(English Translation of Financial Report Originally Issued In Chinese)
QUANTA COMPUTER INC. FINANCIAL STATEMENTS JUNE 30, 2012 AND 2011
(WITH INDEPENDENT AUDITORS’ REPORT THEREON)
Address: No. 188 Wen Hwa 2nd Rd., Kuei Shan Hsiang , Tao Yuan Shien, Taiwan Telephone: 886-3-327-2345
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TABLE OF CONTENTS
Contents Page
Cover Page 1
Table of Contents 2
Independent Auditor’s Report 3
Balance Sheets 4
Statements of Income 5
Statements of Changes in Stockholders’ Equity 6
Statements of Cash Flows 7
Notes to Financial Statements 8-48
- 2 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese)
Independent Auditors’ Report
To the Board of Directors and Shareholders of Quanta Computer Inc.:
We have audited the accompanying balance sheets of Quanta Computer Inc. (the Company) as of June 30, 2012 and 2011, and the related statements of income, changes in stockholders’ equity, and cash flows for the six months then ended. 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. Except as described in the following paragraph, we conducted our audits in accordance with “Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants” and auditing standards generally accepted in the Republic of China. Those regulations 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. As described in Note 4(e) to the financial statements, the long-term investments at equity of Quanta Computer Inc. was stated at NT$33,811,906 thousand and NT$27,056,132 thousand as of June 30, 2012 and 2011, respectively. Investment income related thereto, which amounted to NT$2,460,228 thousand and NT$1,415,617 thousand for the six months ended June 30, 2012 and 2011, respectively, were recognized based upon the financial statements prepared by the investee companies, which were not audited by independent accountants in compliance with the audit procedures described in the preceding paragraph. In our opinion, based on our audits, except as discussed in the preceding paragraph that the carrying values of equity-accounted investments and the investment net income, as well as related disclosures of the investment information were based on unaudited financial statements of the investees, and that the effects of such adjustment, if any, as might have been required had the investees’ financial statements referred to in preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Quanta Computer Inc. as of June 30, 2012 and 2011, and the results of its operations and its cash flows for the six months then ended in conformity with the related financial accounting standards of the “Business Entity Accounting Act” and of the “Regulation on Business Entity Accounting Handling”, and accounting principles generally accepted in the Republic of China and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers.
- 3 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 Quanta Computer Inc. has prepared consolidated financial statements as of and for the six months ended June 30, 2012 and 2011, on which we have both expressed the qualified review reports.
KPMG
CPA: Lin, Wan Wan Chiang, Chung Yi
August 30, 2012
Note to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the 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.
The auditors’ report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors’ report and financial statements, the Chinese version shall prevail.
- 3 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued in Chinese) QUANTA COMPUTER INC. BALANCE SHEETS JUNE 30, 2012 AND 2011 (All Amounts Expressed in Thousands of New Taiwan Dollars, Except for Share Data)
June 30, 2012 June 30, 2011 Amount % Amount % ASSETS Current Assets: Cash and cash equivalents (Notes(2) and (4)(a)) $ 74,001,746 20 64,009,506 19 Financial assets reported at fair value through profit or loss-current (Notes(2) and (4)(b)) 750,345 - 5,749 - Available-for-sale financial assets - current (Notes(2) and (4)(b)) 17,407,448 5 22,773,382 7 Held-to-maturity financial assets - current (Notes (2) and (4)(b)) - - 86,460 - Notes receivable, net 1,023 - 642 - Accounts receivable, net (Notes(2) and (4)(c)) – Related parties (Note(5)) 47,222,017 13 40,651,016 12 – Other customers 134,072,431 36 128,541,292 37 Other receivables, net – Related parties (Note(5)) 568,310 - 752,308 - – Non-related parties 904,863 - 857,953 - Other financial assets – current 354 - 645 - Inventories (Notes(2) and (4)(d)) 42,457,418 11 39,247,226 11 Prepayments (Note(5)) 260,401 - 412,832 - Deferred income tax assets – current (Notes(2) and (4)(j)) 1,740,877 1 1,550,856 - Other current assets (Note(5)) 132,803 - 277,695 - 319,520,036 86 299,167,562 86 Investments: Available-for-sale financial assets － noncurrent (Notes(2) and (4)(b)) 111,190 - 313,804 - Financial assets carried at cost － noncurrent (Notes(2) and (4)(b)) 6,993,550 2 7,200,773 2 Long-term investments at equity (Notes(2) and (4)(e)) 35,747,026 10 29,558,362 9 Other financial assets －noncurrent (Notes(6)) 41,092 - 31,449 - 42,892,858 12 37,104,388 11 Property, Plant, and Equipment, at cost (Notes(2)) : Land 2,000,789 1 2,000,789 1 Buildings 5,467,848 2 5,452,220 2 Machinery and equipment 285,219 - 628,542 - Transportation equipment 13,254 - 13,157 - Furniture and office facilities 343,771 - 282,593 - Leasehold improvements 14,134 - 11,947 - Miscellaneous equipment 1,332,925 - 1,161,984 - 9,457,940 3 9,551,232 3 Less: Accumulated depreciation (1,890,702) (1) (1,458,617) - Prepayments for equipment 105,540 - 5,141 - 7,672,778 2 8,097,756 3 Intangible Assets (Note(2)) 45,460 - 45,471 - Other Assets: Rental assets (Notes(2) and (4)(f)) 1,488,114 - 1,500,779 - Other assets (Note(2)) 3,318 - 3,668 - 1,491,432 - 1,504,447 - TOTAL ASSETS $ 371,622,564 100 345,919,624 100
The accompanying notes are an integral part of the financial statements.
- 4 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued in Chinese) QUANTA COMPUTER INC. BALANCE SHEETS (CONT'D) JUNE 30, 2012 AND 2011 (All Amounts Expressed in Thousands of New Taiwan Dollars, Except for Share Data)
June 30, 2012 June 30, 2011 LIABILITIES AND STOCKHOLDERS' EQUITY Amount % Amount % Current Liabilities: Short-term debt (Note(4)(g)) $ 51,103,360 14 43,172,360 13 Financial liabilities reported at fair value through profit or loss-current (Notes(2) and (4)(b)) 394 - 1,848 - Accounts payable – Related parties (Note(5)) 73,757,573 20 72,977,113 21 – Vendors 61,974,346 16 55,052,410 16 Income tax payable 2,873,027 1 2,856,234 1 Accrued expenses (Note(5)) 7,105,251 2 6,830,672 2 Other payables (Note(5)) 18,417,076 5 20,893,003 6 Other financial liabilities – current (Notes(5)) 6,835,147 2 4,319,959 1 Current portion of long-term debt (Note (4)(h)) 10,771,200 3 - - Warranty reserve 8,556,308 2 9,321,126 3 Other current liabilities (Note(5)) 5,888,257 2 4,284,095 1 247,281,939 67 219,708,820 64 Long-Term Liabilities: Long-term debt (Note(4)(h)) 9,873,600 3 19,885,800 6 Other financial liabilities – noncurrent 16,229 - 15,748 - 9,889,829 3 19,901,548 6 Other Liabilities: Long-term investments at equity-credit (Notes(2) and (4)(e)) 31,434 - 32,702 - Deferred income tax liabilities – noncurrent (Notes(2) and (4)(j)) 1,423,892 - 1,048,628 - Deferred credits (Note(2)) 751,662 - 410,315 - 2,206,988 - 1,491,645 - Total Liabilities 259,378,756 70 241,102,013 70
Stockholders' Equity: Common stock – authorized 4,200,000 thousand shares, 3,846,860 thousand shares issued and outstanding in 2012; 3,840,148 thousand shares issued and outstanding in 2011 38,468,604 10 38,401,484 11 (Note((4)(k)) Capital Surplus (Notes((2)) Premium on stock issuance 13,489,619 4 13,334,606 4 Treasury stock 195,876 - 172,976 - Donated surplus 44 - 44 - Long-term investments at equity 520,167 - 507,759 - 14,205,706 4 14,015,385 4 Retained Earnings: Legal reserve (Note((4)(l)) 20,911,902 6 18,606,648 5 Special reserve (Note((4)(m)) 4,027,178 1 - - Retained earnings – unappropriated (Note((4)(o)) 38,995,000 10 37,642,061 11 63,934,080 17 56,248,709 16 Other Adjustments to Stockholders' Equity: Cumulative translation adjustments (Note((2)) 2,729,678 1 968,207 - Net loss unrecognized as pension cost (Note((2)) - - (74) - Unrealized (loss)gain on financial instruments (Note((2)) (6,761,166) (2) (4,430,631) (1) Treasury stock (Notes(2) and (4)(p)) (333,094) - (385,469) - (4,364,582) (1) (3,847,967) (1) Total Stockholders' Equity 112,243,808 30 104,817,611 30 Commitments and Contingencies (Note(7)) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 371,622,564 100 345,919,624 100
The accompanying notes are an integral part of the financial statements.
- 4-1 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued in Chinese) QUANTA COMPUTER INC. STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (All Amounts Expressed in Thousands of New Taiwan Dollars, Except for Share Data)
For The Six Months Ended June 30, 2012 2011 Amount % Amount % Operating revenues Sales revenue $ 456,513,557 101 504,899,034 101 Less: Sales returns (2,027,459) (1) (3,580,767) (1) Sales allowances (1,416,254) - (950,734) - Net sales 453,069,844 100 500,367,533 100 Cost of goods sold (Note (4)(d)) (439,755,990) (97) (486,136,057) (97) Gross margin 13,313,854 3 14,231,476 3 Unrealized gross profit – end of the period (723,748) - (404,380) - Realized gross profit – beginning of the period 537,435 - 381,368 - 13,127,541 3 14,208,464 3 Operating expenses Selling expenses (1,970,251) - (2,314,746) - General and administrative expenses (1,761,998) - (1,719,508) - Research and development expenses (3,788,301) (1) (3,316,482) (1) (7,520,550) (1) (7,350,736) (1) Income from operations 5,606,991 2 6,857,728 2 Non-operating income Interest income 469,181 - 204,188 - Investments income recognized under equity method (Notes(2) and (4)(e)) 2,520,897 1 1,466,902 - Dividend income 370,709 - 336,404 - Gain on disposal of investments 126,434 - 1,801,991 - Foreign exchange gains, net (Note(2)) 1,114,860 - 1,136,387 - Gain on valuation of financial assets (Notes(2) and (4)(b)) 26,554 - 27,016 - Miscellaneous income 3,683,344 1 1,837,695 - 8,311,979 2 6,810,583 - Non-operating expenses Interest expense (291,157) - (193,573) - Impairment loss (Notes(2) and (4)(b)) (46,376) - (101,184) - Loss on valuation of financial liabilities (Notes(2) and (4)(b)) (394) - (1,848) - Miscellaneous disbursements (155,825) - (78,428) - (493,752) - (375,033) - Income before income tax 13,425,218 4 13,293,278 2 Income tax expense (Notes(2) and (4)(j)) (2,336,281) (1) (2,219,426) - Net income $ 11,088,937 3 11,073,852 2
Before Tax After Tax Before Tax After Tax Earnings per share (NTD) (Notes(2) and (4)(q)) Primary earnings per share $ 3.50 2.89 3.47 2.89 Diluted earnings per share $ 3.46 2.86 3.43 2.86 Assuming that company shares held by its subsidiaries are not regarded as treasury stock (NTD)： Pro-forma primary earnings per share $ 3.49 2.89 3.46 2.89 Pro-forma diluted earnings per share $ 3.45 2.85 3.42 2.85
The accompanying notes are an integral part of the financial statements.
- 5 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued in Chinese) QUANTA COMPUTER INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (All Amounts Expressed of New Taiwan Dollars in Thousands, Except for Share Data)
Capital Stock Retained Earnings Other adjustment item Unappropriated Cumulative Net loss Unrealized Gain or Loss Common Advance Receipts Capital Legal Special Retained Translation unrecognized on Financial Stock for Common Stock Surplus Reserve Reserve Earnings Adjustments as pension cost Instruments Treasury Stock Total Balance as of January 1, 2011 $ 38,338,734 21,388 13,827,260 16,747,441 - 42,249,265 731,137 - 163,394 (475,840) 111,602,779 Conversion of employee stock options 62,750 (21,388) 156,185 ------197,547 Disposal of company shares held by subsidiaries regarded as treasury stock transactions - - 19,235 ------90,371 109,606 Dividends distributed to subsidiaries as an adjustment of capital surplus - - 12,419 ------12,419 Net income for the six months ended June 30, 2011 - - - - - 11,073,852 - - - - 11,073,852 2010 earnings distribution: (Note 1) Legal reserve - - - 1,859,207 - (1,859,207) - - - - - Cash dividends - - - - - (13,821,849) - - - - (13,821,849) Effects of change in percentage of ownership in long-term equity investments - - 276 ------276 Unrealized loss on available-for-sale financial assets ------(4,603,410) - (4,603,410) Changes in equities of investee company under the equity method recognized according to ownership - - 10 - - - 237,070 (74) 9,385 - 246,391 Balance as of June 30, 2011 $ 38,401,484 - 14,015,385 18,606,648 - 37,642,061 968,207 (74) (4,430,631) (385,469) 104,817,611 Balance as of January 1, 2012 $ 38,410,594 6,243 14,060,186 18,606,648 - 49,620,745 2,552,491 (76) (6,579,593) (333,094) 116,344,144 Conversion of employee stock options 58,010 (6,243) 133,597 ------185,364 Dividends distributed to subsidiaries as an adjustment of capital surplus - - 11,923 ------11,923 Net income for the six months ended June 30, 2012 - - - - - 11,088,937 - - - - 11,088,937 2011 earnings distribution: (Note 2) Legal reserve - - - 2,305,254 - (2,305,254) - - - - - Special reserve - - - - 4,027,178 (4,027,178) - - - - - Cash dividends - - - - - (15,382,250) - - - - (15,382,250) Unrealized loss on available-for-sale financial assets ------(255,926) - (255,926) Changes in equities of investee company under the equity method recognized according to ownership ------177,187 76 74,353 - 251,616 Balance as of June 30, 2012 $ 38,468,604 - 14,205,706 20,911,902 4,027,178 38,995,000 2,729,678 - (6,761,166) (333,094) 112,243,808
Note 1: Bonuses to employees amounted to 1,655,000 and emoluments to directors amounted to 42,000 had been charged against earnings.
Note 2: Bonuses to employees amounted to 2,070,000 and emoluments to directors amounted to 42,000 had been charged against earnings.
The accompanying notes are an integral part of the financial statements.
- 6 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued in Chinese) QUANTA COMPUTER INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (All Amounts Expressed in Thousands of New Taiwan Dollars, Except for Share Data)
For The Six Months Ended June 30, 2012 2011 Amount Amount Cash flows from operating activities: Net Income $ 11,088,937 11,073,852 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 240,923 246,502 Amortization 17,314 17,129 (Reversal) provision for doubtful accounts (204,437) 59,158 Reversal for sales allowances and return (1,932,335) (37,947) Reversal for warranty reserve (1,378,040) (529,990) Provision for inventory market price decline and obsolescence 452,264 258,379 Investments income recognized under equity method (2,520,897) (1,466,902) Cash dividends received from long-term investments at equity 1,455 20,036 (Gain) loss on disposal and retirement of fixed assets (6,798) 84 Loss on disposal and retirement of idle assets, net 2,820 2,821 Gain on disposal of investements (140,302) (1,801,991) Loss on reversal permanent market decline on financial assets 42,401 1,559 Deferred credits transferred to miscellaneous income (1,198) (1,839) Reversal for impairment loss of idle assets (10,515) (2,408) Foreign exchange rate effects 44,863 58,473 Unrealized foreign exchange loss - 4,524 Effects of exchange rate change on long-term debt (234,600) (218,400) Others 990 - Change in assets and liabilities: Increase in financial assets held for trading (750,345) (5,749) Decrease in notes receivable 4,318 1,776 Decrease in accounts receivable 23,428,192 20,612,351 Increase in other receivables (468,821) (390,633) Decrease (increase) in inventories 4,524,905 (9,861,876) Decrease (increase) in prepayments 6,520 (73,215) Decrease (increase) in other current assets 9,919 (103,578) Decrease in other financial assets 206 25,180 Decrease in deferred income tax assets 829,123 347,155 Increase in financial liabilities held for trading 394 1,848 Decrease in notes payable - (84) Increase in accounts payable 116,591 4,839,446 (Decrease) increase in income tax payable (1,216,895) 828,797 Increase in accrued expense 351,934 387,801 Decrease in other payables (2,218,009) (21,519,867) Increase in other financial liabilities 1,129,413 1,005,287 Increase in other current liabilities 732,159 395,739 Increase in other operation liabilities 191,917 23,069 Net cash provided by operating activities 32,134,366 4,196,487
The accompanying notes are an integral part of the financial statements.
- 7 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued in Chinese) QUANTA COMPUTER INC. STATEMENTS OF CASH FLOWS (CONT'D) FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (All Amounts Expressed in Thousands of New Taiwan Dollars, Except for Share Data)
For The Six Months Ended June 30, 2012 2011 Amount Amount Cash flows from investing activities: Acquisitions of available-for-sale financial assets (37,965,516) (57,420,878) Proceeds from disposal of available-for-sale financial assets 38,373,984 63,279,763 Proceeds from maturities and paydowns of held-to-muturity financial investment 89,790 - Acquisitions of financial assets carried at cost (51,551) (441,974) Proceeds from disposal of financial assets carried at cost 33,402 11,052 Proceeds from return of capital by financial assets carried at cost 73,376 365,953 Purchase of long-term investments at equity (850,095) (220,915) Proceeds from return of capital by long-term investments at equity 5,809 25,201 Purchase of property, plant and equipment (211,040) (537,432) Proceeds from disposal of property, plant and equipment 75,059 714 Purchase of rental assets (90) (188) (Increase) decrease in other financial assets (767) 8,279 Increase in other assets (15,161) (13,775) Net cash (used in) provided by investing activities (442,800) 5,055,800 Cash flows from financing activities: (Decrease) increase in short-term debts (6,121,265) 18,631,980 Increase in long-term debts - 1,720,800 Conversion of employee stock options 185,364 197,547 Net cash (used in) provided by financing activities (5,935,901) 20,550,327 Foreign exchange rate effects (44,863) (58,473) Net increase in cash and cash equivalents 25,710,802 29,744,141 Cash and cash equivalents, beginning of the period 48,290,944 34,265,365 Cash and cash equivalents, end of the period $ 74,001,746 64,009,506
Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 318,133 163,711 Income tax $ 2,863,628 1,043,474
Non- cash investing and financing activities: Cash dividends payable $ 15,998,199 14,295,304 Purchase of property and equipment with cash and other payables: Property, plant and equipment $ 204,338 315,078 Add: Other payables, beginning of the period 39,536 279,154 Less: Other payables, end of the period (32,834) (56,800) Cash paid $ 211,040 537,432
The accompanying notes are an integral part of the financial statements.
- 7-1 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(1) Organization and Business Quanta Computer Inc. (the ―Company‖) was incorporated on May 9, 1988 in the Republic of China (ROC) and engages primarily in the manufacturing, processing, and sales of laptop computers and telecommunication products. Currently, its Linko factory campuses concentrate on research and development of laptop computers and telecommunication products, while positioned as center of global operation. The shares of the Company became officially listed and traded on the Taiwan Stock Exchange on January 8, 1999.As of June 30, 2012, the Company employs 5,113 employees. (2) Summary of Significant Accounting Policies The financial statements are prepared in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, and accounting principles and practices generally accepted in Taiwan, the Republic of China. The significant accounting policies and measurement basis adopted in preparing the accompanying financial statements are summarized as follows: (a) Foreign Currency and Financial Report Translation The Company’s functional currency is expressed in the New Taiwan dollar, the national currency of the ROC. Foreign currency transactions during the period are translated at exchange rates on the transaction dates. Foreign currency-denominated assets and liabilities are translated into New Taiwan Dollar at the exchange rate prevailing on the balance sheet date, and the resulting realized and unrealized gains or losses are recognized as non-operating income or expenses. The Company adopted the amended ROC Statement of Financial Accounting Standards (―SFAS‖) No. 14, ―The Effects of Changes in Foreign Exchange Rates.‖ Under SFAS No.14, non-monetary assets and liabilities denominated in foreign currencies are stated at historical cost. The exchange differences from the translation of available-for-sale financial assets are recognized as an adjustment to shareholders’ equity. The exchange differences from the translation of financial assets (liabilities) reported at fair value through profit or loss and financial assets carried at cost are recognized in earnings. Foreign currency-denominated long-term investments accounted for under the equity method. The translation difference from these subsidiaries’ foreign currency-dominated financial statements (net of tax) are recorded as ―cumulative translation adjustments‖ under stockholders’ equity of the Company. (b) Use of Estimates The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reporting periods. Actual results could differ from these estimates.
- 8 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(c) Basis for Classifying Assets and Liabilities as Current or Noncurrent Unrestricted cash, cash equivalent, assets held for trading or other assets that the Company will convert to cash or use within in a relatively short period of time – one year or one operating cycle, whichever is longer, are classified as current assets, otherwise are classified as noncurrent assets. Debts due within one year or one operating cycle, whichever is longer, are classified as current liabilities, otherwise are classified as noncurrent liabilities. (d) Cash Equivalents Cash equivalents are defined as highly liquid short-term investments which are readily convertible into known amounts of cash and with maturities within three months. Interest rate fluctuations have little effect on the values of these investments. Cash equivalents include short-term bills with repurchase agreements, commercial paper and banker’s acceptances, which are stated at cost. (e) Financial Assets (Liabilities) Reported at Fair Value through Profit or Loss These financial assets (liabilities) are classified as held for trading and initially designated at fair value through profit or loss. Financial assets held for trading are those that the Company principally holds for the purpose of short-term profit taking. The financial derivatives, except for those that meet the criteria of hedge accounting, are reported as financial assets (liabilities) at fair value though profit or loss. If the hybrid instruments include the main contract and embedded derivatives and the market value of embedded derivatives is not available on the balance sheet date, these hybrid instruments are designated as financial assets (liabilities) and are valued at fair value through profit or loss. (f) Available-for-sale Financial Assets Available-for-sale financial assets are measured at fair value, and changes therein, other than impairment losses and foreign exchange gains and losses on available-for-sale monetary items, are recognized directly in equity. When an investment is derecognized, the cumulative gain or loss in equity is transferred to profit or loss. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized in earnings. If, in a subsequent period, the amount of the impairment loss decreases, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to equity. (g) Held-to-maturity Financial Assets Held-to-maturity financial assets are those that the Company has a positive intent and ability to hold to maturity and are carried at amortized cost using the effective interest method. If there is objective evidence that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount of the financial asset that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.
- 9 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(h) Financial Assets Carried at Cost Financial assets that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are carried at their original cost. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed. (i) Notes and Account Receivables, and Other Receivables Notes and Account receivable are rights resulting from the sale of goods or rendering of services. Other receivables are receivables arising from non-operating activities. The Consolidated Company first assesses whether any objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset shall be reduced through the use of an allowance account. The amount of the loss shall be recognized in profit or loss. Upon determining the amount of impairment, the present value of the estimated future cash flows shall include collateralized financial asset and related insurance recoverable amount. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date impairment is reversed. The amount of the reversal shall be recognized in profit or loss. (j) Non-Financial assets Impairment In accordance with the Statement of Financial Accounting Standards No. 35 (SFAS 35) ―Impairment of Assets, the Company assesses at each balance sheet date for any indication of asset impairment. If any such indication exists, the Company estimates the recoverable amount (which is the higher of fair value less costs to sell or value in use) of the asset. The Company recognizes the impairment loss for an asset whose carrying value is higher than the recoverable amount. The Company reverses an impairment loss recognized in the prior periods for assets other than goodwill if there is an indication that the impairment loss previously recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in the prior periods. The Company performs an impairment test on the cash-generating unit to which the goodwill is allocated on an annual basis and recognizes an impairment loss on the excess of carrying value over the recoverable amount.
- 10 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(k) Inventories The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The fixed manufacturing overheads are allocated to the work-in-process and finished goods by the normal capacity of the manufacturing equipment, and the variable costs are allocated by the actual output. Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the weighted average cost principle. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses at the end of the period. A provision for inventory devaluation and obsolescence is recorded when management determines that the market values of inventories are less than their costs or based on the number of months that inventory items remain unsold. Such provisions are reversed in whole or in part if management further determines that the market values of inventories are greater than their costs. (l) Long-Term Investments at Equity Long-term equity are investments in investees, which the Company has controlling interest over their operation, financial and dividend policies, and owns more than 20% (or owns even less than 20%, but the Company may exercise significant influence) of the investees’ voting shares, are accounted for under the equity method. The Company prepares consolidated financial statements every quarter, which include the accounts of those investees accounted for under the equity method and in which the Company has controlling interest over their operation. Upon sale of long-term investments, the cost and gains or losses in the disposal thereof are calculated using the weighted-average method. The capital surplus and cumulative translation adjustments arising from long-term equity investments are adjusted against current year’s gain or loss based on the percentage of sale. Unrealized inter-company profits or losses resulting from transactions between the Company and an investee accounted for under the equity method are deferred. Inter-company profits or losses arising from fixed assets transactions are recognized over the estimated economic lives of such assets. Inter-company profits or losses rising from transactions involving other assets are recognized when realized. When the Company’s share in losses of an equity-method investee equals its investment in the investee, plus any advances made to the investee, the Company discontinues to apply the equity method. The Company continues to recognize its share in losses of the investee if (a) the Company commits to provide further financial support to the investee or (b) the losses of the investee are considered to be temporary and sufficient evidence shows imminent return to profitability. When the Company’s share in losses of an investee over which the Company has control exceeding its investment in the investee, unless the other shareholders of the investee have assumed legal or constructive obligations and have demonstrated the ability to make payments on behalf of the investee, the Company has to bear all of the losses in excess of the capital contributed by shareholders of the investee. Any credit balance on the carrying value of a long-term investment and advances are reclassified to other liabilities in the balance sheet.
- 11 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(m) Property, Plant, and Equipment, Rental Assets, Idle Assets and Their Depreciation Property, plant, and equipment are stated at cost. Major additions, improvements, and replacements are capitalized. Interest incurred up to the time when the asset is ready for its intended use is capitalized as part of the acquisition cost. Depreciation is calculated using the straight-line method over the economic useful lives plus one year for any salvage value. Assets still in use after full depreciation may continue to be depreciated based on the remaining estimated economic lives and salvage values. The economic useful lives of major property and equipment are as follows: Buildings 3 - 50 years Furniture and office facilities 3 - 9 years Transportation equipment 5 years Miscellaneous equipment 2 - 11 years Leasehold improvements 2 - 5 years Rental assets and idle fixed assets, which are not used for operating purposes, were classified as other assets. (n) Intangible Assets The Company adopts the Statement of Financial Accounting Standard No. 37 (SFAS 37) ―Intangible Assets‖. According to SFAS 37, intangible assets are stated at cost, except for the government grant which is stated at fair value. The intangible assets with finite life is measured at its cost plus the revaluation increment arising from the revaluation in accordance with the laws, less any accumulated amortization and any impairment losses. The intangible assets with indefinite life are measured at its cost plus the revaluation increment arising from the revaluation in accordance with the laws, less any accumulated impairment losses. The depreciable amount of intangible assets with definite lives is determined after deducting its residual value. Amortization is recognized as an expense on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The economic useful life of intangible assets is as follow: Computer software cost 3 years Trademarks 10 years According to SFAS 37, the amortization of intangible assets with indefinite life can’t be recognized. The useful life of an intangible asset with indefinite life that is not being amortizes shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change in accounting estimate.
- 12 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(o) Warranty Reserve An allowance is provided for products sold with warranty, based on the estimated warranty cost and in the consideration of past experience, and is recognized as current expense. (p) Pension Plan The Company has adopted SFAS No.18 ―Accounting for Pensions‖ as the basis of accounting for its defined benefits pension plan. Net periodic pension cost recognized in accordance with SFAS No. 18, includes the current service cost, amortization of net transition asset or obligation, prior service cost and amortization of unrecognized gain (loss) on pension plan on straight-line basis over the expected average remaining service period of 20 years of the employees in accordance with the rules set by the SFB. Under this plan, the Company contributes monthly an amount equal to 2% of gross salary to a pension fund, which is deposited into a designated depository account with the Bank of Taiwan. Pursuant to the Act, the Company contributes an amount equal to 6% of each employee’s gross salary to the Council of Labor Affairs. These contributions are recognized as pension expense during the period when contributions are made. (q) Income Taxes Under SFAS No. 22 ―Income Taxes‖, deferred income taxes are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, loss carry forwards and investment tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly. Adjustments to prior years’ income taxes are reported as current income taxes. When a change in the tax laws is enacted, deferred tax liability or asset is recomputed accordingly. The difference between the new recalculated amount and the original amount is reported as an adjustment to income tax expense (benefit) of income from continuing operations in the period of change. Income taxes credits from purchase of equipment, technical research and development, and personnel training are recognized by the flow-through method. The 10% surtax on undistributed earnings of the Company is reported as current expense on the date when the stockholders declared not to distribute the earnings during their annual meeting.
- 13 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(r) Employee Stock Option Based on Shares The Company uses the intrinsic value method to recognize compensation costs for its employee stock options whose grant date before January 1, 2008. In which, the Company measures the market value of its stocks as of the balance sheet date, and recognizes the difference between the market price of the stock on date of grant and the exercise price of its employee stock option as compensation cost. The compensation costs are recognized as expenses on the statements over the employees’ service period as outlined in the ―Employees Stock Option Rules‖, and all relevant changes in owner’s equity are reflected in the statements as well. (s) Employees Bonuses and Directors’ Emoluments Employee bonuses and directors’ emoluments appropriated are accounted for by Interpretation (96)052 issued by Accounting Research and Development Foundation. The company estimates the amount of employee bonuses and directors’ emoluments according to the Interpretation and recognizes as operating costs or operating expenses. Differences between the amount approved in shareholders meeting and recognized in financial statements, if any, is accounted for as changes in accounting estimates and recognized as profit or loss. (t) Treasury Stock The Company adopts SFAS No. 30 ―Accounting for Treasury Stocks‖ to account for the repurchase of its outstanding shares, carried at cost. Upon disposal, the excess of the selling price over the book value is recorded as a ―capital surplus—treasury stock transaction.‖ If the selling price is lower than book value, the difference is charged against capital surplus from treasury stock, and any deficit is debited against retained earnings. The book value of purchased treasury stock is separately calculated using the weighted-average method. Upon retirement, the ―capital surplus—paid-in capital in excess of par‖ is debited on a pro rata basis. If the book value exceeds the premium on issuance of capital stock, the difference is offset against ―capital surplus—treasury stock‖ in the same classification, and any deficit is charged against retained earnings. If the book value of treasury stock is lower than the total of capital stock and premium on stock issuance, the difference is credited to ―capital surplus—treasury stock.‖ The Company shares being held by the subsidiaries are treated as treasury stock and as a deduction from its stockholder’s equity according to SFAS No. 30 ―Accounting for Treasury Stocks‖. (u) Revenue Recognition Revenue is recognized when title to the product and the risk and benefits of ownership are transferred to the customer. Otherwise, recognition is deferred until these conditions are met. (v) Classification of Capital and Operating Expenditures Expenditures that benefit the Company in future years are capitalized, while immaterial expenditures or those with no future benefits are treated as current expense or loss. (w) Operating Segments The Company has already disclosed information of segments in the consolidated financial statement, but not required in the standalone. - 14 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(x) Earnings per Share (“EPS”) Basic EPS is calculated by dividing net income by the weighted-average number of common shares issued and outstanding during the period. The Company’s convertible bonds, employees’ bonuses and employee stock options which beyond January 1, 2008, are belong to potentially dilutive common shares. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming all potentially dilutive common shares are converted and outstanding. If a dilutive effect does not exist, only basic EPS is disclosed; otherwise, dilutive EPS is disclosed in addition to the basic EPS. The number of shares outstanding is retroactively adjusted for additional shares issued arising from the capitalization of retrained earnings, capital surplus, or employee bonus.
(3) REASONS FOR AND EFFECT OF ACCOUNTING CHANGES Effective January 1, 2011, the Company adopts the amended Statement of Financial Accounting Standards (SFAS) No. 34 ―Financial Instruments: Recognition and Measurement.‖ In accordance with SFAS No. 34, receivables originated by the Company are now covered by SFAS No. 34, subsequent valuation and impairment. This accounting change did not have any significant effect on the Company’s net income and EPS for the six months ended June 30, 2011. Effective January 1, 2011, in accordance with SFAS No. 41, an entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. The Company determines and presents operating segments based on the information that is internally provided to the chief operating decision maker. The Standard also supersedes SFAS No. 20 ―Segment Reporting.‖ Such changes in accounting principle did not have any cumulative effect for the six months ended June 30, 2011.
- 15 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(4) SUMMARY OF MAJOR ACCOUNTS: (a) Cash and Cash Equivalents June 30, 2012 June 30, 2011 Cash on hand and revolving fund $ 700 755 Checking accounts 174 2,648 Saving accounts 951 117,815 Foreign currency deposits 13,300,431 10,487,318 Time deposits 58,184,560 47,409,174 Cash equivalents 2,514,930 5,991,796 Total $ 74,001,746 64,009,506
(b) Financial Instruments 1) Details regarding financial instruments were as follows: June 30, 2012 June 30, 2011 Financial assets reported at fair value through profit lossor - current - Option - call option - USD $ 2,323 5,749 - Credit-linked portfolio and structure notes 748,022 - Total $ 750,345 5,749 Available-for-sale financial assets - current Listed companies: - Alpha Networks Inc. $ 27,910 63,008 - AU Optronics Corp. 3,070,817 4,994,856 - Mediatek Inc. 32,592 - 3,131,319 5,057,864 Beneficiary certificates-open-end mutual funds 14,276,129 17,715,518 Total $ 17,407,448 22,773,382
Available-for-sale financial assets - noncurrent Listed companies: - Global Mixed-mode Technology Inc. $ 111,190 140,131 - Ralink Technology, Corp. - 34,325 - Toumaz Holdings LTD. - 62,975 - Alpha & Omega Semiconductor, Ltd. - 76,373 Total $ 111,190 313,804
Held to maturity financial assets - current - Deutsche Bank DB2W9-1 Financial Bond $ - 86,460
- 16 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
June 30, 2012 June 30, 2011 Financial assets carried at cost - noncurrent Equity securities - common stock : - CDIB Bio Science Ventures I Inc. $ 145,810 195,514 - Bio 21th Venture Capital Corp. 112,000 112,000 - China Power Venture Capital Corp. - 59,250 - AU Optronics Corp. 5,446,447 5,446,447 - 3M PC Touch Solutions Pte. Ltd. 260,640 260,640 - Others 232,338 297,697 Sub-total 6,197,235 6,371,548 Equity securities - preferred stock : - Tilera Corp. 546,209 546,209 Equity securities - partnership : - GS Capital Partners Fund 2000 Offshore, L.P. 63,884 79,702 - Strategic Value II L.P. 5,567 32,873 - IPF III L.P. 45,716 59,213 - Asia Pacific Genesis Venture Capital Fund, L.P. - 12,519 - SBCVC FUND 53,559 48,022 - Translink Capital Partners II L.P. 58,228 - - Others 23,152 50,687 Sub-total 250,106 283,016 Total $ 6,993,550 7,200,773
Financial liabilities reported at fair value through profit or loss - current Financial liabilities held for trading - current: - Option - put option - USD call $ 392 994 - Option - put option - USD put 2 854 $ 394 1,848
- 17 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
2) For the six months ended June 30, 2012 and 2011, the Company recognized loss and profit on financial assets reported at fair value through profit or loss of $26,554 and $27,016 respectively; net loss on financial liabilities reported at fair value through profit or loss of $394 and $1,848 respectively. 3) As of June 30, 2012,details regarding the credit-linked portfolio and structure notes were as follows: Transaction Actual Rate Par Value Issuer Location % Period (Thousand) Amount Designated financial assets reported at fair value through to profit or loss - current Deutsche Bank Shanghai 6- Months 2012/01/18 USD 25,000 $ 748,022 Pudong LIBOR + ~ Development 3.80% 2012/12/28 Bank and its Successor
4) On June 4, 2009, the Company purchased 300 units of the three-year Deutsche Bank Financial Bond with face value of USD10 which has a maturity date of June 4, 2012 and bears the effective interest rate of 3.00%, were reflected as held-to-maturity financial assets-noncurrent. 5) The equity securities–common stock, preferred stock and partnership, with no active market and whose fair value cannot be reliably measured, were reflected as financial assets carried at cost - noncurrent. The former subsidiary of the Company, Quanta Display Inc., merged with AU Optronics Corp. and AU Optronics Corp. being the surviving entity. Based on this merger, the Company acquired shares of AU Optronics Corp. These shares include private placement stocks, which were restricted for sale, and reflected as financial assets carried at cost – noncurrent. The other shares were accounted for available for sale financial assets – current.
- 18 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
For the six months ended June 30, 2012, Global Vision Venture Capital Co., Ltd., China Power Venture Capital Corp., and UC Fund II, in which the Company’s equity investments were accounted for as financial assets carried at cost – noncurrent, have filed for government approval to decrease their capital. Thus, the Company received long-term investments refund of $73,376.
For the six months ended June 30, 2011, Global Vision Venture Capital Co., Ltd., FuYu Venture Capital Investment Corp., China Power Venture Capital Corp., Vision Venture Capital Corp., Maxima Venture I Inc., UC Fund II, and Asia Pacific Genesis Venture Capital Fund L.P. in which the Company’s equity investments were accounted for as financial assets carried at cost – noncurrent, have filed for government approval to decrease their capital. Thus, the Company received long-term investments refund of $365,953.
For the six months ended June 30, 2012 and 2011, the Company’s equity investments were accounted for as financial assets carried at cost – noncurrent, which objective evidence had showed that the stockholder’s equity of these investee companies decreased significantly. Because the impairment in its investment value mentioned above was considered permanent, the company recognized impairment loss for the six months ended June 30, 2012 and 2011 were as follows:
For the Six Months Ended June 30, Investee Company 2012 2011 Quanmax Inc. $ - 41,425 Morgan Stanley Dean Witter Venture Partners 1,170 873 IV, L.P. GS Capital Partners Fund 2000 Offshore, L.P. 15,818 - Strategic Value II L.P. 4,241 203 GS PEP Technology Fund 2000 Offshore, L.P. 5,340 53,500 IPF III L.P 6,846 - Translink Capital Partners II, L.P 12,961 - Total $ 46,376 96,001
- 19 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
6) The equity securities- preferred stock held by the Company, which were classified under financial assets carried at cost - noncurrent for the six months ended June 30, 2012 were as follows: Shares Held Price per Share Convertible into Voting Investee Company (Thousands) (US$) Common Stock Rights Rasvia Systems, Inc. 7,600 0.50 Yes No Questia Media, Inc. 1,294 3.86 Yes Yes Nanosys, Inc. 268 1.87 Yes No Tilera Corp. 61,370 0.29 Yes Yes As of December 31, 2005 the carrying value of the investments in Rasvia Systems, Inc., Questia Media, Inc., and Nanosys, Inc. was reduced to zero as there were evidences indicating that a decline in the value of these investments was other than temporary.
7) As of June 30, 2012 and 2011, financial derivative held by the Company were as follows:
June 30,2012 June 30,2011 Book Nominal Book Nominal Financial Instruments Value Amount Value Amount Derivative assets： Option contracts Options : - Call option - USD put $ 2,323 USD 10,000 5,749 USD 17,000
Derivative liabilities： Option contracts Options : - Put option - USD call $ 392 USD 20,000 994 USD 34,000 - Put option - USD put 2 USD 10,000 854 USD 17,000 $ 394 1,848
Those derivative assets were classified as ―financial assets reported at fair value through profit or loss – current, while those derivative liabilities were classified as ―financial liabilities reported at fair value through profit or loss - current. The derivatives assets are offset against the derivatives liabilities and are stated at net value. For the six months ended June 30, 2012 and 2011, the Company entered into foreign forward contracts and option contracts with the financial institutions to hedge the exchange rate risk. For the six months ended June 30, 2012 and 2011, the revaluation gain thereon amounted to $1,929 and $3,901 respectively. As of June 30, 2012 the option contracts were still not settled.
- 20 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(c) Accounts Receivable June 30, 2012 June 30, 2011 Accounts receivable - Related parties $ 47,222,017 40,651,016 - Other customers 134,819,954 129,263,397 182,041,971 169,914,413 Less: Allowance for doubtful accounts (747,523) (722,105) Net $ 181,294,448 169,192,308
Current accounts receivable didn’t discount, and the carrying amount was approximately to its’ fair value. As of June 30, 2012 and 2011, the Company sold accounts receivable to financial institutions. These transactions conformed to the criteria for derecognizing. The details of accounts receivable sold were as follows:
June 30, 2012 Factoring Credit Amount Bank Amount Sold Amount Advanced Interest Rate Collateral Important Clauses Derecognized Hua Nan Commercial Bank $ 7,518,896 USD 500,000 USD 251,300 1.37% None Non-recourse, the buyer bears 7,518,896 the credit risk and the seller bears non-credit risk Chinatrust Commercial Bank $ 383,506 USD 31,300 USD - 0% None " 383,506 HSBC Bank (Taiwan) Ltd. $ 8,979,306 USD 301,200 USD 285,000 1.48% None " 8,979,306
June 30, 2011 Factoring Credit Amount Bank Amount Sold Amount Advanced Interest Rate Collateral Important Clauses Derecognized Mega International Commercial Bank $ 11,528,000 USD 400,000 USD 400,000 0.814% None Non-recourse, the buyer bears 11,528,000 the credit risk and the seller bears non-credit risk Hua Nan Commercial Bank $ 12,104,400 USD 500,000 USD 420,000 0.85% None " 12,104,400 Chinatrust Commercial Bank $ 107,456 USD 42,500 USD - 0% None " 107,456 HSBC Bank (Taiwan) Ltd. $ 8,659,431 USD 301,000 USD 285,000 0.95% None " 8,659,431
As of June 30, 2012 and 2011, the accounts receivable that conformed to the criteria for derecognizing were reclassified to other receivables.
- 21 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(d) Inventories June 30, 2012 June 30, 2011 Merchandise $ 17,424,242 15,315,373 Less: Allowance for inventory (1,036,160) (649,126) Subtotal 16,388,082 14,666,247 Finished goods 5,595,306 5,877,170 Less: Allowance for inventory (252,838) (237,179) Subtotal 5,342,468 5,639,991 Work-in-Process 932,737 896,776 Less: Allowance for inventory - - Subtotal 932,737 896,776 Raw materials 20,362,503 18,379,903 Less: Allowance for inventory (698,345) (385,324) Subtotal 19,664,158 17,994,579 Goods in-transit 129,973 49,633 Less: Allowance for inventory - - Subtotal 129,973 49,633 Total $ 42,457,418 39,247,226
For the six months ended June 30, 2012 and 2011, the details of cost of goods sold were as follows: For the Six Months Ended June 30, 2012 2011 Cost of goods sold $ 438,122,231 485,658,426 Loss on disposal of obsolescence and scrqpping 1,533,845 220,333 Loss on inventory valuation and obsolescence 452,264 258,379 (Gain) loss on inventory check (69) 907 Income from sale of scrap (2,583) (1,988) Income from obsolescence Compensation (493,267) - Loss on idled capacity 143,569 - Total $ 439,755,990 486,136,057
- 22 - WorldReginfo - ff7f59af-5a34-4c96-b8cd-29c8690ed675 (English Translation of Financial Report Originally Issued In Chinese) QUANTA COMPUTER INC. NOTES TO FINANCIAL STATEMENTS June 30, 2012 AND 2011 (Amounts Expressed in Thousands, Except for Share Data)
(e) Long-term Investments at Equity
June 30, 2012 June 30, 2011 Equity Investments Shares Book Shareholding Shares Book Shareholding Name of Investee Company (In Thousands) Value Ratio (In Thousands) Value Ratio QCJ - $ 3,210 100.00% - 3,968 100.00% (Initial investment: JPY 10,000) Quanta International Ltd. 50,199 28,459,791 100.00% 46,849 22,326,403 100.00% (Initial investment: 2012: USD 501,994; 2011: USD 468,494) WK Technology Fund VI 37,500 295,926 21.43% 37,500 360,075 21.43% (Initial investment:$375,000) Quanta Storage Inc. 82,882 2,299,127 29.78% 82,882 2,212,984 29.07% (Initial investment: $243,142) Quanta Venture Capital Co., Ltd. 99,990 2,084,965 99.99% 99,990 2,135,237 99.99% (Initial investment: $999,900) CAM-CID Asia Pacific Investment Corp. 778 23,962 27.50% 1,519 44,260 27.50% (Initial investment: 2012: USD 778; 2011: USD 1,519) Quanta Computer Technology Investment Corp. 60,000 873,159 100.00% 60,000 869,899 100.00% (Initial investment: $600,000) Quanta Microsystem Inc. 17,500 352,629 75.19% 17,500 186,720 75.19% (Initial investment: $232,750) Tech View International Technology Inc. - - 26.63% - - 26.63% (Initial investment: $1) RoyalTek Co., Ltd. 18,604 534,151 36.76% 26,577 570,540 36.76% (Initial investment: 2012 : $807,586) High Power Lighting Corp. 590 - 5.02% 1,475 - 5.52% (Initial investment: $18,300) Quanta Cloud Technology Inc. 999 4,032 99.90% 999 6,255 99.90% (Initial DataOn Systems Inc.) (Initial investment: $9,990) EBN Technology Corp. 8,375 64,608 25.00% 8,375 65,064 25.00% (Initial investment: $125,625) TWDT Precision Co., Ltd. 41,394 572,531 37.00% 41,394 501,547 37.00% (Initial investment: $377,400) Face Vsion Technology Inc. 2,950 (31,434) 100.00% 1,710 (32,702) 100.00% (Initial investment : 2012: $29,500; 2011: $17,100) Puzzle Logic Inc. 26,400 39,006 100.00% 26,400 39,918 100.00% (Initial investment: $264,000) Gem-Tech Precision Metal Co., Ltd. 29,000 136,009 100.00% 29,000 230,457 100.00% (Initial Investment: $290,000) CloudCast Technology Inc. 4,000 3,920 100.00% 1,000 5,035 100.00% (Initial Investment: 2012 : $40,000) Total $ 35,715,592 29,525,660
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1) Investment income and losses accounted for under the equity method based on the financial statements prepared by investee companies or financial statements of investee companies audited by independent auditors were as follows: For the Six Months Ended June 30, Investee Company 2012 2011 QCJ $ 40 780 Quanta International Ltd. 2,292,982 1,446,913 WK Technology Fund VI (25,825) (4,863) Quanta Storage Inc. 52,092 88,512 Quanta Venture Capital Co., Ltd. 32,070 16,761 Quanta Network Systems Inc. - 17 CAM-CID Asia Pacific Investment Corp. 627 409 Quanta Computer Technology Investment Corp. 83,074 1,221 Quanta Microsystem Inc. 104,129 3,557 RoyalTek Company, Ltd. 2,900 2,527 High Power Lighting Corp. - (1,360) Quanta Cloud Technology Inc. (1,704) (50) EBN Technology Corp. (3,749) (3,463) TWDT Precision Co., Ltd. 38,455 24,210 Face Vsion Technology Inc. (624) (33,537) Puzzle Logic Inc. (4,225) (29,990) Gem-Tech Precision Metal Co., Ltd. (35,864) (39,778) CloudCast Technology Inc. (13,481) (4,964) Total $ 2,520,897 1,466,902
Unrealized gains and losses on inter-company transactions for the six months ended June 30, 2012 and 2011 were eliminated according to the percentage of ownership. Investees whom the Company has controlling interest over their operation, are included in the Company’s consolidated financial statements. 2) The Company deducted from their long-term investments the cash dividends distributed by investee companies based on the approval of their respective board of directors. These cash dividends were as follows: For the Six Months Ended June 30, Investee Company 2012 2011 WK Technology Fund VI $ - 3,750 Quanta Storage Inc. 107,746 165,763 CAM-CID Asia Pacific Investment Corp. 1,455 16,286 Quanta Microsystem Inc. - 63,000 RoyalTek Company, Ltd. 31,626 42,523 TWDT Precision Co., Ltd. - 12,418 Total $ 140,827 303,740
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3) The market values of the Company’s listed investees accounted for under the equity method were as follows:
Investee Company June 30, 2012 June 30, 2011 Quanta Storage Inc. $ 1,715,650 2,130,059 RoyalTek Company, Ltd. 450,207 834,504 Total $ 2,165,857 2,964,563
4) For the six months ended June 30, 2012 and 2011, the Company received investment refund from its investee company CAM-CID Asia Pacific Investment Corp. amounted to $5,809 (USD 195) and $23,750 (USD 818) deducted to its carrying value. 5) On November 15, 2010, the shareholders’ meeting of Quanta Network System Inc. approved for liquidation. For the year ended of December 31, 2011, the Company received investment refund from its investee company Quanta Network System Inc. amounted to $1,451 deducted to its carrying value. 6) As of June 30, 2011, the investee High Power Lighting Corp. has impairment to assess of $5,183. (f) Rental Assets and Idle Assets The Company entered into lease agreements with related and non-related parties for the lease of certain fixed assets, which were reclassified to rental assets as follows: Accumulated Carrying Type of Assets Cost Depreciation Value June 30, 2012 Land $ 1,114,574 - 1,114,574 Buildings and equipment 610,159 177,173 432,986 Total $ 1,724,733 177,173 1,547,560 Less: Accumulated impairment loss (59,446) Net 1,488,114
June 30, 2011 Land $ 1,114,574 - 1,114,574 Buildings and equipment 610,069 164,418 445,651 Total $ 1,724,643 164,418 1,560,225 Less: Accumulated impairment loss (59,446) Net 1,500,779
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The Company adopted the Statement of Financial Accounting Standards No. 35 ―Impairment of Assets to assess for any indication of asset impairment. The carrying value of above rental assets refers to the real estate appraisal report. Based on the results of such assessment, the Company recognized provisions for impairment loss amounting to $59,446 as of both June 30, 2012 and 2011, respectively. The idle assets were as follows: Type of Assets Accumulated Carrying June 30, 2012 Cost Depreciation Value Buildings $ 374 198 176 Production equipment 38,181 31,812 6,369 Molds and tools 77,827 51,497 26,330 Furniture and office equipment 504,764 380,491 124,273 Miscellaneous equipment 741,549 556,975 184,574 Deferred expenses 3,238 2,093 1,145 Total $ 1,365,933 1,023,066 342,867 Less:Accumulated impairment loss (342,867) Net -
June 30, 2011 Buildings $ 374 198 176 Production equipment 39,668 33,018 6,650 Molds and tools 79,297 52,477 26,820 Furniture and office equipment 524,540 394,843 129,697 Miscellaneous equipment 786,048 590,581 195,467 Deferred expenses 3,238 2,093 1,145 Total $ 1,433,165 1,073,210 359,955 Less: Accumulated impairment loss (359,955) Net -
(g) Short-Term Debt Type of Debt June 30,2012 June 30,2011 Letter of Credit $ 18,430,720 3,458,400 Credit Loan 32,672,640 39,713,960 Total $ 51,103,360 43,172,360 Range of Interest Rates 0.69%~0.95% 0.49%~0.85%
As of June 30, 2012 and 2011, the Company was granted short-term and long-term credit limits of $27,400,000, USD 3,738,500 and $26,350,000, USD 3,717,438 , respectively, with $50,626,052 and $38,029,116 remain unused, respectively.
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(h) Long-Term Debt Amount Non-Current Current Type of Debt Interest Rates Portion Portion Total Guarantees June 30, 2012 Sydicate loan with Hun Nan 0.9998%~1.0020% $ - 10,771,200 10,771,200 None Commercial Bank and 14 other banks 1) Syndicate Loan with Taiwan 1.0548% 9,873,600 - 9,873,600 " Corporative Bank and 18 other banks 2) $ 9,873,600 10,771,200 20,644,800
June 30, 2011 Sydicate loan with Hun Nan 0.7738%~0.7910% $ 10,375,200 - 10,375,200 None Commercial Bank and 14 other banks 1) Syndicate Loan with Taiwan 0.8276% 9,510,600 - 9,510,600 " Corporative Bank and 18 other banks 2) $ 19,885,800 - 19,885,800
1) Effective in May 2008, the Company had syndicated facility agreements with Hua Nan Commercial Bank and 14 other participating financial institutions, under which, the term facility and revolving facility available to the Company aggregated USD 360,000 with floating interest rates for a period of 5 years.
2) Effective in June 2010, the Company and Quanta International Limited (QIL) had syndicated facility agreements with Taiwan Corporative Bank and 18 other participating financial institutions, under which, the term facility and revolving facility available to the Company and the QIL aggregated both USD 330,000 with floating interest or a period of 5 years. According to agreement the Company takes full responsibilities for QIL’s repayments.
3) Under these agreements, the financial statements of the Company on the balance sheet date (June 30 and December 31) shall maintain minimum financial ratios, requirement such as those relating to sucrose current ratios, the ratios of the net value of bank loans, interest coverage ratios and tangible net worth, etc. If act against to borrow funds contract a particular condition. The consociation teaches letter bank to have power to depend on to around request that liquidating in time is all to borrow funds. As of June 30, 2012, the Company didn't act against the restriction of the finance ratio of engagement.
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(i) Pension Plan
The Company maintains and funds a retirement plan covering all regular employees. Payments of pension benefits are calculated based on the average monthly salary received for the last six months prior to approved retirement and base point (b.p.) entitlement Each employee earns 2 b.p. for the first 15 years of completed service, and 1 b.p. commencing from the 16th year and thereafter.
The Labor Pension Act of R.O.C. (―the Act‖), which adopts a defined contribution pension plan, takes effect from July 1, 2005. In accordance with this Act, employees of the Company (who were hired prior to July 1, 2005) may elect to be subject to either the Act, and maintain their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. Employees who are hired by the Company after July 1, 2005, shall comply with the provisions of this Act. For employees subject to this Act, the Company contributes monthly to the employees’ individual pension accounts an amount equal to not less than 6% of the employees’ monthly wages and deposits it in a personal retirement benefit account with Bank of Taiwan. However, the retirement plan currently maintained by the Company is yet to be amended to conform to this Act.
For the six months ended June 30, 2012 and 2011, the pension costs and related information were as follows: For the Six Months Ended June 30, 2012 2011 Balance of pension fund-ending $ 939,560 893,509 Current pension costs : Defined benefit pension plan 24,615 13,525 Defined contribution pension plan 108,601 111,233 Balance of pension prepayments-ending 70,035 70,035
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(j) Income Taxes Deferred income tax assets and liabilities: June 30, 2012 June 30, 2011 1) Deductible temporary differences due to - provision for warranty reserve $ 1,454,573 1,584,592 - accrued royalty reserve 79,806 124,903 - provision for doubtful accounts and sales 37,100 4,084 allowances - provision for inventory market decline and 337,848 216,177 obsolescence - unrealized profit on sales 123,037 68,745 - unrealized gain on sale of assets 3,852 116 - provision for impairment of idle assets 58,287 61,192 - provision for impairment of assets 10,106 10,106 - cumulative translation adjustments 4,035 - Total deferred income tax assets $ 2,108,644 2,069,915
- unrealized investment income accounted $ 1,547,508 897,975 for under the equity method - unrealized foreign exchange gain 168,450 378,900 - provision for foreign investment loss 75,701 75,701 - cumulative translation adjustments - 215,111 Total deferred income tax liabilities $ 1,791,659 1,567,687
2) Deferred income tax assets - current $ 1,909,327 1,929,756 Deferred income tax liabilities - current (168,450) (378,900) Net $ 1,740,877 1,550,856
Deferred income tax assets -noncurrent $ 199,317 140,159 Deferred income tax liabilities -noncurrent (1,623,209) (1,188,787) Net $ (1,423,892) (1,048,628)
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3) The components of income tax expense were as follows: For the Six Months Ended June 30, 2012 2011 Current income tax expense $ 1,507,159 1,872,271 Deferred income tax expense 829,122 347,155 Total $ 2,336,281 2,219,426
The components of deferred income tax (benefit) expense were as follows:
For the Six Months Ended June 30, 2012 2011 Provisions for warranty reserve $ 234,266 90,098 Unrealized exchange (loss) gains (60,682) 54,323 Unrealized foreign investment gain 410,257 243,409 Reversal of royalty reserve 24,303 - Unrealized profits on sales (31,673) (3,913) Unrealized (loss) gains on sales of assets (749) 302 (Provisions) reversal for doubtful accounts and 328,497 6,451 sales allowances Provisions on allowance for inventory market (76,885) (43,925) decline and obsolescence Provision on impairment of idle assets 1,788 410 Total $ 829,122 347,155
4) According to the revised tax law announced on June 15, 2010, stated that profit-seeking enterprise’s income tax rate amended to 17%, effective from January 1, 2010. The Company calculates its Alternative Minimum Tax (AMT) accordingly to Income Tax Basic Tax Act. For the six months ended June 30, 2012 and 2011, income tax payable and income tax expense calculated accordingly with the regulated rate with pre-tax profit illustrated on the income statement were as follows: For the Six Months Ended June 30, 2012 2011 Income tax expense calculated on pre-tax financial $ 2,282,287 2,259,857 income at the statutory tax rate Permanent differences (158,238) (331,533) 10% surtax on undistributed earnings 133,785 291,102 Under – accrual of prior years’ deferred 78,447 - income tax liability Income tax expense $ 2,336,281 2,219,426
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5) The Company’s tax returns and stockholders’ imputation tax credit account through the calendar year 2009 have been assessed by the Tax Authority.
6) Stockholders’ Imputation Tax Credit Account and Tax Rate:
As of June 30, 2012 and 2011, the stockholders’ imputation tax credit account was $9,041,562 and $7,745,186, respectively. After filing the corporate income tax returns, the estimated imputation tax credit rate in 2011 and the actual imputation tax credit rate in 2010 for earnings distributed to ROC residents were 18.22% and 18.47%, respectively.
As of June 30, 2012, the undistributed earnings of $38,995,000 were accumulated after 1997.
(k) Capital Stock
For the year ended December 31, 2011, the employee options were converted into 6,762 thousand common stock shares, and the generating total receipts of $234,316, and a premium of $166,697 were recognized under capital surplus, and the amendment of registration was applied.
For the six months ended June 30, 2012, the employee options were converted into 5,612 thousand common stock shares, and the generating total receipts of $185,364, and a premium of $129,244 were recognized under capital surplus. With June 30, 2012 as the effective date for capital increase, and amendments of registration are in the process now.
(l) Legal Reserve and Capital Surplus According to the Company Law revised in January 2012, 10% of the Company’s annual net income is to be set aside as legal reserve until such retention equals the amount of issued common stock. Where a company incurs no loss, it may distribute the amount of legal reserve that exceeds 25% of issued common stock either by capitalizing its legal reserve and distributing the new shares as a stock dividend to its original shareholders in proportion to the number of shares held by each of them or by distributing a cash dividend.
According to the Company Law revised in January 2012, capital surplus can be used to offset a deficit. Where a company incurs no loss, it may capitalize its capital reserve either by issuing new shares, which shall be distributable as a stock dividend to its original shareholders in proportion to the number of shares held by each of them, or by distributing a cash dividend. According to the current ROC Company Act, the total capital surplus capitalized per annum may not exceed 10% of the paid-in capital.
(m) Special Reserve A special reserve equivalent to the debit balance of any account shown in the shareholders’ equity section of the balance sheet (excluding treasury stock), shall be made from unappropriated retained earnings pursuant to existing regulations. The special reserve is allowed to be appropriated to the extent that the debit balance of such accounts is reversed. Previous retained earnings appropriated to special reserve may not be distributed, unless further reverted back to retained earnings.
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(n) Employee Stock Option 1) On December 25, 2007, the Company was authorized by the Securities and Futures Bureau of the Financial Supervisory Commission, Executive Yuan, to issue employee stock options with a total number of 50,000 units on December 31, 2007. Each unit entitled an optioned to subscribe for one thousand share of the Company’s common stock. The contractual life of the option is 6 years, and the holders may exercise the options in accordance with certain schedules as prescribed by the plan starting 2 years from the date of grant and 10 days before the option expires. The exercise price of the options was set at the closing price of the Company’s common stock on the date of the grant were $46.05. After the issuance of employee stock option, any additional change to the Company’s common stock (issuance of new shares for cash, reinvestment using undistributed earnings, reinvestment using capital surplus, merging and acquisition, stock-split, issuance of global depositary receipts and etc), will result in adjustments in the price of the stock options. The after exercise price were $33.03. 2) Details regarding the quantity and weighted average exercise price of the Company’s employee stock options were as follows:
For the Six Months Ended June 30, 2012 2011 Weighted- Quantity of Weighted- Quantity of Stock average Stock Option average Option Exercise (thousand Exercise (thousand shares) Price (NT$) shares) Price (NT$) Outstanding at the beginning 22,168 $ 33.03 29,554 34.89 of the period Granted - - - - Exercised (5,612) 33.03 (5,662) 34.89 Forfeited (46) - (377) -
Outstanding at the end of the period 16,510 23,515
Exercisable at the end of the period 16,510 13,915 Fair value of current period's exerciable stock options $ 4.287 4.287
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3) The Company used the intrinsic value method to recognize compensation costs for its employee stock options issued. Pro forma information using the fair value method was as follows: Issued in 2007 Valuation method: Black-Scholes options pricing model Assumptions: Dividend yields 27.00% Volatility factors of the expected market price 29.00% Risk-free interest rate 2.51% Weighted-average expected life of the options 6 years 4) As of June 30, 2012, information regarding outstanding employee options was as follows: Outstanding for the period ended of June 30, 2012 Exercisable as of June 30, 2012 Weighted Expected average fair Exercisable Weighted Exercise Number remaining value of options number as of average price outstanding period granted June 30, 2012 fair value of $ 33.03 16,510 1.50 years $ 33.03 16,510 $options granted 33.03
(o) Earnings Distribution and Dividend Policy The Company’s Articles of Incorporation stipulate that, after-tax earnings, if any, should first offset cumulative losses, and 10% of the remainder be set aside as legal reserve. If necessary, special reserve could be appropriated. The Board of Directors will submit a proposal regarding the distribution of the remaining balance in the shareholders’ meeting, of which the distribution for employee bonuses shall not be less than 2%, and those of remuneration to directors and supervisors shall not exceed 2% thereof. In the event that the employee bonus as prescribed in the preceding paragraph is distributed in the form of stocks, the employees qualifying for such distribution may include the employees of subsidiaries of the Company who meet certain specific requirements. Such qualified employees and distribution ratio shall be decided by the Board of Directors. In consideration of finance, sales and operation, the Company distributes retained earnings in the current year through cash dividends or stock dividends but gives priority to cash dividend. The distribution ratio of stock dividends may not exceed 50% of total dividends. The net profit deducts 10% legal surplus reserve fund and should provide after the tax of special surplus reserve fund after net sum, Ride to up anticipate the comparison of the remuneration allotment of employee's bonus directors and supervisors. For the six months ended June 30, 2012, and 2011 the estimated amounts of employees’ bonus were $995,000 and $979,500, as for directors and supervisors’ remuneration were $21,000 both period. Allot the number calculation foundation of stock dividend according to the shareholder's meeting the closing price also considers before resolution. The difference between estimate and the amount approved by the Annual General Shareholders’ Meeting, which will be treated as changes in accounting estimation and will be adjusted as gain or loss in the financial statement of 2012 and 2011.
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On June 22, 2012 and June 24, 2011 the Annual General Shareholders’ Meeting resolution declared the Company’s earnings distribution for the 2011 and 2010 were as follows:
2011 2010 Employee bonuses - cash $ 2,070,000 1,655,000 Remuneration to directors and supervisors 42,000 42,000 Total $ 2,112,000 1,697,000
There was no difference between actual result of earnings distribution and the estimation disclosed in the financial statements of 2011and 2010. (p) Treasury Stock 1) The Company’s shares held by its subsidiaries as of June 30, 2012 and 2011 were as follows: June 30, 2012 Shares (thousand) Cost Market Price RoyalTek Co., Ltd. 8,109 $ 333,094 643,846 June 30, 2011 Shares (thousand) Cost Market Price RoyalTek Co., Ltd. 9,384 $ 385,469 638,104
2) The Company’s shares sold by its subsidiaries as of the six months ended June 30, 2011 were as follows: For The Six Months Ended June 30, 2011 Sold Shares Sold Price (thousand) RoyalTek Co., Ltd. 2,200 $ 142,697
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(q) Earnings per Share (EPS)
For the six months ended June 30, 2012 and 2011, the primary earnings per share, and diluted earnings per share and the retroactively adjustments to primary and diluted earnings per share were computed as follows:
For the Six Months Ended June 30, 2012 2011 Before Tax After Tax Before Tax After Tax Net Income $ 13,425,218 11,088,937 13,293,278 11,073,852
Weighted average common shares outstanding 3,843,637 3,843,637 3,836,688 3,836,688 Less: Company shares held by the subsidiaries (8,109) (8,109) (9,384) (9,384) regarded as treasury stock Weighted average common shares outstanding 3,835,528 3,835,528 3,827,304 3,827,304 less of treasury stocks Contingent shares 43,381 43,381 51,003 51,003 Diluted shares 3,878,909 3,878,909 3,878,307 3,878,307 Pro-forma weighted average common shares assuming that the Company shares held by the subsidiaries are not regarded as treasury stock 3,843,637 3,843,637 3,836,688 3,836,688 Pro-forma diluted shares assuming that the Company shares held by the subsidiaries are not regarded as treasury stock 3,887,018 3,887,018 3,887,691 3,887,691
Primary earnings per share $ 3.50 2.89 3.47 2.89 Diluted earnings per share $ 3.46 2.86 3.43 2.86
Pro-forma data assuming that the Company shares held by the subsidiaries are not regarded as treasury stock
Pro-forma primary earnings per share $ 3.49 2.89 3.46 2.89 Pro-forma diluted earnings per share $ 3.45 2.85 3.42 2.85
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(r) Financial Instruments 1) Fair Value of Financial Instruments:
June 30, 2012 June 30, 2011 Financial Assets Book Value Fair Value Book Value Fair Value Financial assets reported at fair $ 750,345 750,345 5,749 5,749 value through profit or loss - current Available-for-sale financial assets - current 17,407,448 17,407,448 22,773,382 22,773,382 Available-for-sale financial assets - noncurrent 111,190 111,190 313,804 313,804 Held-to-maturity financial assets - current - - 86,460 86,460 Financial assets carried at cost - noncurrent 6,993,550 - 7,200,773 - Book value equal to fair value 256,811,836 256,811,836 234,844,811 234,844,811 Total financial assets $ 282,074,369 265,224,979
Financial Liabilities Financial liabilities reported at fair $ 394 394 1,848 1,848 value through profit or loss - current Book value equal to fair value 239,853,782 239,853,782 223,147,065 223,147,065 Total financial liabilities $ 239,854,176 223,148,913
2) Method and assumptions used to establish the fair values of financial instruments are the following:
(A) The fair value of short-term financial instruments is determined by their face value on the balance sheet. As these instruments have short-term maturities, the face value is adopted as a reasonable basis for establishing the fair value. This method is applied to cash and cash equivalents, notes and accounts receivable, other receivables, other financial assets- current, other financial assets-noncurrent, short-term debt, notes and accounts payable, accrued expenses, other payables, other financial liabilities- current and other financial liabilities- noncurrent.
(B) The fair value of financial instruments traded in active markets is based on quoted market prices. If the financial instruments are not traded in an active market then the fair value is determined by using valuation techniques, under which, the estimate and assumption used are consistent with prevailing market conditions. The Company uses the discount rates equal to the rates of return on financial instruments with similar conditions and characteristics including credit conditions, the remaining period of fixed interest, the remaining period of paying principals and paying currencies. The discount rate for held-to-maturity financial assets is 3.00%.
(C) With respect to other financial assets －noncurrent such as refundable deposits that are indispensable guarantee for the on-going operation of the Company, it is impossible to estimate the time necessary to accomplish the exchange of assets. Consequently, the fair market value of these financial instruments cannot be established. The book value is used as the fair market value.
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(D) The fair market value of long-term debt is determined by the present value of future cash flow. As the value derived by using floating interest rate in discounting is close to the book value, the book value is adopted as the fair market value. 3) The fair values of financial assets and liabilities, which were measured at quoted market value or estimated using evaluation techniques were as follows:
June 30, 2012 June 30, 2011 Estimated Estimated Measured Using Measured Using at Quoted Evaluation at Quoted Evaluation Market Price Techniques Market Price Techniques Financial Assets: Financial assets reported at fair value $ - 750,345 - 5,749 through profit or loss - current Available-for-sale financial assets - 3,131,319 14,276,129 5,057,864 17,715,518 current Available-for-sale financial assets - 111,190 - 313,804 - noncurrent $ 3,242,509 15,026,474 5,371,668 17,721,267
Financial Liabilities: Financial liabilities reported at fair value through profit or loss - current $ - 394 - 1,848
4) Gross gain and loss recognized from changes in the fair values of financial assets and liabilities, which were estimated using valuation techniques, amounted to gain $1,952 and $3,901 respectively, for the six months ended June 30, 2012 and 2011. 5) Gains recognized from disposal of available-for-sales financial assets amounted to $126,434 and $1,792,595 for the six months ended June 30, 2012 and 2011, respectively, which were recognized as an adjustment to stockholders’ equity. 6) Financial Risk Information (A) Market risk The equity securities held by the Company are classified into financial assets held for trading and available-for-sale financial assets. As these assets are recognized at fair value, all changes in security market price will expose the Company to market risk. The Company invests in fixed-rate bonds so that all changes in fair-market value of these bonds will expose the Company to market risk. The overseas convertible corporate bonds issued by the Company are denominated in foreign currencies. Therefore, all changes in exchange rate will expose the Company to market risk.
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(B) Credit risk The Company’s credit risk primarily arises from cash and cash equivalents and equity securities. The Company deposits cash in different finance institutions. The cash equivalents include investment in short-term bills with repurchase agreements. The investment in equity securities includes the investment in mutual funds with financial institution of good credit ratings. The Company manages the credit risk exposure with each of these financial institutions. Management believes that cash and cash equivalents and equity securities do not have significant credit risks concentration. The customers of the Company are concentrated in the high-tech computer industry. In order to reduce the credit risk of accounts receivables, the Company regularly evaluates the status of collectibles of accounts receivable and recognizes allowance for doubtful accounts thereon. (C) Liquidity Risk The Company has sufficient operating capital to meet the cash requirements upon settlement of the contracts. Therefore, no capital deficiency risk is expected. The possibility of not selling derivate financial instruments at reasonable price in the market is low. Therefore, the cash flow risk is considered insignificant. The beneficiary certificates and equity securities that the Company is holding have active market. As expected, the beneficiary certificates and equity securities can be sold quickly at near-fair value price in the market. The equity securities carried at cost have no active market. Therefore, these equity securities involve liquidity risk. The currency swap contracts and option contracts will result in US dollar outflow and inflow within one year. Because the Company will settle these contracts with banks by using the proceeds from the foreign currency sales and the exchange rate for the currency swap contracts are fixed, the cash flow risk is deemed to be insignificant. (D) Cash Flow and Interest Rate Risk The Company’s interest rate risk arises from short-term and long-term loans. Loans obtained with floating interest rate will be affected by the changes of market rate, as well as the future cash flow. 7) Risk Management and Hedge Policies Financial derivatives are used to hedge operating risk, as one of the Company’s hedging policies. The risk management of the Company conforms to its internal control system and is evaluated regularly. 8) Financial Instruments with Off-Balance-Sheet Credit Risk: Guarantee and Endorsements of bank loans provided by the Company for related parties As of June 30, 2012, were referred to Note (5).
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(5) Related Party Transactions (a) Names of Related Parties and Relationship with the Company: Name of Related Party Relationship with the Company Quanta Storage Inc.(QSI) An investee company accounted for under the equity method Techman electronics (changshu) Co. A subsidiary of QSI Ltd. (TECHMAN) QCJ An investee company accounted for under the equity method Quanta International Ltd. (QIL) 〃 Quanta Computer Technology Investment 〃 Corp.(QCTI) Quanta Microsystem Inc.(QMIT) 〃 Techview International Technology Inc. 〃 (TVI) RoyalTek Co., Inc.(RTK) 〃 Quanta Cloud Technology Inc. (QCT) 〃 (Initial Data On Systems Inc.(DTO)) EBN Technology Corp.(EBN) 〃 TWDT Precision Co., Ltd.(TWDT) 〃 FaceVsion Technology Inc.(FVT) 〃 Puzzle Logic Inc.(PLI) 〃 Gem-Tech Precision Metal Co., Ltd.(GTP) 〃 CloudCast Technology Inc. (CLO) 〃 Quanta Asia Ltd. (QAL) A subsidiary of QIL QCE Computer B.V. (QCE) 〃 Access International Company (AIC) 〃 Quanta Research International Inc.(QRII) 〃 QCT LLC (QCTU) A subsidiary of QRII Quanta Research International Cambridge 〃 Inc.(QRC) ThinkTech Ind.e Com. De Informatica S/A A subsidiary of QCE (TNH) QCH Inc. (QCH) A subsidiary of AIC Quanta Computer USA, Inc. (QCA) 〃 Quanta Service Inc. (QSI-USA) 〃 Quanta International Technology Ltd. (QIT) A subsidiary of QAL Quanta Development Ltd. (QDL) 〃 QCG Computer GmbH (QCG) A subsidiary of QIT
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Name of Related Party Relationship with the Company Quanta Service Nashville LLC (QSN) A subsidiary of QSI-USA Tech-Front (Shanghai) Computer Ltd. (TFC) A subsidiary of QDLHK Tech-Com (Shanghai) Computer Ltd. (TCC) 〃 Tech-Lead (Shanghai) Computer Ltd. (TLC) 〃 Tech-Trend (Shanghai) Computer Ltd. (TTC) 〃 Tech-Wave (Shanghai) Warehousing Co., 〃 Ltd. (TWW) Tech-Giant (Shanghai) Computer Ltd. (TGC) 〃 Tech-Full Computer (Changshu) Co., Ltd. 〃 (TNC) Kenseisha Shanghai P.M.P. Co., Ltd. (KSH) 〃 Tech-Front (Chongqing) Computer Ltd. 〃 (TFQ) Zhan Yun (Shanghai) Electroinc Co. A subsidiary of TCLHK Ltd.(ZYES) Changshu Zhan Yun Electronic Co., 〃 Ltd.(ZYEC) Dragontech Metallic Industry Co., Same chairman as TWDT Ltd.(SJDT) Mr. Barry Lam The Company’s Chairman Mr. C.C. Leung The Company’s Vice-Chairman Quanta Arts Foundation Same Chairman Quanta Culture & Education Foundation 〃 Quanta Group employee Welfare Committee 〃 Epoch Foundation The Company’s Chairman is a member of board of director of the Foundation Digitro Da Amazonia Ind.e Com. S/A The DIG Company ’s Chairman is a member of (DIG) board of director of the TNH
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(b) Significant Transactions with Related Parties: (a) Purchases For the Six Months Ended June 30, 2012 2011 Name of Related Party Amount % of Net Amount % of Net TFC $ 23,857,281 5.48 65,896,379 13.29 TCC 246,040,128 56.54 292,525,576 58.98 TNC 12,067,149 2.77 10,934,468 2.20 TGC 6,008,869 1.38 5,123,323 1.03 TFQ 22,995,744 5.28 1,675,317 0.34 Others 40,952 0.01 5,060 - Total $ 311,010,123 71.46 376,160,123 75.84
The price and payment terms are the same as those with other vendors, except for those of TFC, TCC, TGC, TNC, TFQ and TVI with no counter-parties with which to compare price and payment terms.
As of June 30, 2012 and 2011, unrealized gross profits from purchases and sidestream transaction from related parties amounted to $37,568 and $598,129, respectively, which were reflected as addition and reduction of income from long-term investments. (b) Sales For the Six Months Ended June 30, 2012 2011 Name of Related Party Amount % of Net Amount % of Net QCH $ 85,028,492 18.77 79,427,519 15.87 Others 4,686,033 1.03 1,562,283 0.31 Total $ 89,714,525 19.80 80,989,802 16.18
Prices of finished goods and merchandise sold to related parties were negotiated, which do not have counter parties to compare with. The collection term is 45 to 120 days. As of June 30, 2012 and 2011, unrealized gross profits from sales, which amounted to $723,748 and $404,380, respectively, were accounted for as deferred credits. (c) Property Transactions For the six months ended June 30, 2012 and 2011, properties sold by the Company to related parties were as follows: For the Six Months Ended June 30, 2012 2011 Proceeds from sale of property $ 74,860 - Cost (68,150) - Gain on property transactions 6,710 - Other (loss) income - price difference 6,694 58 Total $ 13,404 58
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As of June 30, 2012 and 2011 unrealized gain (reflected as deferred credit) resulting from the disposal of property and equipment and other income-price difference amounted to $23,966 and $1,987, respectively. As of December 31, 2006, unrealized gain resulting from the Company sold the stocks of Ralink Technology to QCTI. For the period ended of June 30, 2011, $3,948 was realized and accounted under miscellaneous income. For the six months ended June 30, 2011, the Company purchased property and software from related parties totaled $9,003, respectively, recognized as furniture and office facilities, miscellaneous equipment . (c) Rental Revenue The Company entered into lease contracts with the related parties to rent the 9th Fl. of its office building located at No.119, Hougang Street, Taipei, Taiwan, R.O.C., portion of its research building located at No.188, Wen Hwa 2nd Rd., Kuei Shan Hsiang, Tao Yuan Shien, Taiwan, R.O.C. and portion of its office building located at No.211, Wen Hwa 2nd Rd, Kuei Shan Hsiang, Tao YuahShien, Taiwan, R.O.C.. Rental revenues from the related parties were as follows: For the Six Months Ended June 30, 2012 2011 QSI $ 6,563 6,563 Quanta Group Employee Welfare Committee 11,436 16,289 QMIT 1,042 - RTK 2,729 2,733 FVT - 723 Others 390 2,265 Total $ 22,160 28,573
(d) Endorsement Guarantee As of June 30, 2012 and 2011, endorsement guarantee provide to QIL were USD 330,000 respectively,and total balance of endorsement guarantees were USD 330,000 respectively. (e) Others
(i) For the Six Months Ended June 30, After-sales warranty repair expense paid to: 2012 2011 QCA $ 88,321 79,423 QCG 8,679 11,681 QSN 4,247 - Others 175 90 Total $ 101,422 91,194
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(ii) For the Six Months Ended June 30, Processing fee paid to: 2012 2011 KSH $ 453,375 350,489 TNC 1,885 6,497 Total $ 455,260 356,986
(iii) Purchase of accessories for research and For the Six Months Ended June 30, development : 2012 2011 Total $ 69,613 62,883
For the Six Months Ended June 30, (iv) Testing fee income from: 2012 2011 QMIT $ 223,500 83,064 Others 25,191 19,862 Total $ 248,691 102,926
(v) For the six months ended June 30, 2012 and 2011, the Company donated $15,000 and $15,061 to the Quanta Arts Foundation. The donation was recorded as operating expense – donation. (vi) For the six months ended June 30, 2012 and 2011, the Company donated $195,745 and $147,425 to the Epoch Foundation. The donation was recorded as operating expense – donation. (vii) For the six months ended June 30, 2012 and 2011, the Company provided letters of support to lenders of credit line facilities extended to its subsidiaries, under which, the Company must maintain significant influence over the operations of its subsidiaries for the duration of the loans and is obliged to arrange for funding facilities to be made available to cause the banking facilities to be repaid in full when due. June 30, 2012 Bank Companies Limit Citibank TFC, TCC , and TNC USD 60,000 ZYEC USD 10,000 Standard Chartered Bank TCC USD 47,500 ZYEC USD 10,000 TNC USD 30,000 China Construction Bank TFC and TCC CNY 2,600,000 TNC CNY 400,000 Credit Agricole Corporate and TFC and TCC USD 55,000 Investment Bank Bank of America TCC USD 110,000 Mizuho Corporate Bank TCC USD 50,000 Sumitomo Mitui Banking TCC USD 75,000 Corporation TNC USD 30,000 China Trust Commercial Bank ZYEC USD 10,000 Bank of China ZYEC CNY 35,000
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June 30, 2012 Bank Companies Limit The Shanghai Commercial & TNC USD 5,000 Savings Bank Taipei Fubon Bank TNC USD 30,000 Australia & New Zealand TFC and TCC CNY 260,000 Banking ZYEC USD 5,000 TNC USD 25,000 Agricultural Bank of China TNC CNY 300,000 Cathay United Bank TNC USD 40,000 Mega International TCC USD 70,000 Commercial Bank Taishin International Bank TNC USD 20,000
June 30, 2011 Bank Companies Limit Citibank TFC, TCC , and TNC USD 60,000 ZYEC USD 10,000 Standard Chartered Bank TCC USD 47,500 ZYEC USD 10,000 TNC USD 30,000 China Construction Bank TFC and TCC USD 300,000 TNC CNY 400,000 Credit Agricole Corporate and TFC and TCC USD 55,000 Investment Bank Bank of America TCC USD 110,000 Mizuho Corporate Bank TCC USD 50,000 Sumitomo Mitui Banking TCC USD 75,000 Corporation TNC USD 10,000 China Trust Commercial Bank ZYEC USD 10,000 Bank of China ZYEC CNY 70,000 Bank SinoPac TCC USD 50,000 The Shanghai Commercial & TNC USD 5,000 Savings Bank Taipei Fubon Bank TCC USD 30,000 TNC USD 40,000 ZYEC USD 10,000 Cathay United Bank TNC USD 20,000 Australia & New Zealand TFC and TCC CNY 260,000 Banking TNC USD 25,000 ZYEC USD 5,000 Agricultural Bank of China TNC CNY 300,000 Mega International TCC USD 70,000 Commercial Bank
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(f) Accounts and Notes Receivable (Payable) June 30, 2012 June 30, 2011 Amount % Amount % Accounts Receivable QCH $ 42,634,380 23.42 39,393,125 23.18 Others 4,587,637 2.52 1,257,891 0.74 Total $ 47,222,017 25.94 40,651,016 23.92
Other Receivable QSI $ 111,415 7.56 169,276 10.51 TNC 395,628 26.86 431,975 26.83 Others 61,267 4.16 151,057 9.38 Total $ 568,310 38.58 752,308 46.72
Other receivable includes dividend receivable and raw materials purchased on behalf of related parties. June 30, 2012 June 30, 2011 Amount % Amount % Other Current Assets Total $ 1,918 1.44 1,628 0.59
Accounts Payable TFC $ 916,708 0.68 6,561,752 5.12 TCC 64,978,449 47.87 61,371,955 47.93 KSH 119,826 0.09 113,652 0.09 TNC 2,643,585 1.95 2,110,228 1.65 TGC 872,080 0.64 553,785 0.43 TFQ 4,217,225 3.11 2,260,881 1.77 Others 9,700 0.01 4,860 0.01 Total $ 73,757,573 54.35 72,977,113 57.00
Accrued Expense Total $ 107,183 1.51 204,296 2.99
Other Payable Total $ 32,436 0.18 33,782 0.16
Other Financial Liability - Current Total $ 16,998 0.25 18,943 0.44
Other Current Liabilities Total $ 7,118 0.12 11,125 0.26
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(6) Restricted Assets As of June 30, 2012 and 2011, the following assets were restricted for use or restricted as collateral: Assets June 30, 2012 June 30, 2011 Purpose of Pledge Restricted deposits $ 2,667 20,458 Application for customs Other financial assets - noncurrent 38,425 10,991 Rental deposits for office (refundable deposits) Total $ 41,092 31,449
(7) Major Commitments and Contingencies
For the period ended of June 30, 2012 and 2011, the major commitments and contingencies were as follows:
(A) As of June 30, 2012 and 2011, promissory notes issued as guarantee for debt, foreign exchange forward contracts, export acceptances, and deposits for foreign labor application were $50,050,000, USD 2,109,000 and $51,781,260, USD 1,468,938 , respectively.
(B) As of June 30, 2012 and 2011, promissory notes received for outsourcing production, contracts complying and construction contracts were $388,378 and $390,272, respectively.
(C) The Company had accrued royalty reserve based on sales amount or quantity to use patented technologies involved in the development of its products. Because the final agreements have not been reached, the royalty reserve will be adjusted when the related contracts are finalized and signed.
(D) In 2006, the Company entered into software use agreement with non-related parties involved in the research of its products. The royalty payments were determined by the sales quantities.
(E) In 2006, the Company entered into a royalty agreement with non-related parties involved in the technologies to use computer and other related products. The Company is required to pay royalty commencing on 2007 according to agreement.
(F) During September, 2006, the Company entered into a patent agreement with Samsung Electronics Co., Ltd. due to a patent lawsuit in the United States of America.
(G) On August 29, 2008, the Company entered into a patent agreement with LG Electronic Inc. due to a patent lawsuit in the United States of America.
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(H) Litigation:
On September 14, 2007, Laser Dynamics, Inc. (Laser) filed a patent infringement complaint against the Company and two other companies in the Texas District Court. The Jury of Marshall District Court returned a unanimous verdict in favor of Laser Dynamics and against the Company, based on the Court’s submission of questions to the jury and the evidence presented at trial on July 6, 2009. The compensation was USD 57,456 including pre-judgment interest. The Company requested for rehearing and was accepted by the judge to reconsider the aforementioned compensation amount. For the period ended June 2010, amendment of compensation was given totaled USD 6,200. Further Laser Dynamics requested for a rehearing with the jury, which reopened on January 2011 the given amendment of compensation amounted to USD 8,500. As of July 2011, the Company continues to appoint the solicitors to appeal on the verdict of infringement consequently and in process of Oral Argument on March 2012.
(8) SIGNIFICANT CATASTROPHIC LOSSES: None.
(9) SIGNIFICANT SUBSEQUENT EVENTS: None.
(10) Others (A) Personnel, depreciation, and amortization expense categorized as operating cost or expense were as follows:
Categorized as For the Six Months Ended June 30, 2012 For the Six Months Ended June 30, 2011 Operating Operating Total Operating Operating Total Nature Cost Expense Cost Expense Personnel expenses Salary expense 86,802 3,603,457 3,690,259 475,212 3,406,676 3,881,888 Health and labor 5,754 170,726 176,480 24,147 158,895 183,042 insurance expense Pension expense 3,737 129,479 133,216 12,661 112,097 124,758 Other expense 12,021 252,351 264,372 85,406 210,941 296,347 Depreciation expense 34,836 199,723 234,559 53,168 186,951 240,119 Amortization expense 411 16,903 17,314 97 17,032 17,129
(B) For the six months ended June 30, 2012 and 2011, the Company participated in public welfare and donated $195,745 and $147,425 to Epoch Foundation, which was reported as operating expense, and no particular agreement was entered between the Company and the recipient. (C) Certain accounts for the six months ended June 30, 2011 financial statements were reclassified to conform to the presentation of the six months ended June 30, 2012 financial statements.
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(D) Major foreign currency assets and liabilities information: June 30,2012 June 30,2011 Foreign Exchange Foreign Exchange Currency Rate Currency Rate Financial Asset Monetary Iterm USD $ 8,067,621 29.92 7,167,193 28.82 Long-term Investment underEquity methoud USD 953,253 29.92 780,773 28.82 Financial Liability Monetary Iterm USD 7,078,574 29.92 6,918,596 28.82
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