technologies, Inc. (USA) $ 1,806 - $ 380,542 39 Centaur Technology, Inc. 25,726 4 12,572 1 VIA Technologies (HK) Inc. 12,102 2 5,172 1 VIA Technologies GmbH 3,727 - 2,903 - S3 Graphics, Inc. 81,557 11 1,273 - S3 Graphics Co, Ltd. 59,260 8 - - Others 7,641 1 14,862 2
$ 191,819 26 $ 417,324 43
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December 31 2004 2003 % of Total % of Total Receivables / Receivables / Related Party Amount Payables Amount Payables
Balance payables - Machinery and Equipment Via-Cyrix, Inc. $ 4,815 26 $ 19,152 73 Insight Solution Corp. 524 2 - -
$ 5,339 28 $ 19,152 73
Guarantee deposits received Via Optical Solution, Inc. $ 2,072 40 $ 2,072 33 Via Networking, Inc. 1,532 29 1,486 24 Vate Technology Co., Ltd. - - 1,162 19 Chander Electronics Corp. 1,050 20 1,050 17 Others 378 7 378 6
$ 5,032 96 $ 6,148 99
Property Transactions
The Company acquired part of its computer equipment from LEO Systems Inc. in 2004 and 2003 which amounted to $2,640 thousand and $2,520 thousand, respectively.
The Company acquired part of its computer equipment and furniture and fixtures from Xander International Corp. in 2004 and 2003 which amounted to $1,862 thousand and $789 thousand, respectively.
The Company acquired part of its computer equipment from S3 Graphics, Inc. and VIA Technologies, Inc. in 2004 which amounted to $174 thousand and $491 thousand, respectively.
The Company acquired part of its computer equipment from Insight Solution Corp. in 2003 which amounted to $528 thousand.
The Company sold part of its machinery equipment, furniture and fixtures and research and development equipment to VIA Optical Solution Inc. in 2004 and 2003 which amounted to $2,652 thousand and $452 thousand, respectively.
The Company sold part of its furniture and fixtures and computer equipment to VIA Technologies (China) Ltd. in 2004 which amounted to $97 thousand.
The Company sold part of its computer equipment to VIA Technologies Inc. (USA) in 2004 which amounted to $107 thousand.
The Company sold part of its machinery equipment, computer equipment and research and development equipment to VIA Networking, Inc. in 2004 and 2003 which amounted to $2,620 thousand and $4,457 thousand, respectively.
The Company sold part of its buildings, machinery equipment, computer equipment and research and development equipment to VIA-Testing Technologies, Inc. in 2003 which amounted to $3,933 thousand.
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The Company had factory buildings acquisition agreement amounted to $78,302 thousand with Vate Technology Co., Ltd. in October 2002. In 2004, the Company had already paid $78,333 thousand and finished the transaction.
25. COMMITMENTS AND CONTINGENCIES
In December 2003, the Company’s chairman and president were indicted by the Prosecutor for a complaint filed by D-Link regarding the misappropriation of trade secret. D-Link then filed a supplemental civil action against the Company based on the indictment. The lawsuit was pending at the Taipei district court since January 2004, and the Company had settled with D-Link in August 2004 except for public prosecution. In the settlement between the Company and D-Link, the Company did not have any financial loss. The Company’s attorneys do not believe the outcome is likely to bring any significant financial damage to the Company; thus the Company does not have plans to accrue a fund for damages in advance.
The Company had guaranteed the debt of VIA Networking Technologies, Inc. amounting to $258,806 thousand at December 31, 2004.
26. SIGNIFICANT CONTRACTS
Wafer Production Agreement
The Company and a well-known semiconductor manufacturing company (the “Contractor”) have entered into the wafer production agreement.
The contents of the agreement are as follows:
Term and Termination: The term shall start on March 27, 1997 and shall terminate on March 26, 2004. However, it shall be automatically renewed for another calendar year unless terminated by a three months prior written notice.
Capacity Planning: The company shall, prior to the 20th of each calendar month, send to Contractor a six month forecast of anticipated Wafer orders.
Price: Fabricated Wafer prices will be negotiated and determined between the Company and the Contractor based on the market price as of the month before every calendar quarter. The prices are in U.S. Dollars.
In 2004, the Company and the Contractor did not terminate the agreement. Therefore the agreement is renewed automatically until March 26, 2005.
Patent Agreement
On November 24, 1998, the Company has patent agreement with Intel. On June 30, 2000 and April 8, 2003, the Company amended part of the provision as follows:
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Contractor Contract Period Product Description
Intel November 24, 1998 to P5/P6 chipsets a. Authorization in the expiration of manufacturing and the last patent selling P5/P6 chipsets. licensed to expire. b. Except for payment of the full amount of royalties at once, the Company shall pay the amount computed from gross profit within 45 days following the end of each calendar quarter.
April 8, 2003 to the Pentium 4 CPU Pentium 4 CPU patent expiration of the chipset agreement. last patent licensed to expire
27. FINANCIAL INSTRUMENTS
As of December 31, 2003, the Company held foreign currency option contracts for trading purpose. In accordance with the Statement of Financial Accounting Standards No. 27 “Disclosure of Financial Instruments,” the Company discloses related information as follows:
Amount of Contract and Credit Risk
Foreign Currency Option Contracts
2003 Contract Buy/Sell Trade Date Expiry Date Call/Put Amount Strike Rate
Sell 2003.07.07~2003.11.26 2004.01.07~2004.01.28 USD/NTD US$11,000 34.40~35.00
Forward Exchange Contracts
2004 2003 Contract Credit Contract Credit Amount Risk Amount Risk
Forward exchange contract US$ 2,000 $ - US$ 5,675 $ -
Interest Rate Swap Contract
2004 Trade Date Term Contract Amount
2004.09.23 2004.09.27~2007.09.26 $ 500,000
The Company only deals with banks with good credit, which is according to banks’ reputation and the Company’s past experience with them. Moreover, because the Company established a series of control procedures for transactions of derivative financial instruments, no credit risks are expected.
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Market Risk
The Company’s transactions of foreign exchange instruments are for trading purpose, thus, such instruments are measured at the balance sheet date using the market value. As of December 31, 2003, foreign exchange loss on foreign currency option amounted to $31 thousand.
Forward exchange contracts are for trading purpose, thus such contracts are measured at the balance sheet date using the market value. As of December 31, 2004 and 2003, foreign exchange gain on forward exchange contracts amounted to $1,152 thousand and $121 thousand, respectively.
Interest rate swap contract is for non-trading purpose. As of December 31, 2004, the devaluation loss on interest rate swap contract amounted $1,877 thousand.
Liquidity Risk, Cash Flow Risk and the Amount, Timing and Uncertainty of Future Cash Requirements Risk
From December 31, 2004 to January 18, 2005, all of the foreign currency option and forward exchange contracts have matured, and resulted in foreign exchange gains amounted to $915 thousand. Because the Company has sufficient working capital to settle those contracts, no future cash requirements risk existed.
The Company held interest rate swap contract for avoiding the risk of interest change of long- term bank loan. As of December 31, 2004, interest expense had already been accrued according the rate of the contract with counter party. In addition, the Company has sufficient working capital to settle those contracts, either future cash requirements risk nor liquidity risk existed.
Purpose and Category of Financial Instrument Held
The Company held derivative financial instruments for trading activity purpose, and to earn profit from foreign exchange fluctuation, interest income and profit from stock price fluctuation.
Disclosures of Derivative Instruments in the Financial Statements
The receivables and payables generated from foreign currency option shall be offset, and the net balance will be included in other current financial assets or other current liabilities. As of December 31, 2003, the net balance recorded in other current liabilities was $31 thousand. The Company held derivative financial instruments for trading activities at December 31, 2004 and 2003. Net gain (loss) generated from transactions of derivative financial instruments for trading activities for the years ended December 31, 2004 and 2003 amounted to $1,009 thousand and $3,681 thousand, respectively, recognized as non-operating income (expense) - foreign exchange gain (loss), net.
As of December 31, 2004 and 2003, the Company did not hold any Assets-Swap contract. Interest income from transaction of Assets-Swap contract for the years ended December 31, 2003 amounted to $10,870 thousand.
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The receivables and payables generated from forward exchange contract shall be offset, and the net balance will be included in other financial assets, current or other current liabilities. As of December 31, 2004 and 2003, the net balance recorded in other financial assets, current was $1,152 thousand and $121 thousand, respectively. Gain generated from transactions of forward exchange contract for the years ended December 31, 2004 and 2003 amounted to $17,381 thousand and $16,324 thousand, respectively, recognized as non-operating expense - foreign exchange loss, net.
The initial guarantee from securities credit transactions is measured by market price. As of December 31, 2004 and 2003, the Company did not hold any securities credit transactions. Gain generated from transactions of short sales of stock for the years ended December 31, 2004 and 2003 amounted to $1,107 thousand and $1,392 thousand, respectively, recognized as non-operating income - gain on sale of investments.
The receivables and payables generated from contract shall be offset, the net balance will be included in assets or liabilities. As of December 31, 2004, the net balance was zero.
Fair Value of Financial Instruments
Derivative Financial Instruments
December 31 2004 2003 Carrying Fair Carrying Fair Amount Value Amount Value
Liabilities Foreign currency options $ - $ - $ 31 $ 31 Interest rate swap-contract - 1,877 - - Assets Forward exchange contract 1,152 1,152 121 121
The fair value of derivative financial instruments is the estimated amount that the Company would receive or pay if contracts are closed at the balance sheet date. The Company obtained quotes from banks to estimate the fair value.
Non-derivative Financial Instruments
December 31 2004 2003 Carrying Fair Carrying Fair Amount Value Amount Value
Assets Cash and cash equivalents $ 6,628,773 $ 6,628,773 $ 5,750,624 $ 5,750,624 Short-term investments 215,740 765,459 18,260 18,260 Notes and accounts receivable, net 2,180,928 2,180,928 2,747,665 2,747,665 Notes and accounts receivable from related parties, net 152,744 152,744 601,807 601,807 Other financial assets, current 169,551 169,551 624,794 624,794 Long-term investments 6,857,137 6,857,137 12,161,908 12,161,908 Other financial assets, noncurrent 11,865 11,690 12,562 12,438
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December 31 2004 2003 Carrying Fair Carrying Fair Amount Value Amount Value
Liabilities Notes and accounts payable $ 3,995,992 $ 3,995,992 $ 3,475,925 $ 3,475,925 Notes and accounts payable due to related parties 717,063 717,063 313,960 313,960 Accrued expenses 728,567 728,567 996,727 996,727 Other current financial liabilities 709,524 709,524 597,098 597,098 Corporate bonds payable 1,905,161 1,905,161 2,288,239 2,288,239 Long-term loans 500,000 500,000 12,957 12,957 Other financial liabilities 5,219 5,142 6,237 6,175
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
The carrying amount approximated the fair value because of the short maturities of such instruments, including cash and cash equivalents, notes and accounts receivable, notes and accounts receivable from related parties, other current financial assets, notes and accounts payable, notes and accounts payable due to related parties, accrued expenses, and other current financial liabilities.
Securities, short-term investments and long-term investments, are measured based on quoted market prices for these instruments. If the securities do not have market prices, fair value is measured based on financial or other information.
The fair value of other financial assets and liabilities are based on the discounted value of the future cash flows expected to be received. The discount rate is based on the average interest rate of time deposits in banks.
The fair value of long-term loans, including current portion, and corporate bonds payable are estimated based on rates that the Company obtained which are comparable to rates offered by the banks to other borrowers for long-term debts with same terms and maturities.
28. SEGMENT INFORMATION
Industry Segment
Manufacturing and sales of PC chipset and semiconductor accounted for over 90% of the Company’s total revenues; therefore, the disclosure for industry segment is not applicable.
Foreign Operations
Currently, the Company does not have any foreign operations.
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Export Sales
Export sales for the years ended December 31, 2004 and 2003 were as follows:
Areas 2004 2003
Hong Kong $ 10,274,876 $ 9,797,105 Singapore 270,087 300,442 Japan 288,544 207,069 USA 567,330 296,352 Europe 863,593 598,170 Others 320,958 149,272
$ 12,585,388 $ 11,348,410
Dominant Customers Information
Sales to major customer for the years ended December 31, 2004 and 2003 were as follows:
2004 2003 % of Total % of Total Segment Customer Amount Sales Amount Sales
Chipset A $ - - $ 2,442,834 12 Chipset B 2,632,230 13 2,243,208 11 Chipset C - - 2,128,940 11 Chipset D 3,229,831 17 1,639,633 8
$ 5,862,061 30 $ 8,454,615 42
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