CONTENTS...TECO ELECTRIC & MACHINERY CO., LTD. 1 CONTENTS I.Letter to Shareholders 2 II. Company...

1TECO ELECTRIC & MACHINERY CO., LTD.

CONTENTS

I.Letter to Shareholders 2

II. Company Profile 4

III. Corporate Governance Report3.1 Organization 53.2 Directors, Supervisors and Management Team 73.3 Implementation of Corporate Governance 143.4 Information on CPA fee 253.5 Information on Replacement of CPA 253.6 Information on Service of the Company’s Chairman, President, and Financial or Accounting Managers at the Accounting Firm or Its Affiliates 253.7 Changes in Shareholding of Directors, Supervisors, Managers and Major Shareholders 263.8 Information Disclosing the Relationship between any of the Company’s Top Ten Shareholders 273.9 Long-Term Investments Ownership 28

IV. Capital Overview4.1 Capital and Shares 294.2 Corporate Bonds 334.3 Global Depository Shares 344.4 Employee Stock Options 354.5 Status of New Shares Issuance in Connection with Mergers and Acquisitions 364.6 Financing Plans and Implementation 36

V. Operational Highlights5.1 Business Activities 375.2 Market and Sales Overview 415.3. Human Resources 485.4 Information on Outlay for Environment Protection 485.5 Labor Relations 535.6 Important Contracts 55

VI. Financial Information6.1 Five-Year Financial Summary 566.2 Five-Year Financial Analysis 606.3 Supervisors’ Report in the Most Recent Year 62

VII. Review of Financial Conditions, Operating Results, and Risk Management7.1 Analysis of Financial Status 637.2 Analysis of Operation Results 637.3 Analysis of Cash Flow 647.4 Major Capital Expenditure Items 647.5 Investment Policy in Last Year, Main Causes for Profits or Losses, Improvement Plans and the Investment Plans for the Coming Year 657.6 Analysis of Risk Management 65

VIII. Special Disclosure8.1 Summary of Affiliated Companies 718.2 Private Placement Securities in the Most Recent Years 768.3 The Shares in the Company Held or Disposed of by Subsidiaries in the Most Recent Years 76

Financial Statements for the Years Ended December 31, 2012 and 2011, and Independent Auditors’ Report 77

Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011, and Independent Auditors’ Report 164

TECO ELECTRIC & MACHINERY CO., LTD.2

I. Letter to Shareholders

Dear Shareholders,

Affected by the Euro debt crisis and persistently sluggish global economy, Taiwan’s exports declined in 2012. At domestic front, influenced by hikes of gas and power rates and resumption of capital gains tax for stock investments, Taiwan’s GDP only grew 1.26% in the year, a five-year low. However, thanks to the concerted effort of our staffers, TECO still managed to firmly grasp profit-making opportunities, thereby boosting operating profits and net profits to recent highs.

A. Review of Business Performance in 2012Analysis of the company’s business performance in 2012 follows:

Unit: NT$ thousand

2012 2011 ChangeNet revenue 25,461,139 25,798,135 -1%

Operating income 1,754,248 1,182,535 48%

Net profits 2,964,701 2,783,210 7%

For net revenue, large motors and small motors boasted brisk order reception and shipment, boosting operating revenue. Due to decline in domestic contract engineering projects, engineering revenue dropped. Sales of home appliances, air conditioners, and system automation products also tumbled, due to languid consumption willingness amid the sluggish economy. Overall speaking, the company’s sales decreased 1% compared to 2011.For operating income, benefiting from price decline for raw materials, the company stepped up its effort in improving designs and augmenting production efficiency, lowering costs. Consequently, gross margin gained three percentage points in 2012 over the 2011 level. Strict control of various expenses also drove down operating expenses, thereby enabling the company’s operating income to rack up 48% growth compared to 2011.

For non-operating income, due to the effect of downturn of China’s domestic demand and slackening economy in Europe on the profits of the affiliates, investment returns under equity method diminished in 2012. Meanwhile, the company incurred forex loss, due to appreciation of NT dollar against major currencies. As a result, net non-operating income dropped.

Regarding R&D, in 2012, the company successfully developed a variety of products, including medium- and high-voltage spark-free explosion-proof motor, medium-voltage high-efficiency energy-saving motor, permanent-magnet direct-drive wind-power generator, multi-unit synchronous control technology for inverter, household multi-unit air conditioner in keeping within accordance with 2016 energy-saving standard , and 1,000-ton centrifugal chiller, which contain a total of 36 domestic and foreign patents.

www.teco.com.tw 3

B. Outline of 2013 Business PlanThe Cabinet-level Directorate General of Budget, Accounting, and Statistics predicts that Taiwan’s economy will grow 3.59% in 2013, with moderate upturn of the global economy.

Regarding domestic sales, as the engineering unit will start listing revenue from the execution of engineering projects undertaken last year, engineering revenue is expected to grow considerably this year. Thanks to recovery of the domestic economy and rollout of new products, domestic sales of home-appliances, air-conditioner, small motor, and system automation units will grow steadily this year. Regarding exports, in view of the economic recovery in America, thanks to Obama government’s policy encouraging return of manufacturers and the exploration of shale oil, sales of TECO’s subsidiaries in the U.S., Canada, and Mexico will pick up. Expected upturn of Europe will facilitate shipment of the company’s large motors, which, plus the rollout of LVED small motor series, will jack up exports to Europe. New contract-production orders from Japan will further induce steady export growth.

The company’s operating goal in 2013 focuses on the expansion of sales growth. The company is going to launch a litany of new products, including explosion-proof motor, high-efficiency motor, electric-vehicle motor, 510-series large industrial inverter, multi-unit household and commercial inverter air conditioners, and centrifugal chiller. Meanwhile, the company will actively explore the new markets of Turkey and India. In the aspect of management, the company will step up recruitment of excellent talent and carry out acquisition or strategic alliances, in order to enhance revenue growth.

The company commits to the materialization of corporate governance and fulfillment of corporate responsibility. In addition to passage of the evaluation of Taiwan Corporate Governance Association and obtaining of top 100-brand honor granted by the Ministry of Economic Affairs, the company gained corporate-citizen award granted by Common Wealth magazine and golden medal of Taiwan Excellence Awards in 2012. The company will adhere to consistent management concept of integrity, in order to maximize the benefits for shareholders and pursue high revenue and profit growth, so as to provide payback to the long-standing support and patronage of shareholders and investing public.

President Sophia ChiuTECO Electric & Machinery Co., Ltd


II. Company Profile2.1.1 Date of Incorporation: June, 19562.1.2 Company History1956 Established1970 Produced air conditioners and entered the home appliances market1986 Joint venture with Westinghouse Electric to form TECO Westinghouse Motor1989 Founded TECO Industry Malaysia Sdn. Bhd.1990 Founded Toshiba Compressor (Taiwan) Corp. with Toshiba1992 Established Yatec Engineering Corporation with Yaskawa Electric Manufacture Co., Ltd of Japan1995 Acquired Westinghouse Motor Co., Ltd (USA)1998 Founded TECO Electro Devices Co., Ltd. for manufacturing of stepping motors

1999 Founded TECO (Dong Guan) Air Conditioning Equipment Co., Ltd. for manufacturing and sales of commercial air conditioning

2000 Founded Suzhou TECO Electric & Machinery Co., Ltd for the production and distribution of small motors2001 Established Smart Card Division for National Health Insurance IC-card project

2002 Founded Wuxi TECO with China Steel, Nippon Steel and Marubeni-Itochu Steel for production and distribution of large motors

2003 Wuxi TECO Electric & Machinery Co., Ltd commenced mass productionMerged Tai-An Electric Co., Ltd.

2004 Exported large-sized LCD TV to JapanEstablished Jiangxi TECO Electric & Machinery Co., Ltd.

2005 Founded Yaskawa TECO Motor Engineering Corp. to expand to Japanese marketWon bid of orange/blue line extension projects of TRTS project

2006Strategic alliance with CTC to set up the first Wind Power Project in Texas, USAFounded TECO (Vietnam) Electric & Machinery Co., Ltd.Founded TECO Electric & Machinery (Chin-Tao) Co., Ltd. to manufacture compressors

2007

Joint venture with South Korea’s Finetec Century in setting up a compressor manufacturing facility in Qingdao, ChinaLaunch into Wind-Power Generation; introduce a 2MW Wind-Power generatorSet up Asia Innovative Technology (Xiamen) to produce LCD monitorsAnnounce the “TECO Go Eco” declaration to join the cause of reducing carbon emissions

2008Founded Fujian TECO Precision Co., Ltd.Asia Innovative Technology Co., Ltd.(Xiamen) commenced operationTECO Electric & Machinery (Chin-Tao) Co., Ltd. commenced production

2009 Completion of TECO Mexico plantInauguration of Qingdao TECO Century Inauguration of Tianjin operating center

2010 Inauguration of Fujian Teco Precision Co., Ltd.Rollout of TECO’s first 2MW wind-power turbineInauguration of TECO Sichuan Trading Co., Ltd.

2011

Formal operation of TECO’s large-scale 2MW wind turbineCompletion the new plant of Tai-An Technology (Wuxi) Co., Ltd.Inauguration the new plant of TECO Middle East (TME)Acquired An Yang Electric Co., Ltd. and Taitec Technology Co., Ltd. to enhance the competitiveness

2012 Gained corporate-citizen award granted by Common Wealth magazineAnnounced whole series electric vehicle motorTECO’s 2MW wind-power turbine got golden medal of Taiwan Excellence Awards

www.teco.com.tw 5

Chairman

Internal Audit Division

Legal Division

Business Development Center

Secretariat Division

President

Office of President

Finance Group

CRP Team

Quality Assurance Dept

Safety & Health Dept

Information Technology Dept

Asset Management Dept

Corporate Purchasing Division

Finance Division

Management Accounting Division

Human Resources Division

Green Electric

Machine Group

HouseholdAppliances

Group

IndustrialMotors &

ApplicationsGroup

IndustrialProduct &

SystemAutomation

Group

ECOEnergyGroup

TecoGroup

ResearchInstitute

PowerBusinessGroup

Smart Home Dept

III. Corporate Governance Report3.1 Organization

3.1.1 Organization Chart


3.1.2 Major Corporate Functions

Business Unit Operations

Industrial Motors & Applications

Production and sales of medium to large-sized 3-phase motors, medium to large-sized high-efficiency motors, medium to large-sized explosion-proof motors, medium to large-sized inverter-duty motors, DC motor and medium to large-sized generators.

Green Electric Machine

Production and sales of single-phase motors, vehicle-used motors, permanet magnet motors, small-sized 3-phase motors, small-sized high-efficiency motors, small-sized explosion-proof motors, small-sized inverter-duty motors, small-sized generators, aluminum refining and smelting, small-sized coolant compressors.

Industrial Products & System Automation

Production and sales of AC/DC motor controls, molded-case circuit breakers, electronic relays, inverters and programmable logic controllers, servo controllers.

Power Business

R&D, design, production, and sales of equipment and systems meant for the supply of electrical power; undertaking of projects related to power distribution and generation, alternative energy, and rail stations and depots.Air-conditioning equipment for specific environments such as clean rooms; design, construction, and management of electrical engineering systems for high-rise buildings; integration of air-conditioning and electrical engineering systems for hospitals and hotels; water pump stations and other related projects. Ultra-high pressure 161KV/69KV substations switchgears and installation projects.

Household Appliances

Production, assembly, sales, and repair of air conditioners, refrigerators, washing machines, dehumidifiers, dryers, televisions, LCD monitors, air purifiers, small appliances, DVD recorders, stereo systems, health appliances, beauty appliances, freezer storages, loe-temperature caged carts, freezers, chillers for machine tools, condensing units ; dealership of other domestic and foreign home appliances brands.

ECO Energy GroupDevelopment, manufacturing, sales, and system integration of wind-power turbines, related equipments for solar power generators, wind/solar hybrid street lights.

Teco Group Research InstituteResearch and development catering to requirements of the medium-to-long term development of new products and technical support to members of the TECO group.

Intelligent System DivisionChip-embedded cards for financial, medical, national defense, and public transportation services; systems integration for ITS- and RFID-based cards; non-person vending machine.

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3.2 Directors, Supervisors and Management Team3.2.1 Directors and Supervisors

April 30, 2013

Title Name Date Elected Term(Years)

Date First Elected(Note)

Shareholding when Elected Current Shareholding Spouse & Minor

Shareholding

Shareholding by Nominee Arrangement Experience (Education) Other Position

Executives, Directors or Supervisors who are spouses or within two degrees

of kinship

Shares % Shares % Shares % Shares % Title Name Relation

ChairmanTong Ho Gloabl Investment Co., Ltd Representative : C.K. Liu

2012.6.152012.6.15

33

2000.4.212000.4.21

2,240,2620

0.12%0

2,240,262300,000

0.12%0.02%

0122,018

00.01%

00

00

Ph.D,University of IllinoisChairman of Tecom Co., Ltd. & TECO Holdings USA, Inc.

- - -

Managing Director

Theodore M.H. Huang 2012.6.15 3 1972.5.12 18,486,633 1.00% 18,486,633 0.98% 5,839,071 0.31% 0 0Master, University of Pennsylvania

Chairman of An-Tai International Investment Co., Ltd. & TECO Australia Pte Limited.

DirectorYu-Ren, Huang

Father & Son

Managing Director

Fred P.C. Huang 2012.6.15 3 1988.3.28 21,614,831 1.17% 21,614,831 1.14% 230,588 0.01% 0 0Master, University of TokyoBachelor, National Taiwan University

Chairman of Tecom Co., Ltd.,.. - - -

Managing Director

John C.T. Huang 2012.6.15 3 1991.5.8 15,279,849 0.83% 15,279,849 0.81% 2,110,934 0.11% 0 0Department of Economics,, Fu Jen Catholic University

Chairman of Sen Yeh Construction Co., Ltd. & Wan Yu Development Co., Ltd.

- - -

Managing & Independent Director

Sush-Der, Lee (Note) 2012.6.15 3 20012.6.15 0 0 0 0 0 0 0 0 Minister, Ministry of FinanceChair Professor Emeritus of Department of Finance, Chung Yuan Christian University

- - -

Independent Director

Tian-Jy, Chen 2012.6.15 3 20012.6.15 0 0 0 0 16,356 0.00% 0 0

Minister without Portfolio, Executive Yuan Chairperson of Council for Economic Planning and Development

Professor of Department of Economics, National Taiwan University

Independent Director

Chen, Chin-Chien 2012.6.15 3 20012.6.15 0 0 0 0 989 0.00% 0 0Director-General, Taipei National Tax Administration, Ministry of Finance

None

Director Hsien Sheng Kuo 2012.6.15 3 1982.3.27 9,126,238 0.49% 9,126,238 0.48% 1,573,020 0.08% 0 0 Tamkang UniversityChairman of Ping Tung Bus Lines Co., Ltd. & Nantou Bus Lines Co., Ltd.

DirectorYaskawa Electric Corporation. Representative : Masao Kito

2012.6.152012.6.15

33

2006.6.152007.4.30

29,541,0890

1.60%0

29,541,0890

1.58%0

00

00

00

00

Nagoya Institute of Technology

- - -

DirectorKuang Yuan Industrial Co., Ltd. Representative: Shih Chien Yang

2012.6.152012.6.15

33

2009.6.192009.6.19

22,033,9190

1.19%0

22,033,9190

1.16%0

00

00

00

00

Ph.D.,Northwestern University, US

Chairman of Global Strategic Venture Capital Co., Ltd. & Huan Xun Venture Capital Co., Ltd.

- - -

DirectorTung Kuang Investment Co., Ltd.Representative : Sohpia Chiu

2012.6.152012.6.15

33

2000.4.212006.6.15

30,341,3642,241,964

1.64%0.12%

30,341,3641,741,964

1.60%0.09%

016,987

00%

00

00

Master, University of Michigan, Ann-Arbor

Chairman of Asia Pacific Telecom Co., Ltd. & Taiwan Pelican Express Co., Ltd…

- - -

DirectorTung Kuang Investment Co., Ltd.Representative : Hong-Xiang, Lin

2012.6.152012.6.15

33

2000.4.212006.6.15

30,341,3642,923,893

1.64%0.16%

30,341,3642,923,893

1.60%0.15%

00

00

00

00

Master, University of Houston

Chairman of Tong Dai Co., Ltd. & TECO Electric & Machinery Pte Ltd.

- - -

DirectorLien Chang Electronic Co., Ltd.Representative: Chin San, Chien

2012.6.152012.6.15

33

2009.6.191997.5.24

4,173,0005,417,181

0.23%0.29%

4,173,0005,417,181

0.22%0.29%

01,285,214

00.07%

00

00

Director of TECO Electric & Machinery Pte. Ltd.

Director of Lien Quan Investment & Development Co., Ltd.

- - -

DirectorMao Yang Co., Ltd. Representative: Yong-Xiang Chang

2012.6.152012.6.15

33

1994.4.282006.9.6

5,000,8930

0.27%0

5,000,8930

0.27%0

00

00

00

00

Minghsin University of Science & Technology

Chairman of Hong Tong Co., Ltd. & Vice Chairman of Taiwan Wax Company Ltd.

- - -

DirectorCreative Sensor Inc.Representative: Yu-Ren, Huang

2012.6.152012.6.15

33

2009.6.192012.6.15

10,000,000234,623

0.54%0.01%

10,000,000234,623

0.53%0.01%

00

00

00

00

Master,Columbia UniversityChairman of Creative Sensor Inc. & TECO Image Systems Co., Ltd.

Managing Director

Theodore M.H. Huang

Father& Son

Note: To be the Chairman of Taiwan Stock Exchange, the company’s Managing & Independent Director, Mr. Sush-Der, Lee resigned on Feb. 25, 2013.


Annual Report2011

Datas for Directors and SupervisorsApril 30, 2013

Criteria

Name

Meet One of the Following Professional Qualification Requirements, Together with at Least Five Years Work Experience Independence Criteria(Note)

Number of Other Public Companies in Which the Individual is Concurrently Serving as an Independent Director

An Instructor or Higher Position in a Department of Commerce, Law, Finance, Accounting, or Other Academic Department Related to the Business Needs of the Company in a Public or Private Junior College, College or University

A Judge, Public Prosecutor, Attorney, Certified Public Accountant, or Other Professional or Technical Specialist Who has Passed a National Examination and been Awarded a Certificate in a Profession Necessary for the Business of the Company

Have Work Experience in the Areas of Commerce, Law, Finance, or Accounting, or Otherwise Necessary for the Business of the Company 1 2 3 4 5 6 7 8 9 10

Tong Ho Gloabl Investment Co., Ltd Representative : C.K. Liu

V V V V V V V V V

Theodore M.H. Huang V V V V V V V V 1

Fred P.C. Huang V V V V V V V V

John C.T. Huang V V V V V V V V V V 1

Tian-Jy, Chen V V V V V V V V V V V V 2

Chin-Chien, Chen V V V V V V V V V V V

Hsien Sheng Kuo V V V V V V V V V V V

Yaskawa Electric Corporation. Representative : Masao Kito V V V V V V V V V V

Kuang Yuan Industrial Co., Ltd.Representative : Shih Chien Yang V V V V V V V V V

Tung Kuang Investment Co., Ltd.Representative : Sophia Chiu V V V V V V V V

Tung Kuang Investment Co., Ltd.Representative : Hong-Xiang, Lin

V V V V V V V V

Lien Chang Electronic Co., Ltd.Representative : C. S. Chien V V V V V V V V V V

Mao Yang Co., Ltd. Representative: Yong-Xiang Chang

V V V V V V V V V V

Creative Sensor Inc.Representative: Yu-Ren, Huang V V V V V V

Note: Please tick the corresponding boxes if directors or supervisors have been any of the following during the two years prior to being elected or during the term of office.1. Not an employee of the Company or any of its affiliates.2. Not a director or supervisor of the Company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the Company, its

parent company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares.3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate

amount of 1% or more of the total number of outstanding shares of the Company or ranking in the top 10 in holdings.4. Not a spouse, relative within the second degree of kinship, or lineal relative within the fifth degree of kinship, of any of the persons in the preceding three subparagraphs.5. Not a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total number of outstanding shares of the Company or that holds shares

ranking in the top five in holdings.6. Not a director, supervisor, officer, or shareholder holding 5% or more of the share, of a specified company or institution that has a financial or business relationship with the Company.7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal,

financial, accounting services or consultation to the Company or to any affiliate of the Company, or a spouse thereof.8. Not having a marital relationship, or a relative within the second degree of kinship to any other director of the Company.9. Not been a person of any conditions defined in Article 30 of the Company Law.

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

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Title Name Date Effective

Shareholding Spouse & Minor Shareholding

Shareholding by Nominee

Arrangement Experience(Education) Other Position

Managers who are Spouses or Within

Two Degrees of Kinship

Shares % Shares % Shares % Title Name Relation

President Sophia Chiu 2005.6.1 1,741,964 0.092% 16,987 0.001% - -

Master, University of Michigan, Ann-Arbor

Supervisor of Tecom Co., Ltd. - - -

Executive Consultant S.C. Lin 2000.7.1 1,532,245 0.081% 40,434 0.002% - -

National Taiwan University

Chairman of Teco Westinghouse Motor Company

- - -

Vice President George Lien 2001.8.1 1,403,130 0.074% 0 - - -

Master, Stevens Institute of Technology

Chairman of Media Vision Inc. - - -

Assistant Vice President

Hong Xiang Lin 1998.8.21 2,923,893 0.154% 0 - - -

Master, University of Houston

Chairman of Tong Dai Co., Ltd. - - -


Yu Kuang Wang 2003.10.01 757,806 0.040% 28,622 0.002% - - Tatung

University

Director, Micropac (BVI) Worldwide

- - -


Steven Chiang 2011.12.25 0 - 0 - - - Ph.D,University of Florida

Chairman of Yatec Engineering Corporation

- - -


Chin-Liang Yang 2013.3.26 323,938 0.017% 133,998 0.007% - - National Cheng

Kung University

Chairman of Tong Tai Jung Co., Ltd.

- - -

3.2.2 Management TeamApril 30, 2013


3.2.3 Remuneration of Directors, Supervisors, President, and Vice President

Remuneration of Directors(Including Independent Directors) Unit: NT$ thousand

Code Title Name

Remuneration Relevant remuneration received by directors who are also employees

Compensation paid to directors from an invested

company other than the

company’s subsidiary

Base Compensation(A) Severance Pay(B) Bonus to Directors(C) Allowances(D)Ratio of total remuneration

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

Salary, Bonuses, and Allowances (E) Severance Pay (F) Profit Sharing- Employee Bonus (G) Exercisable Employee

Stock Options (H)

Ratio of total compensation (A+B+C+D+E+F+G) to net

income(%)

The company

Companies in the

consolidated financial

statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statementsThe company

Companies in the


statements

The company

Companies in the


statementsCash Dividend

Stock Dividend

Cash Dividend

Stock Dividend

1 Chairman

Tong Ho Gloabl Investment Co., Ltd Representative : C.K. Liu

- - - - Total:101,269

Total:101,269

Total:785

Total:1,256 3.44% 3.46% Total:

7,632Total:8,832

Total:108

Total:108

Total:3,238 - Total:

3,238 - - - 3.81% 3.87% Yes

2 Managing Director

Theodore M.H. Huang

3 Managing Director Fred P.C. Huang

4 Managing Director John C.T. Huang

5Managing & Independent Director

Sush-Der, Lee

6 Independent Director Tian-Jy, Chen

7 Independent Director Chin-Chien, Chen

8 Director

Yaskawa Electric Corporation. Representative : Masao Kito

9 Director

Kuang Yuan Industrial Co., Ltd.Representative: Shih Chien Yang

10 Director

Tong Kuang Investment Co., Ltd.Representative: Hong-Xiang, Lin & Sophia Chiu

11 Director Hsien Sheng Kuo

12 Director

Lien Chang Electronic Co., Ltd.Representative: C. S. Chien

13 DirectorMao Yang Co., Ltd. Representative: Yong-Xiang Chang

14 Director Creative Sensor Inc.

15Managing & Independent Director

Hong Chang Chang

16 Director

Jung Gi Investment Co., Ltd.Representative: Emilie Sun

17 Director

Grand Pacific Investment & Development Co., Ltd.Representative: Mao-Nan Jian

Note: No actural retirees in 2012; the figures in this column refer to provision or earmarking for severance and retiretn funds.

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Bracket

Name of Directors(Note 1)Total of (A+B+C+D) Total of (A+B+C+D+E+F+G)

The companyCompanies in the

consolidated financial statements

The companyCompanies in the

consolidated financial statements

Under NT$ 2,000,000 5,6,7,15 5,6,7,15 5,6,7,15 5,6,7,15NT$2,000,000 ~

NT$5,000,00016, 17 16, 17 16, 17 16, 17

NT$5,000,000 ~

NT$10,000,0002, 3, 4, 8, 9, 10, 11,12,13,14 3, 4, 8, 9, 10, 11,12,13,14 3, 8, 9, 10, 11,12,13,14 3, 8, 9, 10, 11,12,13,14

NT$10,000,000 ~

NT$15,000,000 1 1, 2 1, 4 1, 4

NT$15,000,000 ~

NT$30,000,0002 2

NT$30,000,000 ~

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

NT$100,000,000Over NT$100,000,000Number of Directors 17 17 17 17

Note 1: Shown by code of Directors in the previous table

Remuneration of SupervisorsUnit : NT$ thousand

Code Title Name

Remuneration Compensation paid to

supervisors from an invested company

other than the company’s subsidiary

Base Compensation(A) Severance Pay(B) Bonus to Directors(C) Allowances(D)Ratio of total

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

The company

Companies in the consolidated

financial statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

The company

Companies in the


statements

1 Resident supervisor Tong Shung Wu - - - - 825 825 61 67 0.03% 0.03%

None

2 Supervisor

Tung Kuang Investment Co., Ltd.Representative: Bo Yuan Wang & Hsin-Yi Lin (Note 1)

- - - - Total:4,635

Total:4,635

Total:0

Total:0

Total0.16%

Total0.16%

(Note 1) Compensations for the supervistor should be publized separately, since over 50% of his shareholding has been mortgaged.

BracketName of Supervisors (Note 1)

Total of (A+B+C+D)The company Companies in the consolidated

financial statementsUnder NT$ 2,000,000 1 1NT$2,000,000 ~ NT$5,000,000 2 2NT$5,000,000 ~ NT$10,000,000NT$10,000,000 ~ NT$15,000,000 NT$15,000,000 ~ NT$30,000,000NT$30,000,000 ~ NT$50,000,000NT$50,000,000 ~ NT$100,000,000Over NT$100,000,000Number of Supervisors 2 2

Note 1: Shown by code of Supervisors in the previous table


Compensation of President and Vice PresidentUnit : NT$ thousand

Code Title Name

Salary(A) Severance Pay (B)Bonuses and Allowances

(C)Profit Sharing- Employee Bonus (D)

Ratio of total compensation (A+B+C+D)

to net income(%)

Exercisable Employee Stock Options

Compensation paid to the

president and vice president from an invested company

other than the company’s subsidiary

The company

Companies in the consolidated financial

statements

The company


statements

The company


statements

The company

Companies in the consolidated

financial statements

The company


statements

The company


statementsCash Stock Cash Stock

1 President Sophia ChiuTotal:

17,986Total1:8,604

Total:1,530

Total:1,530

Total:17,218

Total:19,250

Total:15,016

-Total:

15,016- 1.86% 1.88% - - Yes

2Executive Consultant

S.C. Lin

3 Vice President George Lien

4Assistant Vice President

Hong Xiang Lin


Yu Kuang Wang


StevenChiang

Note: No actural retirees in 2012; the figures in this column refer to provision or earmarking for severance and retiretn funds.

Bracket Name of President and Vice President (Note 1)The company Companies in the consolidated

Under NT$ 2,000,000

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

NT$5,000,000 ~ NT$10,000,000 2, 3, 4, 5, 6 3, 4, 5, 6

NT$10,000,000 ~ NT$15,000,000 1 1, 2

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

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

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

Over NT$100,000,000

Number of Executives 6 6

Note 1: Shown by code of Executives in the previous table

www.teco.com.tw 13

Unit : NT$ thousand

Title Name

Employee

Bonus- in

Stock(Fair

Market Value)

Employee

Bonus- in

Cash

TotalRatio of Total Amount

to Net Income(%)

Executive

Officers

President Sophia Chiu

Total:

17,620

Total:

17,6200.59%

Executive Consultant S.C. Lin

Vice President George Lien

Assistant Vice President Hong Xiang Lin

Assistant Vice President Yu Kuang Wang

Assistant Vice President Steven Chiang

Group Director Andy Liu

Group Director Kevin Yeh

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

Unit : NT$ thousand

YearTotal remuneration paid to directors, supervisors,

presidents and vice presidents

Ratio of total remuneration paid to directors,

supervisors, presidents and vice presidents to

net income (%)

2012 174,630 5.89%

2011 164,917 5.93%

The company’s compensations are set according to levels offered by peers for the same positions, responsibilities of the positions, and their contribution to the company in achieving its business goal. The determination of compensations is based on the company’s guidelines for performance and compensations, which take into account the company’s overall business performance, achievement of an employee’s personal performance goal, and his/her contribution to the corporate performance, in order to reach reasonable levels of compensation. Year-end bonus is paid out according to a fixed share of net profits, which can only be changed by a resolution of the board of directors.


3.3 Implementation of Corporate Governance3.3.1 Board of Directors

A total of 9 meetings of the board of directors were held in 2012, director attendance was as follows:

Title Name Attendance in Person(B) By Proxy Attendance

rate (%)B/A Remarks

Chairman Tong Ho Gloabl Investment Co., Ltd Representative : C.K. Liu 9 0 100 % Continued (2012.6.15 Re-election)

Required Attendance Times: 9

Managing Director Theodore M.H. Huang 9 0 100 % Continued (2012.6.15 Re-election)Required Attendance Times: 9

Managing Director Fred P.C. Huang 7 2 78 % Continued (2012.6.15 Re-election)Required Attendance Times: 9

Managing Director John C.T. Huang 8 1 89 % Continued (2012.6.15 Re-election)Required Attendance Times: 9

Managing & Independent Director Sush-Der Lee 5 0 100 % New elected (2012.6.15 Re-election)


IndependentDirector Tian-Jy Chen 2 3 40 % New elected (2012.6.15 Re-election)Required Attendance Times: 5

IndependentDirector Chin-Chien Chen 5 0 100 % New elected (2012.6.15 Re-election)Required Attendance Times: 5

Director Yaskawa Electric Corporation. Representative : Masao Kito 1 8 11 % Continued (2012.6.15 Re-election)


Director Kuang Yuan Industrial Co., Ltd.Representative: Shih Chien Yang 6 3 67 % Continued (2012.6.15 Re-election)


Director Tung Kuang Investment Co., Ltd.Representative: Sophia Chiu 5 0 100% New elected (2012.6.15 Re-election)


Director Hsien Sheng Kuo 7 2 78% Continued (2012.6.15 Re-election)Required Attendance Times: 9

Director Lien Chang Electronic Co., Ltd. Representative : Chin San Chien 8 1 89 % Continued (2012.6.15 Re-election)


Director Mao Yang Co., Ltd. Representative: Yong-Xiang Chang 5 4 56% Continued (2012.6.15 Re-election)


Director Tung Kuang Investment Co., Ltd.Representative: Hong-Xiang Lin 5 0 100% New elected (2012.6.15 Re-election)


Director Creative Sensor Co., Ltd.Representative: Yu-Ren Huang 5 0 100% New elected (2012.6.15 Re-election)


Managing & Independent Director Hong Chang Chang 4 0 100 % Already existed (2012.6.15 Re-election)


Director Creative Sensor Co., Ltd.Representative: S. C. Lin 3 1 75% Already existed (2012.6.15 Re-election)


Director Lien Chang Electronic Co., td.Representative: Sophia Chiu 4 0 100% Already existed (2012.6.15 Re-election)


Director Jung Gi Investment Co., td.Representative: Emilie Sun 4 0 100 % Already existed (2012.6.15 Re-election)


Director Kuang Yuan Industrial Co., td.Representative: Chung Te Chang 3 1 75 % Already existed (2012.6.15 Re-election)


DirectorGrand Pacific Investment & Development Co., Ltd.Representative: Mao-Nan Jian

4 0 100 % Already existed (2012.6.15 Re-election)Required Attendance Times: 4

Other mentionable items:1. If there are the circumstances referred to in Article 14-3 of Securities and Exchange Act and resolutions of the directors’ meetings objected to by Independent Directors or

subject to qualified opinion and recorded or declared in writing, the dates of meetings, sessions, contents of motions, all independents’ opinion and the Company’s response to independent directors’ opinion should be specified: None

www.teco.com.tw 15

2. The execution of Directors’ avoidance of motions in conflict of interest: i. Director’s Name:

Fred P.C. Huang (Managing Director).Contents of the case: Donation to “TECO Technology Foundation” for various events in 2012. (22-18 Board of Meeting, 2012.4.12)Reason for avoidance of conflict of interest and the status of voting: Since the aforementioned managing director also serves as director of the targeted property of the case (TECO Sci-tech, Culture, and Education Foundation), he left the meeting and abstained from taking part in the voting. Other directors passed the case without objection.

ii. Director’s Name:Tian-Jy Chen (Independent Director).Contents of the case: Appointment of members of the company’s second term of compensations committee. (23-1 Board of Meeting, 2012.6.15)Reason for avoidance of conflict of interest and the status of voting: Since the aforementioned independent director also serves as the membership of the compensations committee, he left the meeting and abstained from taking part in the voting. Other directors passed the case without objection.

iii. Director’s Name:Sush-Der Lee (Managing & Independent Director).Contents of the case: Share release in line with the application of Taiwan Pelican Express Co., Ltd. for share listing on the emerging enterprise market. (23-4 Board of Meeting, 2012.10.16)Reason for avoidance of conflict of interest and the status of voting: Since the aforementioned director also serves as the Chairman of Gre Tai Securities Market, he left the meeting and abstained from taking part in the voting. Other directors passed the case without objection.

3. Measures taken to strengthen the functionality of the Board: i. According to “Regulations Governing the Appointment and Exercise of Powers by the Remuneration Committee of a Company Whose Stock is Listed on the Stock

Exchange or Traded Over the Counter” promulgated by the Financial Supervisory Commission on March 18, 2011, the company’s board of directors resolved to set up compensations committee on August 22, 2011, whose members will be appointed by the board of directors. The committee will operate according to the company’s “organizational charter for compensations committee” and help improve the performance evaluation and compensations management system for ranking managers, so as to materialize corporate governance:

ii. In accordance with the corporate-governance norm and the guidance of Taiwan Stock Exchange, the board of directors passed the “Criteria for Ethic Behaviors of Directors and Managing Officers ” on Dec. 15, 2011, in order to induce conformance of the behaviors of the company’s directors and managerial staffers to ethical standards and strengthen corporate governance.

iii. According to the “Regulations Governing the Exercise of Powers by Audit Committees of Public Companies” promulgated by the Financial Supervisory Commission on March 28, 2006, the board of directors resolved to set up “audit committee” on June 15, 2012. The committee consists of independent directors (three seats) and operate according to “the organizational charter of auditing committee,” in order to assist the board of directors with policy making and improve corporate governance.

iv. The company arranges regular advanced-study courses for directors and supervisors, helping them obtain related information and retain the advantage and competence for core value and expertise.

The Operation of Supervisors and the Board of DirectorsThe Company set up “Audit Committee” on June 15, 2012 to replace the original supervisor system. A total of 9 meetings of the board of directors were held in 2012, and 4 meetings of the board of directors were held from Jan. 1, 2012 to June 14, 2012. Supervisor attendance was as follows:

Title Name Attendance in Person(B)

Attendance rate (%)B/A Remarks

Resident supervisor Tong Shung Wu 4 100 % Already existed (2012.6.15 Re-elected)Required Attendance Times: 4

Supervisor Tung Kuang Investment Co., Ltd.Representative: Bo Yuan Wang 3 75 % Already existed (2012.6.15 Re-elected)


Supervisor Tung Kuang Investment Co., Ltd.Representative: Hsin –Yi Lin 4 100 % Already existed (2012.6.15 Re-elected)


Other mentionable items:1. Composition and responsibilities of supervisors: (1) Communication between supervisors and employees/shareholders:

Supervisors have good communications with employees and shareholders, such as direct communication with shareholders during the annual shareholders’ meeting. Email address of Supervisors: [email protected]

(2) Communications between supervisors and the Company's Chief Internal Auditor and CPA (e.g. the items, methods and results of the audits of corporate finance or operations, etc.):A. The company’s supervisors have direct communications channel with in-house auditing chief and certified public accountants. In compliance with the regulations of the

regulator, they carry out check of the company’s finance and business status regularly, as well as communicate with management and governing units directly.B. In addition to the reception of monthly auditing report, supervisors can require auditing chief to make business report for them. Auditing chief also has to deliver

business report on the quarterly meeting of the board of directors, assuring full communications on the execution and efficacy of auditing operation. C. Certified public accountants also report to supervisors on the result and finding of the auditing of financial statement every quarter.

2. If a supervisor expresses an opinion during a meeting of the Board of Directors, the dates of meetings, sessions, contents of motions, resolutions of the directors’ meetings and the Company’s response to supervisor’s opinion should be specified: None


3.3.2 Audit Committee

The Company set up “Audit Committee” on June 15, 2012 to replace the original supervisor system. The committee consists of independent directors (three seats), who select one among them as the convener and chairman of its meeting, and functions according to the company’s “organizational charter for the audit committee,” with the scope of its auditing covering the company’s financial statement, the company’s auditing and accounting policy and procedure, the company’s internal-control system, major transactions in assets or derivatives, raising or issuance of securities, appointment and dismissal of, along with compensations for, certified public accountant(s), and appointment and dismissal of financial, accounting, and internal-auditing managers.

A total of 5 meetings of the Audit Committee were held in 2012, and the Audit Committee attendance was as follows:

Title NameAttendance in Person

By ProxyAttendance

rate (%)Remarks

Convener & Chairman

Sush-Der, Lee 5 0 100 %New-elected (2012.6.15 Re-elected)Required Attendance Times: 5

Member Tian-Jy, Chen 4 1 80 %New-elected (2012.6.15 Re-elected)Required Attendance Times: 5

Member Chin-Chien, Chen 5 0 100 %New-elected (2012.6.15 Re-elected)Required Attendance Times: 5

Other mentionable items:

1. Items specified in article 14-5 of Securities Transaction Law and other items resolved by the board of directors with support of two thirds of directors but without

approval of the auditing committee.: None

2. The execution of Independent Directors’ avoidance of motions in conflict of interest:

i. Director’s Name: Sush-Der, Lee (Convener & Chairman).

Contents of the case:

Comply with the application of OTC trading - stock release case of Taiwan Pelican Express Co., Ltd. (1-4 Audit Committee Meeting, 2012.10.15)

Reason for avoidance of conflict of interest and the status of voting:

Since the aforementioned convener, Mr. Sush-Der, Lee, also serves as the chairman of Taiwan Stock Exchange, he left the meeting and abstained from taking part

in the voting. Mr. Tian-Jy, Chen was the deputy Chairman, and other directors passed the case without objection.

ii. Director’s Name: Tian-Jy, Chen (Independent Director).

Contents of the case:

Appointment of members of the company’s second term of compensations committee. (23-1 Board of Meeting, 2012.6.15)

Reason for avoidance of conflict of interest and the status of voting:

Since the aforementioned independent director also serves as the membership of the compensations committee, he left the meeting and abstained from taking

part in the voting. Other directors passed the case without objection.

3. Communication conditions among Independent Directors, Internal Audit Managers, and Accountants:

i. The company’s independent directors, internal-auditing managers, and certified public accountant(s) have direct contact channel. According to the regulations of

the regulator, they carry out regular check of the company’s financial and business status and directly communicate with the management unit and governing unit.

ii. In addition to the reception of monthly auditing report, an independent director can summon auditing chief to make business report to him/her. During the quarterly

meeting of the auditing committee, auditing chief would make internal-auditing report, thereby achieving full communications for the execution and achievement of

auditing operation.

iii. After completing the auditing of semi-annual or annual financial statement, the company’s certified public accountant(s) would report the results of his/her auditing

or perusal, as well as other mandatory items of communications, at the meeting of the audit committee.

www.teco.com.tw 17

3.3.3 Corporate Governance Execution Status and Deviations from “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies”

Items Implementation status Discrepancy with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies “ and reasons

A. Company’s shareholding structure and interests of shareholders a. Method for handling shareholders’ suggestions or disputes b. Grasp of the list of major shareholders and the ultimate controllers

behind major shareholders c. Method for the establishment of risk control mechanism and firewall

vis-à-vis affiliates

a. The company has instituted stock-affairs units for tackling shareholders’ opinions or disputes.

b. The company constantly grasps the list of major shareholders and the ultimate controllers of major shareholders.

c. There exist distinct separation between the personnel, assets, and financial management between the company and its affiliates. The company regularly inpsects the accounts and internal control system of affiliates and establishes proper risk control mechanism and firewall.

a. Compliance with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies “

b. Compliance with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies “

c. Compliance with Compliance with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies “

B. Constitution and responsibilities of the board of directors a. Status for the institution of independent directors b. Regularly evaluate the independence of certified public accountants

a. From the shareholders’ meeting on June 18, 2009, the company has instituted one independent director. From the shareholders’ meeting on June 15, 2012, the company has instituted three independent directors, for taking part in the company’s management and the operation of investment evaluation committee and other committees.

b. The company replaced certified public accountants in 2003, 2007, and 2010, which was approved by fifth meeting of the 20th board of directors (2003.9.18), tenth meeting of the 21st board and directors (2007.10.16), fifth meeting of the 22nd board of directors (2010.3.26), and sixth meeting of the 23rd board of directors (2013.3.26).

a. Compliance with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies”.

b. Compliance with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies”.

C. Establishment of communications channel with related parties The company has maintained good communications channel with related parties, including corresponding banks and other creditors, employees, consumers, suppliers, communities, in addition to respecting and upholding their legal rights.

Compliance with “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies “

D. Information publication a. The company sets up corporate website to disclose information on

finance and corporate governance. b. The company also publicizes information via other methods (such

as the setup of English-language website, designation of specific persons for the collection and disclosure of company information, implementation of spokesperson’s system, and posting of the process of investors’ conference on the website).

a. The company institutes website for disclosing the status of finance and corporate governance. The address of the corporate website: www.teco.com.tw

b. The company institutes English-language website (http://www.teco.com.tw/en_version/index.asp), designates specific persons for the collection and disclosure of corporate information, and implements spokesperson’s system.


E. The status of the operation of nomination, compensations and other functional committees

The 22nd board of directors approved the establishment of “Salary and Compensations Committee” at its 13th meeting (2011.8.22) and the committee already held its first meeting on Dec. 30, 2011. The 23rd board of directors approved the establishment of “Audit Committee” at its 1st meeting (2012.6.15) and the committee already held its first meeting on Jul. 5, 2012.


F. Should the company has formulated guidelines for corporate governance according to “Corporate Governance Best-Practice Principles for TWSE/GTSM Listed Companies,” describe its operation and its difference with the latter.

The company has formulated guidelines for corporate governance and reported its contents to shareholders’ meeting in 2009. It has fully implemented the regulations of the guidelines.G. Other important information conducive to the understanding of the company’s governance (such as employees’ interest, concern for employees, investor relationship, supplier relationship, the rights of related

parties, advanced study of directors and supervisors, the implementation of risk management policy and risk appraisal criteria, implementation of client policy, and the taking out of liabilities insurance for directors and supervisors):

a. The company has formed labor union, which convenes regulation and communication with the management, so as to uphold the interest of employees. Regarding investor relationship, the company has established a specialized unit for regular disclosure of the company’s key business information, thereby enhancing transparency of corporate information, as well as feedback mechanism allowing investors to express their opinions on corporate development. The company also actively takes part in investors’ conference, informing investors of the company’s current operational status and development plan.

b. Attendance of directors in the meetings of board of directors is good and supervisors are also present. c. The company has taken out liabilities insurance for directors and supervisors. d. In 2012, the company’s directors undertook 42 hours of advanced study, and managerial staffers 21 hours.H. Should a company evaluate its corporate governance by itself or entrust specialized unit to undertake the evaluation, describe the evaluation outcome, major defects (or suggestions), and status of improvement.

In 2010, the company passed the evaluation of “Taiwan Corporate Governance Association” according th the criteria of “CG6005 common version.”The association put forth the following suggestions:

a. As members of the board of directors possess expertise in finance, accounting, and industry, the association suggested to convert professional external institutional directors as independent directors, to strengthen the governance performance of the board of directors.

b. The board of directors should evaluate the performance of ranking managers, to assure faithful implementation of the company’s development strategies in the short, medium, and long term. c. The company should formulate the group’s risk management policy and system, to as to monitor the company’s overall risk. Status of Improvement: a. According to the decree of FSC No. 1000010723, Mar. 22, 2011, the company has planned to institute three independent directors during the election for new directors at the shareholders’ meeting in 2012. b. The 22nd board of directors approved the establishment of “Salary and Compensations Committee” at its 13th meeting (2011.8.22) and the committee already held its first meeting on Dec. 30, 2011. The committee

will regularly evaluate the performance of directors, supervisors, and managerial staffers, as well as the policy, system, standard, and structure of salary and compensations, before putting its proposal to the board of directors for discussion.

c. The 23rd board of directors approved the establishment of “Audit Committee” at its 1st meeting (2012.6.15) and the committee already held its first meeting on Jul. 5, 2012. The “Audit Committee” will supervise the following items:

(a)Propriety of the company’s financial statement (b)The selection (dismissal) of certified public accountants, their independence and performance (c)Effective implementation of internal control (d)Compliance with related laws and regulations (e)Management of existing or potential risks.


3.3.4 Compensations Committee

Information on Members of Compensations Committee

Status(note 1)

Conditions

Name

Whether or not possess over five years of working experience and following professional qualifications Conformance to independency (note 2)

Number of part-time positions on the compensations c o m m i t t e e s o f other companies

Note (3)

I n s t r u c t o r s o r h i g h e r p o s i t i o n i n t h e f i e l d s o f c o m m e r c e , l a w, finance, accounting o r o t h e r re l a t e d d e p a r t m e n t s a t universities

Judges, prosecutors, lawyers, certified public accountants, o r o t h e r re l a t e d p ro f e s s i o n a l s o r t e c h n i c i a n s w i t h government licenses

W o r k i n g e x p e r i e n c e i n c o m m e r c e , l a w , f i n a n c e , a c c o u n t i n g , o r o t h e r r e l a t e d fields

1 2 3 4 5 6 7 8

IndependentDirector

Tian-Jy, Chen v v v v v v v v v 1

Hong Chang, Chang v v v v v v v v v 1

Yong Ho, Chiu v v v v v v v v v 0

Norte 1: For the column of status, please fill in director, independent director, or other positions.

Note 2: For members conforming the following conditions during the two years before the appointment or the term of the position, please give a check mark “v”in the

black space under the code of various conditions:

(1) Not an employee of the company or its affiliates

(2) Not a director or supervisor of the company or its affiliates, excluding independent director at companies in which the company or its parent company owns

over 50% of voting right directly and indirectly

(3) Not a shareholder owning over 1% stake in the company, in the names of himself/herself, the spouse, offspring before the age of majority, or others, or not

one of the top-10 natural-person shareholders

(4) Not spouse or relatives within second kinship or relatives of direct lineage within third kinship of the aforementioned three kinds of persons

(5) Not director, supervisor, or employee of institutional shareholder owing over 5% stake in the company directly, or director, supervisor, or employee of the

top-five institutional shareholders

(6) Not director, supervisor, manager, or shareholder with over 5% stake of specific company or institution with financial or business dealing with the company

(7) Not professionals providing commercial, legal, financial, and accounting services or consulting to the company or its affiliates; not owner, partner,

director, manager, or spouse of such person of firms of sole proprietorship or partnership, companies, or institutions providing aforementioned services or

consulting to the company and its affiliates.

(8) Without cases mentioned in various clauses of Article 30 of Company Law

www.teco.com.tw 19

A. There are three members of the Compensations CommitteeB. The term of the current committee: June 15, 2012 to June 14, 2015. The committee has met twice (A) in the

recent year. The attendance and qualifications of committee members follow:

Title Name Number of

attendance (B)

Number of attendance via

proxy

Actual attendance rate (%) (B/A)

(note) Note

ChairmanHong Chang, Chang

2 0 100%2012.6.15 Reelection: Continued

MemberYong Ho, Chiu

2 0 100%2012.6.15 Reelection: Continued

Member Tian-Jy, Chen 2 0 100%2012.6.15 Reelection: New-elected

Member Cheng, Li 2 0 100%2012.6.15 Reelection: already existed

Other items needing registration: 1. In case the board of directors declines or modifies the suggestions of the compensations committee, specify

the date, number, contents, and resolutions of the meeting of the board and its handling of the opinions of the compensations committee. (If the compensations approved by the board are higher than the level suggested by the compensations committee, specify the difference and reason.)

2. If a member opposes or has reservation, on record or in written form, about the resolutions of the compensations committee, specify the date, number, and agenda of the meeting of the committee, as well as the way for the handling of member’s opinions.


3.3.5 Social Responsibility

Fulfillment of social responsibility: The company’s system, measures, and fulfillment for events related to social responsibility, including environmental protection, communal participation, social contribution, social services, public benefits, consumer rights, human rights, and security and hygienic.

Items Concrete measures

Difference with the "Corporate Social Responsibility Best

Practice Principles for TWSE/GTSM - Listed Companies"

and reasons A. Implementation of corporate governance a. Formulation of the policy or system for corporate social

responsibility and review of their implementation

b. Status for the institution of specialized unit, or unit on a partial-responsibility basis, for pushing corporate social responsibility

c. Regular undertaking of education, training, and promotion on corporate ethics for directors, supervisors, and employees, associate the events with performance evaluation system for employees, and the establishment of an effective system for incentives and punishment.

a. The company has distinct social responsibility policy, complies with international norm, and designates specific unit to handle the issue on a partial responsibility basis.

b. The company regularly undertakes education and training (including promotion) for directors, supervisors, and employees. No difference

B. Environment for sustainable developmenta. Status for the dedication of the company to enhancing the

utilization efficiency of various resources and utilizing recycled materials in lowering the impact on the environment;

b. Status of the company in establishing proper environmental-management system according to its industrial features;

c. Status of the company in the institution of specific environment-management unit or personnel to uphold environment;

d. Status of the company in formulating carbon-abatement and greenhouse-gases reduction strategy, in line with its concern for climatic change on its operation.

a. Develop IE4 high-efficiency motor and high-efficiency air-conditioners home appliance products to save the electricity ; the use of environment-friendly coolant, environment-friendly foaming solution for refrigerators, and the recycling and reuse of paper boxes;

b. Passage of the certification of ISO 14001, OHSAS18001, and TOSHMS.

c. The institution of specific safety and environment-protection unit and

personnel; d. Pushing of greenhouse-gas inspection, Chung-Li plant was already

certified, and formulation of energy-conservation and carbon-abatement program.

No difference

C. Upholding of public benefitsa. Status of the company in instituting proper management

methods and procedures concerning labor-related laws/regulations and the protection of the employees’ legal right;

b. Status of the company in providing a safe and healthy working environment for employees and carrying out safety and health education for employees regularly;

c. Status of the company in formulating and publicizing consumer interest policy and providing transparent and effective procedure for consumer complaints concerning its products and services;

d. Status of the company in cooperating with suppliers for jointly

fulfilling corporate social responsibility; e. Status of the company in participating in communal development

and events of charity/public-benefit bodies via commercial events, donation of physical goods, corporate volunteer service or other professional services.

a. Posting of employee work rules, performance evaluation measures, rules for employee leave on corporate poster;

b. Randomly publicity of health information, holding of fire-fighting safety drill and health lectures every half a year, and holding of safety education training and health promotion event annually;

c. Adoption of the quality policy of “topnotch products and zero consumer complaint”; provision of toll-free 365-days-a-year around-the-clock call center service and online repair request and inquiry service; instant notification for accidents of designated products, according to the policy of the Bureau of Standards, Metrology, and Inspection;

d. Cooperation with suppliers in undertaking carbon-footprint certification;

e. Regular sponsoring of “TECO Sci-Tech Award,” via TECO Technology Foundation, so as to encourage the development of Taiwan’s technological innovation; pushing of creativity education; and support for the sustainable development of aboriginal culture.

No difference

D. Intensification of information disclosurea. Method of the company in disclosing information on relevant and

reliable corporate social responsibility;b. Compilation of report on corporate social responsibility to

publicize its effort in pushing corporate social responsibility.

a. Publicize “Corporate Social Responsibility report” on the company’s website.

b. Plan to publicize 2011 “Corporate Social Responsibility report” on the company’s website in Dec. 2012.

No difference

E. Describe the operation of company’s guidelines for corporate social responsibility, should it exist, and its difference with “Corporate Social Responsibility Best Practice Principles for TWSE/GTSM - Listed Companies.”No difference

F. Other key information conducive to the understanding of the operation of corporate social responsibility (such as system and measures, as well as their fulfillment, of the company concerning environmental protection, communal participation, social contribution, social service, public benefits, consumer interest, human right, safety and hygienic).

Related information will be publicized by “Corporate Social Responsibility” report on the company’s website.

G. In case the company’s report on products or corporate social responsibility has passed the certification of related certification bodies, describe the inspection standards: a. The company’s report on products and corporate social responsibility complies with the standards of GRI (The Global Reporting Initiative). b. The compay doesn’t apply for external inspections yet.

www.teco.com.tw 21

3.3.6 Adherence to the Management Principle of Integrity and Measures

The company executes integrity-based management based on “Corporate Social Responsibility Best Practice Principles for TWSE/GTSM-Listed Companies.”

Items Status of operation

Difference with guidelines for integrity-based

management of listed companies and reasons

A. Formulate policy and program for integrity-based management (1) The company explicitly stresses the policy of integrity-based

management in its regulations, charters, and external documents and pledge of the board of directors and management for materializing the policy.

(2) Status of the company in formulating programs, as well as operating procedure, behavior guidelines, and education and training contained in the programs, to prevent dishonest behaviors.

(3) Status of the company, as specified in the program against dishonest behaviors, in preventing bribery, corruption, and provision of illegal political donations, when undertaking business activities with higher risk of dishonest behaviors

(1) Although the company has yet to formulate “guidelines for integrity-based management,” the company’s directors and management have been cautiously fulfilling their duties in compliance with the obligation of attention of a prudent administrator.

(2) The company has formulated behavioral guidelines, strictly forbidding employees to accept, without permission of superiors, gifts valued over NT$1,000 from companies or individuals with business dealings with the company. With permission of superiors, the gifts must be used for lot drawing at year-end party.

(3) The company’s legal-affairs office screens contracts and prevents violation of law in signing contracts, while the auditing office irregularly checks and continuously tracks status of improvement.

No major difference

B. Materialize integrity-based management(1) The company should avoid business dealings with parties with

dishonest behaviors on record and specify in business contracts articles of integrity-based behaviors.

(2) Status of the operation of the company’s unit responsible for pushing integrity-based management either on a specialized or part-time basis and the status of the supervision of the board of directors.

(3) Status of the company in formulating policy to prevent conflict of interest and providing proper reporting channel.

(4) Operation of the company’s effective accounting system and internal control system, designed to materialize integrity-based management and status of the operation of the company’s internal auditors.

(1) The legal-affairs office examines the contracts signed for external business activities, to avoid dealing with parties with dishonest behaviors on record.

(2) The company’s auditing office, overseen by the board of directors directly, audits the company’s internal operation and uncovers violation of integrity-based management.

(3) The company has formulated “behavioral guidelines,” forbidding all employees to accept benefits, to avoid sacrifice of company’s interests in exchange for employees’ personal interests.

(4) To materialize integrity-based management, the company has established effective accounting system and internal control system and internal auditors regularly check compliance with the two systems.

No major difference

C. Status of the company in establishing a reporting channel and penalty and complaint system for violation of integrity-based management.

The company stresses internal promotion of ethic ideas and encourages employees to report suspected or confirmed violations of laws/regulations or company regulations and charters to managerial staffers, internal auditing directors, supervisors, or other proper persons.

No major difference

D. Intensify information disclosure (1) The company discloses information related to integrity-based

management on its corporate website. (2) The company embraces other information disclosure methods

(such as setup of English-language website, designation of persons responsible for collection of company information and placement of information on the company’s website).

(1) The company doesn’t disclose information related to integrity-based management on website.

(2) The company has disclosed information to the regulator or the public in a complete, proper, timely, and correct manger on Market Observation Post System.

No major difference

E. Should the company formulate own guidelines for integrity-based management according to “Guidelines for Integrity-Based Management of Listed Companies,” specify its execution and difference with the guidelines.The company has not formulated yet.

F. Other key information conducive to the understanding of the company’s integrity-based management (such as promotion of the company’s determination and policy for integrity-based management among business partners, invitation of business partners for attending related education and training, and review and revision of the company’s guidelines for integrity-based management): The company materializes integrity-based management via compliance with Company Law, Securities Transactions Law, and regulations and laws governing listed firms, in addition to forbidding dishonest behaviors in business dealings.

3.3.7 Corporate Governance Guidelines and Regulations

The company has instituted “”Corporate Governance Principles”, and implemented the regulations of the guidelines faithfully. The docunment could be accessed on Market Observation Post System (http://mops.twse.com.tw) comforming to related regulations.


3.3.8 Other Important Information Regarding Corporate Governance

1. The important information regarding corporate governance has been disclosed on Market Observation Post System (http://newmops.twse.com.tw) comforming to related regulations.

2. Advanced studies for directors and supervisors in 2012:Title Name Date Organizer Training Course Time

Chairman Tong Kuang Investment Co., Ltd Representative : C.K. Liu 2012.12.4

ChunghwaCorpporateGovernanceAssociation

The Antitrust You Don’t Know 3 hrs

ManagingDirector Theodore M.H. Huang 2012.12.4



ManagingDirector Fred P.C. Huang 2012.12.4



Managing Director John C.T. Huang 2012.12.4



Managing & Independent Director

Sush-Der, Lee 2012.12.11


The Audit Committee Practice 3 hrs

Independent Director Tian-Jy, Chen

2012.5.11 Securities & Futures Institute

Forum for dut ies of L isted Companys’ Independent Directors 3 hrs

2012.8.3


Corporate Governance and Criminal Risk Management/ Operation Privacy Protection 3 hrs

Independent Director Chin-Chien, Chen 2012.12.4



Director Kuang Yuan Industrial Co., Ltd.Representative: Shih Chien, Yang 2012.12.4



Director Tung Kuang Investment CO., Ltd.Representative: Sophia Chiu 2012.12.4



Director Lien Chang Electronic Co., Ltd.Representative: Chin San, Chien 2012.12.4



Director Mao Yang Co., Ltd. Representative: Chin San, Chien 2012.12.4



Director Tung Kuang Investment CO., Ltd.Representative: Hong-Xiang, Lin 2012.12.4



Director Creative Sensor Inc.Representative: Yu-Ren, Huang 2012.12.4



www.teco.com.tw 23

3. Advanced studies for managing staffers in 2012:Title Name Date Organizer Traning course Time

President Sophia Chiu 2012.12.4



Vice President George Lien 2012.12.4



Assistant Vice President Hong-Xiang, Lin 2012.12.4



Assistant Vice President Steven Chiang 2012.12.4



Assistant Vice President Yu Kuang, Wang 2012.12.4



Group Director Andy Liu 2012.12.4



Group Director Kevin Yeh 2012.12.4



3.3.9 Internal Control System

Please refer to page 33 of the Chinese annual report.

3.3.10 In the recent year and up to the publication of the annual report, legal penalties for the company and internal staffers, penalties of internal staffers by the company for violation of internal control system and regulation, major defects and improvement status

None


3.3.11 Major Resolutions of Shareholders’ Meeting and Board Meetings

2012/03/20

(1) The Board of Directors resolved 2011 financial statements with operating revenue NT$25,798,135,000, EPS 1.54, and related financial reports material would be resolved by 2012 shareholders’ meeting.

(2) The Board of Directors resolved to hold the Annual Shareholders’ Meeting on June 15, 2012, where shareholders would deliberate on a proposed cash dividend of NT$0.90 per share, or a total of NT$1,654,922,000.

(3) The Board of Directors resolved to invest in China with a total amount of US$ 800,000 dollars to invest in Shanghai TECO Trade Co., Ltd., which will be responsible for the marketing planning and sales development of electric related products.

2012/05/02The Board of Directors resolved the 3rd issue of Domestic Unsecured Convertible Bonds with total par value up to NT$ 3 billion, issued period 3 years, and the raised funds would be used to redeem bank loans to reduce interest expense.

2012/06/15

Shareholders’ meeting(1) Acknowledged 2011 business report and financial statement. (2) Acknowledged 2011 earnings allocation, amounting to NT$0.90 per share for cash dividend payment.(3) Approved revision of “Articles of Incorporation”(4) Approved revision of “Procedure for Acquisition or Disposal of Assets”(5) Approved revision of “Rules Governing Shareholders’ Meeting”(6) Election of the 23rd term Board of Directors(7) Removal of restrictions on non-competition clauses for the 23rd term Board of Directors (including

Independent Directors)

2012/06/15The board of directors set the “ex-dividend base date” on July 9, 2012, paying out cash dividend of NT$1,654,921,724, or NT$0.9 per share, and setting the dividend payout date on August 3, 2012.

2012/06/15 The board of directors selected C.K Liu to be the new Chairman.

2012/07/30The board of directors resolved to dispose securities of Taiwan Pelican Express Co., Ltd., with 17,200,000 shares, total amount NT$ 344,000,000, and the total disposed value was NT$ 132,364,000.

2012/08/24The board of directors acknowledged the financial statement for the first half of 2012, showing revenue of NT$12,811,108,000 and after-tax net profit of NT$0.69 per share.

2012/10/16Board of Directors resolved to participate private placement project for convertible peferred stock of Tecom Co., Ltd., trading volume is about 320,000,000 shares, and total amount was under NT$ 500,000,000

2012/12/20Teco's Board of directors announced the resolution regarding strategic alliance with Kuenling Machinery Refrigerating Co., Ltd. to increase revenue in Southeast Asia and cultivate the market in China.

2013/03/26

(1)The board of directors resolved to convene 2013 shareholders’ meeting on June 21, 2013.(2) The Board of Directors resolved 2012 financial statements with operating revenue NT$25,461,139 thousand,

EPS 1.63, and plans to pay cash divident NT$ 1 per share, and the total amount was NT$ 1,866,650,000. The related financial reports material would be submitted to 2013 shareholders’ meeting.

2013/04/16The Board of Directors resolved to issue the 1st Domestic Unsecured RMB Bonds in 2013, with par value up to RMB 3 billion. The raised funds would be used to expand the working capital.

NumberResolution of 2012 Shareholders’ Meeing

(June 15, 2012)Implementation

1Acceptance of the 2011 Business Report and Financial Statements

※ The proposal was approved by the participating Shareholders with 82.52% approved percentage.

2Approval of cash dividend payout of NT$0.9 per share for the distribution of 2011 profits.

1. The proposal was approved by the participating Shareholders with 82.70% approved percentage.

2. Ex-Dividend Trading Date: 2012/07/09. Cash Dividend Payout date: 2012/08/03.

3 Approval of amendment to the Articles of Incorporation※ The proposal was approved by the participating

Shareholders with 76.53% approved percentage.

4Approval of amendment to the Procedure for Acquisition or Disposal of Assets


5.Approval of amendment to the Rules Governing Shareholders’ Meeting


6Approval of the proposal for removal of restrictions on non-competition clauses for the company’s 23rd term newly elected Directors, including independent directors


www.teco.com.tw 25

3.3.12 Major Issues of Record or Written Statements Made by Any Director or Supervisor Dissenting to Important Resolutions Passed by the Board of Directors

None

3.3.13 Resignation or Dismissal of Personnel Involved in Preparation of Financial Reports

None

3.4 Information on CPA fee3.4.1 Accountant Information

Name of accounting firm CPA names Auditing period Note

Pricewaterhouse Coopers, Taiwan Ping-Chiun Chih Audrey Tseng 2012

3.4.2 Table of Brackets for CPA Fees

Fee item

Fee bracketsAuditing fee Non-auditing fee Total

1 Lower than NT$2 M.

2 NT$2-4 M. V V

3 NT$4-6 M.

4 NT$6-8 M.

5 NT$8-10 M.

6 NT$10 M. and higher V V

3.4.3 Non-inspection fees for CPAs, accounting firms, and its affiliates account for over one quarter of inspection fee: Nil

3.4.4 Replacement of accounting firm and auditing fee for the replacement year is lower than amount in the year prior to the replacement: Nil

3.4.5 Auditing fee decreases by over 15% from the previous year: Nil

3.5 Information on replacement of CPA: Not applicable

3.6 Information on service of the company’s chairman, president, and financial or accounting managers at the accounting firm or its affiliates: Nil


3.7 Changes in Shareholding of Directors, Supervisors, Managers and Major Shareholders

3.7.1 Changes in Shareholding of Directors, Supervisors, Managers and Major Shareholders

Unit: Share

Title Name

2012 Apr. 30, 2013

HoldingIncrease

(Decrease)

PledgedHoldingIncrease

(Decrease)

HoldingIncrease

(Decrease)

PledgedHoldingIncrease

(Decrease)

ChairmanTong Ho Gloabal Investment Co., Ltd.Representative : C. K. Liu

- (1,410,000) - -

Managing Director Theodore M. H. Hunag - - - -

Managing Director Fred P. C. Huang - - - -

Managing Director John C. T. Huang - (4,105,000) - 3,128,000Managing & Independent Director Sush-Der, Lee (Note 3) - - - -

Independent Director Tian-Jy, Chen - - - -

Independent Director Chin-Chien, Chen - - - -

Director Hisen Sheng, Kuo - - - -

Director Yaskawa Electric CorporationRepresentative : Masao Kito - - - -

DirectorKuang Yuan Industrial Co., Ltd.Representative: Shih-Chien, Yang

- (1,300,000) - 570,000

Director

Tong Kuang Investment Co., Ltd.Representative: Chwen-Jy, Chiu (Sophia Chiu)/ Hong-Xiang, Lin

- (11,542,000) - (2,200,000)

DirectorLien Chang Electronic Co., Ltd.Representative: Chin San, Chien

- - - -

DirectorMao Yang Co., Ltd. Representative: Yong-Hsiang, Chang

- - - -

Director Creative Sensor Inc.Representative: Yu-Ren, Huang 2,600,000 - - -

President Sophia Chiu 700,000 - - -

Executive Consultant S. C. Lin - - 1,200,000 -

Vice President George Lien 785,000 - - -

Management Hong-Xiang, Lin - - - -

Management Yu Kuang Wang - - - -

Management Steven Chiang - - - -

Management Chin-Liang Yang - - - -

Major Shareholder None - - - -

Note 1: Shareholders with more than 10% holdings shall be noted as “Major Shareholder” and listed separatelyNote 2: Shares transfer and shares pledge with related parties should fill out the following columns.Note 3: To be the Chairman of Taiwan Stock Exchange, the company’s Managing & Independent Director, Mr. Sush-Der, Lee

resigned on Feb. 25, 2013.

www.teco.com.tw 27

3.7.2 Shares Transfer with Related Parties

Name Reason of Transfer Date of Transaction Transferee

Relationship between Transferee and

Directors, Supervisors, Managers and Major

Shareholders

SharesTransaction Price

(NTD)

Not Applicable

3.7.3 Shares Transfer with Related Parties

NameReason of

PledgeDate of

TransactionTransferee

Relationship between Transferee and Directors, Supervisors, Managers and Major

ShareholdersShares

Shares holding

%

Shares Pledged

%

Pledged Amount

Not Applicable

3.8 Information Disclosing the Relationship between any of the Company’s Top Ten Shareholders

April 30, 2013

NameShareholding Spouse & Minor

Shareholding

by Nominee

Arrangement

The relationship

between any of the

Company’s

Top Ten Share

holders

Remarks%

Shares % Shares % Shares % Name Relation

Cathay Life Insurance 53,510,000 2.83% - - - - - - -

WGI Emerging Markets Smaller Companies

Fund, LLC38,241,000 2.02% - - - - - - -

IShare MSCI Emerging Market Index Fund 36,664,000 1.94% - - - - - - -

Vanguard Emerging Market Stock Index Fund 34,296,000 1.81% - - - - - - -

Tong Kuang InvestmentCo., Ltd. 30,341,364 1.60% - - - - - - -

Yaskawa Electric Corporation 29,541,089 1.56% - - - - - - -

Dimensional Emerging Markets Value Fund 26,004,725 1.37% - - - - - - -

Stichting Depositary APG Emerging Markets

Equity Pool23,792,833 1.26% - - - - - - -

Goldman Sachs International 23,442,816 1.24% - - - - - - -

Russell Investments Ireland Limited 22,302,300 1.18% - - - - - - -


3.9 Long-Term Investments Ownership Unit: As of December 31, 2012

InvesteeOwnership by TECO

Direct / Indirect

Ownership by

Directors, Supervisors

and Management

Total Investment

Shares % Shares % Shares %

Tong Dai Co., Ltd. 5,290,800 92.63% 0 0.00% 5,290,800 92.63%

Teco Nanotech Co., Ltd. 21,502,098 86.01% 205,000 0.82% 21,707,098 86.83%

TECO International Investment Co., Ltd. 50,562,000 100.00% 0 0.00% 50,562,000 100.00%

TECO Holding, USA 1,680 100.00% 0 0.00% 1,680 100.00%

TECO Electric & Machinery Pte Ltd. Singapore 7,200,000 90.00% 800,000 10.00% 8,000,000 100.00%

TECO Electric Europe Ltd. 4,500,000 100.00% 0 0.00% 4,500,000 100.00%

Tong An Assets Management & Development

Co., Ltd.102,224,193 100.00% 0 0.00% 102,224,193 100.00%

Appliance (HK) Ltd. 1,499,999 99.99% 0 0.00% 1,499,999 99.99%

Tong An Investment Co., Ltd. 369,686,118 99.60% 1,484,682 0.40% 371,170,800 100.00%

TECO Electro Devices Co., Ltd. 15,386,949 62.57% 371,324 1.51% 15,758,273 64.08%

Tecnos International Consultant Co., Ltd. 2,876,000 57.52% 801,000 16.02% 3,677,000 73.54%

Tong Tai Jung Co., Ltd. 3,960,000 60.00% 0 0.00% 3,960,000 60.00%

UVG Investment Co., Ltd. 225,782,346 100.00% 0 0.00% 225,782,346 100.00%

Information Technology Total Services Co., Ltd. 12,123,248 60.62% 2,135,250 10.68% 14,258,498 71.30%

Tesen Electric & Machinery Co., Ltd. 20,000,000 100.00% 0 0.00% 20,000,000 100.00%

GD TECO Taiwan Co., Ltd. 22,400,000 100.00% 0 0.00% 22,400,000 100.00%

Taitec Technology CO.,LTD. 950,000 95.00% 0 0.00% 950,000 95.00%

Yatec Engineering Corp. 7,799,996 64.95% 0 0.00% 7,799,996 64.95%

Taian (Subic) Electric Co., Inc. 17,131,155 76.70% 0 0.00% 17,131,155 76.70%

Taian (Malaysia) Electric Sdn. Bhd. 13,113,235 66.85% 0 0.00% 13,113,235 66.85%

An Tai International Investment Co., Ltd. 15,000,000 100.00% 0 0.00% 15,000,000 100.00%

Micropac (BVI) Worldwide Investment Co., Ltd. 6,883,591 100.00% 0 0.00% 6,883,591 100.00%

Taian-Etacom Technology Co., Ltd. 7,033,000 84.73% 0 0.00% 7,033,000 84.73%

Taian Electric Co., Ltd. 100,000 100.00% 0 0.00% 100,000 100.00%

Tecom 400,602,050 63.52% 0 0.00% 400,602,050 63.52%

E-Joy International Co., Ltd. 5,000,000 79.37% 999,810 15.87% 5,999,810 95.24%

A-Ok Technical Co., Ltd. 1,300,000 86.67% 0 0.00% 1,300,000 86.67%

TECO Technology (Vietnam) Co., Ltd. 13,772,799 100.00% 0 0.00% 13,772,799 100.00%

TECO (Philippines) 3C & Appliances, Inc. 651,000 60.00% 0 0.00% 651,000 60.00%

An-Sheng Travel Co., Ltd. 480,000 19.20% 1,920,000 76.80% 2,400,000 96.00%

Taiwan Pelican Express Co., Ltd. 24,559,700 28.56 10,105,000 11.75% 34,664,700 40.31%

www.teco.com.tw 29

IV. Capital Overview

4.1 Capital and Shares

4.1.1 Source of Capital

A. Type of StockApril 30, 2013 / Unit: Share

Share Type Authorized Capital RemarksIssued Shares Un-issued Shares Total SharesCommon Share 1,893,679,583 1,136,870,417 3,030,550,000 -

B. Information for Shelf Registration

SecuritiesType

Preparing to Issue Amount Issued AmountPurpose and Effect for Issued

Shares

Issue Period for Unissued

SharesRemarksTotal Shares

AuthorizedAmount(NTD)

Shares Price

Employee stock

options50 million shares NT$500 million 50 million shares NT$500 million

Retain talents needed by the company, motivate employees and enhance their identification

with the company, so as to create benefits for the company and

shareholders

(1) 0 shares(2)2007/12/26 ~2013/12/25

Unsecured Convertible Corporate

Bond

30,000 units NT$3 billion 30,000 units NT$3 billion

To save interest expenses, strengthen the flexibility of capital

movement, and improve the financial structure

(1) 0 units(2)2012/07/12 ~2015/07/12

4.1.2 Status of ShareholdersApril 30, 2013

ItemGovernment

AgenciesFinancial

Institutions

Other Juridical Person

Foreign Institutions & Natural Persons

Domestic Natural Persons

Total

Number of Shareholders 1 74 153 610 83,643 84,481

Shareholding (shares) 4,063,000 140,962,166 195,285,713 816,779,767 736,588,937 1,893,679,583

Percentage 0.21% 7.45% 10.31% 43.13% 38.90% 100.00%


4.1.3 Shareholding Distribution Status

The par value for each share is NT$10April 30, 2013

Class of Shareholding

(Unit : Share)Number of Shareholders Shareholding (Shares) Percentage

1 ~ 999 36,675 10,910,582 0.58%

1,000 ~ 5,000 31,590 73,086,144 3.86%

5,001 ~ 10,000 7,283 54,673,815 2.89%

10,001 ~ 15,000 2,703 33,179,179 1.75%

15,001 ~ 20,000 1,499 27,232,399 1.44%

20,001 ~ 30,000 1,536 38,135,400 2.01%

30,001 ~ 40,000 656 23,003,728 1.21%

40,001 ~ 50,000 473 21,587,343 1.14%

50,001 ~ 100,000 893 63,441,397 3.35%

100,001 ~ 200,000 437 60,750,451 3.21%

200,001 ~ 400,000 277 78,187,883 4.13%

400,001 ~ 600,000 119 58,229,580 3.07%

600,001 ~ 800,000 64 44,638,203 2.36%

800,001 ~ 1,000,000 42 37,367,257 1.97%

1,000,001 or over 234 1,269,256,222 67.03%

Total 84,481 1,893,679,583 100.00%

4.1.4 List of Major Shareholders

Shareholder's Name Shares PercentageCathay Life Insurance 53,510,000 2.83%

WGI Emerging Markets Smaller Companies Fund, LLC 38,241,000 2.02%

IShare MSCI Emerging Market Index Fund 36,664,000 1.94%

Vanguard Emerging Market Stock Index Fund 34,296,000 1.81%

Tong Kuang InvestmentCo., Ltd. 30,341,364 1.60%

Yaskawa Electric Corporation 29,541,089 1.56%

Dimensional Emerging Markets Value Fund 26,004,725 1.37%

Stichting Depositary APG Emerging Markets Equity Pool 23,792,833 1.26%

Goldman Sachs International 23,442,816 1.24%

Russell Investments Ireland Limited 22,302,300 1.18%

www.teco.com.tw 31

4.1.5 Market Price, Net Worth, Earnings, and Dividends per ShareUnit: NT$

Item 2011 2012 April 30, 2013

Market Price per Share (Note 3)

Highest Market Price 22.80 22.50 28.15

Lowest Market Price 15.30 17.75 22.15

Average Market Price 18.88 20.06 24.29

Net Worth per Share

Before Distribution 20.18 20.69 22.88

After Distribution 19.26 Note 1 Note 2

Earnings per Share

Weighted Average Shares (thousand shares) 1,811,438 1,820,675 1,830,869

Earnings Per Share 1.54 1.63 0.45

Dividends per Share

Cash Dividends 0.90 1.00(Note 1) Note 2

Stock Dividends

．Dividends from Retained Earnings - - -

．Dividends from Capital Surplus - - -

Accumulated Undistributed Dividends - -

Return on Investment

Price / Earnings Ratio (Note 4) 12.26 12.31 -

Price / Dividend Ratio (Note 5) 20.98 20.06 (Note 1) Note 2

Cash Dividend Yield Rate (Note 6) 0.05 0.05 (Note 1) Note 2

Note 1: Pending for approval of Shareholders' meeting Note 2: Pending for approval of Shareholders' meeting and Board of Directors' meetingNote 3: List the highest and lowest market price in each year and calculate average market price by total trading volume/total

trading sharesNote 4: Price / Earnings Ratio = Average Market Price / Earnings per ShareNote 5: Price / Dividend Ratio = Average Market Price / Cash Dividends per ShareNote 6: Cash Dividend Yield Rate = Cash Dividends per Share / Average Market Price

4.1.6 Dividend Policy and Implementation Status

A. Dividend Policy

TECO deals in a line of business characterized by steady growth, but many of its investees have yet to take off. Therefore, its distribution of earnings must take into account the need for further expansion and more reinvestments going forward. After legal and special reserves are set aside, 1% to 5% of the remaining earnings in a given year will be appropriated for remunerations to Directors and Supervisors, and 1% to 10% for employee bonuses. In principle, 80% of the remainder and retained earnings from the previous year will be drawn upon as dividend payments to shareholders. Of all dividend payments, cash generally accounts for 50% but must not run below 5%

B. Proposed Distribution of Dividend

Cash dividend of NT$1.0 per share.


4.1.7 Impact on Company’s business performance, EPS and ROI from the stock grant proposed by Shareholders Meeting:

Not applicable.

4.1.8 Employee Bonus and Directors' and Supervisors' Remuneration

A. Information Relating to Employee Bonus and Directors’ and Supervisors’ Remuneration in the Articles of Incorporation

Earnings in a given year, if any, must be first drawn upon to pay taxes and make up for cumulative losses, followed by the appropriation of legal and special reserves. Out of the remaining portion:a.1% to 5% as compensation for directors and supervisors.;b.1% to 10% as bonus for employee.

B. Estimate of Employee Bonus and Directors’ and Supervisors’ Remuneration a. Foundation of estimation 1. Amount of net income 2. Requirement of legal reserve 3. Regulations in Article of Corporation 4. Historical record of distribution b. Foundation of share calculation for stock dividend: Not Applicable c. No difference between total amount paid and number of estimation

C. Profit Distribution of Year 2012 Approved in Board of Directors Meeting for Employee Bonus and Directors’ and Supervisors’ Remuneration

a. Recommended Distribution of Employee Bonus and Directors’ and Supervisors’ Remuneration: (NT$ thousand)

Employee Bonus – in Cash $ 240,141Employee Bonus – in Stock 0Directors' and Supervisors' Remuneration 106,729Total $ 346,870

No difference from the number of estimation

b.Ratio of Recommended Employee Stock Bonus to Capitalization of Earnings:

Not applicable

c. Recounted EPS after Recommended Distribution of Employee Bonus and Directors’ and Supervisors’ Remuneration: (NT$ thousands)

Not applicable (already expensed)

www.teco.com.tw 33

D. Information of 2011 Earnings Set Aside to Employee Bonus and Directors’ and Supervisors’ Remuneration:

Amount recommended by the Board of Diretors

Amount resolved by the Shareholders’ Meeting

Employee Bonus - Cash 225,440 225,440Directors' and Supervisors'

Remuneration – Cash100,196 100,196

Total 325,636 325,636The actual distribution of employee bonus and directors’ and supervisors’ remuneration above is parallel

with the recommended resolution of the Board of Directors.

4.1.9 Buyback of Treasury Stock

None

4.2 Corporate Bonds

4.2.1 Issuance of Corporate BondsApril 30, 2013

Type of Corporate Bond 3rd Domestic Unsecured Convertible Corporate BondIssue date 2013/07/12Par value NT$ 100,000Issue and Trading Place DomesticIssue Price According to face amountTotal Amount NT$ 3 billionInterest Rate 0%Duration 3 years, Expiration date: 2015/07/12Assurance Institution NoneAssignee Hua Nan Commercial Bank Ltd.Underwriting Institution Fubon Securities Co., Ltd.Signed Lawyer Handsome Attorneys-at-Law Ya-Wen ChiuSigner Accountants PricewaterhouseCoopers, TaiwanPing-Chiun ChihAudrey Tseng

Repayment

According to article 5 of the company’s corporate bond conversion methods, except bondholders who convert to the company’s common shares according to article 10, or the company buyback from security companies for cancellation of registration, and redemption according to article 18, the company will pay in once based on the par value.

Outstanding Amount NT$ 2,147,400,000

Redeption or Advanced RepaymentPlease refer to the company’s issue and conversion methods of 2012 3rd Domestic Unsecured Convertible Corporate Bond.

Restrictive ClausesPlease refer to the company’s issue and conversion methods of 2012 3rd Domestic Unsecured Convertible Corporate Bond.

Credit Rating Institution : Credit Rating Date and the Outcome of the Rating

N/A

Other rights

Amount Already Be Converted NT$ 852,600,000

Issue and Conversion MethodsPlease refer to the company’s issue and conversion methods of 2012 3rd Domestic Unsecured Convertible Corporate Bond.

S h a r e s D i l u t i o n & I n f l u e n c e o n Srockholders’ Equity

According to the conversion price now, if the remaining corporate bonds were all converted to common shares, the company will need to issue 99,879,215 new shares, the capital inflation rate is 5.27%, which has limited influence on the stockholders’ equity.

Entrust Institution of Exchange Object N/A

Unit:NT$ thousand


4.2.2 Information of the Convertible Bond

Category 3rd Unsecured Convertible Corporate BondYear

Item2012 2013/04/30

Market Price of the Convertible Bond

Highest 103.8 129.10Lowest 99.05 103.80Average 100.59 112.72

Convertible Price NT$21.5 NT$21.5

Issue Date and Conversion Price while IssuingIssue Date : 2012/07/12 Conversion Price while Issuing : NT$22.5/share

Conversion Methods Issuing New Stocks

4.3 Global Depositary Shares

Issuance Date March 28, 1997Listing & Exchange London

Issue Amount US$107,643,862Offer Price US$20.08Issue Unit 5,539,880

Underlying Security Newly issued common shares from rights offerTotal Shares of Underlying Security 55,398,800 common shares

Rights & Obligations of GDS Holders Same as Holders of Common SharesTrustee None

Depositary Bank Bank of New York MellonCustodian Bank Mega International Commercial Bank

Outstanding Balance 613,849 GDSsApportionment of expenses for the issuance and

maintenanceMainly by the issuer

Important terms and conditions of depositary and custodian contracts

Depositary bank acts on behalf of GDS holders; custodian bank holds on to the underlying common shares

Market Price (US$)

2012Highest 7.66Lowest 5.87Average 6.78

Year to date as of March 31, 2013

Highest 8.33Lowest 7.74

8.05

www.teco.com.tw 35

4.4 Employee Stock Options

4.4.1 Issuance of Employee Stock Options

April 30, 2013Type of Stock Option 1 st TrancheRegulatory approval date 2007/12/12Issue date 2007/12/26Units issued 50,000Option shares to be issued as a percentage of outstanding shares 2.62%Duration 6 yearsConversion measures New Issuance

Conditional conversion periods and percentagesMore than 2 years 40%More than 3 years 70%More than 4 years 100%

Converted shares (Shares) 30,858 thousand sharesExercised amount (NT$) NT$308, 580 thousandNumber of shares yet to be converted (share) 19,142 thousand sharesAdjusted exercise price for those who have yet to exercise their rights (NT$) 12.1Unexercised shares as a percentage of total issued shares 1.01%Impact on possible dilution of shareholdings NT$386,343 thousand

4.4.2 List of Executives Receiving Employee Stock Options and the Top 10 Employees with Options Valued in Excess of NT$30 Million

Title(Note 1) Name

No. of Option Shares

(Thousand shares)

Option Shares As a

Percentage of Shares lssued

Exercised Unexercised

No. of Shares

Strike Price(NT$)

Amount(NT$

thousand)

As percentage of Shares

lssued

No. of Shares

Strike Price(NT$)

Amount(NT$

thousand)

As percentage of Shares

lssued

President Sophia Chiu

5,492 0.29% 4,063 12.1~13.2 50,118.8 0.21% 1,429 12.1 17,290.9 0.07%

Executive Consultant S.C. Lin

Vice President George Lien

Assistant Vice President George Huang

Assistant Vice President Hong Xiang Lin

Assistant Vice President Yu Kuang Wang

Group Director Andy Liu

Group Director Kevin Yeh

Employees None (with options valued exceeding NT$ 30million)


4.4.3 Status on Limited Employee Rights shares

None

4.4.4 List of Executives and Top 10 Employees Receiving Limited Employee Rights Shares

None

4.5 Status of New Shares Issuance in Connection with Mergers and Acquisitions

None

4.6 Financing Plans and Implementation

Incompletion of previous issuances of securities or private share placement or those completed in the recent three years but without evident benefits: Nil

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V. Operational Highlights

5.1 Business Activities

5.1.1 Business Scope

A. Business Scope

Business Scope Sales %

Industrial Products 61%

Home Appliances 25%

Construction 9%

Others 5%

Total 100%

B. New products development

(1) Industrial Products Business:Motor for industrial large gas compressor, medium and large motor conforming to new ultra-high efficiency of the U.S., medium and large permanent magnetic generator, doubly-fed generator, electric-car motor, direct-current brushless motor for air conditioner, CNS/IEC explosion-proof motor, small motor conforming to new ultra-high efficiency of the U.S., high-efficiency motor for vertical water pump and ATEX explosion-proof motor.

(2) Home-appliances business:Energy-saving and environment-friendly inverter air-conditioner, high energy-efficiency inverter refrigerator, commercial inveter air conditioner, inveter centrifugal ice-water machine, multi-connection VRF system inverter air conditioner, freezer equipments, inverter oil/water coolers for machine tools, combined air conditioner box, smart home appliance remote-control system, large-sized LED TV, Taiwan-specification H.264 HDTV, internet intellect TV and 4K2K UHD TV.

(3) The wind-power business targets mainly at 2MW wind-power turbine and plans for 3MW offshore wind power system. Meanwhile the Company also develops KW-level small wind-power generators featuring vertical- and horizontal axis, wind power converter, photovoltaic power converter, Micro Inverter and related wind power projects or photovoltaic power projects.

5.1.2 Industry Overview

A. Industrial Product BusinessThanks to extensive industrial and consumption application, global demand for motor is steady, especially in view of the excellent evaluation of Taiwan-made motor on the global market. Therefore, motor has been a mainstream heavy-electric export item. In response to the energy-conservation and carbon-abatement policy of various governments, the development of motor still focuses on high efficiney and low carbon emission.


B. Wind-power industry:(1) Due to limited natural resources, soaring energy prices, and global warming, energy conservation and

carbon abatement has become a global current. Governments worldwide have encouraged the development of renewable energy via legal means. It’s estimated thatg current wind-power generation cost has been comparable to the cost of fossil fuel-fired power generation, making it most cost-effective renewable energy.

(2) There are two trends in the development of wind-power turbine: One is large scale and offshore models. 1.5MW and 2MW are mainstream on-shore models, 3MW models are of both on-shore and offshsore usage, while over 3MW models are mainly installed offshore. Various system suppliers have been rolling out models with ever larger capacities. Secondly, 50KW and smaller models are mainly applied in buildings, farms, fishing ponds, and communities. The diversified power sources can greatly enhance the reliability of power grid and demand for wind-power generators has been on the rise, along with the settlement of wholesale prices for the purchase of wind-power electricity, as evidenced by large increase in the interest among prospective wind-farm investors, following the publication of such prices in 2011.

(3) China is one of the fastest-developing wind-power markets in the world and low wind speed turbine becomes main demands, focus on the application in central and south of China. Afterwards, China is stressing the quality control of wind turbines and expansion of export markets. In quality control, it emphasizes the need for LVRT (low voltage ride-through) in linking to the grid and plans to strengthen the strength of power grid during the period of the 12th five-year economic development plan, so as to assure steady output of wind-power generation in northwestern and northern China. If Taiwanese firms can demonstrate their consistent quality control and long-standing overseas marketing experience, they will be able to obtain cost edge in penetrating the international market.

(4) Offshore wind power is also a development focus of various countries. Europe has an early start in this field and has achieved various concrete results. China is carrying out a number of items, mainly for R&D and demonstration. The Taiwanese government also encourages domestic firms to develop exemplary offshore wind power generation. There are already two private companies and one government owned company won the projects. These demonstrated projects might bring hiddenpotential business opportunities domestically before 2019.

C. Home-appliances industry (1) Application of inverter technology in home appliances

Energy conservation and environment-protection is a major appeal in product development at present. The application of variable-frequency technology and environment-friendly coolant in home appliances can lead to the achievement of high COP value, which embodies the care of enterprises for “energy conservation” and “environmental protection.” Under the leadership of TECO, domestic home-appliances manufacturers have also launched various variable-frequency models, which have become customers’ primary choices when buying air-conditioners. TECO has rolled out, one step ahead of peers, models capable of detecting and displaying power consumption, satisfying the need of consumers for energy-conserving products.

(2) Data of the ITIS Plan of IEK of Industrial Technology Research Institute (ITRI) show that functions and added value of traditional home appliances can be augmented via the application of micron/nanometer technology, such as the application of MEMS sensor in white goods and small home appliances (such as hair dryer). In addition, with the gradual maturity of nanometer materials technology, some home appliances manufacturers have begun to apply nanometer materials in home appliances and lighting products, highlighting the selling points of deodorant, fresh preservation, anti-germ, and self-cleansing, for the

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attraction of consumers with high regard for product functions and quality. Examples include air conditioners and air purifiers. TECO and some domestic peers have launched products embracing nanometer silver photo catalyst, such as air purifiers and air conditioners, due to the deodorant and anti-germ effect of the material.

(3) Development of network home appliances marketITIS Plan of ITRI’s IEK show that the scope of Internet application has gradually extended from study and bedroom to kitchen through mobile handset devices, such as white goods and portable small home appliances in kitchen with Internet-access function. Those products boast the function of Internet-based information retrieval and management. Most manufacturers believe that Internet-access function is a key feature for home appliances in the future. TECO’s home appliances all possess Internet-access capability in both hardware and software and has successively received order for communications exchange offices, schools, and smart buildings and completed commercial operation smoothly.

5.1.3 Research and Development

A. The company spent NT$802,687,000 on R&D in 2012

(1) Industrial Motors Category1. Mid-to-high voltage no spark explosion-proof motor (AEZKXL series, Taiwan Excellence Awards)2. Pan-European high-efficiency energy-saving motor (AEHG series, Taiwan Excellence Awards)3. Mid-to-high voltage high-efficiency energy-saving motor (ASHA series, Taiwan Excellence Awards)4. Mid voltage breaker motor (AEHAGD series)5. 2MW/FC2000 built-in permanent magnet second generation wind generator6. 11KW permanent magnet direct-drive wind generator7. Back-pack 2MW FHIG wind generator R&D successfully8. IEC high-efficiency explosion-proof motor Ex e, Ex n, Ex Td (Australia TestSafe Certification, frame

achieves 355)9. IEC high-efficiency explosion-proof motor Ex d (China CNEX Certification, frame achieves 280)10 IEC high-efficiency explosion-proof motor Ex d, Ex e, Ex n (Taiwan TS Certification)11 Electric-vehicle permanent magnet motor series, 35~150KW12 High-efficiency EV induction-motor series, liquid cooled (Taiwan Excellence Awards)13.Ventilation 65/20KW direct-drive in-wheel motor for electric vehicle14.High-efficiency oil permanent magnet servo motor series (Taiwan Excellence Awards)15. Wind/Water application high-efficiency IPM motor (Taiwan Excellence Awards)16. IE4 high-efficiency induction-motor, NEMA series, reaches 100HP (Taiwan Excellence Awards)17. High-efficiency motor IE3, JIS, reaches 100HP

(2) System Automation Category1. Inverter F510 series (2012 Taiwan Excellence Awards)2. Built-in permanent magnet motor IPM Autotuning technology3. Built-in permanent magnet motor IPM magnetic pole counterpoint technology4. Packaged air-conditioners inverter A515 series (2012 Taiwan Excellence Awards)5. IP55 sealed inverter6. High-speed telecommunicated servo drive N series7. TLB series leak circuit breaker8. TMS series manual motor driver (2012 Taiwan Excellence Awards)9. Capacitive contactor (2012 Taiwan Excellence Awards)


(3) Signal processing and Videotex Category1. Broadband interactive smart home services platform2. Wind power artificial intelligence SCADA series

(4) Freezing and Air-Conditioning Category1. Freely choice home used multiparity air-conditioners, which complied with 2016 energy-saving standards2. High energy-saving air-conditioners surpass 2016 national standards3. Circuit box air-conditioners (2012 Taiwan Excellence Awards)4. Tooling machine used intelligence inverter water freezer (2012 Taiwan Excellence Awards)5. Tooling machine used intelligence inverter oil freezer (2012 Taiwan Excellence Awards)6. Whole series air-conditioners (90~605L), which reach national efficiency7. Double-door freezer went listed8. Three-door 600L inverter energy saving refrigerators (2012 Taiwan Excellence Awards)9. 1000 ton centrifugal chiller development was finished10. Whole series high-efficiency gas-cooled chiller went listed11. Store used inverter built-in air-conditioners (2012 Taiwan Excellence Awards)12. High-efficiency variable flow volume & static pressure type (channel) air-conditioners (2012 Taiwan

Excellence Awards)

B. Future R&D projects:• Control technology for permanent-magnet motor • Energy-saving & environmental protection technology for home appliances• Tooling machine variable frequency chiller applied products’ development• Variable frequency air-conditioners multiparible pipe & freely choice technology development• Development of energy-saving & high efficiency centrifugal chiller • Development of low-temperature logistics distribution system • Development of energy-saving permanent magnetic motor & medium-to-high permanent magnetic

generator technology• Industrial huge gas compressor motor• American new extra high efficiency small, medium, and large motor• High pressure explosion-proof motor• Extra high-efficiency motor • Induction motor• Vehicle-used wheel motor• Electric-vehicle traction motor• Direct drive wind generators• All-electric/hybrid vehicle-used motor driver • High-efficiency photovoltaics inverters• Vehicle-used electric/wind power generator structure and heat flow analysis • Small type wind power generator inverter • Devrlopment of oil-used energy-saving permanent magnetic servo motor technology• Development of high power AC permanent magnetic servo motor and driver series products• Development of driver for BLAC compressor • Development of advanced level servo driver• Multi-used sensed/permanent magnetic motor driver• Image converter and broadcast technology for 3D advertising player

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• Naked eyes & multi-angle 3D image generation technology• Internet TV and interactive contents servo integration technology• UHD 4K2K extra high resolution image processing technology

5.1.4 Long-term and Short-term Development

For industrial motor business, the company’s long-term goal is to become the world’s best motor manufacturer. In the short run, with the company’s factories in Wuxi, Jiangxi, and Fujian of China, as well as in Japan and the Middle East, gradually manifesting their benefits, the company will continue its global deployment, enhance manufacturing and cost-control capability, accelerate the establishment of strategic alliances with partners in mainland China, Europe, the U.S., and Japan, so as to augment its global market share. In line with the government’s promotion of alternative energy, the company has established a joint venture in China, A-Tech TECO, for producing wind-power generator, which has become a leading manufacturer of the product in Greater China.

For wind-power equipment, the company’s long-term goal is become one of the world’s 10 largest manufacturers. In the short term, rapidly obtain certification and highly reliable performance record, to pave the way for foraying into the Chinese market. Establish local supply chain for components and parts; seek cross-Taiwan Strait technological and business cooperation, for development of offshore wind-power generation. TECO has obtained TFC2000 onshore wind-turbine certification. Test of LVRT (low-voltage ride-through) technology, a highly regarded technology in China, was already passed by Electric Power Research Institute. Meanwhile, the company will also start to develop and produce the offshore wind power system for adapting the wind condition in Taiwan.

For home appliances, in the long run, the company aspires to become the leading brand in Taiwan and actively penetrate overseas air-conditioning market. For commercial air-condirioners, the company will horizontally integrate the largest domestic chiller OEM to raise the company’s competitiveness from operating cooperation and productive integration. Meanwhile, the company will also expand foreign market in south-east Asia, cooperate in China market business, and arrange air-conditioner’s market in Turkey. For LCD TV, the short-term plan is to establish a cross-strait division-of-labor system and strive for OEM (original equipment manufacturer) orders from major international firms, thereby expanding its shares in the world and Taiwan.

In other aspects, backed by abundant experience of electric machinery of buildings, mass rapid transit system, and high-speed rail, the company will dedicate to winning large-scale businesses for office buildings, rapid mass transit system, and rail engineering. The company has sold high-voltage gas insulation switch to Taiwan Power Co., and in addition to continue seeking business from Taipower, the company will also actively explore the private market.

5.2 Market and Sales Overview

5.2.1 Market Analysis

A. Sales (Service) RegionThe company is shipping industrial products to such major regions as America, Europe, Australia, Japan, China and Taiwan, and targets to extend the reach to the Middle East and India. Home appliances are shipped


mainly to the domestic market, with minor markets including Australia, Southeast Asia, Singapore, and Japan. The company plans to tap the home-appliances markets in China, Vietnam, and Indonesia. For wind-power products, in addition to the Chinese market, the company is set sight on the markets of Southeast Asia, New Zealand, and Australia, where awareness of clean energy has emerged.

B. Market Share (%) of Major Product Categories (1) Industrial Product

The company boasts 50% domestic market share in general prupose sector and also offers customers custom motor featuring special usage and specifications, with the capacity reaching 30,000 horsepower in induction motors, ranking Top 5 around the world.

(2) Wind-power businessThe first wind-power turbine was erected in Inner Mongolia of China in 2010 and completed linkage with grid for power generation in March 2011. Also, the company completed wind-turbine certification, and arranged LVRT (low-voltage ride-through) certification in China, fulfilling many-year power generation under rigorous environment. Successfully forayed into Southeast Asian market in 2011 and obtained orders in Vietnam. Considering the demands of wind power in the China market, the company will start to build factory in Hunan, and serve in nearby area.

(3) Home Appliances and Air ConditionerThe company is one of the top three makers of home appliances and air conditioners in Taiwan, with market share reaching 9% for household air conditioners, 14% for refrigerators, 15% for washing machines, 10% for LCD, and 35% for commercial-use air conditioners.

C. Market Trend of Major Product Categories(1) Industrial Products

TECO originated from motor production, which has remained a core part of the company’s operation, offering the dynamism for Taiwan’s industrial development. After years of effort since the company’s inception, it has set up various production and marketing bases through the world. It ranks among the world’s top five heavy-electrical equipment suppliers and has hit world-class level, in terms of quality, variety, production scale, and sales channel.

Due to the close linkage between business of low-pressure motors and the economic situation, demand slackened conspicuously in the second half of 2012. Demand for medium-pressure motors, however, remained stable. In 2013, the general economy will score a rather weak recovery. The domestic market of the U.S. is expected to grow steadily on decreasing unemployment rate and realty recovery. Thanks to the new economic measures of the new leadership, China is expected to resume stable growth. The weakening Japanese yen will continue to benefit Japan’s manufacturing industry in 2013.

In 2013, the company will continue strengthen marketing and production integration, so as to boost market share and cut cost. It will also develop new products, continue integrating domestic and overseas resources in tapping the OEM market, emerging market, and solicit public construction and domestic and overseas engineering projects, in the hope of achieving the goal of high growth.

(2) Wind-Power BusinessDue to global warming and drastic climate changes, countries worldwide have begun to emphasize the

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use of renewable energy by setting up development goal for renewable energy, in order to cut emission of greenhouse gases. Among renewable energies, wind power is most cost-effective. Therefore, the European Union targets raising the share of wind power to 50% by 2030.

Despite its high entry barrier, TECO is ready to tap the market by integrating its solid R&D strength in the fields of machinery and electricity. The company has successfully made inroads into the wind turbine assembly market in the U.S. and has developed 2MW permanent-magnet wind-power turbine bearing own brand, the first such product made by Taiwan which boasts high local content rate. This wind turbine system boasts solid structure and complete lineup, capable for meeting the needs of areas featuring strong typhoon or cool climate, suits both 50/60Hz enabling global use, and can easily meet the rigorous demands for connection to grids of countries worldwide.

TECO will root its wind power business on Taiwan and set sight on China, combining Taiwan’s advantage in quality control and China’s huge market potential. It will establish wind turbine assembly plants near wind farms and foster local supply chains, so as to save on transportation cost and facilitate the management and maintenance for up to 20 years, thereby augmenting the utilization rate of wind turbine and maximizing profits. In addition, the company will integrate cross-Taiwan strait technological strength in the joint development of next-generation offshore wind turbine which suits the Asian climate.

(3) Home AppliancesGrowth of market demand for home appliances is limited, since they are mature products. In addition to existing products, the company will develop or introduce new products with high added value or key components/parts, such as large-size (55” and larger) LCD TV, LED TV, inverter refrigerator with high EF value, muti-temperature-layer refrigerator, DD inverter washing machine and external-rotor motor (key component), photo-catalyst air purifier, DC inverter air conditioner with high COP value, inverter electric-control substrate (key component), remote-control SAA(Smart Appliance Alliance) air conditioner, and air conditioner with nano bamboo-charcoal filer and other home appliances with health appeal. The purpose is to expand sales channel and increase revenue and profit with differentiated products.

Meanwhile, the company has been constantly rolling out new models for industry-use air-conditioning and freezing products, such as package air conditioner, central air conditioning equipment, flooded water chiller, centrifugal water chiller, inverter multi-evaporator VRF air conditioner, and train air conditioner, thereby creating optimal and the most comfortable workplace for domestic and overseas industries. The company also offers various air-conditioning and freezing engineering service with cutting-edge technology, to help with industrial upgrading.

Along with the development of new technologies and the increasing convenience of the Internet, information products have integrated with home appliances, giving birth to information appliances. The company will marry its decades-long experience for home appliances with cutting-edge information technologies of the members of the group in developing information appliances suited to market needs, thereby creating every larger profits for shareholders.

Besides domestic market, the company has also made major inroads into the international market, following years of strenuous effort, especially for LCD TV and air conditioner which have enjoyed very good sales to Southeast Asia, Australia, and Europe. In the future, along with increase in national income and the advent of the information age, the company will continue to launch various even more human-friendly new products, so as to meet market demand.


D. Favorable and Unfavorable Factors in the Long-range Future and Countermeasures(1) Industrial Product

The company’s industrial product has won very good repute, in terms of quality and function, in the industry. It has established a far-reaching operation network on both domestic and overseas fronts, including production and marketing bases in the U.S., China, and Southeast Asia, and marketing offices in Japan, Europe, and Australia. However, rapid change in the business climate and the transformation of economic conditions and industrial structure has posed major challenge to the company’s future development.

Favorable and unfavorable factors for industrial product business, along with countermeasures follow: a. Favorable factors

• Good brand image • Higher production scale and market share than peers• Solid market channel • Reliable quality• Complete product lineup• Huge market potential of the greater China market, for which the company has established a firm

foothold in Chinab. Unfavorable factors

• Low-price competition from imported products in the domestic market due to WTO membership• Market saturation leading to price competition among machinery firms and increasingly rigorous demand

for price and delivery by buyers• Transplantation of traditional machinery firms to China and other countries, due to their declining

competitiveness and demand of emigrated downstream customers• Influence by European financial crisis

c. Countermeasures • Reduce cost, shorten delivery schedule, enhance competitive edge, and boost market share.• Accelerate new-product development, develop products with high added value, and establish a production

system featuring cross-strait division of labor. • Increase overseas marketing offices and establish an effective service network. • Strive for emerging business opportunities related to environmental production and energy conservation. • Join hands with foreign engineering firms in soliciting project orders.

(2) Wind Power Businessa. Favorable factors

• The company has established good repute for industrial product in the field of wind-power business, capable of achieving synergy effect readily by integrating the resources of the group.

• The U.S. subsidiary already has the experience for contract assembly of complete wind turbine, which can be copied in any other region of the world.

• The company boasts complete product lineup and cutting-edge technology, capable of meeting the rigorous demands for connection to grid in the future. Its products suit both 50/60Hz, facilitating logistics work and cost control.

• The company has sound communications channel with its affiliates worldwide, enabling it a firm grasp of the latest development in renewable-energy laws/regulations and demands of grids worldwide.

b. Unfavorable factors• Insufficient domestic supply chain for components and parts of wind turbine, complicating the effort for

cost/delivery control• Shortage of domestic R&D talents for wind tubine, impeding technological development

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• Saturation of domestic onshore wind power market and difficulty in obtaining the testing ground, which postpones certification schedule

• Chinese wind-power equipment firms resort to low-price competition to tap the overseas markets, thereby disrupting the market order.

c. Countermeasures • Set up Asian supply chain by utilizing the wind-power production capacity of China and Korea, thereby

gaining a local edge. • Establish joint R&D team with Industrial Technology Research Institute, capitalizing on the latter’s

electrical-machinery talents to facilitate technological development, and solicit Chinese talents released from its tightening policy, to facilitate deployment in the Chinese market in the next stage.

• Seek legal testing grounds on both sides of the Taiwan Strait and tap the Chinese market via strategic alliance with China Datang Corp. and Xiang Tan Electric, and other non big five power generation group.

• Set up logistics team to strengthen local services and cut maintenance cost. • Take advantage of Taiwan offshore model wind farm, tap related domestic resources and integrate the

relative strengthness between Cross straits to develop the technology which can adapt to the unique environment in Tawian Strait.

(3) Home Appliances and Air-Conditioning Businessa. Favorable factors

• TECO can capitalize on its good brand image and support of the group’s resources, facilitating the demonstration of synergy effect.

• The company has pioneered the rollout of around-the-clock service and expanded its sales channel, strengthening its competitive niche.

• The company has joined “The R&D Alliance of the Smart Home-Appliances Industry,” giving it a ready access to information on smart home appliances and online digital communications technology.

• Conform to MIT logo and first-tier energy-saving model, one step ahead of peers.b. Unfavorable factors

• Home appliances/household air conditioning market has saturated, featuring acute competition and low margin.

• WTO membership entails tariff cuts, bringing in competition from renowned brands of Japan, the U.S., Korea, and China.

• The Taiwanese market is limited in scale and it’s difficult to develop the global branding, due to high expense for marketing own brands and insufficient price competitiveness.

• Competition from hypermarkets and chain sales channels impacts the traditional channel of agents. • The current of bilateral or regional free-trade agreements in recent years has posed major challenge to

Taiwan. c. Countermeasures

• Expand product lineup and cut cost via OEM (original equipment manufacturer) strategic alliance, thereby raising market share.

• Capitalize on China’s low-cost edge and embrace SKD (semi knock-down) production mode, so as to boost the cost competitiveness of some products.

• Grasp product development trend in domestic and overseas markets via the operation of product panel and new-product review sessions, thereby introducing innovative products timely.

• Plan differentiated products tailored to the needs of the targeted customers of different channels. • Step up assistance for agents for strengthening their management and store outlets, thereby enhancing

their competitiveness. • Establish directly owned store outlets gradually.


5.2.2 The Production Procedures of Main ProductsIndustrial Products:

Products Use Production Process

High-efficiency motors, single-phase motors, low- and high-voltage 3-phase motors, synchronous motors, explosion-proof motors, brake motors, variable-pole motors, gear-reducing motors, crane motors, high-temperature exhaust gas fan motors, inverter-duty motors, high-thrust motors, steel-cased motors, aluminum-cased motors, eddy-current motors, wound rotor motors, submersible motors, DC motors, ventilation blowers, wind-powered generators.

Provision of power for industrial production

Casting, Stamping, Electrical E n g i n e e r i n g , M e c h a n i c a l Engineering, Design, Planning, Assembly, Integration

Electric vehicle power motioned permanent magnetic motor, Electric vehicle power motioned induction motor, permanent magnetic motor, AC/permanent magnetic servo motor,

Industrial and electric vehicle used

Stamping, Electrical Engineering,Engineering, Magnet, Design,Planning, Assembly, Integration

Wind Power Products:


2.0MW PMSG (Permanent Magnetic Synchronous Generator) wind turbine

Power supplyDecentralized power application

Power,Control ,System integrat ion,Composi te materials,Casting, Stamping , Electrical Engineering, Mechanical Engineering, Design, Planning, Assembly, Integration

5.0MW offshore wind power system Energy supply

Power,Control ,System integrat ion,Composi te materials,Casting, Stamping , Electrical Engineering, Mechanical Engineering, Design, Planning, Assembly, Integration,Shipping,Marine engineering

KW level wind turbine Decentralized power supply

Casting, Stamping , Electrical Engineering, Mechanical Engineering, Design, Planning, Assembly, Integration

Home Appliances & Air Conditioners:


Window-type, vertical-type, air conditioner with high COP value, inverter-type air conditioners with new environment-friendly coolant and SAA-compliant smart air conditioners; “FUZZY” Internet refrigerators, infrared remote-controlled refrigerators, inverter-type refrigerators; refrigerator with high EF value , DD inverter washing machines; oxygen-generating air-conditioning equipment; dehumidifiers; dryers; small appliances; Low-temperature roller conveyor for home-delivery operation,elevator air-conditioning, cooler for tooling machine, movable CDC air conditioner, low-temperature logistics freezer; PC cooling modules

Household,Commercial,Industrial applications

Design, Planning,Assembly,Integration

LCD Monitors, LED TVs, DVD Players, Recordable DVD players, Stereo Systems

Home Entertainment

Design, Planning, Assembly

Chillers for centralized air-conditioning systems, package air conditioners, split-type air conditioners, inverter multi-evaporator VRF air conditioner, train air-conditioning systems, centrafigual chiller

Commercial,IndustrialApplications;Transportation systems

Design, Planning,Assembly,Integration

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5.2.3 Major Suppliers and Clients

A. Major Suppliers Information for the Last Two Calendar YearsUnit:NT$ thousand

2011 2012 2013 (As of March 31)

CompanyName

Amount PercentRelation

withIssuer

CompanyName


withIssuer

CompanyName


withIssuer

Tesen Electric & Machinery Co., Ltd.

2,481,985 12%Affiliated Company

Tesen Electric

&Machinery Co., Ltd.


Tesen Electric

&Machinery Co., Ltd.

584,922 12%Affiliated Company

Note 1: Major suppliers mean each commanding 10%-plus share of annual order volume.

B. Major Clients (each commanding 10%-plus share of annual order volume) Information for the Last Two Calendar Years

Unit:NT$ thousand

2011 2012 2013 (As of March 31)

CompanyName


withIssuer

CompanyName


withIssuer

CompanyName


withIssuer

Teco Westinghouse Motor Co., Ltd.


Teco Westinghouse Motor Co. Ltd


Teco Westinghouse Motor Co. Ltd


5.2.4 Production over the Last Two YearsUnit: Units; NT$ thousand

Year

Output

Major Products

2011 2012

Capacity Quantity Amount Capacity Quantity Amount

Motor 1,080,000 652,569 9,197,097 1,080,000 607,852 9,233,810

Compressor 71,400 35,485 72,767 0 0 0

System Automation 3,000,000 2,518,528 2,328,905 3,000,000 2,423,634 2,267,996

Total 4,151,400 3,206,582 11,598,769 4,151,400 3,031,486 11,501,806


5.2.5 Shipments and Sales over the Last Two YearsUnit: Units; NT$ thousand

Shipments Year

& Sales

Major Products

2011 2012Local Export Local Export

Quantity Amount Quantity Amount Quantity Amount Quantity Amount

Motor & System Automation 2,963,798 6,202,095 1,589,411 9,068,021 2,730,593 5,627,483 1,337,423 9,882,885

Home Appliacne & Air Conditioner 810,738 6,017,361 175,516 985,504 848,059 5,840,438 87,310 588,282

Construction 2,097,968 2,328,499Service 312,762 394,585Other 20,466 1,114,423 5,945 798,968

Total 3,795,002 15,744,610 1,764,927 10,053,525 3,548,597 14,989,972 1,424,733 10,471,167

5.3 Human Resources

Year 2011 2012 Till April 30, 2013Number of Employees 2,726 2,657 2,655

Average Age 38.07 38.47 38.61Average Years of Service 11.38 11.88 11.97

Education

Ph.D. 19 18 17Masters 315 331 332

Bachelor’s Degree 1,305 1,294 1,305Senior High School 863 806 800

Below Senior High School 224 208 201

5.4 Information on Outlays for Environmental Protection A. Loss from environmental pollution in recent two years

2011 2012 a. State of pollution (kind and extent) Nil Nil b. Compensation recipients or penalizing units Nil Nilc. Compensation amount or penalty Nil Nild. Other loss Nil Nil

B. Countermeasuresa. Improvement measures planned 1. Improvement plan for environmental-protection equipment

Installation of new environmental-protection equipment, waste reduction by strengthening the maintenance of existing equipment and improvement of production process, improvement of workplace, promotion of energy conservation, recycle and reuse of waste water, and reuse of waste materials, so as to prevent emission of pollutants and comply with legal requirements.

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2. Plan for management improvement Continue pushing ISO14001 environment management system, pinpoint sections in the operational process (covering the entire product life which includes production, sales, the usage of product, and its disposal) which produce impact on the environment and improve the emission of pollutants, thereby alleviating the environmental impact and augmenting environmental performance. Continue pushing OHSAS 18001 vocational safety and hygiene management system and the passage of the certification of TOSHMS by the Council of Labor Affairs; incorporate safety and hygiene management into the corporate management culture; strengthen the site reviews on environment protection and safety/hygiene; indentify the unsecure environment and situations and make improvements ; regularly hold environmental-protection and safety/hygiene training, fire-fighting drill and drill emergency response; regularly inspect operating environment and physical examination of employees, so as to lower the hazards of risk of workplace and prevent the occurrence of vocational disaster.

3. Continue pushing the program for checking and reduction greenhouse-gas emissionIn response to global climate change, the company began to check greenhouse-gas emission in 2005 and has already applied for and passed ISO14064 greenhouse-gas emission certification since 2011. The company started to push energy-conservation and carbon-abatement program, in 2006, especially power usage in the second category, which has been participated all the factories and staff units. The company has also established energy-conservation task force and hired experts to help with diagnosis and offer advices for the execution of the program.

The company has spared no effort in pushing the “TECO GO ECO” program and shifting both industrial and consumer product lines towards energy conservation and warming resistance, in addition to engaging in the major green R&D projects of wind-power generator, hybrid car, motor for electric car and production of green products (such as permanent magnet & high-efficiency motors, home appliances, air conditioners, washing machines, and refrigerators).

4. Corporate social responsibility report of TECOSustainable development for enterprise is an indispensable mindset for corporate management in the new century. At the time when enterprises are facing rigorous challenges, they need to rethink the direction and strategy for their sustainable development and manifest their management performance via corporate social responsibility report. The report covers information on the three major aspects of economy, society, and environment, so as to improve external image and help communicate with related parties. Corporate social responsibility report is TECO’s second time to issue nonfinancial information report, with the purpose of manifesting the company’s methods, achievements, and related strategies and goals of the company in fulfilling social responsibilities in a transparent and open manner for the social public and related parties. The report mainly covers various acts and performance figures concerning environmental protection, corporate governance, social participation, and concern for employees, clients, and consumers.


5. Projected capital outlay for environmental protection in the next three years (1) Planned procurement of anti-pollution equipment and outlays i. Plans in next three years

2013 2014 2015

Improvement engineering for infrared oven

Replacement of old switchboards, installation of safety cable, and noise reduction for casting and peripheral equipment



Maintenance, improvement, or installation of pollution-abatement equipment



Replacement of the consumption materials of activated carbon, filtering net, and filtering ball



R600a safety system for storage area for coolant

Improvement of waste-water equipment

Installation of energy-saving light Improvement of waste-water equipment

Improvement of waste-water equipment Installation of energy-saving light

Improvement engineering for access points to waste water

Add inverters to air-conditioners

ii. Projected outlays (Unit: NT$ thousand)

2013 2014 2015$ 15,806 $ 16,782 $ 15,149

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(2) Expected improvements i. Cut emission of air pollutants and waste water to the level in compliance with legal requirement. ii. Push cut on industrial waste by reducing output of waste materials, strengthening mechanism for the

recycle of waste materials, implementing control for emission reduction. iii. Establish energy-conservation and carbon-abatement task force, which will pinpoint equipment with

larger energy consumption and areas with higher power consumption, as well as formulate feasible energy conservation programs after consulting experts/scholars and push their execution, thereby slashing carbon emission.

iv. Produce green products and dedicate to the development of energy-conserving environment-friendly products, to alleviate the impact on the environment and fulfill corporate social responsibility.

v. Install high-efficiency power-saving lighting to enhance the efficiency of existing lighting equipment and adopt proper power deployment and control circuit to save power.

vi. Carry out risk evaluation for workplace, so as to assure the provision of a safe workplace.

6. Expected effect of improvement (1) Effect on net profits

i. Avoidance of loss from finesii. Avoidance of loss from suspension of operationiii. Avoidance of disputes for environmental pollutioniv. Cut production cost via reduction of environmental-protection outlays, thanks to waste abatement and

pollution prevention. (2) Effect on competitiveness status

i. Augment the corporate image and meet the expectation of related parties. ii. Comply with the global environmental-protection current, avoid trade barriers, and boost sales

opportunities. b. Failure to adopt countermeasures

1. Failure to adopt improvement measures: Nil2. State of pollution: Nil3. Possible loss and compensation amount: Nil

C. Workplace and Protection Measures for the Personal Safety of Employees a. Special environmental-protection and safety/hygiene units are presented at every department, factory, and

the headquarters. Specialized units and staffers are instituted to handle affairs related to environmental protection and safety/hygiene and practices related to safety/hygiene affairs are carried out regularly, according to legal requirement.

b. Environmental-protection and safety/hygiene training, plus physical examination for employees, are conducted regularly: New employees and employees shifted to new positions must undertake safety/hygiene training courses, whose duration and contents comply with legal requirement. Only trained personnel with necessary licenses can operate dangerous machines or equipment, such as overhead traveling crane, forklift, organic solvent, boiler, and high-pressure gases. Specialized staffers or technicians all must undertake retraining regularly.


c. Detection of operating environmentAccording to “Enforcement Measures for Detecting Laborers’ Operating Environment,” detect the operating environment for chemical and physical elements, with the former including carbon dioxide, dust particle, and organic solution, and the latter including noise and overall temperature index. Entrust qualified operating-environment detecting institutions to carry out the detection periodically, to assure compliance of the operating environment with law/regulation.

d. Health care and managementEmployee health is the largest assets of the company. Medical rooms are instituted at various departments and factories and are furnished with doctors for providing medical consulting and dedicated nurses for caring employees’ health. Organize health classes, publicize health information and organize health-improvement activities. Continue pushing employees to stress self-health management and create a safe and comfortable working environment, so as to enhance employees’health and physical strength and further extend the concept to their families.

e. Fire-fighting drill and emergency-response drill for special workplaces are held regularly: Ordinary fire-fighting drill takes place every half a year and covers such training items as team organization, practice, response to emergency, and post-accident handling. Emergency-response drill for special workplaces is conducted every year, in order to train employees’ capability in handling accidents.

f. Institution of TOSHMS management system and passage of performance certificationThe safety and hygiene management system of various departments and plants (Plant Chung-Li, Plant Kuan-Yin, and Plant Hu-Kou) has passed the certification of the Bureau of Standards, Metrology, and Inspection, under the Ministry of Economic Affairs, according to “OHSAS 18001-2007 version” and the Council of Labor Affairs according to “TOSHMS.” Its performance has also been acknowledged by the CLA.

g. Pushing Globally Harmonized System of Classification & Labeling of ChemicalsTo highlight dangerous and hazardous substances, safety labels for materials have been installed in workplaces, where updated information on the safety of materials is available as reference for employees. According to revised management measures, change in raw materials and production process cannot be made before the approval of management, collection of information on materials’ safety, and completion of training of related employees.

h. Continue pushing the program for checking and reducing greenhouse-gas emission To cope with global climate change, the company started to push energy-conservation and carbon-abatement program in 2006, especially power usage in the second category, which has been participated by all the factories and staff units. The company has also established energy-conservation task force and hired experts to help with diagnosis and offer advices for the execution of the program. In addition, the company has been conducting check of greenhouse-gas emission since 2005 and continuing pushing statistics and applying for greenhouse-gas certification of ISO 14064.

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5.5 Labor RelationsA. The company’s various employee welfare measures, advanced study, training, and retirement system, along

with their execution, as well as labor-management agreements and various employee-benefit protection measures follow: a. Employee welfare measures

The company has high regard for employee welfare and work safety constantly, as evidenced by the setup of employee welfare committee back in 1964, which handles various employee welfare measures, so that employees can share the profits of the company. The company’s welfare measures follow: 1. Employee welfares provided by the company

(1) Marriage and funeral subsidy (2) Physical examination for employees(3) Company uniform (4) Dividend sharing and stock option (5) Year-end bonus (6) Retirement fund (7) Meal subsidy (8) Labor insurance, health insurance, group insurance, and accident insurance (9) Preferential rates for purchase of the company’s products

2. Welfare measures provided by the employee welfare committee (1) Subsidy for travel, marriage, funeral, and hospitalization(2) Group parties (3) Birthday gift (4) Childbirth subsidy (5) Gifts for three major festivals (6) Scholarship for employees’ children(7) Other employee welfares

b. Advanced study, education, and training The company appropriates 0.1% of its annual revenue for employee training, which is included in the annual corporate plan, holding regular courses on professional and management knowledge for employees at various positions and cultivating excellent talents with aggressive working attitude and innovative concept, according to training plans for various stages for their career.

In 2012, the company held courses on executive training, common knowledge, professional capability, and company policy, which boasted 13,842 persons of attendance, on top of 884 persons of attendance for outside courses. Every employee received 24.16 hours of training on average.

c. Retirement system and its implementation The company has formulated “measures for labor retirement,” in compliance with legal requirements, according to which the company appropriate a certain amount of fund to be deposited into a specialized account at the Central Trust of China for care of employees after their retirement. For employees who embrace labor-pension system after July 1, 2005, the company appropriates a sum equivalent to 6% of their monthly pays, set according to an official pay scale, to their individual accounts at the Labor Insurance Bureau every month.


d. Labor-management agreements and protection measures for employee benefitsThe company has enjoyed harmonious labor-management relationship, thanks to open-minded management style of executives and the understanding of company policy by laborers.

The company set up TECO employee welfare committee in April 1964, in charge of various employee welfare affairs, which was followed by the establishment of TECO labor union in July, 1974. In March 1980, the company’s factories initiated labor-management meeting, in order to boost working efficiency, improve labor conditions, and bridge the opinions of management and labor. The company has reported to the regulator for the establishment of those organizations, which have been functioning normally over the past years.

To safeguard the interests of both labor and management and assure their harmonious relationship, the company signed a group contract with representatives of the labor union on December 28, 1981, which was then forwarded to and approved by the regulator.

In 1999, the company was granted the “national good labor-management relationship business award” and “exemplary labor-management meeting award” by the Council of Labor Affairs and the “good labor-management relationship award” by the Taoyuan County government. In 2009, it passed the certification for healthy workplace by the Bureau of Health Promotion ; in 2010 it was granted the award of “national manpower innovation” by the Council of Labor Affairs and “excellent award for healthy workplace” by Taipei city government, and it gained "Corporate Citizen Award" granted by Common Wealth Magazine in 2012 in acknowledgement of the company’s effort in achieving a harmonious and co-prosperous relationship between labor and management.

e. Guidelines for employee behavior or ethics1. To uphold the working order at workplace and clearly define the rights and obligations of labor and

management, the company has formulated “employee working rules,” which has been approved by the regulator and publicized as the guidance for the company in employee management. The rules set out clear regulations on employees’ position, title, employment, leave, service, salary, reward and punishment, evaluation, promotion, welfare, layoff, compensation for vocational injuries, and retirement.

2. The company expects every employee to do his/her best to contribute to the achievement of the company’s business goal and enhance his/her ethical standard. It, therefore, has formulated “behavioral guidelines,” with major contents including: a. Strictly forbid employees to take, without approval of their superiors, gifts from suppliers, their

agents, their employees, or any individual with business relationship with the company. b. The company’s internal information (or information related to the company’s interest or business),

be it in the aspect of technology, finance, or business, is the company’s business secret, for which employees have the obligation of confidentiality and cannot leak it to any outside party. In addition, after leaving the company, employees still have to abide by the confidentiality obligation according to the principle of integrity and refrain from leaking the company’s secrets or utilize them in engaging in illegal competition.

c. Political donation: Employees should not donate to or sponsor via other means political candidates under the name of the company or its affiliated institutions.

B. The company had not incurred any loss from labor-management dispute as of the date for the publication of the annual report and expects no such loss in the future.

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5.6 Important Contracts

Agreement Counterparty Period Major contents Restrictions

1.Joint-venture contract ROYAL Co., Ltd. Signed on March 1,1991 Run family-oriented restaurants in Taiwan Nil

2.Joint-venture contract TECHNOS Co., Ltd. and others Signed on Sep. 1, 1998

Set up Tecnos International Consultant Co., Ltd. for engagement in vocational training, management consulting, wholesale of business machines, wholesale of information software, and international trade.

Nil

3. Agency contract Tecoson Industrial and others, totaling 667 companies

One year after the starting of shipment, should any party fail to notify contrary opinion three months before the ending of the contract, the contract will be extended by one year automatically, an arrangement which will be repeated afterwards.

Rights and obligations for agency for home appliances, electric motor, and air conditioners. Nil

4. Joint-venture contract Far Eastern ETC Signed on Nov. 15, 2004Setup of Far Eastern ETC Co., Ltd. with Far EasTone Telecommunications Co., Ltd., SYSTEX Corporation and MITAC Inc.

Nil

5.Joint-venture contract Finetec Century Corporation Signed on Dec. 18, 2007 Setup of Qingdao TECO Century Refrigeration Technology Co., Ltd Yes

6.Joint-venture contract

Great TECO Motor(PTE) Ltd., China Steel Asia Pacific Holdings PTE Ltd. and Marubeni-Itochu Steel Inc

Signed on Dec. 31, 2007 Setup of Qingdao TECO Precision Mechatronics Co., Ltd. Yes

7. Work contract Continental Engineering Corp. Signed the contract with the client on Feb. 26, 2008, with the project scheduled for completion on June 15, 2014.

Undertake CU02 engineering work for Taoyuan Airport Access MRT syste. Nil

8. Joint-venture contract A-TECH Wind Power (Jiangxi) Co.,Ltd. Signed on Sep. 10, 2010 Setup of TECO A-TECH (Wind Power) Co., Ltd. Nil

9.Syndicated-loan contract First Bank Dec. 15, 2010-Dec. 14, 2015 Mid-term revolving loan Yes

10. Wind Turbine Sales Contract Asia RenewableEnergy Corporation Signed on May. 1, 2011 Landing 30 units of TFC2000 wind turbines from

Vietnam Nil

11. Construction contract Chung-Lu Construction Co.,Ltd. Signed on June 10, 2011Undertake electric-machinery engineering for the BOT (build-operate-transfer) project of “Songshan tobacco plant cultural park.”

Nil

12. Work contract Li Jin Engineering Co.,Ltd. Signed on Aug. 5, 2011 Undertake the construction of the headquarters building of Hua Nan Bank. Nil

13. Work contract Far Eastern ETCSigned construction contract on Sep. 2012, and the projected accomplished date will be May 31, 2013

Undertake the basic infrastructure of highway electronic charging system mile accounting stage (central II area, south I area).

Nil

14. Work contractRailway Reconstruction Bureau, Ministry of Transportation and Communications

Signed construction contract on Oct. 16, 2012, and the projected accomplished date will be April 26, 2016

Undertake BCI 251/252Z railway overheadzation from Pingtung to Teochow, and the base electric traction line system construction in Teochow.

Nil

15. Motor Sales Contract Mirtsubishi Heavy Industries, Ltd. Signed the contract on Mar. 16, 2012 Linkou project of Taiwan Power Company Nil

16. Work contractBureau of National Health Insurance, Department of Health, Executive Yuan

Signed the contract on Dec. 5, 2012Production for national health insurance IC card (the sixth outsourcing serive project, personnel procurement contract)

Nil

17. Share buy/sell contract Fubon Multimedia Technology Co., Ltd. Signed the contract on Aug. 9, 2012 Sold common shares of Taiwan Pelican Co, Ltd. Nil

18. Strategic alliance agreement Kuenling Machinery Refrigerating Co., Ltd. Signed the contract on Dec. 20, 2012

1. Strengthen the company’s production technology and R&D cooperation.2. Strengthen the cooperation of operation management, marketing, fostering talent, and development strategy.

Nil

19. Work contract Taiwan High Speed Rail Corporation Signed the contract on Jan. 8, 2013 Undertake the construction of S260 Changhua

station Nil


VI. Financial Information6.1 Five-Year Financial Summary6.1.1 Condensed Balance Sheet

Unit: NT$ thousand

Year

Item

Five-Year Financial Summary

2008 2009 2010 2011 2012

Current assets 15,139,663 12,014,298 12,233,833 15,077,804 13,221,379 Funds & Long-term investments 34,351,199 36,677,573 37,390,876 38,932,580 39,663,344 Fixed assets 4,125,458 3,717,337 3,487,379 3,539,116 3,495,068

Intangible assets 171,434 126,333 81,232 36,131 0

Other assets 2,666,831 2,774,507 2,476,630 2,296,432 2,286,752

Total assets 56,454,585 55,310,048 55,669,950 59,882,063 58,666,543

Current liabilities

Before distribution 10,391,993 6,593,727 7,810,702 9,204,638 8,510,598

After distribution 11,303,576 7,596,491 9,279,192 10,865,710 Note 1

Long-term liabilities 11,409,324 11,849,900 10,699,790 11,948,671 10,101,577

Other liabilities 1,361,998 1,313,486 1,349,296 1,541,809 1,834,253

Total liabilities



Capital stock 18,231,659 18,231,659 18,313,129 18,388,019 18,490,969

Capital surplus 5,769,153 5,818,896 5,832,183 5,764,454 5,919,258

Retained earnings



Unrealized gain or loss on financialinstruments (647,994) 355,696 (28,538) (789,841) (438,596)

Cumulative translation adjustments 1,158,985 1,191,466 248,393 1,081,867 715,660

Net loss unrecognized as pension cost (Note 1) (178,386) (68,895) (68,040) (85,308) (310,486)

Total shareholders’equity



Note 1: Earnings allocation has not yet to be passed by shareholders’ meeting.

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Unit: NT$ thousand

Year

Item

Year-to-date 2013.3.31(Note 2)

Current assets 37,888,427 Property, plant and equipment 14,707,439 Intangible assets 83,389

Other assets 21,189,154

Total assets 73,868,409

Current liabilitiesBefore distribution 18,498,449 After distribution Note 1

Total non-current liabilities 13,480,983

Total liabilitiesBefore distribution 31,979,432 After distribution Note 1

Capital stock 18,731,194

Capital surplus 6,118,191

Retained earningsBefore distribution 15,587,161 After distribution Note 1

Other equity interest (541,085) Treasury shares (320,839) Non-controlling interests 2,314,355

Total shareholders’equity

Before distribution 41,888,977 After distribution Note 1

Note 1: Earnings allocation has not yet to be passed by shareholders’ meeting.

Note 2: Financial data (consolidated) as of March 31, 2013 had been audited by certified public accountants.


6.1.2 Condensed Statement of IncomeUnit: NT$ thousand

Year

Item

Five-Year Financial Summary

2008 2009 2010 2011 2012

Operating revenue 28,871,715 22,210,105 23,244,789 25,798,135 25,461,139

Gross profit 4,540,286 4,140,657 4,447,422 4,700,215 5,190,315

Income from operations 916,407 816,021 978,079 1,182,535 1,754,248

Non-operating income 1,987,625 2,138,293 2,270,060 2,204,399 2,023,454

Non-operating expenses 1,202,418 890,861 435,072 527,838 463,902

Income from operations of continued segments - before tax 1,701,614 2,063,453 2,813,067 2,859,096 3,313,800

Income from operations of continued segments - after tax 1,833,939 1,957,096 2,491,686 2,783,210 2,964,701

Income from discontinued departments - - - - -

Extraordinary gain or loss - - - - -

Cumulative effect of accounting principle changes - - - - -

Net income 1,833,939 1,957,096 2,491,686 2,783,210 2,964,701

Earnings per share 1.00 1.09 1.38 1.54 1.63

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Unit: NT$ thousandYear

Item

Year-to-date 2013.3.31(Note 1)

Operating revenue 13,265,366

Gross profit 3,166,219

Operating profit 1,151,250

Non-operating income (expenses) 74,744

Income before Tax 1,225,994

Profit (loss) from continuing operations 866,177

Income from discontinued departments -

Profit (loss) 866,177

Other comprehensive income, net 1,255,077

Total comprehensive income 2,121,254

Profit (loss), attributable to owners of parent 818,637

Profit (loss), attributable to non-controlling interests 47,540

Comprehensive income, attributable to owners of parent 1,923,512

Comprehensive income, attributable to non-controlling interests 197,742

Earnings per share 0.45

Note 1: Financial data (consolidated) as of March 31, 2013 had been audited by certified public accountants.

6.1.3 Auditors’ Opinions from 2008 to 2012

Year CPA Firm CPA's Name Auditing Opinion

2012 PricewaterhouseCoopers, Taiwan Ping-Chiun Chih, Audrey Tseng Modified Unqualified Opinion

2011 PricewaterhouseCoopers, Taiwan Ping-Chiun Chih, Audrey Tseng Modified Unqualified Opinion

2010 PricewaterhouseCoopers, Taiwan Ping-Chiun Chih, Wen-Hong Kao Modified Unqualified Opinion

2009 PricewaterhouseCoopers, Taiwan Wen-Hong Kao, Ping-Chiun Chih Modified Unqualified Opinion

2008 PricewaterhouseCoopers, Taiwan Wen-Hong Kao, Ping-Chiun Chih Modified Unqualified Opinion


6.2 Five-Year Financial Analysis

Year

Item

Financial analysis in the past five years

2008 2009 2010 2011 2012

Financial

structure (%)

Ratio of liabilities to assets 41.23 35.91 35.89 38.08 34.85

Ratio of long-term capital to fixed assets 1,080.96 1,272.33 1,330.62 1,385.36 1,382.57

Solvency (%)Current ratio 145.65 182.21 156.49 163.81 155.35Quick ratio 94.77 117.99 100.2 102.46 102.00Times interest earned ratio 6.91 12.46 36.52 28.24 31.86

Operating ability

Accounts receivable turnover (turns) 4.64 3.71 4.95 4.49 4.83Average collection period 78.63 98.33 73.77 81.33 75.56Inventory turnover (turns) 6.19 4.46 5.19 4.98 4.73Accounts payable turnover (turns) 4.47 3.94 4.20 4.01 3.84Average days in sales 59.01 81.92 70.38 73.27 77.16Fixed assets turnover (turns) 7.34 4.97 6.18 6.75 7.24Total assets turnover (turns) 0.50 0.35 0.40 0.41 0.43

Profitability

Return on total assets (%) 3.64 3.74 4.61 4.97 5.15Return on stockholders' equity (%) 5.23 5.70 7.00 7.65 7.87Ratio to issued

capital (%)

Operating income 5.37 4.48 5.35 6.44 9.50

Pre-tax income 10.78 11.32 15.40 15.56 17.94

Profit ratio (%) 6.35 10.04 11.18 11.74 11.64Earnings per share ($) 1.00 1.09 1.38 1.54 1.63

Cash flowCash flow ratio (%) 18.17 62.81 27.89 14.63 43.39Cash flow adequacy ratio (%) 68.94 89.02 72.24 83.8 105.88Cash reinvestment ratio (%) 0.05 5.70 2.11 -0.21 3.51

LeverageOperating leverage 5.68 5.97 5.35 4.81 5.62Financial leverage 1.52 1.28 1.09 1.10 1.07

Explain reasons for changes in various financial ratios in the recent two years: 1. Increase in Operating Income : Benefitting from price decline for raw materials, the company stepped up its effort in

improving designs and augmenting production efficiency, lowering costs. Consequently, gross margin gained 3% in 2012 over the 2011. Strict control of various expenses also drove down operating expenses. Consequently, the company’s operating income substantially grew 48% than 2011.

2. Increase in cash flow ratio, cash flow adequacy ratio, and cash reinvestment ratio : Mainly resulting from the better profit outcome in 2012, which increased the net cash inflow from NT$1.347 billion in 2011 to NT$3.693 billion in 2012 (increased amount: NT$2.346 billion).

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Year

Item

Year-to-date

2013.3.31

Financial structure (%)Ratio of liabilities to assets 43.29Ratio of long-term capital to fixed assets 345.10

Solvency (%)Current ratio 204.82Quick ratio 134.71Times interest earned ratio 19.87

Operating ability

Accounts receivable turnover (turns) 5.48Average collection period 66.56Inventory turnover (turns) 3.65Accounts payable turnover (turns) 5.00Average days in sales 99.87Fixed assets turnover (turns) 3.63Total assets turnover (turns) 0.73

Profitability

Return on total assets (%) 4.77Return on stockholders' equity (%) 8.07Ratio to issued

capital (%)

Operating income 24.91

Pre-tax income 25.50

Profit ratio (%) 6.17Earnings per share ($) 1.79

Cash flowCash flow ratio (%) 6.05Cash flow adequacy ratio (%) 124.43Cash reinvestment ratio (%) 2.97

LeverageOperating leverage 10.45Financial leverage 1.06

Explain reasons for changes in various financial ratios in the recent two years: N/A (first time to adopt IFRS)


6.3 Supervisors’ Inspection Report in the Most Recent Year

Audit Committee’s Inspection Report. (Translation)

To: General Shareholders Meeting 2013

The undersigned having duly inspected and approved the business report, financial statements (included consolidated financial statements) for 2012 and the proposed profit distribution plan prepared and proposed by the Board of Directors, with the financial statements having been audited and certified by PricewaterhouseCoopers with the Audit Committee’s Report Produced, hereby submit this report pursuant to Article 219 of the Company Act.

TECO Electric & Machinery Co., Ltd. Convener of Audit Committee:

Tian-Jy Chen

March 26, 2013

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VII. Review of Financial Status, Operating Results, and Risk Management

7.1 Analysis of Financial Status Unit: NT$ thousand

YearItem 2012/12/31 2011/12/31

DifferenceRemark

Amount %Current Assets $13,221,379 $15,078,465 (1,857,086) (12) Note 1Fixed Assets 3,495,068 3,539,116 (44,048) (1)Other Assets 2,286,752 2,296,432 (9,680) -Total Assets 58,666,543 59,882,724 (1,216,181) (2)Current Liabilities 8,510,598 9,341,841 (831,243) (9)Long-term Liabilities 10,101,577 11,948,671 (1,847,094) (15) Note 2Total Liabilities 20,446,428 22,801,958 (2,355,530) (10) Note 2Capital stock 18,490,969 18,388,019 102,950 1Capital surplus 5,919,258 5,759,692 159,566 3Retained Earnings 11,534,303 10,412,568 1,121,735 11 Note 3Total Stockholders' Equity 38,220,115 37,080,766 1,139,349 3Note 1: Decrease on Current assets: Due to parts of the constructions in process in the year were close to the completion.Note 2: Decrease on Total liabilities: Decreased long-term borrowings from banks.Note 3: Increase on Retained earnings: Due to increase in profit in the year than the previous year.

7.2 Operating Results7.2.1 Analysis of Operating Results

Unit: NT$ thousandYear

Item2012 2011

DifferenceRemarkAmount %

Gross Sales 26,356,941 26,845,420Less: Sales Returns & Allowances (895,802) (1,047,285)Net Sales 25,461,139 25,798,135 (336,996) (1)Cost of Sales (20,200,502) (21,099,038) 898,536 4Gross Profit 5,260,637 4,699,097 561,540 12Realized(Unrealized) Profit from Intercompany Transactions (70,322) 1,118 (71,440)

Gross Profit - Net 5,190,315 4,700,215 490,100 10Operating Expenses (3,436,067) (3,517,680) 81,613 2Operating Income 1,754,248 1,182,535 571,713 48 Note 1Non-operating Income and Gains 2,023,454 2,204,399 (180,945) (8)Non-operating Expenses and Losses (463,902) (527,838) 63,936 12 Note 2Income Before Tax 3,313,800 2,859,096 454,704 16 Note 1-2Tax Benefit (Expense) (349,099) (75,886) (273,213) (360) Note 3Net Income 2,964,701 2,783,210 181,491 7 Note 4Analysis and explanation for changes: 1. Demand for motor increased and home appliances and system automation department both racked growth. Meanwhile, thanks to increased added

value for products resulting from R&D effort, Gross Profit – Net increased. Effort in cutting cost, reducing expenses, and exercising budget control further dampened Operating Expenses, leading to increase in Operating Income.

2.The main reason is from impairment loss. 3.The main reason is provisional different in income tax resulting from net change in deferred income-tax assets (liabilities). 4.Overall speaking, the net profit in the year increased.

7.2.2 Change in gross profit: No need of analysis since the change is less than 20%.


7.3 Analysis of Cash Flow

7.3.1 Cash Flow Analysis for the Current Two YearsYear

Item2012 2011 Variance (%)

Cash Flow Ratio (%) 43.39 14.63 196.58

Cash Flow Adequacy Ratio (%) 105.88 83.8 26.35

Cash Reinvestment Ratio (%) 3.51 -0.21 -Analysis and explanation for changes in ratios:In 2012, cash flow ratio, net cash flow adequacy ratio, and cash reinvestment ratio increased compared to 2011, due to the better profit in 2012, which increased net cash flow from operation activities to NT$3.693 billion, NT$2.346 billion higher than 2011’s NT$1.347 billion.

7.3.2 Cash Flow Analysis for the Coming Year Unit: NT$ thousand

Cash and Cash Equivalents,

Beginning of Year (1)

Estimated Net Cash Flow

from Operating Activities(2)

Estimated Cash Outflow (Inflow)(3)

Cash Surplus(Deficit)

(1)+(2)-(3)

Remedy for Cash Deficit

Investment Plans Financing Plans

2,792,719 1,611,237 2,287,749 2,116,207 - -1. Analysis of change in cash flow in the current year:

(1) Operation activities: Although the U.S. economy has been recovering gradually, the Euro-debt crisis has yet to subside entirely and global consumption sentiment appears to be rather conservative, clouding business and profit outlook. However, thanks to steady growth for core business, operation activities are expected to score net cash inflow this year.

(2) Investment activities: To expand core business, the company will adjust investment plan according to economic status and continue review long-term equity investment outside core business, for disposal at proper timing, so as to generate profits to support core-business investment. Investment activities are expected to continue generate net cash outflow this year.

(3) Financing activities: Since cash inflow from operation and self-owned capital will be used to expand core business and repay bank borrowings, it is expected that financing activities in the coming year will generate net cash outflow.

2. Remedy for Cash Deficit and Liquidity Analysis: Not Applicable

7.4 Major Capital Expenditure Items

7.4.1 Major Capital Expenditure Items and Source of CapitalUnit: NT$ thousand

Project Actual or Planned Source of Capital

Actual or Planned Date of

CompletionTotal Capital

Actual or Expected Capital Expenditure

2011 2012 2013~2014

2011 Capital Expenditure – Equipment Renewal

Working Capital 2011/12/31 221,421 221,421 -


Working Capital 2012/12/31 305,561 - 305,561


Working Capital 2013/12/31 530,273 - - 530,273

www.teco.com.tw 65

7.4.2 Expected Benefits

In addition to increasing the output of industrial products and home appliances, the above equipment renewal projects are expected to help reduce production costs and improve the quality of products.

7.5 Investment Policy in Last Year, Main Causes for Profits or Losses, Improvement Plans and the Investment Plans for the Coming Year

A. Equity Investment Policy In line with changes in domestic and global economies, as well as the current of energy conservation and alternative energy in public construction and infrastructural engineering, the company focuses its new equity investment on its core businesses of indstrial motor and home appliances, accompanies long-term development plan, and cautiously evaluate each investment plan.

B. Major reasons for profits or loss: The company listed NT$1,346,315,000 of investment returns on the basis of equity method in 2012, NT$1,656,739,000 in 2011 and NT$1,765,514,000 in 2010 respectively. It mainly came from increased profits generated by investments in industrial mortors business.

C. Investment plan for the next yearIn the coming one year, investments will focus on core business, for new product development, explosion-proof motor, high-efficiency motor, and electric-vehicle motor developed by industrial motor and ECO energy businesses, 510-series large industrial inverter developed by system automation business, and whole-series first-grade machines, multi-unit household and commercial variable-frequency air conditioner, centrifugal ice water machine developed by home appliance business. For new market exploration, the company will focus on Turkey and India this year.

7.6 Analysis of Risk Management

Effects of Changes in Interest Rates, Foreign Exchange Rates and Inflation on Corporate Finance, and Future Response Measures

A. The non-traditional quantitative-easing monetary policy of developed nations has facilitated speculation of hot money in bulk commodities and its long-term stay in emerging markets, leading to large-scale currency revaluation of developing nations. However, in 2013, after resumption of the office of prime minister, Shinzo Abe vowed to attain a 2% targeted inflationary rate by 2012, in order to rid of the specter of deflation which has haunted the Japanese economy for over 20 years. Subsequently, Japanese yen depreciated by over 20% from US$1=78 yen to US$1=95 yen. However, to prevent further deterioration of their trade conditions, emerging countries have competed with Japan to devalue their currencies. In addition, economic damage caused by Europe’s tight-budget policy has gradually surfaced, driving global funds to the two major economies of the U.S. and China. Market expects that the U.S. will continue its quantitative-easing monetary policy this year but China’s new leadership will embrace more active economic policy to stimulate economic recovery. In addition, China may adopt contractionary policy to alleviate persistent inflationary pressure. Taiwan is scheduled to hold referendum on the fourth nuclear power plant in the second half and should local people resolve to terminate the construction of the plant, rising power rates will fuel inflation, stepping up the


pressure for interest hike. The company will properly foreign-currency loan position in Taiwan, to cut interest outlay and embrace proper loaning strategy, according to market changes.

B. Despite the weakening trend of Asian currencies, the New Taiwan dollar may strengthen due to the effect of renminbi, as the two currencies have much closer interaction than the past. In addition, power-rate hike, scheduled in the second half, will give rise to the issue of inflation and interest-rate hike again. However, possibility for revaluation of the NT dollar for the whole year cannot be ruled out. Except natural risk hedging via adjustment in the position of assets and liabilities, the company will carry out substantive risk hedging via forward forex transaction. In the future, the company will closely monitor development of forex market and actively undertake risk hedging according to the principle of stability, in order to cut effect of forex-rate fluctuation on the company’s profits.

C. Massive exploration of shale gas by the U.S. has greatly boosted the world’s energy supply. Plus uncertain outlook of global economic recovery and limited demand for basic metals, bulk-commodity prices are unlikely to swing in 2013. Moreover, since TECO purchases raw materials mostly via contract-based price negation, price fluctuation will not have adverse effect on the company’s profits.

D. As the global economy has yet to recover fully, the company will closely monitor change in interest rate, exchange rate, and inflation, as well as its effect on the company’s income, thereby embracing adequate risk-hedging measures timely.

7.6.2 Policies, Main Causes of Gain or Loss and Future Response Measures with Respect to High-risk, High-leveraged Investments, Lending or Endorsement Guarantees, and Derivatives Transactions

A. The company abstains from high-risk and high leveraged investments.

B. At the end of 2012, outstanding loans extended by the company amounted to NT$44,241,000, with the sole recipient being United View Global Investment Co., Ltd., which is the company’s 100%-owned subsidiary. Therefore, the company complies with its guidelines for loan extension, both in terms of loan amout and recipient.

C. In 2012, the outstanding amount of the endorsement and guarantee extended by the company reached NT$1,027,804,000, for the company’s subsidiaries, affiliates, and business partners. Since the company retains majority seats on the board of directors of its subsidiaries and appoints their management, it has absolute control and grasp of their operations, slashing the risk of endorsement and guarantee for them. In addition, the company regularly gets hold of its subsidiaries’ financial statement and business status data for analysis of its profit level and evaluation of the risk for endorsement and guarantee, enabling it to embrace measures to cut risk in advance. In recent years, these subsidiaries gained steady profit growth, gradually lowering the risk of endorsement and guarantee extended by the company.

D. In 2012, derivatives held by the company was forward exchange trading, whose corresponding traders were mainly international financial institutions with outstanding credit. In addition, the company traded with many financial institutions to diversify risks, minimizing the possibility for default. Therefore, credit risk for the company in derivatives trading is very low. Moreover, derivatives held by the company are mainly for the purpose of risk hedging and the ensuing income/loss can be offset by the income/loss in the risk-hedging category, minimizing the market risk.

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E. The company has formulated a number of investment guidelines for cutting risk, including “Procedure for the Acquisition and Disposal of Assets,” “Procedure for Lending Capital to the Others,” “Procedure for the Endorsement and Guarantee,” and “Procedure for the Trading and Disposal of Derivatives.”

7.6.3 Future Research & Development Projects and Corresponding Budget

TECO derives its growth momentum from R&D. In recent years, the company pooled the R&D strength and marketing experience of its R&D units all over the world, and cooperated with industrial, government, and academic units in strengthening its core businesses and stepping into the sector of green energy. The company has initiated a number of key R&D projects in the aspects of wind-power generation, PV inverter, rare-earth permanent magnet motor, and in-wheel motor.

For the R&D of new technologies and new products in the medium- and long-term and the short-term business need of the improvement in price-performance ratio, the TECO R&D team has been actively cultivating its technological strength via the search of external resources, such as technological consultation, cooperation, and transfer.

On the basis of existing core technologies, such as rotated machinery and generator design, machinery drive and design, power/electronic control and design, and internet-related technology, integrate new market needs, industrial specifications, new-materials application, sensor-application technology, wireless-network technology, and green-industry technology, thereby coordinating overall R&D strategy and technological planning.

The company formulates its future R&D plan on the following bases: A. Grasp and analysis of industrial development, government policy, and market trend; B. The establishment and rooting of key technologies;C. Competitiveness relative to rivals in Europe, the U.S., and Japan; D. Global market positioning and technological integration;E. Grasp of R&D progress and quality.

Therefore, in 2013 TECO will dedicate to the R&D of:A. High-efficiency motorB. Reluctive motor and driveC. Low energy-consumption inverter refrigeratorD. Permanent-magnet three-wheel in-wheel motor and driveE. All series wind-power generator and drive F. High efficiency PV inverterG. Medium-voltage inverter H. Internet-related technology for system automation productsI. Multiple commercial air-conditioners systems

The goal is to develop products conforming to new European specifications in the existing market, seek high value-added innovative applications in existing sales channels, and strive for commercialization of emerging technologies and new market opportunities.


Term of R&D Focus Major R&D items

Short-term

Develop new-product application market, Enhance performance of existing products & Enhance product profitability and market share

High-performance servo motor and drive

Inverter DD washing machine

Super premium motor

Permanent-magnet motor and drive

Control for servo system

High rotational-speed motor

Multi-unit commercial-use package air conditioning unit

Technology of sinusoidal sensorless drive

Servo parameter automatic adjusting technology

Electric vehicle power package

Intelligence battery and battery management system

Break energy recharge technology

Energy –saving electric vehicle certification technology

Electric vehicle battery certification technology

Mid-term

Accumulation of core technological strength & Development of new technological strength

Medium- and high-voltage inverter

Advanced inverter technology

Large high-efficiency motor (FSR)

Hydraulic motor for hybrid injection molding machine

R&D of wind-power technology

Application technology of digital home in smart phone

Remote monitoring technology of motor and generator

Internet-related technology for electric-control products

Commercial air-conditioning for train

Long-term Deployment in new business scope

Rare-earth in-wheel motor and drive for electrical vehicle

Electric passenger/farm oriented pedicabtricycle

Super-conductivity motor and generator

R&D for new-generation digital home appliances systems

Micro-electric system in large high-efficiency power system

R&D for new-generation industrial servo system

Regional market oriented R&D for industrial technology

R&D for integrated and innovative technology

The company’s general research institute oversees the overall R&D strategy, technology deployment and ongoing product R&D, with an eye on technological deployment and product development in short-, medium-, and long-term, including:

7.6.4 Effects of and Response to Changes in Policies and Regulations Relating to Corporate Finance and Sales

None

www.teco.com.tw 69

7.6.5 Effects of and Response to Changes in Technology and in Industry Relating to Corporate Finance and Sales

In line with the social trend of decreasing population, as well as the need of green energy, the company has taken into account the global development trend, own technological strength, and growth potential of related industries. Therefore, in addition to strengthening its technological edges of high-performance motor, application of environment-friendly coolant in home appliances, and energy-saving frequency-variable products, the company added the R&D of rare-earth permanent-magnet electric machinery in passenger/farm oriented vehicle, closely studied international technology trend’s and market trend’s reports, gave an impetus to innovative competition, sopported green energy international competition, and planned techchlogy forum in several areas and long-term technology development plan to accomplish planned-to-achieved strategies and time table.

In green energy, there include prmanent magnetic motor of electric edicabtricycle, wind-power generators, PV inverters and multiple air-conditioners systems.

From 2013, adding the internet-related technology R&D of system automation products, servo motor dedicated location sensor, reluctive motor, and clean-energy control and security products for digital homes, strengthened technological cooperation with affiliates, active pursuit of technological cooperation with foreign firms, and accumulation of R&D strength, so as to meet the long-term need of the society.

7.6.6 The Impact of Changes in Corporate Image on Corporate Risk Management, and the Company’s Response Measures

The company has been pursuing sustained growth via “pluralized management” and “global deployment,” and has been striving to project a quality corporate image for a globalized group by manifesting in-depth social care via TECO Foundation and rigorous demand for quality and service. The company’s crisis management plan covers its production bases worldwide and has helped the company respond properly to the ordeal of major incidents in recent years, thanks to the company’ constant effort in fostering crisis-management capability. In the future, the company will continue simulating the outbreak of major incidents and formulate response plans, in order to safeguard the interests of shareholders.

7.6.7 Expected Benefits from Risks Relating to and Response to Merger and Acquisition Plans

The Company has no ongoing merger and acquisition activities.

7.6.8 Expected Benefits from Risks Relating to and Response to Factory Expansion Plans

The Company has no ongoing factory expansion projects.


7.6.9 Risks Relating to and Response to Excessive Concentration of Purchasing Sources and Excessive Customer Concentration

A. Of the company’s suppliers, only one, TESEN Electronic Co., Ltd., accounts for over 10% share in the latest year, which, however, poses no risk for the company’s in the control of input supply, since TESEN is 100% owned by the company.

B. Of the company’s customers, only one, TECO-Westinghouse Motor Co., Ltd., accounts for over 10% share in the company’s sales in the latest one year, thanks to the phenomenal growth of motor sales in America. TECO-Westinghouse, however, is a 100%-owned subsidiary of the company, which has absolute control of its operation. In addition, its shares in the company’s two-year-sales both reached 14% and 10% seperately, giving no risk for concern for sale concentration.

7.6.10 Effects of Risks Relating to and Response to Large Share Transfers or Changes in Shareholdings by Directors, Supervisors, or Shareholders with Shareholdings of over 10%

The company doesn’t have a shareholder with over 10% of shareholding and there is no massive share transfer or swap among the company’s directors and supervisors in the latest year.

7.6.11 Effects of Risks Relating to and Response to Changes in Control over the Company

None

7.6.12 For litigation and non-litigation cases, specify the company and directors, supervisors, president, chief executive, and major shareholders with over 10% of shareholding, as well as affiliates. For major litigation, non-litigation, or administrative disputes with major effects on the interests of shareholders or stock prices, disclose the facts, target value, starting dates for litigation, major parties involved, and the status of the cases up to the publication of the yearbook: None.

7.6.13 Other Major Risks

None

www.teco.com.tw 71

VIII. Special Disclosure8.1 Summary of Affiliated Companies8.1.1 Chart of Affiliated Companies

100%

68.03%

100%

100%

50.00%

30.00%

70.00%

100%

100%

99.99%

100%

100%

100%

100%

100%

100%

87.50%

55%

60%

100%

100%

49.99%

100%

100%

100%

100%

100%

100%

100%

100%

100%

54.83%

TECOElectric & Machinery Co., Ltd

Tasia (PET) Ltd.

0.20%

0.20%

10%

10.76%

19.20%

54%

19.20%

19.20%

5.26%

1.51%

0.01%

0.80%

0.42%

Taiwan Pei Li Tone Co., Ltd.

TECO Capital InvestmentCo., Ltd.

TECO Capital Investment(SAMOA) Co., Ltd.

Jack Property Service & Management Company

Tecoson Industrial Development

Asia Air TechIndustrial (PTE) Ltd

Great Teco, S.L.

TECO Australia Pty. Ltd.

Great Teco Motor (PTE) Ltd.

TECO Industrial ( Malaysia)Sdn. Bhd.

P.T TECO Elektro Indonesia

Teco Electric & Machinery B.V.

Asia Electric&Machinery(PTE) LTD.

TECO Electronic& Machinery Sdn.Bhd.

P.T Teco Multiguna Electro

Teco Electronic & Machinery (THAI) Co.,Ltd.

Teco (Vietnam) Electronic & Machinery Company Ltd.

TYM Electric and Machinery Sdn. Bhd.

Antech Automation Corp.

Hubbell-Taian Co., Ltd.

Hubbell-Anmex International(s) Pte.Ltd

TECO Westinghouse MotorIndustrial Canada

TECO Westinghouse Motor Company

Teco Electronic Devices Co.,Ltd.

An-Tai InternationalInvestment (Singapore) Co., Ltd.

Universal Mail Service Ltd.

Unison Service Corporation

Information TechnologyTotal Service (BVI) Co., Ltd.

GreyBack International Property Inc.

Tecom InternationalInvestment Co., Ltd.

WondaLink Inc.

Baycom Opto-ElectronicsTechnology Co., Ltd.

Wuhan Tecom Co., Ltd.

Tecom Tech (Wuxi) Co., Ltd.

Beijing Tecom Innovative echnology Co., Ltd.

Tecom Tech Investment (BVI) Limited.

Tecom Global TechInvestment (B.V.I)

Tecom Global TechInvestment Pte Limited.

Tecom Tech Investment (B.V. I)

Sankyo Co., Ltd.100%

100%

100%

70%

100%

100%

100%

100%

100%

100%

100%

82.35%

76.67%

85.31%

100%

100%

100%

100%

100%

50%

100%

100%

45.60%

100%

100%

100%

100%

100%

100%

Tecoson HK Co., Ltd.

TECO (Dong Guang) Air Conditioning Equipment

TECO Technology & Marketing Center Co., Ltd.

Qingdao Jie Zheng PropertyService & Management Company

Technical InformationInternational Co., Ltd.

Qingdao TECOInnovative Co., Ltd.

TECO Electric and Machinery GmbH

Shanghai TECO Electric& Machinery Co., Ltd.

TECO (New Zealand)Limited

Suzhou TECO Electric & Machinery Co., Ltd.

Wuxi TECO Electric &Machinery Co., Ltd.

Jiangxi TECO Electric &Machinery Co., Ltd.

QingDao TECO Precision Mechatronics Co., Ltd.

Fujian TECO PrecisionCo., Ltd.

TECO Group Science-Technology (Hang Zhou)

Nasnchang Dong-HuanManagement & Consulting

NanchangTECO Electric &Machinery Co., Ltd.

Xiamen TECO TechnologyCo., Ltd.

Qingdao TECO CenturyAdvanced High-tech

Asia Innovative Technology Co., Ltd.

Teco Westinghouse Motor Company S. A. de C. V.

Beijing Pelican ExpressCo., Ltd.

Taichang TECO ElectroDevice Co.

Tai-An Technology(Wuxi) Co., Ltd.

Information Technology TotalService (Hang Zhou) Co., Ltd.

Information Technology(Wuxi) Co., Ltd.

Information Technology TotalService (Xiamen) Co., Ltd.

EcolectricInternational Co., Ltd.

50%

15%

Tong Tai Co., Ltd.

Yatec Engineering Corp.

TECO Electric Europe Ltd.

TECO International Investment Co., Ltd.

Tong An InvestmentCo., Ltd.

A-OK Technical Co., Ltd

U.V.G.InvestmentCo.,Ltd

Tesen Electric & Machinery Co., Ltd.

Taian (Subic) ElectricCo., Ltd.

Taian-EtacomTechnology Co., Ltd.

GD TECO Taiwan Co.,Ltd.

Tong Tai Jung Co., Ltd.

TECO Electric &Machinery (Pte) Ltd.

An Tai International Investmet Co., Ltd.

Tecnos InternationalConsultant Co., Ltd.

An-Sheng Travel Co., Ltd.

Taian Electric Co., Ltd.

TECO Appliance (HK)Co., Ltd.

Taian-Jaya Electric Sdn, Bhd.

TECO (PHILIPINES)3C & APPLIANCES, INC.

TECO Holding USA Inc.

TECO Nanotech Co., Ltd.

TECO Electro DevicesCo., Ltd.

E-Joy International Co., Ltd.

Micropac(BVI)Worldwide

Taian (Malaysia) ElectricSdn. Bhd.

TECO Technology(Vietnam) Co., Ltd.

Information TechnologyTotal Service Co., Ltd.

Tong-An Asset Management & Develoement Co., Ltd.

92.63%

64.95%

100%

100%

99.60%

86.67%

100%

100%

76.70%

84.73%

100%

60.00%

90%

100.00%

57.52%

19.20%

100.00%

99.99%

95.00%

60.00%

100%

86.01%

62.57%

79.37%

100%

66.85%

100.00%

60.62%

100.00%

28.56%

63.52%

Taiwan Pelican Express Co.,Ltd.

Tecom Co.,Ltd.

Pelecanus Express Pte. Ltd.10.66%

10.66%

100.00% 80.00%

15.13%28.64%

100.00% 100.00%

100.00%

100.00%

100.00%

7.42%

100.00%

100.00%

10.26%

1.09%

Teco Sichuan Trading Co., Ltd.100%

Tianjin TECO Technology Co., Ltd

Jiangxi TECO AirConditioning Equipment Co., Ltd


8.1.2 Information Regarding Affiliated CompaniesUnit: NT$thousand

Company Date of Incorporation

Paid-in Capital Major Business

Tong Dai Co., Ltd. 1972.06 57,120 Sales of MotorsTECO International Investment Co., Ltd. 1989.06 505,620 Investment ActivityTECO Holding USA Inc. 1995.03 775,571 Investment and Trading in USA

TECO Electric & Machinery (Pte) Ltd. Singapore 1972.09 190,080 Sales of Motors in Singapore and Other Countries Nearby

TECO Electric Europe Limited 1992.03 210,735 Sales of Motors in EuropeTong-An Assets Management & Development Co., Ltd. 1997.07 1,022,242 Real Estate BusinessTong-An Investment Co., Ltd. 1998.08 3,711,708 Investment ActivityTECO Electro Devices Co., Ltd. 1998.03 245,926 Manufacture of Stepping MotorsTecnos International Consultant Co., Ltd. 1998.06 50,000 Business Consulting and Human Resource ServicesTong Tai Jung Co., Ltd. 1996.04 66,000 Sales of MotorsUnited View Global Investment Co., Ltd. (UVG) 1999.08 6,556,719 Investment Holding CompanyInformation Technology Total Services Co., Ltd. 1990.12 199,990 Sales of SoftwareTesen Electric & Machinery Co., Ltd. 2001.03 200,000 Manufacture of Home ApplianceGD TECO Taiwan Co., Ltd. 2002.02 224,000 Manufacture of IC ProjectsYatec Engineering Corporation 1993.01 120,100 Electric System Development and ServiceTaian (Subic) Electric Co., Inc. 1997.03 194,307 Manufacture and Sales of Tools and EquipmentTaian (Malaysia) Electric Sdn. Bhd. 1989.03 186,144 Manufacture and Sales of Tools and EquipmentAn-Tai International Investment Co., Ltd. 1990.09 150,000 Investment ActivityMicropac (BVI) Worldwide Investment Co., Ltd. 1993.03 199,899 International TradingTaian-Etacom Technology Co., Ltd. 1999.12 83,000 Manufacture of Bus Way ComponentsE-Joy International Co., Ltd. 2004.06.25 63,000 Distributor of Home ApplianceA-Ok Technical Co., Ltd. 2004.10.07 15,000 Repair of Home ApplianceTaiwan Pelican Express Co., Ltd. 1999.09.10 860,000 Home Delivery ServiceTasia (Pte) Ltd. 1995.12 25,233 Investment ActivityTecoson Industrial Development (Singapore) 1993.02 39,248 Investment and Trading ActivitiesTecoson HK Co., Ltd. 1993.06 14,982 Investment ActivityAsia Air Tech Industrial (Pte) Ltd. 1999.06 246,840 Investment ActivityTECO (Dong Guang) Air Conditioning Equipment Co., Ltd. 1999.11.09 327,744 Manufacture of Air Conditioning EquipmentTECO Australia Pty. Ltd. 1993.04 904,950 Sales of Motors and Home Appliance in AustraliaTECO New Zealand Ltd. 1983.04 71,985 Sales of Home AppliancesGreat Teco Motor Ltd. 2000.01.27 3,030,400 Investment ActivitySuzhou TECO Electric & Machinery Co., Ltd. 2000.02.18 174,670 Manufacture and Sales of MotorsWuxi TECO Electric & Machinery Co., Ltd. 2002 1,108,692 Manufacture and Sales of MotorsTECO Industrial (Malaysia) Sdn. Bhd. 1989.06 715,026 Manufacture and Sales of Motors in MalaysiaP.T TECO Elektro, Indonesia 1997.08.14 739,068 Sales of Home AppliancesP.T TECO Multiguna Electro 1983.06 22,737 Investment and Trading ActivitiesTECO Electronic & Machinery (Thai) Co., Ltd. 1987.04 57,210 Investment and Trading ActivitiesTECO Westinghouse Motor Company 1988.01 598,950 Sales of Motors in USATECO Westinghouse Motor Industrial, Canada 1995.12 32,248 Sales of MotorsTECO Electro Devices Co., Ltd. 1998.03 72,890 International TradingTaichang TECO Electro Devices Co., Ltd. 2001.12 128,256 Manufacture and Sales of Stepping MotorsAn-Tai International Investment (Singapore) Co., Ltd. 1993.03 287,583 Investment ActivityTai-An Technology (Wuxi) Co., Ltd. 2000.07 552,499 Manufacture and Sales of Optical FiberAsia Electric & Machinery Pte Ltd. 2000.06.05 1,614,188 Investments in Home Appliances BusinessJack Property Service & Management Company 2000.04.13 30,250 Asset ManagementGreat Teco, S.L. 2003.01 23,094 Sales of Home AppliancesNanchang TECO Electric & Machinery Co., Ltd. 2003.11.10 531,517 Manufacture and Sales of Air ConditioningSankyo Co, Ltd. 1992.02.14 10,092 Sales of Home AppliancesTECO Electronic & Machinery B.V. 2005.04.18 25,403 Sales of Motors and LCD TV in EuropeSTE Marketing Sdn. Bhd. 1987.12 83,697 Investment and TradingJiangxi TECO Electric & Machinery Co., Ltd. 2005.06.01 417,733 Manufacture and Sales of MotorsQingdao TECO Precision Mechatronics Co., Ltd 2006.12 1,972,978 Manufacture and Sales of CompressorsTECO Westinghouse Motor Company S.A. de C.V 2005.12 16,299 Manufacture and Sales of MotorsXiaman TECO Technology Co., Ltd. 2006.11 22,897 Sales of Motors and Home AppliancesTYM Electric & Machinery Sdn. Bhd. 2006.06 4,745 Sales of MotorsTECO (Vietnam) Electric & Machinery Company 2005.04 55,352 Manufacture and Sales of Motors

www.teco.com.tw 73

Company Date of Incorporation

Paid-in Capital Major Business

TECO Technology (Vietnam) Co., Ltd. 2006.08 143,737 Manufacture and Sales of Tools and EquipmentAsia Innovative Technology (Xiamen) Co., Ltd. 2006.12 868,837 R&D and Manufacture of LCD TVTECO Group Science-Technology (Hang Zhou) Co., Ltd. 2007.06 10,854 R&D of Electronic Devices and System AutomationTianjin TECO Technology Co., Ltd 2010.01.22 15,908 Operation Center in Central ChinaJiangxi TECO Air Conditioning Equipment Co., Ltd. 2010.02.05 172,669 Sales of Air ConditionersTECO Sichuan Trading Co., Ltd. 2010.08.25 27,950 Sales of Home AppliancesQingdao TECO Century Advanced High-tech Mechatronics Co., Ltd. 2008.03 670,925 Manufacture and Sales of Compressors

Fujian TECO Precision Co., Ltd. 2008.05 391,785 Sales and Production of Motors and GeneratorsTeco Appliance (HK) Co., Ltd. 1991.02.12 5,618 Sales of Home AppliancesTaian Electric Co., Ltd. 2004.03.17 1,000 Manufacture and Sales of electric equipmentTaiwan Pei Li Tone Co., Ltd. 2001.07.27 7,350 Home Delivery BusinessAn-Sheng Travel Co., Ltd. 2005.03.15 25,000 Travel Business

Hubbell-Taian Co., Ltd. 1991.08.22 27,200 Import, export and sales of power distributors, lighting and explosion-proof tools

Antech Automation Corp. 1991.09.01 1,000 Slaes of System Automation ProductsHubbel-Anmex International(s) Pte. Letd. 2006.01.26 22,997 Sales of Electronic ProductsUniversal Mail Service Ltd. 1989.12 13,000 Business Docunment ProcessingUnison Service Corporation 2001.08 17,000 Software, Data Processing and Information ProvisionInformation Technology Total Service (BVI) Co., Ltd. 2001.03 44,751 Investment AcitivitiesTeco Group Science-Technology (Hang Zhou) Co., Ltd. 2002.10 2,506 Software, Data Processing and Information ProvisionInformation Technology (Wuxi) Co., Ltd. 2004.08 11,567 Software, Data Processing and Information ProvisionInformation Technology Total Service (Xiamen) Ltd. 2007.12 4,658 Software, Data Processing and Information ProvisionGreyBack International Property Inc. 2007.02.28 29,040 Real Estate BusinessTaian-Jaya Electric Sdn. Bhd. 1988.06.07 9,498 Manufacture and Sales of MotorsNanchang Dong-Huan Management & Consulting Co., Ltd. 2008.01.07 3,349 Investment ActivitiesTECO CAPITAL INC. 2008.04.15 19,112 Investment ActivitiesEcolectric International Co., Ltd. 1997.04.10 23,292 Sales of Air ConditionersTECO (PHILIPINES) 3C & APPLIANCES, INC. 2008.08.22 6,737 Sales of Home Appliance and Air ConditionersPelecanus Express Pte, Ltd 2010.04.19 14,520 Investment Activities

Qingdao TECO Innovation Co., Ltd. 2010.08.11 60,955 Merchant and Management Service for Science Park’s Development and Operation

TECO Technology & Marketing Center Co., Ltd. 2011.04.01 10,092 Investment ActivitiesTECO Capital Investment (SAMOA) Co., Ltd. 2011.01.18 58,080 Holding CompanyBeijing Pelican Express Co., Ltd. 2010.10.13 13,954 Storge Services

TECO Nanotech Co., Ltd. 1989.06.01 250,000 Production & Sales of Nano-applied ingredients and products

Technical Information International Co., Ltd. 2008.07.28 46,583 Development & Sales of SoftwareShanghai TECO Electric & Machinery Co., Ltd. 2012.08.04 23,609 Agency of Machinery and Electric ProductsTECO Electric and Machinery GmbH. 2012.09.01 962 Production & Sales of Machinery

Tecom Co., Ltd. 1980.09.25 6,307 Production ans Sales of Business Communication Products

Tecom International Investment Co., Ltd. 1980.04.16 120,000 Investment ActivitesBaycom Opto-Electronics Technology Co., Ltd. 1980.04.16 435,913 Research, Production & Sales of Fiber and Fiber CablesTecom Global Tech Investment (B.V.I) 2002.08.13 33.156 Investment ActivitesTecom Global Tech Investment Pte Limited 2004.07.19 487,166 Investment ActivitesTecom Tech Investment (B.V. I) 2008.09.25 49,556 Investment Activities

WondaLink Inc. 2010.03.18 29,000 Telecommunication and Production and Design of Electronic Components

Wuhan Tecom Co., Ltd. 2003.02.24 7,711 Internet Telecommunication Technnolgy Development and Related Services

Tecom Tech (Wuxi) Co., Ltd. 2004.09.06 527,045 R&D and Production of Telecommunication SystemTecom Tech Investment (BVI) Limited. 2008.11.03 31,858 R&D and Production of IT Products

Beijing Tecom Innovative Technology Co., Ltd. 2010.12.07 15,063 The Internet of Intelligent Home System and Related Services

GDH Co., Ltd. 2005.09.12 85,000 Research, Production and Sales of Woven FabricQingdao Jie Zheng Property Service & Management Company 2012.08.20 2,939 Property Management and Related Services


8.1.3 Operational Highlights of Affiliated CompaniesUnit: NT$thousand

Company Capital Total Assets

Total Liabilities Net Worth Net Sales Operating

IncomeNet Profit /

Loss EPS(NT$)

Tong Dai Co., Ltd. 57,120 457,273 264,393 192,880 984,204 48,291 50,955 8.92 Great TECO Whirlpool Co., Ltd. 199,000 248,850 5,386 243,464 9,373 -2,755 9,076 0.46 Tecnos International Consultant Co., Ltd. 50,000 228,143 162,969 65,174 1,191,633 14,424 11,544 2.31TECO Electric Europe Limited 210,735 188,725 165,029 23,696 260,933 -8,452 -7,043 -1.57TECO International Investment Co., Ltd. 505,620 921,736 102,150 819,586 -63,846 -67,665 -62,141 -1.23 TECO Electro Devices Co., Ltd. 245,926 499,877 119,837 380,040 520,384 23,684 -14,120 -0.57 TECO Electric & Machinery (Pte) Ltd. Singapore 190,080 3,248,572 493,054 2,755,518 2,843,807 563,930 262,958 Tong Tai Jung Co., Ltd. 66,000 346,844 216,042 130,802 763,118 27,502 24,687 3.74 Information Technology Total Services Co., Ltd. 199,990 400,921 177,672 223,249 719,133 24,729 22,184 1.11 UVG Investment Co., Ltd. 6,556,719 7,399,111 275,838 7,123,273 -236,747 -236,590 -262,994 -11.65 Tong-An Investment Co., Ltd. 3,711,708 4,721,519 26,461 4,695,058 262,324 236,974 238,848 0.64TECO Holding USA Inc. 775,571 8,253,690 2,303,220 5,950,470 9,998,598 1,343,192 944,304 TECO Westinghouse Motor Company 598,950 6,059,429 1,925,933 4,133,496 8,366,863 926,847 604,186 An-Tai International Investment Co., Ltd. 150,000 482,163 883 481,280 29,324 28,168 28,908 1.93Taian (Subic) Electric Co., Inc 194,307 232,785 59,764 173,021 271,705 914 501 0.07Taian (Malaysia) Electric Sdn. Bhd. 186,144 15,107 313 14,794 0 -172 115 Taian-Etacom Technology Co., Ltd. 83,000 303,415 185,026 118,389 568,937 37,482 32,757 3.95 Tasia (PTE) Ltd. 25,233 272,521 356,834 -84,313 493,921 -115,358 -115,493 Teco Electronic & Machinery (THAI) Co.,Ltd. 57,210 258,996 83,888 175,108 374,071 23,681 23,455 TECO Australia Pty. Ltd. 904,950 2,243,764 445,537 1,798,227 2,729,674 368,959 145,397 TECO Industrial Malaysia Sdn. Bhd. 715,026 638,096 108,020 530,076 771,331 24,894 30,596 P.T TECO Elektro, Indonesia 739,068 412,068 16,894 395,175 17,052 -18,452 272 Asia Air Tech Industrial (PTE) Ltd. 246,840 113,615 5,728 107,887 -24,584 -24,783 -24,783 Tecoson Industrial Development (Singapore) 39,248 30,111 1,245 28,866 211,410 390 -738 TECO Westinghouse Motor Industrial, Canada 32,248 2,360,373 540,911 1,819,462 2,213,175 421,217 316,518 Antech Automation Corp. 1,000 1,773 0 1,773 0 -5 1 0.01An-Tai International Investment (Singapore) Co., Ltd. 287,583 273,358 187 273,171 0 -78 -74 Tecoson HK Co., Ltd. 14,982 18,035 0 18,035 211,364 511 452 1.13TECO (Dong Guang) Air Conditioning Equipment Co., Ltd. 327,744 167,068 54,424 112,644 12,782 -10,084 -24,584

Micropac (BVI) Worldwide 199,899 1,002,447 358 1,002,089 38,448 38,396 38,396 Taian Technology (Wuxi) Co., Ltd 552,499 1,592,375 607,078 985,297 2,120,386 31,510 38,454 Great Teco Motor Ltd. 3,030,400 3,221,132 7,270 3,213,862 171,613 -180,238 -180,238 Suzhou TECO Electric & Machinery Co., Ltd 174,670 587,701 377,019 210,682 1,327,655 29,342 26,987Universal Mail Service Ltd. 13,000 13,461 10,432 3,209 48,270 1,568 1,517 1.17INFORMATION TECHNOLOGY TOTAL SERVICE (BVI) Co., Ltd. 44,751 63,437 5,196 58,241 0 -1,109 8,311

Tong-An Assets Management & Development Co., Ltd. 1,022,242 5,778,068 1,065,973 4,712,095 187,692 61,483 55,330 0.54 P.T. TECO Multiguna Electro 22,737 411,882 72,764 339,118 725,624 95,863 72,695 Yatec Engineering Corporation 120,100 506,979 282,031 224,948 750,764 23,972 31,371 2.61 TECO New Zealand Limited 71,985 82,495 152,824 -70,329 97,296 432 3,024 Asia Electric & Machinery 1,614,188 731,225 2,228 728,997 153,134 -153,570 -153,570 Wuxi TECO Electric & Machinery Co., Ltd 1,108,692 3,296,662 1,456,675 1,839,987 3,906,303 244,759 241,972 GD TECO Taiwan Co., Ltd. 224,000 126,518 109,596 16,922 213,633 -6,278 -4,505 -0.20Tesen Electric & Machinery Co., Ltd. 200,000 271,772 106,315 165,457 2,340,810 15,339 13,427 Teco Electronic Devices Co.,Ltd. 72,890 211,753 0 211,753 0 -48 -36,012 Taichang TECO Electro Devices Co., Ltd. 128,256 292,734 81,307 211,427 200,671 -43,626 -35,957 Unison Service Corporation 17,000 7,018 37,745 -30,727 100,603 -8,265 -9,299 -5.47Information Technology Total Service (Hang Zhu) Ltd. 2,506 4,789 3,846 943 0 -304 1,912 Taian Electric Co., Ltd. 1,000 886 0 886 0 -12 -10 -0.10Media Vision Inc. 27,156 24,638 30 24,608 0 -2,528 -2,548 -0.94E-Joy International Co., Ltd. 63,000 23,890 34,718 -10,828 124,679 -5,652 -4,585 -0.73A-Ok Technical Co., Ltd. 15,000 72,114 48,649 23,465 279,495 9,107 7,595 5.06 Jack Property Service & Management Co., Ltd. 30,250 167,250 59,138 108,112 248,555 21,279 18,742 6.20 Great Teco, S.L. 23,094 46,458 28,290 18,168 77,347 1,563 686

www.teco.com.tw 75

Company Capital Total Assets

Total Liabilities Net Worth Net Sales Operating

IncomeNet Profit /

Loss EPS(NT$)

Nanchang TECO Electric & Machinery Co., Ltd. 531,517 91,674 74,309 17,365 107,263 -25,942 -16,547 Sankyo Co., Ltd. 10,092 246,268 323,457 -77,189 471,962 -101,942 -99,075 Teco Electric & Machinery B.V. 25,403 387,287 156,693 230,594 711,144 -52,912 -54,703 STE Marketing SDN. BHD 83,697 409,979 101,452 308,527 662,975 39,696 36,378 4.12Jiangxi TECO Electric & Machinery Co., Ltd. 417,733 1,624,350 1,158,974 465,376 807,088 -30,068 -32,669 Qingdao TECO Precision Mechatronics Co., Ltd 1,972,978 1,777,263 807,890 969,373 784,751 -263,476 -281,211 Teco Westinghouse Motor Company S. A. de C. V. 16,299 87,312 81,532 5,780 144,225 940 911 Xiaman TECO Technology Co., Ltd. 22,897 112,127 88,894 23,233 212,880 555 472 TYM Electric & Machinery Sdn. Bhd. 4,745 137,150 25,090 112,060 183,615 17,648 16,692 Teco (Vietnam) Electronic & Machinery Company Ltd. 55,352 161,038 62,831 98,207 171,472 23,105 19,599 TECO Technology (Vietnam) Co., Ltd. 143,737 234,766 91,029 143,737 60,346 -5,799 -5,741 Asia Innovative Technology (Xiamen) Co., Ltd. 868,837 678,163 225,620 452,543 896,866 60,758 417,732 Qingdao TECO Century Advanced High-tech Mechatronics Co., Ltd. 670,925 602,749 244,200 358,549 139,017 -59,794 -69,885

Fujian TECO Precision Co., Ltd. 391,785 414,730 205,945 208,785 135,308 -54,664 -62,220 Nanchang Dong-Huan Management & Consulting Co., Ltd. 3,349 2,634 8,690 -6,056 890 -768 -599

Teco Appliance (HK) Co., Ltd. 5,618 2,824 0 2,824 0 0 -23 Taiwan Pei Li Tone Co., Ltd. 7,350 1,853 0 1,853 0 0 3 An-Sheng Travel Co., Ltd. 25,000 14,387 583 13,804 35,868 -2,023 -1,449 Hubbell-Taian Co., Ltd. 27,200 100,419 25,592 74,827 107,569 11,951 12,808 4.71Hubbel-Anmex International(s) Pte. Letd. 22,997 18,405 1,651 16,754 12,843 2,562 2,421 Information Technology (Wuxi) Co., Ltd. 11,567 20,629 10,070 10,559 30,255 -2,471 -1,852 Information Technology Total Service (Xiamen) Ltd. 4,658 10,626 8,769 1,857 13,866 645 665 GreyBack International Property Inc. 29,040 72,687 41,382 31,305 28,781 6,487 4,423 Teco Group Science-Technology (Hang Zhou) Co., Ltd. 10,584 17,671 3,973 13,698 40,360 538 354 Taian-Jaya Electric Sdn. Bhd. 9,489 170,382 54,602 115,780 154,091 23,481 8,232 TECO CAPITAL INC. 19,112 7,168 0 7,168 0 -32 -2,353 Ecolectric International Co., Ltd. 23,292 41,648 25,488 16,160 72,650 -4,317 -4,443 TECO (PHILIPINES) 3C & APPLIANCES, INC. 6,737 51,168 50,326 842 50,838 -3,332 -3,686 Taiwan Pelican Express Co., Ltd. 860,000 1,816,125 713,295 1,102,830 2,538,541 241,308 242,951 2.83Tianjin TECO Technology Co., Ltd. 15,908 53,807 40,712 13,095 97,149 -5,971 -7,751Jiangxi TECO Air Conditioning Equipment Co., Ltd. 172,669 195,566 95,325 100,241 332,501 -30,543 -28,753TECO Sichuan Trading CO.,LTD. 27,950 44,681 28,854 15,827 42,473 -3,992 -3,707Pelecanus Express Pte. Ltd. 14,520 14,303 0 14,303 0 -127 -127Qingdao TECO Innovation Co., Ltd. 60,955 17,162 7,493 9,669 0 -19,992 20,306TECO Technology & Marketing Center Co., Ltd. 10,092 22,962 32,167 -9,205 14,608 -14,581 -14,509TECO Capital Investment (SAMOA) Co., Ltd. 58,080 9,315 0 9,315 0 0 -20,590Beijing Pelican Express Co., Ltd. 13,954 9,992 4,362 5,630 12,357 2,147 -1,449TECO Nanotech Co., Ltd. 250,000 62,734 56,951 5,783 7,067 -59,816 -51,446 -2.06Technical Information International Co., Ltd. 46,583 7,802 -247 8,049 5,751 -3,278 -3,270,822Shanghai TECO Electric & Machinery Co., Ltd. 23,609 23,068 7,995 15,073 0 -8,566 -8,566TECO Electric and Machinery GmbH. 962 9,237 3,387 5,850 38,159 10,903 1,830Tecom Co., Ltd. 6,307 4,085 3,235 850 7,254 -529 -640 -2.20Tecom International Investment Co., Ltd. 120,000 173,719 20,271 153,448 0 -594 -14,650Baycom Opto-Electronics Technology Co., Ltd. 435,913 710,072 150,811 559,261 663,684 37,035 35,053 0.80Tecom Global Tech Investment (B.V.I) 33,156 3,393 704 2,689 704 -1 -1,764Tecom Global Tech Investment Pte Limited 487,166 9,620 0 9,620 338 -7 -150,904Tecom Tech Investment (B.V. I) 49,556 4,664 0 4,664 0 0 -17,455WondaLink Inc. 29,000 2,545 22,561 -20,016 19,697 -14,513 -14,515 -5.01Wuhan Tecom Co., Ltd. 7,711 16,802 14,129 2,673 55,665 -4,524 -5,056Tecom Tech (Wuxi) Co., Ltd. 527,045 14,983 5,326 9,657 128,005 -101,451 -150,430Tecom Tech Investment (BVI) Limited. 31,858 14,395 1,430 12,965 0 -3,744 -3,835Beijing Tecom Innovative Technology Co., Ltd. 15,063 2,636 4,057 -1,421 7,040 -6,705 -6,705GDH Co., Ltd. 85,000 25,242 46,894 -21,652 8,077 -14,825 -15,125Qingdao Jie Zheng Property Service & Management Company 2,939 2,940 1,751 1,189 0 -1,757 -1,756


8.2 Private Placement Securities in the Most Recent Years

None

8.3 The Shares in the Company Held or Disposed of by Subsidiaries in the Most Recent Years

Unit: NT$ thousand; Shares; %

Name of subsidiary

Stock capital collected

Fund source

Shareholding ratio of the company

Date of acquisition or

disposition

Shares and amount acquired

Shares and amount

disposed of

Investment gain (loss)

Shareholdings & amount in the most

recent yearMortgage

Endorsement amount

made for the subsidiary

Amount loaned to the

subsidiaryTong An Investment Co., Ltd.

3,711,708 Working Capital 99.60% Successive

Acquisition19,540,052Shares

$232,969 - - 19,540,052Shares$542,236 16,561,052Shares - -

An Tai International Investment Co., Ltd.

150,000 Working Capital 100.00% Successive

Acquisition2,825,748Shares

$26,308 - - 2,825,748Shares$68,101 None - -

www.teco.com.tw 77

TECO ELECTRIC & MACHINERY CO., LTD.

NON-CONSOLIDATED FINANCIAL STATEMENTS

AND REPORT OF INDEPENDENT ACCOUNTANTS

DECEMBER 31, 2012 AND 2011

For the convenience of readers and for information purpose only, the auditors’ reportand the accompanying financial statements have been translated into English from theoriginal Chinese version prepared and used in the Republic of China. In the event ofany discrepancy between the English version and the original Chinese version or anydifferences in the interpretation of the two versions, the Chinese-language auditors’report and financial statements shall prevail.


1

REPORT OF INDEPENDENT ACCOUNTANTS

To TECO Electric & Machinery Co., Ltd.

We have audited the accompanying non-consolidated balance sheets of TECO Electric& Machinery Co., Ltd. as of December 31, 2012 and 2011, and the relatednon-consolidated statements of income, of changes in stockholders’ equity and of cashflows for the years then ended. These non-consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these non-consolidated financial statements based on our audits. Asdescribed in Note 4(9) to the non-consolidated financial statements, we did not audit thefinancial statements of certain investee companies accounted for under the equitymethod. These long-term equity investments amounted to $3,926,983,000 and$6,589,659,000, constituting 7% and 11% of the related total assets as of December 31,2012 and 2011, respectively, the related credit investment balance amounted to$8,594,000 and $4,955,000, both constituting 0% of the related total assets as ofDecember 31, 2012 and 2011, respectively, and the related investment incomeamounted to $115,739,000 and $549,238,000, constituting 3% and 19% of the relatednet income before tax for the years then ended. The financial statements of theseinvestee companies were audited by other auditors whose reports thereon have beenfurnished to us and our opinion expressed herein, insofar as it relates to the amountsincluded in the non-consolidated financial statements and information disclosed in Note11 relative to these investees, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the “Rules Governing the Examination ofFinancial Statements by Certified Public Accountants” and generally accepted auditingstandards in the Republic of China. Those rules and standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve that our audits and the reports of the other auditors provide a reasonable basisfor our opinion.

In our opinion, based on our audits and the reports of the other auditors, thenon-consolidated financial statements referred to in the first paragraph present fairly, inall material respects, the financial position of TECO Electric & Machinery Co., Ltd. asof December 31, 2012 and 2011, and the results of its operations and its cash flows forthe years then ended, in conformity with the “Rules Governing the Preparation ofFinancial Statements by Securities Issuers” and generally accepted accountingprinciples in the Republic of China.

www.teco.com.tw 79

2

We have also audited the consolidated financial statements of TECO Electric &Machinery Co., Ltd. and subsidiaries (not presented herein) as of and for the yearsended December 31, 2012 and 2011, which is expected to adopt IFRSs starting fromJanuary 1, 2013. In our report dated March 26, 2013, we expressed an unqualifiedopinion with an explanatory paragraph thereon.

The non-consolidated financial statements of TECO Electric & Machinery Co., Ltd. asof and for the year ended December 31, 2012 expressed in US dollars are presentedsolely for the convenience of the reader and were translated from the New Taiwan dollarfinancial statements using the exchange rate of NT$29.04 to US$1.00 as of December31, 2012. This basis of translation is not in accordance with generally acceptedaccounting principles in the Republic of China.

PricewaterhouseCoopers, Taiwan

March 26, 2013The accompanying non-consolidated financial statements are not intended to present the financialposition and results of operations and cash flows in accordance with accounting principles generallyaccepted in countries and jurisdictions other than the Republic of China. The standards, procedures andpractices in the Republic of China governing the audit of such non-consolidated financial statements maydiffer from those generally accepted in countries and jurisdictions other than the Republic of China.Accordingly, the accompanying non-consolidated financial statements and report of independentaccountants are not intended for use by those who are not informed about the accounting principles orauditing standards generally accepted in the Republic of China, and their applications in practice.


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www.teco.com.tw 81

4

TECO ELECTRIC & MACHINERY CO., LTD.NON-CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31,(EXPRESSED IN THOUSANDS OF DOLLARS, EXCEPT EARNINGS PER SHARE DATA)

New Taiwan Dollars US Dollars2011 % 2012 % 2012

(Unaudited - Note 2)Operating revenues (Note 5)

SalesSales returnsSales discountsNet sales

Construction revenueService revenueTotal operating revenues

Operating costs (Notes 4(5), 4(18), 4(22), 4(25) and 5)Cost of goods soldConstruction costService costTotal operating costs

Gross profitUnrealized intercompany profit (Note 5)Realized intercompany profitGross profit, netOperating expenses (Notes 4(18), 4(22), 4(25) and 5)

Selling expensesGeneral and administrative expensesResearch and development expensesTotal operating expenses

Operating incomeNon-operating income

Interest incomeInvestment income accounted for under the equity method (Note 4(9))Dividend incomeGain on disposal of investmentsForeign exchange gain, netRental income (Note 5)Gain on valuation of financial assets, net (Note 4(2))Gain on valuation of financial liabilities, net (Note 4(14))Miscellaneous incomeTotal non-operating income

Non-operating expensesInterest expenseLoss on disposal of property, plant and equipmentForeign exchange loss, netFinancing expensesImpairment loss (Note 4(8), 4(13))Loss on valuation of financial liabilities, net (Note 4(14))Miscellaneous expenses (Note 4(25))Total non-operating expenses

Income before income taxIncome tax expense (Note 4(15))Net income

Earnings per share (Note 4(23))Income before

income taxNet

IncomeIncome before

income taxNet

IncomeIncome before

income taxNet

IncomeBasic earnings per share

Net incomeDiluted earning per share

Net income

Pro forma information under the assumption that the subsidiaries' investment in the Company is not treated as treasury stock:Net incomeBasic earnings per share

Net incomeDiluted earning per share

Net income

The accompanying notes are an integral part of these non-consolidated financial statements.See report of independent accountants dated March 26, 2013.


5

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www.teco.com.tw 83

6

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7

TECO ELECTRIC & MACHINERY CO., LTD.NON-CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,(EXPRESSED IN THOUSANDS OF DOLLARS)

New Taiwan Dollars US Dollars2011 2012 2012

(Unaudited-Note 2)Cash flows from operating activities

Net incomeAdjustments to reconcile net income to net cash provided by operating

activitiesGain on valuation of financial assets(Gain) loss on valuation of financial liabilitiesBad debts provision (reversal of allowance for doubtful accounts)Provision for decline in value of inventoriesInvestment income accounted for under the equity methodCash dividends from investee companies accounted for under the

equity methodGain on disposal of investments, netImpairment lossDepreciation, amortization and loss on disposal of property, plant

and equipment, netAmortization of discounts on bonds payableChanges in assets and liabilities

Financial assests at fair value through profit or loss-currentNotes receivableNotes receivable-related partiesAccounts receivableAccounts receivable-related partiesOther receivablesOther receivables-related partiesOther financial assets-currentInventoriesConstruction in progress, netPrepaid expensesDeferred income tax assets (liabilities), netOther current assetsFinancial liabilities at fair value through profit or lossNotes payableNotes payable-related partiesAccounts payableAccounts payable-related partiesIncome tax payableAccrued expenses and other payablesReceipts in advanceOther current liabilitiesAccrued pension liabilitiesOther liabilities-others

Net cash provided by operating activitiesCash flows from investing activities

Increase in other receivables-related parties-loan garanted(Increase) decrease in pledged fixed depositsProceeds from disposal of available-for-sale financial assets-non currentProceeds from disposal of financial assets carried at cost-non-currentIncrease in financial assets carried at cost-non-current, netProceeds from disposal of long-term equity investments accounted for under

the equity methodIncrease in long-term equity investments accounted for under the equity

methodProceeds from disposal of property, plant and equipmentAcquisition of property, plant and equipmentDecrease (increase) in refundable depositsIncrease in deferred expenses

Net cash used in investing activities

(Continued)

www.teco.com.tw 85

8

TECO ELECTRIC & MACHINERY CO., LTD.NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


New Taiwan Dollars US Dollars2011 2012 2012

(Unaudited-Note 2)Cash flows from financing activities

Proceeds from issuance of corporate bondsDecrease in short-term loansIncrease (decrease) in long-term loansIncrease in guarantee deposits receivedPayment of cash dividendsProceeds from exercise of employee stock options

Net cash used in financing activitiesNet cash inflow from mergerIncrease in cash and cash equivalentsCash and cash equivalents at beginning of the yearCash and cash equivalents at end of the year

Supplemental disclosures of cash flow informationInterest (net of amount capitalized) paid during the yearIncome tax paid during the year

Investing activities that resulted in partial cash flowsAcquisition of property, plant and equipmentAdd: other payables at beginning of the yearLess: other payables at end of the yearCash paid

Supplemental information of statutory mergerThe book value of net assets through merging with subsidiaries

Current assetsFixed assetsOther assetsCurrent liabilitiesOther liabilities

Investment cost before statutory mergerBook value of net assets of subsidiariesCash balance of subsidiariesNet cash inflow from merger

The accompanying notes are an integral part of these non-consolidated financial statements.See report of independent accountants dated March 26, 2013.


TECO ELECTRIC & MACHINERY CO., LTD.NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012 AND 2011(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,

EXCEPT AS OTHERWISE INDICATED)

1. HISTORY AND ORGANIZATION

TECO Electric & Machinery Co., Ltd. (the Company) was incorporated on June 12, 1956under the provisions of the Company Law of the Republic of China (R.O.C.) as acompany limited by shares. The Company primarily engages in the manufacture,installation, wholesale, retail of various types of electrical and mechanical equipment,general mechanical equipment, air-conditioning units, electronic equipment,telecommunication equipment, office equipment, and home appliances. In 2003, TaianElectric & Machinery Co., Ltd. was merged with the Company. In 2011, An YangElectric Co., Ltd. and Taitec Technology Co., Ltd. were merged with the Company. Asof December 31, 2012, the Company had approximately 2,903 employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying non-consolidated financial statements are prepared in conformity withthe “Rules Governing the Preparation of Financial Statements by Securities Issuers” andgenerally accepted accounting principles in the Republic of China. The Company’ssignificant accounting policies are summarized as follows:

(1) Foreign currency transactions

A. Transactions denominated in foreign currencies are translated into functionalcurrency at the spot exchange rates prevailing at the transaction dates.Exchange gains or loss due to the difference between the exchange rate on thetransaction date and the exchange rate on the date of actual receipt and paymentare recognized in current year’s profit or loss.

B. Receivables, other monetary assets and liabilities denominated in foreigncurrencies are translated at the spot exchange rates prevailing at the balancesheet date. Exchange gains or losses are recognized in profit or loss.

C. When a gain or loss on a non-monetary item is recognized in profit or loss, anyexchange component of that gain or loss shall be recognized in profit or loss.Conversely, when a gain or loss on a non-monetary item is recognized directlyin equity, any exchange component of that gain or loss shall be recognizeddirectly in equity. However, non-monetary items that are measured on ahistorical cost basis are translated using the exchange rate at the transactiondate.

www.teco.com.tw 8710

(2) Criteria for classifying current or non-current items

A. Assets that meet one of the following criteria are classified as current assets;otherwise, they are classified as non-current assets:a. Assets expected to be realized, used or intended to be sold during the normal

course of business;b. Assets held mainly for trading purposes;c. Assets expected to be realized within 12 months from the balance sheet date;

d. Unrestricted cash and cash equivalents.B. Liabilities that meet one of the following criteria are classified as current

liabilities; otherwise, they are classified as non-current liabilities:

a. Liabilities incurred within the Company’s operating activities and expected tobe paid during the normal course of business;

b. Liabilities incurred mainly for trading activities;c. Liabilities expected to be paid within 12 months from the balance sheet date;d. Liabilities for which the repayment date cannot be extended unconditionally

to more than 12 months after the balance sheet date.(3) Cash and cash equivalents

Cash and cash equivalents are short-term, highly liquid investments which arereadily convertible to known amounts of cash and which are subject to insignificantrisk of changes in value resulting from fluctuations in interest rates.

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

A. Derivative financial instruments are recognized and derecognized usingsettlement date accounting. These financial instruments are recognized initiallyat fair value.

B. Derivative financial instruments that do not qualify for hedge accounting areinitially recognized at fair value at the balance sheet date, and the gain or loss isrecognized immediately in profit or loss.

(5) Available-for-sale financial assets

A. Available-for-sale financial assets are recognized and derecognized using tradedate accounting and are recognized initially at its fair value plus transactioncosts that are directly attributable to the acquisition of the financial asset.

B. The financial assets are remeasured and stated at fair value, and the unrealizedgain or loss is recognized in equity. The gains or losses are recognizedimmediately when the financial assets are derecognized. The fair value oflisted and OTC stocks is based on latest quoted fair prices at the balance sheetdate. The fair value of open-end funds is based on the net asset value at the

TECO ELECTRIC & MACHINERY CO., LTD.88 11

balance sheet date.

C. If there is any objective evidence that the financial asset is impaired, theimpairment loss is recognized in profit or loss. If, in a subsequent period, theamount of the impairment loss decreases, the previously recognized impairmentloss shall be reversed as equity adjustments.

(6) Financial assets and financial liabilities carried at cost

A. Financial assets and financial liabilities carried at cost are recognized andderecognized using trade date accounting and are recognized initially at its fairvalue plus transaction costs that are directly attributable to the acquisition orissuance of the financial assets or financial liabilities.

B. If there is any objective evidence that the financial assets are impaired, theimpairment loss is recognized in profit or loss. Such impairment loss cannotbe reversed.

(7) Settlement date accounting

Any change in the fair value during the period between the trade date and thesettlement date / balance sheet date is not recognized for financial assets carried atcost or amortized cost. For financial assets and financial liabilities at fair valuethrough profit or loss, the change in fair value is recognized in profit or loss. Foravailable-for-sale financial assets, the change in fair value is recognized directly inequity.

(8) Notes, accounts and other receivables

A. Notes, accounts and other receivables are initially recognized at fair value andsubsequently amortized using the effective interest method. Receivables areassessed at end of each reporting period when there is objective evidence that, asa result of one or more events that occurred after the initial recognition of thereceivable, the estimated future cash flows of the asset have been affected.

B. Starting from January 1, 2011, the amount of the impairment loss recognized isthe difference between the asset’s carrying amount and the present value ofestimated future cash flows, after taking into account the related collateral andguarantees, discounted at the receivable’s original effective interest rate. Thecarrying amount of the receivable is reduced through the use of an allowanceaccount.

(9) Inventorieswe

The perpetual inventory system is adopted for inventory recognition. Inventoriesare stated at cost. The cost is determined using the weighted-average method.Fixed manufacturing overhead is allocated over the normal capacity of theproduction equipment. If production fluctuates over interim periods, the costvariances resulting from such fluctuation are deferred in the interim statements. At


the end of year, inventories are evaluated at the lower of cost or net realizable value,and the individual item approach is used in the comparison of cost and net realizablevalue. The calculation of net realizable value is based on the estimated selling pricein the normal course of business, net of estimated costs of completion and estimatedselling expenses.

(10) Construction in progress and partial construction billings

A. Construction in progress are stated at cost and the related interests arecapitalized in accordance with the generally accepted accounting principles inthe Republic of China.

B. If the balance of construction in progress exceeds the balance of partialconstruction billings, partial construction billings is deducted from constructionin progress and presented as current assets. If the balance of partialconstruction billings exceeds the balance of construction in progress,construction in progress is deducted from partial construction billings andpresented as current liabilities.

(11) Long-term equity investments accounted for under the equity method

A. Long-term equity investments in which the Company holds more than 20% ofthe investee company's voting shares or has the ability to exercise significantinfluence on the investee’s operational decisions are accounted for under theequity method. The excess of the initial investment cost over the acquired netasset value of the investee attributable to goodwill is no longer amortized andcarries on tests of impairment every year, effective January 1, 2006.Retrospective adjustment of the amount of goodwill amortized in previous yearsis not required. The excess of acquired net asset value of investee over theinitial investment cost is allocated proportionately and applied as a reduction tothe book value of identifiable non-current assets, and any remaining amount ofsuch excess after this allocation is credited to extraordinary gains. However,negative goodwill acquired prior to December 31, 2005 is continuouslyamortized.

B. Investment loss on the non-controlled entities over which the Company has theability to exercise significant influence is recognized to the extent that theamount of long-term investments in such investees is written down to zero.However, if the Company continues to provide endorsements, guarantees orfinancial support for such investees, the investment loss is recognizedcontinuously in proportion to the Company’s equity interest in such investees.In the case of controlled entities, the Company recognizes all the losses incurredby such entities that will not be covered by other stockholders. When theoperations of such investees become profitable, the profit shall be allocated to


the Company to the extent that the amount of losses previously recognized bythe Company is fully recovered.

C. The capital reserve and long-term equity investment amounts are adjusted bythe variance between the investment cost and net assets of the investee due tothe disproportionate acquisition or decrease of shares in connection with thecapital increase or decrease by the investee company. If the balance of capitalreserve from long-term investment is not sufficient to cover the amount, it isthen charged to retained earnings.

D. The financial statements of foreign investments accounted for under the equitymethod are translated into New Taiwan dollars. The Company recognizes itsproportionate share in the translation adjustment based on its percentage ofownership in the investee company, which is recorded in the cumulativetranslation adjustment account in stockholders’ equity.

E. All majority-owned subsidiaries and controlled entities are consolidated whenthe Company and its subsidiaries own more than 50% of the investee company’svoting shares or have the ability to exercise control.

(12) Property, plant and equipment

A. With the exception of certain fixed assets which are carried at governmentrevaluation increments, property, plant and equipment are stated at cost.Interests incurred on the loans used to bring the assets to the condition andlocation necessary for their intended uses are capitalized. The land valueincremental reserve resulting from the revaluation increment is recorded aslong-term liability.

B. Depreciation is provided on the average method over the estimated useful livesof the assets. The estimated useful lives of fixed assets are 2 to 60 years.

C. Major renewals and improvements are capitalized and depreciated accordingly.Maintenance and repairs are expensed as incurred. When an asset is sold orretired, the cost and accumulated depreciation are removed from the respectiveaccounts and the resulting gain or loss is included in current non-operatingincome (expense).

D. Fixed assets not used in operations are reclassified as other assets and therelated depreciation is charged to non-operating expense.

E. When transferring the Company’s land to a wholly-owned subsidiary, the landrevaluation balance and the related land value increment tax and reserve aretransferred and no gain or loss is recognized.

(13) Deferred charges


Deferred charges are stated at cost and amortized over the estimated useful economiclives based on the straight-line method.

(14) Impairment of non-financial assets

A. Impairment loss is recognized when the recoverable amount of an asset is lessthan its book value. The recoverable amount is the higher of the fair value lesscosts to sell and value in use of an asset. When the impairment no longerexists, the impairment loss recognized in prior years shall be recovered.

B. The recoverable amount of goodwill should be estimated at the same date eachyear, and the impairment loss on goodwill is not recoverable.

(15) Convertible bondsFor the bonds payable issued after January 1, 2006, the issuer of a financialinstrument shall classify the instrument, or its component parts, on initialrecognition as a financial liability, a financial asset or an equity instrument inaccordance with the substance of the contractual arrangement and the definitions ofa financial liability, a financial asset and an equity instrument. These bonds areaccounted for as follows:

A. The difference between the issue price and face value of convertible corporatebonds is accounted for as premium or discount which is required to beamortized over the period from the date of issuance to maturity date using theinterest method and is recorded as “interest expense”.

B. The value of any derivative features (such as a call option and put option)embedded in the compound financial instrument is recognized as “financialassets or financial liabilities at fair value through profit or loss”. Thesederivative features are subsequently remeasured and stated at fair value on eachbalance sheet date, and the gain or loss is recognized in “gain or loss onvaluation of financial assets or financial liabilities”. At the maturity of theredemption period, if the fair value of common stock exceeds the redemptionprice, the fair value of the put option is recognized as “paid-in capital”; however,if the fair value of common stock is lower than the redemption price, the fairvalue of the put option is recognized in “gain or loss”.

C. Conversion option and conversion price resetting option embedded in the bondsissued by the Company, which are convertible to an equity instrument, arerecognized in “capital reserve from stock warrants”. When conversion price isreset, the fair value of the additional common stocks that have to be issued afterthe resetting is recognized as a current loss. When a bondholder exerciseshis/her conversion rights, the liability component of the bonds (includingcorporate bonds and embedded derivatives) shall be revalued at fair value on theconversion date, and the resulting difference shall be recognized as “gain or loss”


in the current period. The book value of the common stock issued due to theconversion shall be based on the adjusted book value of the above-mentionedliability component plus the book value of the stock warrants.

D. Costs incurred on issuance of convertible bonds are proportionally charged tothe liabilities and equities of the underlying instruments based on initialrecognition costs.

(16) Long-term liabilities

Long-term liabilities maturing within 12 months after the balance sheet date areclassified as long-term, if they meet the following two requirements: (a) TheCompany intends to refinance or extend their maturity dates beyond 12 months; and(b) the Company has refinanced or extended the maturity date before the balancesheet date.

(17) Retirement plan

A. Under the defined benefit pension plan, net periodic pension costs arerecognized in accordance with the actuarial calculations. Net periodic pensioncosts include service cost, interest cost, expected return on plan assets,amortization of unrecognized net transition obligation and gains or losses onplan assets. The unrecognized net transition obligation is amortized equallyover 18 years.

B. Under the defined contribution pension plan, net periodic pension costs arerecognized as incurred.

(18) Income tax

A. Income tax is provided based on accounting income after adjusting forpermanent differences. The provision for income tax includes deferred taxresulting from items reported in different periods for tax and financial reportingpurposes. Over or under provision of prior years' income tax liabilities isincluded in the current year's income tax expense. When a change in the taxlaws is enacted, the deferred tax liability or asset is recomputed accordingly inthe period of change. The difference between the new amount and the originalamount, that is, the effect of changes in the deferred tax liability or asset, isreported as an adjustment to current income tax expense (benefit).

B. Income tax credits arising from the acquisition of equipment or technology, andexpenditures for research and development, employee training and developmentand investment in qualified stocks are recorded as deferred income tax assetsand credited to income tax expense in the period the related expenditures areincurred.

C. An additional 10% corporate income tax is recognized if the current earnings


are not distributed in the following year. The 10% additional corporate incometax is recorded as income tax expense after the appropriation of earnings isapproved by the stockholders.

D. Based on the “Income Basic Tax Act”, if the regular income tax is equal or morethan the basic tax, the income tax payable shall be calculated in accordance withthe Income Tax Act and other relevant laws. Whereas, if the regular incometax is below the basic tax, the income tax payable shall be equal to the basic tax.The difference between the regular income tax and basic tax shall not be subjectto deductions of investment tax credits granted under the provisions of otherlaws.

(19) Treasury stock

A. Treasury stock is stated at cost, which is accounted for on a weighted-averagebasis, and the amount is charged against retained earnings.

B. If the grant date of treasury stock reserved for employees was after January 1,2008, the treasury stock shall be accounted for in accordance with the R.O.C.SFAS No. 39, “Accounting for Share-based Payment”.

C. Upon retirement of treasury stock, if the acquisition cost is above the book value,the difference should be credited to “capital reserve-treasury stock”. If theacquisition cost is below the book value, the difference should first be offsetagainst capital reserve from the same class of treasury stock transactions, andthe remainder, if any, is debited to retained earnings.

D. The Company's common stock owned by its subsidiary is treated the same astreasury stock.

(20) Share-based payment-employee compensation plan

A. The employee stock options granted from January 1, 2004 through December 31,2007 are accounted for in accordance with EITF 92-070, EITF 92-071, EITF92-072 of the Accounting Research and Development Foundation, R.O.C.,dated March 17, 2003, “Accounting for Employee Stock Options”. Under theshare-based employee compensation plan, compensation cost is recognizedusing the intrinsic value method and pro forma disclosures of net income andearnings per share are prepared under the fair value method.

B. For employee stock options granted after January 1, 2008, the Company shallmeasure the services received and recognize as salaries during the vestingperiod by using the fair value of the equity instruments granted.

(21) Employees’ bonuses and directors’ and supervisors’ remuneration

The costs of employees’ bonuses and directors’ and supervisors’ remuneration are


accounted for as expenses and liabilities, provided that such recognition is requiredunder legal or constructive obligation and the amounts can be estimated reasonably.However, if the accrued amounts for employees’ bonuses and directors’ andsupervisors’ remuneration are significantly different from the actual distributedamounts resolved by the stockholders at their annual stockholders’ meetingsubsequently, the differences shall be recognized as gain or loss in the following year.In addition, according to EITF 97-127 of the Accounting Research and DevelopmentFoundation, R.O.C., dated March 31, 2008 “Criteria for Listed Companies inCalculating the Number of Shares of Employees’ Stock Bonus”, the Companycalculates the number of shares of employees’ stock bonus based on the closing priceof the Company’s common stock at the previous day of the stockholders’ meetingheld in the year following the financial reporting year, after taking into account theeffects of ex-rights and ex-dividends.

(22) Revenues, costs and expenses

A. Sales revenue is recognized when the earning process is substantially completedand payment is realized or realizable.

B. Service revenue is recognized based on the percentage-of-completion method.Any expected loss on a contract is recognized as cost or expense immediately.

C. Percentage-of-completion method is adopted if the gains (losses) on long-termconstruction contracts can be reasonably estimated, otherwise, the completedcontract method is adopted. When the estimated contract costs exceed thecontract price, the resulting loss is included in the current net income under bothmethods.

D. Expenses are recorded as incurred.

(23) Use of estimates

The preparation of financial statements in conformity with generally acceptedaccounting principles in the Republic of China requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand the disclosures of contingencies at the date of the financial statements and theamounts of revenues and expenses during the reporting period. Actual results coulddiffer from those assumptions and estimates.

(24) Operating segments

The operating segment information disclosed in these financial statements isconsistent with that reported in the Company’s management reports. The chiefoperating decision-maker, which is the Company’s Board of Directors, is responsiblefor distributing resources to each operating segment and evaluating their performance.In accordance with R.O.C. SFAS No. 41, "Operating Segments", the Company


discloses the information in the consolidated financial statements and not in theseparate financial statements.

(25) Convenience translation into US dollars (unaudited)

The Company maintains its accounting records and prepares its financial statementsin New Taiwan dollars. The United States dollar amounts disclosed in the 2012financial statements are presented solely for the convenience of the readers and weretranslated into US dollars using the exchange rate of US$1: NT$29.04 on December31, 2012. Such translation amounts are unaudited and should not be construed asrepresentation that the New Taiwan dollar amounts represent, have been, or could beconverted into United States dollars at that or any other rate.

3. CHANGES IN ACCOUNTING PRINCIPLES


Effective January 1, 2011, the Company adopted the newly amended R.O.C. SFASNo. 34, "Financial Instruments: Recognition and Measurement". Impairment loss(bad debts allowance) is recognized when there is objective evidence of impairmentfor notes, accounts and other receivables. There is no significant impact on the netincome for the year ended December 31, 2011 as a result of this change inaccounting principle.


Effective January 1, 2011, the Company adopted the newly issued R.O.C. SFAS No.41, "Operating Segment" which supersedes R.O.C. SFAS No. 20, "SegmentReporting". This change in accounting principle had no impact on the net incomeand earnings per share for the years ended December 31, 2011.


4. DETAILS OF SIGNIFICANT ACCOUNTS

(1) Cash and cash equivalents

December 31,2012 2011

Cash on handCash in banksCash equivalents

Cash equivalents are short-term notes with maturities within three months from thedate of investment.

(2) Financial assets at fair value through profit or loss

December 31,2012 2011

Current items:Held for tradingDerivative financial instruments

A. The Company recognized net gain on valuation of financial assets amounting to$27,050 and $25,240 for the years ended December 31, 2012 and 2011,respectively.

B. The information on trading nature and contract of derivative financialinstruments are as follows:

December 31, 2012

Nature Contract periodContract amount

(Notional amount) Fair valueForward exchange:BUY USD/SELL JPY Jan. 31~Mar. 29, 2013 JPYBUY USD/SELL TWD Jan. 3~Feb. 22, 2013 USD

SELL AUD/BUY USD Jan. 4, 2013 AUD

December 31, 2011


(Notional amount) Fair valueForward exchange:SELL USD/BUY TWD Jan. 9~Feb. 9, 2012 USD

SELL EUR/BUY USD Jan. 3, 2012 EUR

SELL AUD/BUY USD Jan. 14~ Jan. 5, 2012 AUD


C. The Company entered into forward exchange contracts to hedge the change ofexchange rate arising from export sales. However, the transaction did notqualify for hedge accounting, therefore it was classified as held for trading, andaccounted for at fair value through profit or loss.

(3) Notes receivable-netDecember 31,

2012 2011Notes receivableLess: allowance for doubtful accounts

(4) Accounts receivable-netDecember 31,

2012 2011Accounts receivableLess: allowance for doubtful accounts

(5) Inventories-net

December 31, 2012

CostAllowance for

decline in value Book valueRaw materialsWork in processFinished goodsInventory in transit

December 31, 2011

CostAllowance for

decline in value Book valueRaw materialsWork in processFinished goodsInventory in transit

Except for cost of goods sold, the inventories recognized as operating costsamounted to $26,623 and $11,758 for the years ended December 31, 2012 and2011, respectively.


(6) Construction in progress-net

A. The balance of construction in progress which exceeded partial constructionbillings is as follows:

December 31,2012 2011

Construction in progressPartial construction billings

B. The balance of partial construction billings which exceeded construction inprogress is as follows:

December 31,2012 2011

Partial construction billingsConstruction in progress


C. As of December 31, 2012 and 2011, cumulative gain (loss) recognized underthe percentage-of-completion method for major contracts are summarized asfollows:

December 31, 2012

Construction

Expectedcompletion

dateContract

price

Estimatedcontract

cost

Percentageof

completion

Cumulativegain (loss)recognized

Construction A Aug. 2013 $ 2,237,039 $ 2,146,199 98% $ 88,614

Construction B Dec. 2016 1,241,394 1,280,283 89% ( 38,889)

Construction C May 2013 1,007,885 911,998 73% 69,594

Construction D May 2013 985,482 906,297 88% 69,290

Construction E Dec. 2013 938,373 1,525,748 96% ( 587,375)

Construction F Dec. 2013 621,282 674,470 98% ( 53,188)

Construction G Dec. 2013 591,800 580,999 98% 10,553

Construction H May 2013 561,590 569,471 7% ( 7,881)

December 31, 2011

Construction

Expectedcompletion

dateContract

price

Estimatedcontract

cost

Percentageof

completion

Cumulativegain (loss)recognized

Construction A June 2012 $ 2,258,773 $ 2,179,006 91% $ 72,815







Construction H May 2013 556,190 506,133 2% 1,109

Construction I June 2012 1,312,199 1,243,511 99% 68,562

Construction J June 2012 1,273,788 1,170,356 99% 102,244


December 31,2012 2011

Non-current items:Listed and OTC stocksAdjustment of available-for-sale financial assets


(8) Financial assets carried at costDecember 31, 2012

Number of Percentageof

ownershipOriginal

CostPeriod-end

balanceNames of investeesshares

(in thousands)Non-current items:A. Emerging stocks

1. Taiwan High Speed RailwayCorporation

2. CANDO Corporation3. Industrial Bank of Taiwan4. Asia Pacific Telecom Group

Co., Ltd.5. Others

B. Unlisted stocks1. Far Eastern Electronic Toll

Collection Co., Ltd.2. Pacific Venture Partners Fund3. Pacific Technology Partners

Fund4. Others

December 31, 2011Number of Percentage

ofownership

OriginalCost

Period-endbalanceNames of investees

shares(in thousands)

Non-current items:A. Emerging stocks

1. Taiwan High Speed RailwayCorporation

2. CANDO Corporation3. Industrial Bank of Taiwan4. Asia Pacific Telecom Group

Co., Ltd.

B. Unlisted stocks1. Far Eastern Electronic Toll

Collection Co., Ltd.2. Pacific Venture Partners Fund3. Pacific Technology Partners

Fund4. Others


A. The above investments held by the Company were measured at cost since thefair value cannot be measured reliably.

B. The Company recognized the impairment of financial assets carried at cost-Vmax Telecom and Far Eastern Electronic Toll Collection amounting to$92,000 and $200,750 for the year ended December 31, 2012 and 2011,respectively.


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B. The investment income totaling $115,739 and $549,238 for the years endedDecember 31, 2012 and 2011, respectively, were based on the investees’financial statements which were audited by other auditors. As of December 31,2012 and 2011, the related investments were stated at $3,926,983 and$6,589,659, respectively, and the related investments with credit balance were$8,594 and $4,955, respectively.

C. As of December 31, 2012 and 2011, the Company's common stocks owned byits subsidiaries, Tong-An Investment Co., Ltd. and others, with a total cost of$346,912 (22,366,000 shares) for both years, were treated as treasury stock.


Originalcost

Revaluationincrement

Accumulateddepreciation

Net bookValue

December 31, 2012LandBuildingsMachinery and equipmentTransportation equipmentMiscellaneous equipment

Prepayments for fixed assets

December 31, 2011LandBuildingsMachinery and equipmentTransportation equipmentMiscellaneous equipment

Prepayments for fixed assets


A. Certain assets were appraised in the years 1961, 1974 and 1980, and therevaluation increment was recorded as other equity adjustment. As ofDecember 31, 2012 and 2011, the balance of revaluation increment was both$285,272.

B. For the years ended December 31, 2012 and 2011, capitalized interest amountedto $491 and $362, respectively.

(11) Leased assets

December 31, 2012Original

CostAccumulateddepreciation

Accumulatedimpairment

Net bookvalue

LandBuildingsMachinery andequipment

Miscellaneousequipment

December 31, 2011Original

CostAccumulateddepreciation


Net bookvalue

LandBuildingsMachinery andequipment


Leased assets mainly consist of property, plant, and equipment located in Quanyingof Taoyuan County, Hsinchuang of New Taipei city, Sanchong Road at NankangDistrict and Songjiang Road at Zhongshan District of Taipei City.

(12) Idle assets

December 31,2012 2011

Farm land-Taoyuan CountyFarm land-Yunlin County

Less: accumulated impairment

The Company was unable to transfer the title of certain farmland to the Company’sname due to legal restrictions. As of December 31, 2012 and 2011, the land titlewas registered under an individual’s name. The Company entered into an agreementto secure the title and the first mortgage right.


(13) Impairment of assets

A. For the years ended December 31, 2012 and 2011, the impairment lossrecognized is as follows:

B. The impairment loss on financial assets carried at cost-non-current wasrecognized as the recoverable amount was less than the book value.

(14) Financial liabilities at fair value through profit or loss

December 31,2012 2011

Current items:Held for trading

Derivative instrumentsA. The Company recognized (loss) gain on valuation of financial liabilities

amounting to ($2,212) and $5,843 for the years ended December 31, 2012 and2011, respectively.

B. The information on trading nature and contract of derivatives financialinstruments are as follows:

December 31, 2012

Nature Contract periodContract amount(Notional amount) Fair Value

Forward exchange:SELL GBP/BUY USD Jan.31, 2013 GBPSELL EUR/BUY USD Jan. 31~Mar. 28, 2013 EURSELL USD/BUY TWD Jan. 3~Mar. 22, 2013 USD

December 31, 2011

Nature Contract periodContract amount(Notional amount) Fair Value

Forward exchange:BUY USD/SELL TWD Jan. 9~Feb. 9, 2012 USD

C. The Company entered into forward exchange contracts to hedge the change ofexchange rate arising from export sales. However, the transaction did notqualify for hedge accounting, therefore, it was classified as held for trading andaccounted for at fair value through profit or loss.

Recognized instatement of income

2012 2011Impairment loss on:Financial assets carried at cost-non-current


(15) Income tax

A. Deferred income tax assets and liabilities:

December 31,2012 2011

CurrentDeferred income tax assetsDeferred income tax liabilities

Non-currentDeferred income tax assetsLess: valuation allowance

Deferred income tax liabilities


B. The components of deferred income tax assets and liabilities are as follows:

December 31, 2012Amount Tax effect

CurrentDeferred income tax assets

Investment tax creditsUnrealized intercompany profitUnrealized expensesOver provision of allowance for doubtfulaccounts

Provision for decline in value ofinventories

Others

Deferred income tax liabilitiesOthers

Non-currentDeferred income tax assets

Investment tax creditsImpairment lossTax benefit of loss carryforwardsDifference resulting from different useful

lives of fixed assets between financialand tax basis

Permanent loss on long-term investments

Less: valuation allowance

Deferred income tax liabilitiesInvestment income from foreign

investmentsOthers




Investment tax creditsUnrealized intercompany profitUnrealized expensesOver provision of allowance for doubtfulaccounts

Provision for decline in value ofinventories



Investment tax creditsImpairment lossTax benefit of loss carryforwardsDifference resulting from different useful

lives of fixed assets between financialand tax basis

Permanent loss on long-term investments


Deferred income tax liabilitiesInvestment income from foreign

investmentsOthers


C. The reconciliation between income tax expense and income tax payable are asfollows:

2012 2011Current year income tax expense based on

statutory incomeTax effect of permanent differencesTax effect of investment tax creditsOver provision for income tax payable in prior

year and net change in deferred income tax(liabilities) assets

Current income tax expenseEffect of Income Basic Tax ActAdditional 10% corporate tax on undistributedearningsIncome tax expenseLess: Net changes in deferred income tax

liabilitiesUnder provision for income tax payable inprior years

Foreign income tax paidPaid and prepaid income tax

Income tax payable payable

D. As of December 31, 2012, the Company’s income tax returns through 2010 havebeen assessed and approved by the Tax Authority.

E. As of December 31, 2012, the unused investment tax credits and tax benefit ofloss carryforwards amounted to $150,563 and $183,996, respectively. Thedetails are as follows:

Qualified expenditures Total credits

Unusedinvestmenttax credits

Year ofexpiration

Automated production equipment,transportation construction projects,investments in important technologycompanies, research & developmentexpenditures and employees’ trainingexpenditures



Year ofexpiration

Tax benefit of loss carryforwards


(16) Bonds payableItem December 31, 2012

September 30,December 31, 201130,Issuance of convertible bonds

Discount of bonds payable

A. Domestic unsecured convertible bonds - 3(A) On July 12, 2012 to July 12, 2015, the Company issued 0% coupon, 3-year

unsecured convertible bonds with the principal amount of $3,000,000.The bonds are repayable in full at face value at maturity. The bonds werelisted on the Taiwan Over-The-Counter Securities Exchange on July 12,2012.

(B) Under the terms of the convertible bonds, the bondholders have the right toask for the conversion of the bonds into common stocks of the Companyduring the period from the date after one month of issuance of bonds to 10days before the maturity date, except the stop transfer period. The rightsand obligations of the new shares converted form convertible bonds are thesame as the issued and outstanding common stock.

(C) The conversion price of the convertible bonds for $22.5 per share. Theconvertible debt issue continued after the conversion price of the event ofthe company due to anti-dilution terms of provisions will depend on themethod of conversion, set the mode to be adjusted.

(D) The Company may repurchase all of the outstanding bonds at face value atany time after the following events, provided that the amount of theoutstanding bonds is less than 10% of the initial issuance amount of bondsduring the period from the day after three months after issuance of thebonds to 40 days before the maturity date of the bonds.

(E) Under the terms of the convertible bonds, all bonds (redeemed, maturedand converted) are retired and not to be re-issued.

B. The fair value of convertible option of $110,100,000 was separated from bondspayable, and was recognized in “Capital reserve from stock warrants” inaccordance with R.O.C. SFAS No. 36. The fair value of put and call optionsembedded in bonds payable was separated form bonds payable, and wasrecognized in “Financial assets or liabilities at fair value through profit or loss”.


(17) Long-term loans

December 31,2012 2011

Long-term loansCommercial papers payableLess: unamortized discount

Interest rates

A. Under the long-term contracts with certain financial institutions, the Company isrequired to maintain certain financial ratios and capital requirements as well asmeet certain restrictions relative to significant asset acquisitions or disposals.

B. As of December 31, 2012 and 2011, a portion of loans due within one year wereclassified as long-term as these were refinanced before the balance sheet date.


A. The Company has a non-contributory and funded defined benefit plan inaccordance with the R.O.C. Labor Standards Law, covering all regularemployees before the implementation of the Labor Pension Act on July 1, 2005.The defined benefit plan will continue to cover the employees who choose toremain with the defined benefit plan. Upon retirement, pension payments arecalculated based on total years of service and average salary of the last sixmonths prior to retirement. Two base units are earned for the first 15 years ofservice and one unit for each additional year thereafter, with a maximum of 45units. The Company contributes 6% of the employees’ monthly salary to anindependent retirement trust fund, with the Bank of Taiwan, the trustee.

B. The related assumptions used for the actuarial valuation are as follows:

2012 2011Discount rateAverage salary increase rateExpected return rate on plan assets


C. The reconciliation between the funded status and accrued pension liability as ofDecember 31, 2012 and 2011 are summarized as follows:

December 31,2012 2011

Benefit obligation:Vested benefit obligationNon-vested benefit obligationAccumulated benefit obligationAdditional benefits based on future

salary increasesProjected benefit obligation

Fair value of plan assetsFunded statusUnrecognized transition obligationPrior service cost unamortizedUnrecognized net pension lossAdditional pension liabilityAccrued pension liabilityVested obligation

D. The components of net pension cost for the years ended December 31, 2012and 2011 are as follows:

2012 2011Service costInterest costExpected return on plan assetsUnrecognized transition obligationPrior service cost amortizedUnrecognized net pension loss amortized

E. Effective July 1, 2005, the Company established a defined contribution pensionplan under the R.O.C. Labor Pension Act for eligible employees holdingRepublic of China citizenship. The Company deposits the pension amountbased on 6% of the employees’ monthly salary into each employee’s personalpension account with the Bureau of Labor Insurance. The pension cost underthis plan amounted to $72,184 and $69,457 for the years ended December 31,2012 and 2011, respectively.


(19) Common stock

A. As of December 31, 2012, the Company’s issued and outstanding capitalamounted to $18,471,209, with a par value of $10 (in dollars) per share.

B. As of December 31, 2012, 10,295,000 shares of employee stock options hadbeen exercised, but the registration procedure for 1,976,000 shares has not yetbeen completed.

C. On December 17, 1996, the Board of Directors of the Company adopted aresolution that allows certain stockholders to issue 5,540 thousand units ofglobal depository receipts (GDRs), represented by 55,399 thousand shares ofcommon stock. A unit of GDR represents 10 shares of common stock. Afterobtaining approval from SFB, these GDRs were listed on the SecuritiesExchange of London, with total proceeds of US$107,644,000. The issuance ofGDRs were presented by issuing common shares, therefore, there is about 7%dilutive effect on the common shares’ equity. The main terms and conditionsof the GDRs are as follows:

a. Voting rights

GDR holders may, pursuant to the Depositary Agreement and the relevantlaws and regulations of the R.O.C., exercise the voting rights pertaining to theunderlying common shares represented by the GDRs.

b. Redemption of the underlying common shares represented by the GDRs

When the holders of the GDRs request the Depositary to redeem the GDRs inaccordance with the relevant R.O.C. regulations and the provisions in theDepositary Agreement, the Depositary may (i) deliver the underlyingcommon shares represented by the GDRs to the GDR holders, or (ii) sell theunderlying common shares represented by the GDRs in the R.O.C. stockmarket on behalf of the GDR holder. The payment of proceeds from suchsale shall be made subject to the relevant R.O.C. laws and regulations and theprovisions in the Depositary Agreement.

c. Distribution of dividends, preemptive rights and other rights GDR holdersown the same rights as common shareholders.

d.There were 48 thousand units outstanding, representing 479 thousandcommon shares as of December 31, 2012.


(20) Capital reserve

A. The R.O.C. Company Law requires that the capital reserve shall be exclusivelyused to offset against accumulated deficit or increase capital and shall not beused for any other purpose. Capital reserve from paid-in capital in excess ofpar value and donated surplus can be transferred to common stock up to anannual limit of 10% of total common stock.

B. Capital reserve from stock warrants please refer to Note 4(16).(21) Share-based payment-employee compensation plan

A. As of December 31, 2012 and 2011, the Company’s share-based payment plansare as follows:

(A) Treasury stock transferred to employees:

Type of arrangement Grant date

Grant quantity

(in thousands of shares) Vesting conditionsPlan 1 Apr. 6, 2006 3,359 Vested immediatelyPlan 2 Jan. 4, 2007 8,106 "Plan 3 Mar. 30, 2007 4,021 "Plan 4 Oct. 3, 2007 8,286 "

(B) Employee stock options:

December 31, 2012

Grant dateGrant

quantityContract

periodVesting

conditions

Actualturnover

rate

Estimated futureturnover

rate

Dec. 26, 200750,000 units

(Note) 6 years2 years’service 4.3% 5%

December 31, 2011

Grant dateGrant

quantityContract

periodVesting

conditions

Actualturnover

rate

Estimated futureturnover

rate

Dec. 26, 200750,000 units


Note: Each unit entitles the holder to subscribe for 1,000 shares of theCompany’s common stock.


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

For the years ended December 31,2012 2011

Weighted-average Weighted-averageNo. of shares exercise price No. of shares exercise price

Stock options (in thousands) (in dollars) (in thousands) (in dollars)Options outstanding at

beginning of the yearOptions grantedDistribution of stock

dividends / adjustments fornumber of shares granted forone unit of option

Options abandonedOptions exercisedOptions outstanding at end of

the yearOptions exercisable at end of

the yearOptions authorized but not

granted at end of the yearOptions revoked

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

December 31, 2012Stock options outstanding Stock options exercisable

Weighted-averageRange of expected Weighted-average Weighted-average

exercise price No. of shares remaining exercise price No. of shares exercise price(in dollars) (in thousands) vesting period (in dollars) (in thousands) (in dollars)

year




years


c. Before January 1, 2008, the Company adopted the Black-Scholesoption-pricing model to estimate the fair value of the stock options. Theweighted-average parameters are as follows:

December 26, 2007Stock price per share (in dollars) $ 15.1Exercise price per share (in dollars) 15.1Expected price volatility 34.99%Expected vesting period 6 yearsDividends yield rate 0%Risk-free interest rate 2.42%Fair value per share (in dollars) $ 5.75

B. The pro forma net income are $2,970,352 and $2,747,365, and earnings pershare are $1.63 (in dollars) and $1.52 (in dollars) per share for the years endedDecember 31, 2012 and 2011, respectively, based on the assumption that thecompensation cost is accounted for using the fair value method for the stockoptions granted before the adoption of R.O.C. SFAS No. 39, “Accounting forShare-based Payment”.

(22) Retained earnings and legal reserve

A. As stipulated in the Company’s Articles of Incorporation, the current earnings, ifany, shall be distributed in the following order:

(a) Payment of taxes and duties.

(b) Covering prior years’ accumulated deficit, if any.

(c) After deducting items (a) and (b), set aside 10% of the remaining amountas legal reserve.

(d) Set aside a certain amount as special reserve, if any.

(e) After deducting items (a) to (d), appropriating 1%~5% of remainingearnings as directors’ and supervisors’ compensation.

(f) After deducting items (a) to (d), appropriating 1%~10% of remainingearnings as employees’ bonuses.

(g) Distributing the remaining amount plus prior years’ retained earnings toshareholders according to their shareholding percentage. The distributionrate is principally 80%, of which cash dividend shall account for 5%~50%of the distributed amount.

(h) The Company may grant the employees of subsidiaries employee bonusesas described above if certain criteria prescribed by the Board of Directorsare met.


B. The Company’s dividend policy is summarized below:As the Company operates in a volatile business environment and is in the stablegrowth stage, the residual dividend policy is adopted taking into considerationthe Company’s financial structure, operating results and future expansion plans.

C. Except for covering accumulated deficit or issuing new stocks or cash toshareholders in proportion to their share ownership, the legal reserve shall notbe used for any other purpose. The use of legal reserve for the issuance ofstocks or cash to shareholders in proportion to their share ownership ispermitted, provided that the balance of the reserve exceeds 25% of theCompany’s paid-in capital.

D. (1)The appropriation of 2011 and 2010 earnings had been approved by theshareholders during their meeting on June 15, 2012 and June 10, 2011,respectively, as follows:

2011 2010Dividendsper share

Dividendsper share

Amount (in dollars) Amount (in dollars)Legal reserve $ 278,321 $ 249,169Cash dividends 1,654,922 $ 0.90 1,468,490 $ 0.80

(2)The appropriation of 2012 earnings had been proposed by the Board ofDirectors on March 26, 2013. Details are summarized below:

2012Dividends per share

Amount (in dollars)Legal reserve $ 296,470Cash dividends 1,688,650 $ 1.00As of March 26, 2013, the 2012 earnings appropriation and capitalization ofcapital reserve had not been approved by the stockholders.

The estimated employees’ bonus amounted to $225,440 and $202,327, andthe estimated directors’ and supervisors’ remuneration amounted to $100,196and $89,923 for the years ended December 31, 2011 and 2010, respectively.The appropriation of 2011 earnings was different with actual cash dividenddistribution totaling $6,150. The difference is attributed to stock optionsexercised between June 15, 2012 and the ex-right date the shareholdersapproved and the director approved the appropriation of 2011 earnings whichincreased the number of shares.

E. The estimated employees’ bonus amounted to $240,141 and $225,440, and theestimated directors’ and supervisors’ remuneration amounted to $106,729 and$100,196 for the years ended December 31, 2012 and 2011, respectively, which


are recognized as operating costs and operating expenses based on the netincome within the range stipulated in the Company’s Articles of Incorporationin consideration of the legal reserve and other factors. Information on theappropriation of the Company’s employees’ bonus and directors’ andsupervisors’ remuneration as proposed by the Board of Directors and approvedby the stockholders will be posted in the “Market Observation Post System” atthe website of the Taiwan Stock Exchange.

F. As of December 31, 2012 and 2011, the undistributed earnings are as follows:

December 31,2012 2011

Before December 31, 1997On or after January 1, 1998

(a) Earnings that have not been imposed10% tax

(b) Earnings that have been imposed 10%tax

G. As of December 31, 2012 and 2011, the imputation tax credit account balancewere $304,413 and $286,371, respectively, and the estimated and actualcreditable tax ratio in 2012 and 2011 were 7.06% and 6.49%, respectively.


(23) Earnings per share

A. Earnings per share for common stockholders are as follows:

For the year ended December 31, 2012

Net income

Weighted averageoutstanding

common sharesEarnings per share

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

Basic earnings per share (EPS)

Net income

Common stockequivalents withpotential dilutiveeffect:Employee stockoptions

Employees’ bonus

Diluted EPS

Net income


Net income





Net income


Employees’ bonus

Diluted EPS

Net income


B. Pro forma information assuming that the Company’s common stocks owned byits subsidiaries are not treated as treasury stock are as follows:


Net income





Net income


Employees’ bonus

Diluted EPS

Net income


Net income





Net income


Employees’bonus

Diluted EPS

Net income


(24) Treasury stock

As of December 31, 2012 and 2011, the Company’s common stock owned by itssubsidiaries both amounted to $346,912. The shares, total cost and market valueof the Company’s common stocks owned by its subsidiaries are as follows:

December 31, 2012Shares

(in thousands)Cost

(in dollars)Market value( in dollars )

Tong-An Investment Co., Ltd.An-Tai International Investment Co., Ltd.


(in thousands)Cost

(in dollars)Market value( in dollars )



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5. RELATED PARTY TRANSACTIONS(1) Names and relationship of related partiesNames of related parties Relationship with the Company Names of related parties Relationship with the Company

Teco Nanotech Co., Ltd. An investee company accounted Titco International Corp. An investee company accounted(Teco Nanotech) for under the equity method (Titco) for under the equity method

Teco International (The company was liquidated inInvestment Co., Ltd. April 2012)(Teco International) Vmax Telecom Co., Ltd. Note

Tong-An Assets Management & (Vmax)Development Co., Ltd. Taian Electric Co., Ltd. An investee company accounted(Tong-An Assets) (Taian) for under the equity method

Tong Dai Co., Ltd. Lien Chang Electronic Enterprise(Tong Dai) Co., Ltd. (Lien Chang)

Tesen Electric & Yatec EngineeringMachinery Co., Ltd. Corporation (Yatec)(Tesen) An-Tai International

Information Technology Investment Co., Ltd.Total Services Co., Ltd. (An-Tai)(ITTS) Micropac Worldwide (BVI)

Tong Tai Jung Co., Ltd. (Micropac)(Tong Tai Jung) TA Associates International Pte. Ltd.

Teco Electro Devices Co., Ltd. (TA Associates)(Teco Electro) A-Ok Technical Co., Ltd.

Teco Electric & (A-Ok Technical)Machinery (Pte) Ltd. Taian-Etacom Technology Co., Ltd.(Teco Singapore) (Taian-Etacom)

Teco Electric Co., Ltd. Taian Shen Electric Co., Ltd.(Teco Europe) (Taian Shen)

Teco Holding USA Inc. Perkilangen Elektrik Taian(Teco Holding) Jaya Sdn. Bhd.

Royal Host Taiwan Co., Ltd. (Perkilangen)(Royal) Taian (Subic) Electric Co., Inc.

GD Teco Taiwan Co., Ltd. (Taian Subic)(GD Teco) PT. Taian Electronic Indonesia

Tung Pei Industrial Co., Ltd. (PT. Taian)(Tung Pei) Taian (Malaysia) Electric Sdn., Bhd.

Great Teco Whirlpool (Taian Malaysia)Co., Ltd. (The company was liquidated in An Yang Electric Co., Ltd.(Teco Whirlpool) June 2012) (An Yang) (The investees were merged with the

Tecom Co., Ltd. (Tecom) Company in July 2011.)Tecnos International E-Joy International Co., Ltd. An investee company accounted

Consultant Co., Ltd. (E-Joy International) for under the equity method(Tecnos) An-Sheng Travel Co., Ltd.

Tong-An Investment Co., Ltd. (An Sheng)(Tong-An) Yaskawa Teco Motor

E-Value Commerce Co., Ltd. Engineering Co. (Yaskawa)(E-Value) Teco Vietnam Electric Co., Ltd.

Samwha Industrial Systems Co., Ltd. (Teco Vietnam)

(Samwha) Teco Appliance (H.K.) Co., Ltd.Taitec Technology Co., Ltd. The investees were merged with the (Teco Appliance)

(Taitec) Company in July 2011. United Development Corporation Ltd.Solidtec Consulting Inc. An investee company accounted (United Development)

(Solidtec) for under the equity method Century Development Corporation(Century Development)

Note : The Company lost of significant influence in February 2012. As a result, Vmax is no longer a related party after the capital increase.


Names of related parties Relationship with the Company Names of related parties Relationship with the CompanyTaiwan Pelican Express An investee company accounted TECO (PHILIPPINES) 3C & An investee company accounted

Co., Ltd. (Pelican) for under the equity method APPLIANCES, INC. for under the equity methodUnited View Global Investment (TECO 3C)

Co., Ltd. (UVG) An-Shin Food Service Co., Ltd. The director is the same as theCreative Sensor Inc. (An-Shin) chairman of the company

(Creative Sensor) Tecoson Industrial An investee company accountedMedia Vision Inc. Development Ltd. (Tecoson) for under the equity method

(Media Vision) (The company was liquidated in Teco Electronic Devices Co., Ltd.July 2012) (Teco Devices)

Teco Westinghouse Motor An investee company accounted Nanchang Dong-Huan ManagementIndustrial-Canada for under the equity method & Consulting Co., Ltd.(Teco Westinghouse Canada) (Nanchang Dong-Huan)

Teco Westinghouse Motor Teco Inc. (Teco Inc.)Company (Teco Westinghouse) Great Teco, S.L.

Teco Industrial (Malaysia) Sdn. Bhd. Great Teco)(Teco Malaysia) Jason Technology (Asia) Co., Ltd.

Tecoson HK Co., Ltd. (Jason Technology)(Tecoson HK) Tasia (Pte) Ltd.

Wuxi Teco Electric & (Tasia)Machinery Co., Ltd. Tong Yuan Electronic & Machinery(Wuxi Teco) Sdn. Bhd. (Tong Yuan)

Suzhou Teco Electric & P.T Teco Multiguna ElectroMachinery Co., Ltd. (Teco Multiguna)(Suzhou Teco) Asia Air Tech Industrial Co., Ltd.

Nan Chang Teco Electronic & (AAT)Machinery Co., Ltd. Great Teco Motor Ltd. (GTM)(Nanchang Teco) Great Teco Investment Co., Ltd. (GTI)

Taichang Teco Electro Devices Co. Teco Electronic & Machinery Co.,(Taichang Teco) Ltd. (Teco THAI)

Jiangxi Teco Electric and Information Technology TotalMachinery Co., Ltd. Service (BVI)(Jiangxi Teco) (ITTS BVI)

QingDao Teco Precision Information Technology TotalMechtronics Co., Ltd. Service (Hang Zhu) Co., Ltd.(QingDao Teco) (ITTS Hang Zhu)

Xiamen Teco Technology Advanced Innovative Marketing Inc.Co., Ltd. (Xiamen Teco) (AIM)

Sichuan Teco Changhong Tecma Information Systems Sdn. Bhd.Precision Co., Ltd. (TECMA)(Sichuan Teco) Asia Electric & Machinery (Pte) Ltd.

Asia Innovative Technology Co., Ltd. (Asia PTE)(Xiamen An-Tai) STE Marketing Sdn. Bhd

An-Tai International (STEM)Investment Co., Singapore Sankyo Co., Ltd. (Sankyo)(An-Tai Singapore) Teco Electronic & Machinery B.V.

Le-Li Co., Ltd. (Le-Li) (Teco Netherlands)(Le-Li) TECO Middle East Electric and

Antech Automation Corp. Machinery Limited Co.(Antech) (TME)

An-Hubbell-Taian Co., Ltd. Asia Pacific Telecom Co., Ltd. The chairman is the same as(An-Hubbell) (Asia Pacific Telecom) the CEO of the Company

Gorich Technology Co., Ltd. Teco Image System Co., Ltd. Related party in substance(Gorich) (Teco Image)


Names of related parties Relationship with the Company Names of related parties Relationship with the CompanyTension Envelope Taiwan An investee company accounted Kuenling Machinery An investor in a joint

Co., Ltd. (Tension) for under the equity method Refrigerating CO., Ltd. venture with the Company (Note)Universal Mailing Service (Kuenling Refrigerating)

Co., Ltd. (Universal) Yuban & Co. (Yuban)Teco Australia Pty. Ltd. (Yuban)

(Teco Australia) Baycom Opto-Electronics An investee company accountedTeco Information International Technology Co., Ltd. for under the equity method

Investment Corp. (Baycom)(Teco Information) Tecom International Same chairman

Jack Property Service & Investment Co., Ltd.Management Company (Tecom International)(Jack Property) Teco Sichuan trading Co., Ltd. An investee company accounted

Tai-An Technology (Wuxi) (Teco Sichuan) for under the equity methodCo., Ltd. (Tai-An Wuxi) Jiangxi Teco-Lead PM Generator

Teron Electric (Huizhou) Co., Ltd. Manufacturing Co., Ltd.(Teron) (Jiangxi Teco-Lead)

Teco (Dong Guang) Air Conditioning Qingdao Teco precisionEquipment Co., Ltd. Mechatronics co., Ltd.(Teco Dong Guang) (QingDao Teco)

Unison Service Corporation Taiwan Litec Material Co., Ltd.(Unison) (Litec Material) (The company was liquidated in

TYM Electric & Machinery Sdn. Bhd. Augst 2012)(TYM) Information Technology Total Services An investee company accounted

Ching Chi International Limited (Wuxi) Co., Ltd. for under the equity method(Ching Chi) (ITTS Wuxi)

P.T Teco Elektro Indonesia Information Technology Total Services(P.T Teco) (Xiamen) Ltd.

Teco Group Science-Technology (ITTS Xiamen)(Hang Zhou) Co., Ltd. Jiangxi Teco Air Conditioning(Teco Hang Zhou) Equipment Co., Ltd.

Qingdao TECO Century Advanced Jiangxi Teco Air)High-tech Mechtronics Co., Ltd. Tianjin Teco Technology Co., Ltd.(TECO Century) (Tianjin Teco)

Fujian Teco Precision Co ., Ltd. Teco Westinghouse Motor Company(Fujian Teco) S. A. de C. V.

Shanghai TECO Electric & Taiwan Glass Industry CorporationMachinery Co.,Ltd. (Taiwan Glass)(Shanghai Teco)

Note According to EITF 99-371 of the Accounting Research and Development Foundation, Kuenling Refrigerating and Yuban & Co. were no longerrelated parties after the EITF was released.


(2) Significant transactions and balances with related parties

A. Sales


Amount

% of netoperatingrevenues Amount

% of netoperatingrevenues

Teco WestinghouseTeco AustraliaTeco SingaporeTeco Westinghouse CanadaTong DaiTong Tai JungTeco NetherlandsSankyoTaian ShenYASKAWATeco EuropeTWMMYatecE-JoyWuxi TecoTaian-EtacomAsia InnovativeOthers

The sales terms, including pricing and collection, were negotiated inconsideration of cost, market, competitors and other factors. The unrealizedgain from downstream sales amounting to $443,013 and $372,691 for theyears ended December 31, 2012 and 2011, respectively, had been eliminatedand listed as other current liabilities.

B. Construction revenueFor the years ended December 31,2012 2011

Amount



Century Development

These construction revenues are recognized under the ercentage-of-completionmethod according to the construction contracts, which were negotiated inconsideration of the general market price and other factors.


C. Purchases


Amount

% of netoperating

costs Amount

% of netoperating

costsTesenWuxi TecoTeco MalaysiaSuzhou TecoAsia InnovativeTai-An WuxiTaian SubicQingDao TecoGD TecoAn YangOthers

The purchase terms, including pricing and payments, were negotiated inconsideration of the general market price and other factors.

D. Shipping expense


Amount

% ofserviceexpense Amount

% ofserviceexpense

Pelican

The shipping terms, including pricing and payments, were negotiated inconsideration of the market price and other factors.

E. Service expense


Amount

% ofserviceexpense Amount

% ofserviceexpense

A-Ok Technical

The service terms, including pricing and payments, were negotiated inconsideration of the cost, market, competitors and other factors.

F. Compensation of directors and management personnel

Total compensation expenses were $199,136 and $172,406 for the years endedDecember 31, 2012 and 2011, respectively, including estimated bonuses to beappropriated from 2012 earnings with the actual amount to be finalized and


approved upon the resolution of the shareholders during their meeting in 2012.The other information will be available in the annual report for the shareholders’meeting.

G. Notes receivable-net

December 31,2012 2011

Amount

% of notesreceivable(including

related parties) Amount


related parties)Tong DaiTong Tai JungYatecOthers

H. Accounts receivable-net

December 31,2012 2011

Amount

% ofaccounts

receivable(including

relatedparties) Amount

% ofaccounts


relatedparties)

Teco WestinghouseTeco NetherlandsSankyoTeco AustraliaTeco Westinghouse CanadaTeco SingaporeAsia InnovativeOthers

Add: foreign exchange (loss) gain, net

Less: reclassified to other receivables

Less: allowance for doubtful accountscredit balance of long-term

equity investments

As of December 31, 2012 and 2011, accounts receivable amounting to $206,218and $239,875, respectively, were reclassified to other receivables as their agingwere over the normal credit term.


I. Other receivables

(A) Loan granted

For the year ended December 31, 2012Maximum Balance (Note) Ending

Balance(Note) RateInterest

RevenueInterest

ReceivableDate AmountU.V.G 2012.10As of December 31,2012, The Company actual loaned to U.V.G $44,241. TheCompany had no financing transactions with its related party during the yearended December 31, 2011.Note: The credit line approved by the Board of Directors.

(B) Overdue accounts receivable:

December 31,2012 2011

Amount

% of otherreceivables(including


% of otherreceivables

(includingrelated parties)

SankyoAsia InnovativeOthers

(C) OthersDecember 31,

2012 2011

Amount



% of otherreceivables


QingDao TecoTeco WhirlpoolTeco NanotechOthers

Less: allowance fordoubtful accounts

credit balance oflong-term equityinvestments

Other receivables - others mainly consist of receivables from sale of materials andleased property, etc.


J. Partial construction billings

December 31,2012 2011

Amount

% of partialconstruction

billings Amount

% of partialconstruction

billingsCentury DevelopmentPartial construction billings are receipts in advance from the air conditioner andthe cybernation construction of Nan-Kang Software Park.

K. Notes payable

December 31,2012 2011

Amount

% of notespayable (includingrelated parties) Amount

% of notespayable


PelicanOthers

L. Accounts payable

December 31,2012 2011

Amount

% of accountspayable (includingrelated parties) Amount

% of accountspayable


Wuxi TecoSuzhou TecoAsia InnovativeTeco MalaysiaOthers

M. Accrued expenses

December 31,2012 2011

Amount

% of accruedexpenses

(includingrelated parties) Amount

% of accruedexpenses


Tong-An AssetsOthers


N. Endorsements and guarantees

December 31,2012 2011

Teco InternationalGD TecoTMEAn-TaiTeco EuropeOthers

O. Operating lease transactionsFor the years ended December 31,

Location Leased property Lessee 2012 2011Taoyuan Land, building

and equipmentTesen, etc.

Nankang, Taipei Building ITTS, etc.Songjiang, Taipei An-Shin, etc.Others Land, building

and equipmentPelican, etc.

Rent was determined by negotiation and was collected pursuant to the provisionsset forth in the contract.

P. Property transactions

(A) The Company rented assets in Quanying and Chungli of Taoyuan Countyfrom Tong-An Assets for self-use or rentals. For the years ended December31, 2012 and 2011, the rent expense was $56,444 and $53,689, respectively.As of December 31, 2012 and 2011, unpaid rent amounted to $81,612 and$22,745 (listed as accrued expenses), respectively.

(B) The Company sold a number of compressors (listed as machinery andequipment and other equipment) to QingDao Teco in July, 2011. The contractamounted to $54,558, and gain on disposal of property, plant and equipmentamounted to $9,360. As of December 31, 2012, $52,019 had not beenreceived (listed as other receivables-related parties).

(C) The Company purchased equipments from Yatec Engineering Corporation andother subsidiary in 2012. The purchase amounted to $83,510. As ofDecember 31, 2012, $44,638 had not been received (listed as other payables).

6. DETAILS OF PLEDGED ASSETSDecember 31,

Assets 2012 2011 PurposePledged assets-

Other financial assets-current Exercise guarantee forTime deposits construction


7. COMMITMENTS AND CONTINGENT LIABILITIES

In addition to those disclosed in Note 5, the significant commitments and contingentliabilities of the Company are as follows:

(1) As of December 31, 2012, the outstanding letters of credit for the materials andequipment purchases was $610,709.

(2)As of December 31, 2012, the total purchase contracts for machinery and equipment withvarious companies amounted to $210,070, of which $71,331 had been paid (listed asprepayment for equipment).

8. MAJOR CATASTROPHE

None.

9. SUBSEQUENT EVENTS

As of March 26, 2013, the book value of conversion bonds amounted to $353,400

have been converted into common stocks to 3,534,000 shares.

10.OTHERS

(1) Certain accounts in the December 31, 2011 financial statements were reclassified toconform with the December 31, 2012 financial statement presentation.

www.teco.com.tw 133

56

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The methods and assumptions used to estimate the fair values of the above financialinstruments are summarized as follows:

A. For short-term instruments, the fair values were determined based on theircarrying values because of the short maturities of the instruments. Thismethod was applied to cash and cash equivalents, notes and accounts receivable(including related parties), other receivables (including related parties), otherfinancial assets-current, short-term loans, notes and accounts payable(including related parties), accrued expenses and other payables (includingrelated parties).

B. For refundable deposits, long-term loans (including current portion) andguarantee deposits received, the fair value was determined based on theircarrying values because the discounted values are approximately the same asthe carrying values.

C. The fair value of financial assets at fair value through profit or loss andavailable-for-sale financial assets was based on quotations in the active market.

D. The fair value of derivative financial instruments which include unrealizedgains or losses on unsettled contracts was determined based on the amount tobe received or paid assuming that the contract was settled as of the reportingdate. The fair value was provided by the counterparty financial institution.

(3) For available-for-sale financial assets, the amount of gain (loss) recognized directlyin equity during the years ended December 31, 2012 and 2011 was $351,245 and($761,303), respectively. As of December 31, 2012 and 2011, the financialliabilities with cash flow risk due to the change of interest amounted to $7,198,924and $11,987,731, respectively.


(4) Procedure of financial risk control and hedge

A. The main objective of financial risk control and hedge strategy is to reduce theloss of assets or liabilities resulting from the exchange rate and interest ratefluctuations. The Company achieves financial hedge by entering intoderivatives and all activities of hedge follow the principles listed below toachieve risk control:

(a) Nature hedge.

(b) Not eroding the profit of the main business.

(c) Not entering into financial instruments other than the transaction currency.

(d) To execute the stop-loss point.

(e) To execute the operating process.

B. In monitoring control, the Board of Directors enacted procedures and authorizedthe management to operate in compliance with the operating strategy and toensure that the risk of these transactions is within the tolerable range of theCompany. If any unusual event occurs, necessary actions should be taken andreported to the Board of Directors immediately.


59

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.Th

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form

atio

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ated

asse

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ws:

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embe

r31,

2012

Dec

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r31,

2011

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enci

es(

(inth

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www.teco.com.tw 137

60

(b) The investments in equity financial instruments owned by the Companyare exposed to price risk, but the possibility of market risk is low as aresult of the setting of a stop-loss point.

(c) The loans mostly belong to adjustable rate mortage and the Companyadjusts the loan position at market rates. Therefore, the Companyexpects no significant market risk.

(d) The Company’s major import and export transactions are conducted inforeign currencies. The change in fair value will be caused by fluctuationsin the foreign exchange rate. However, the amounts and periods of theCompany’s accounts receivable and accounts payable are equivalent, sothe market risk could be offset. If the gap is raised, the Company wouldadopt the forward contract to hedge the risk, so the Company estimatesthere would be no market risk.

B. Credit risk

(a) The equity financial instruments have active markets and are transactedwith financial institutions which are all in good credit standing.Therefore, the credit risk is low.

(b) The Company’s receivables are all approved as a result of rigorous creditreview procedures, and some of which are required to have adequateinsurance or provide necessary collaterals. Therefore, the Companyexpects no significant credit risk.

(c) Loan guarantees provided by the Company are in compliance with theCompany’s “Procedures for Provision of Endorsements and Guarantees”and are provided to affiliated companies and investees which theCompany owns directly or indirectly more than 50% ownership or withwhich the Company has normal business transactions. As the Companyis aware of the credit conditions of these companies, it has not required toprovide collateral for the loan guarantees. In the event that thesecompanies fail to comply with banks’ loan agreements, the maximum lossto the Company is equal to total loan guarantee amount.

C. Liquidity risk

The Company’s investments in equity financial instruments which have activemarkets are expected to be sold easily and quickly in the market at the priceclose to the fair value. The Company’s investments in equity financial


61

instruments without active markets are exposed to liquidity risk.

D. Cash flow risk due to changes in interest rate

The loans are mostly issued at floating interest rate. Accordingly, the futurecash flow will fluctuate with the yield rate of these debt instruments.Therefore, there is cash flow risk due to changes in interest rate.

www.teco.com.tw 139

62

11.D

ISC

LOSU

RE

OF

INV

ESTE

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YIN

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www.teco.com.tw 141

64

C.M

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:

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www.teco.com.tw 143

66

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--

223,

480

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tingh

ouse

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ada

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ount

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eiva

ble

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--

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lam

ount

was

$56,

620

I.D

eriv

ativ

efin

anci

alin

stru

men

tsun

derta

ken

durin

gth

eye

aren

ded

Dec

embe

r31,

2012

:Ple

ase

refe

rto

Not

es4(

2)an

d(1

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www.teco.com.tw 145

68

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ofin

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nies

A.I

nfor

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ofin

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nies

:

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Nam

eof

inve

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tion

Mai

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ing

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ities

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alin

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men

tinv

esto

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nize

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ount

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e

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iwan

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ufac

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key

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key

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unit

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rnat

iona

lTa

iwan

Inve

sted

vario

usin

vest

men

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e

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and

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e

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rious

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gan

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69

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.Inf

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atio

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pani

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ontin

ued)

:

Nam

eof

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Nam

eof

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tion

Mai

nop

erat

ing

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ities

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alin

vest

men

tinv

esto

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eld

byth

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etin

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e(lo

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ount

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(Con

tinue

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www.teco.com.tw 147

70

A-2

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71

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aren

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Dec

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ber

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e1)

Cre

dito

rB

orro

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ral

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ling

onto

tal

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sgr

ante

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kIte

mVa

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ng-A

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(Con

tinue

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www.teco.com.tw 149

72

Not

e1:

Num

ber“

0”re

pres

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red

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otex

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coSi

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ore’

sne

tass

ets,

and

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guar

ante

eto

asi

ngle

party

shal

lnot

exce

ed6%

ofTe

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ore’

snet

asse

ts.

Not

e4:

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cord

ance

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eto

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ntee

amou

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alln

otex

ceed

10%

ofTa

i-An

Wux

i’sne

tass

ets,

and

the

guar

ante

eto

asi

ngle

party

shal

lnot

exce

ed5%

ofTa

i-An

Wux

i’sne

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ets.

Not

e5:

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cord

ance

with

Wux

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polic

y,th

eto

talg

uara

ntee

amou

ntsh

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otex

ceed

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ets,

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guar

ante

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ngle

party

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lnot

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ed3%

ofW

uxiT

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ts.

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e6:

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licy,

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tota

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rant

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ount

shal

lnot

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ed20

%of

Teco

Wes

tingh

ouse

’sne

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ets,

and

the

guar

ante

eto

asi

ngle

party

shal

lno

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eed

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snet

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ts.

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e7:

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ance

with

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m’s

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y,th

eto

talg

uara

ntee

amou

ntsh

alln

otex

ceed

20%

ofTe

com

’sne

tass

ets,

and

the

guar

ante

eto

asi

ngle

party

shal

lnot

exce

ed10

%of

Teco

m’s

neta

sset

s.N

ote

8:In

acco

rdan

cew

ithB

ayco

m’s

polic

y,th

eto

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uara

ntee

amou

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otex

ceed

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s,an

dth

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aran

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sing

lepa

rtysh

alln

otex

ceed

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ofB

ayco

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neta

sset

s.N

ote

9:In

acco

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cew

ithTe

com

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rnat

iona

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licy,

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tota

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rant

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ount

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lnot

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ed20

%of

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tern

atio

nal’s

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ctor

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ong-

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Dec

embe

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ote

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.V.G

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herla

nds$

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apor

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embe

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ote

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73

C.E

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e3:

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lnot

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%of

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Ass

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ote

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ount

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apor

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lnot

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ceed

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www.teco.com.tw 153

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www.teco.com.tw 155

78

E.A

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ded

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real

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www.teco.com.tw 157

80

J.D

eriv

ativ

efin

anci

alin

stru

men

tsun

derta

ken

durin

gth

eye

aren

ded

Dec

embe

r31,

2012

:a.

Obj

ectiv

e:Th

eco

mpa

nies

ente

red

into

certa

info

rwar

dex

chan

geco

ntra

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tohe

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risk

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reig

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cyflu

ctua

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orei

gncu

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nom

inat

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onet

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asse

tsan

dlia

bilit

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b.M

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kas

are

sult

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asse

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anci

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men

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www.teco.com.tw 159

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www.teco.com.tw 161

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www.teco.com.tw 163

86

12. SEGMENT FINANCIAL INFORMATION

In accordance with R.O.C. SFAS No. 41, “Operating Segments”, segmentinformation is only disclosed in the consolidated financial statements.


TECO ELECTRIC & MACHINERY CO., LTD.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AND REPORT OF INDEPENDENT ACCOUNTANTS

DECEMBER 31, 2012 AND 2011

For the convenience of readers and for information purpose only, the auditors’ reportand the accompanying financial statements have been translated into English from theoriginal Chinese version prepared and used in the Republic of China. In the event ofany discrepancy between the English version and the original Chinese version or anydifferences in the interpretation of the two versions, the Chinese-language auditors’report and financial statements shall prevail.

www.teco.com.tw 165

1

REPORT OF INDEPENDENT ACCOUNTANTS TRANSLATED FROM CHINESE

To TECO Electric & Machinery Co., Ltd.

We have audited the accompanying consolidated balance sheets of TECO Electric &Machinery Co., Ltd. and subsidiaries as of December 31, 2012 and 2011, and the relatedconsolidated statements of income, of changes in stockholders’ equity and of cash flowsfor the years then ended. These consolidated financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. As described in Note 2(1) to theconsolidated financial statements, we did not audit the financial statements of certainconsolidated subsidiaries whose statements reflect total assets of $2,205,303,000 and$5,661,726,000, constituting 3% and 8% of total consolidated assets as of December 31,2012 and 2011, respectively, and total operating revenues of $2,451,323,000 and$5,042,684,000, constituting 5% and 11% of consolidated operating revenues for theyears then ended. Further, as described in Note 4(10) to the consolidated financialstatements, we also did not audit the financial statements of certain investee companiesaccounted for under the equity method. These long-term equity investments amountedto $3,698,279,000 and $3,577,157,000, both constituting 5% of total consolidated assetsas of December 31, 2012 and 2011, respectively, the related credit investment balanceamounted to $33,563,000 and $4,721,000, both constituting 0% of total consolidatedassets as of December 31, 2012 and 2011, respectively, and the related investmentincome amounted to $130,310,000 and $288,346,000, constituting 4% and 10% ofconsolidated net income for the years then ended. The financial statements of theseconsolidated subsidiaries and investees accounted for under the equity method wereaudited by other auditors whose reports thereon have been furnished to us and ouropinion expressed herein, insofar as it relates to the amounts included in theconsolidated financial statements and information disclosed in Note 11 relative to theseconsolidated subsidiaries and investees, is based solely on the reports of the otherauditors.

We conducted our audits in accordance with the “Rules Governing the Examination ofFinancial Statements by Certified Public Accountants” and generally accepted auditingstandards in the Republic of China. Those rules and standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve that our audits and the reports of the other auditors provide a reasonable basisfor our opinion.


2

In our opinion, based on our audits and the reports of the other auditors, theconsolidated financial statements referred to in the first paragraph present fairly, in allmaterial respects, the financial position of TECO Electric & Machinery Co., Ltd. andsubsidiaries as of December 31, 2012 and 2011, and the results of their operations andtheir cash flows for the years then ended, in conformity with the “Rules Governing thePreparation of Financial Statements by Securities Issuers” and generally acceptedaccounting principles in the Republic of China.

The Company begin to adopt International Financial Reporting Standards, InternationalAccounting Standards, and Interpretations/bulletins (collectively referred herein as theIFRSs) as recognized by the Financial Supervisory Commission, Executive Yuan,R.O.C (FSC) and the “Rules Governing the Preparation of Financial Statements bySecurities Issuers” that are to be applied in 2013 in the preparation of consolidatedfinancial statements of the Company and its subsidiaries starting from January 1, 2013.Information relating to the adoption of IFRSs by the Company is disclosed in Note 13 inaccordance with Jin-Guan-Zheng-Shen-Zi Order No. 0990004943 of the FSC, datedFebruary 2, 2010. The IFRSs may be subject to changes during the time of transition;therefore, the actual impact of IFRSs adoption on the Company and its subsidiaries maybe subject to changes.

The consolidated financial statements of TECO Electric & Machinery Co., Ltd. andsubsidiaries as of and for the year ended December 31, 2012 expressed in US dollars arepresented solely for the convenience of the reader and were translated from the NewTaiwan dollars financial statements using the foreign exchange rate of Taiwan Bank ofNT$29.04 to US$1.000 as of December 31, 2012. This basis of translation is not inaccordance with generally accepted accounting principles in the Republic of China.

PricewaterhouseCoopers, TaiwanMarch 26, 2013The accompanying consolidated financial statements are not intended to present the financial position andresults of operations and cash flows in accordance with accounting principles generally accepted incountries and jurisdictions other than the Republic of China. The standards, procedures and practices inthe Republic of China governing the audit of such financial statements may differ from those generallyaccepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanyingconsolidated financial statements and report of independent accountants are not intended for use by thosewho are not informed about the accounting principles or auditing standards generally accepted in theRepublic of China, and their applications in practice.As the financial statements are the responsibility of the management, PricewaterhouseCoopers cannotaccept any liability for the use of, or reliance on, the English translation or for any errors ormisunderstandings that may derive from the translation.

www.teco.com.tw 167

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otes

3,4(

5),6

and

10)

Inco

me

tax

paya

ble

(Not

e4(

19))

Acc

ount

srec

eiva

ble,

net-r

elat

edpa

rties

(Not

es3,

5an

d10

)A

ccru

edex

pens

es(N

otes

4(26

),5

and

10)

Oth

erre

ceiv

able

s(N

otes

4(19

)and

10)

Oth

erpa

yabl

es(N

ote

10)

Oth

erre

ceiv

able

s-re

late

dpa

rties

(Not

es3,

4(10

),5

and

10)

Rec

eipt

sin

adva

nce

Oth

erfin

anci

alas

sets

-cur

rent

(Not

es6

and

10)

Parti

alco

nstru

ctio

nbi

lling

s(N

otes

4(7)

and

5)In

vent

orie

s,ne

t(N

otes

4(6)

and

6)Le

ss:C

onst

ruct

ion

inpr

ogre

ss(N

otes

4(7)

and

5)C

onst

ruct

ion

inpr

ogre

ss(N

otes

4(7)

and

5)Lo

ng-te

rmlia

bilit

ies-

curre

ntpo

rtion

(Not

es4(

21),

6an

d10

)Le

ss:P

artia

lcon

stru

ctio

nbi

lling

s(N

otes

4(7)

and

5)Li

abili

tyun

derc

apita

llea

se-c

urre

nt(N

ote

4(11

))Pr

epai

dex

pens

esO

ther

curre

ntlia

bilit

ies(

Not

e5)

Non

-cur

rent

asse

tshe

ldfo

rsal

e(N

ote

4(9)

)To

talc

urre

ntlia

bilit

ies

Def

erre

din

com

eta

xas

sets

-cur

rent

(Not

e4(

19))

Long

-term

Liab

ilitie

sO

ther

curre

ntas

sets

Bon

dsPa

yabl

e(N

otes

4(20

)and

10)

Tota

lcur

rent

asse

tsLo

ng-te

rmlo

ans(

Not

es4(

21),

6an

d10

)Fu

ndsa

ndIn

vest

men

tsLi

abili

tyun

derc

apita

llea

se-n

on-c

urre

nt(N

ote

4(21

))Av

aila

ble-

for-s

ale

finan

cial

asse

ts-n

on-c

urre

ntTo

tall

ong-

term

liabi

litie

s(N

otes

4(3)

,6an

d10

)R

eser

veFi

nanc

iala

sset

scar

ried

atco

st-n

on-c

urre

ntLa

ndva

lue

incr

emen

talr

eser

ve(N

ote

4(11

))(N

otes

4(6)

,4(1

6),6

and

10)

Oth

erLi

abili

ties

Long

-term

equi

tyin

vest

men

tsac

coun

ted

foru

nder

Acc

rued

pens

ion

liabi

litie

s(N

ote

4(22

))th

eeq

uity

met

hod

(Not

es4(

10),

5an

d6)

Gua

rant

eede

posi

tsre

ceiv

ed(N

ote

10)

Prep

aym

ents

forl

ong-

term

inve

stm

ents

(Not

e4(

10))

Def

erre

din

com

eta

xlia

bilit

ies-

non-

curre

nt(N

ote

4(19

))To

talf

unds

and

inve

stm

ents

Oth

erlia

bilit

ies(

Not

e4(

10)a

nd5)

Prop

erty

,Pla

ntan

dEq

uipm

ent(

Not

es4(

11),

4(16

),6

and

7)To

talo

ther

liabi

litie

sC

ost

Tota

lLia

bilit

ies

Land

Stoc

khol

ders

'Equ

ityBu

ildin

gsC

apita

lM

achi

nery

and

equi

pmen

tC

omm

onst

ock

(Not

es4(

23)a

nd9)

Tran

spor

tatio

neq

uipm

ent

Subs

crip

tion

forc

omm

onsto

ckre

ceiv

edin

adva

nce

Leas

edas

sets

Cap

italr

eser

ves(

Not

e4(

24))

Leas

ehol

dim

prov

emen

tsPa

id-in

capi

tali

nex

cess

ofpa

rval

ueO

ther

equi

pmen

tTr

easu

ryst

ock

Rev

alua

tion

incr

emen

tsLo

ng-te

rmin

vest

men

tsC

osta

ndre

valu

atio

nin

crem

ents

Net

asse

tsfro

mm

erge

rLe

ss:A

ccum

ulat

edde

prec

iatio

nSt

ock

optio

nA

ccum

ulat

edim

pairm

ent

Oth

ers

Con

stru

ctio

nin

prog

ress

and

prep

aym

ents

fore

quip

men

tR

etai

ned

earn

ings

(Not

e4(

26))

Tota

lpro

perty

,pla

ntan

deq

uipm

ent,

net

Lega

lres

erve

Inta

ngib

leA

sset

sU

ndist

ribut

edea

rnin

gsD

efer

red

pens

ion

costs

(Not

e4(

22))

Oth

ereq

uity

adju

stmen

tsO

ther

inta

ngib

leas

sets

(Not

e4(

16))

Cum

ulat

ive

trans

latio

nad

just

men

ts(N

ote

4(19

))To

tali

ntan

gibl

eas

sets

Unr

ecog

nize

dpe

nsio

nco

st(N

ote

4(22

))O

ther

Ass

ets

Unr

ealiz

edga

inor

loss

onfin

anci

alin

stru

men

tsLe

ased

asse

ts(N

otes

4(12

)and

6)(N

otes

4(3)

,4(1

0)an

d10

)Id

leas

sets

(Not

e4(

13))

Unr

ealiz

edre

valu

atio

nin

crem

ents

(Not

es4(

10).4

(11)

)R

efun

dabl

ede

posit

s(N

ote

10)

Trea

sury

stoc

k(N

otes

4(10

),4(

28)a

nd6)

Def

erre

dex

pens

esTo

talP

aren

tCom

pany

Stoc

khol

ders

'Equ

ities

Long

-term

note

sand

acco

unts

rece

ivab

le(N

ote

4(14

))M

inor

ityin

tere

sts

Res

trict

edas

sets

(Not

e4(

15))

Tota

lSto

ckho

lder

s'Eq

uity

Oth

eras

sets

Com

mitm

ents

and

cont

inge

ntlia

bilit

ies(

Not

es4(

11),

5,an

d7)

Tota

loth

eras

sets

Subs

eque

ntev

ents

(Not

es9)

TOTA

LA

SSET

STO

TAL

LIA

BIL

ITIE

SA

ND

STO

CK

HO

LDER

S'EQ

UIT

Y


4

TECO ELECTRIC & MACHINERY CO., LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME



Unaudited-Note 2Operating revenues (Notes 4(29) and 5)

SalesSales returnsSales discountNet sales

Financial instrument sales revenue, netConstruction revenueService revenueTotal operating revenues


Gross profitUnrealized intercompany profit (Note 5)Realized intercompany profitNet gross profitOperating expenses (Notes 4(22), 4(26), 4(30) and 5)



Interest income (Note 5)Investment income accounted for under the equity method (Note 4(10))Dividend incomeGain on disposal of property, plant and equipmentGain on disposal of investmentsForeign exchange gain, netRental income (Note 5)Gain on valuation of financial assets, net (Note 4(2))Gain on valuation of financial liabilities, net (Note 4(18))Miscellaneous incomeTotal non-operating income

Non-operating expensesInterest expenseForeign exchange loss, netFinancing expensesDepreciation on idle assets (Note 4(30))Impairment loss (Notes 4(8) and 4(16))Loss on valuation of financial assets, net (Note 4(2))Loss on valuation of financial liabilities, net (Note 4(18))Miscellaneous expenses (Note 4(30))Total non-operating expenses

Income before income taxIncome tax expense (Note 4(19))Consolidated net incomeAttributable to:

Equity holders of the CompanyMinority interests

Income beforeIncome Tax

NetIncome


NetIncome


NetIncome

Earnings per share (Note 4(27))Basic earnings per share

Equity holders of the CompanyDiluted earnings per share

Equity holders of the Company

The accompanying notes are an integral part of these consolidated financial statements.See report of independent accountants dated March 26, 2013.

4

TECO ELECTRIC & MACHINERY CO., LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME



Unaudited-Note 2Operating revenues (Notes 4(29) and 5)

SalesSales returnsSales discountNet sales

Financial instrument sales revenue, netConstruction revenueService revenueTotal operating revenues


Gross profitUnrealized intercompany profit (Note 5)Realized intercompany profitNet gross profitOperating expenses (Notes 4(22), 4(26), 4(30) and 5)



Interest income (Note 5)Investment income accounted for under the equity method (Note 4(10))Dividend incomeGain on disposal of property, plant and equipmentGain on disposal of investmentsForeign exchange gain, netRental income (Note 5)Gain on valuation of financial assets, net (Note 4(2))Gain on valuation of financial liabilities, net (Note 4(18))Miscellaneous incomeTotal non-operating income

Non-operating expensesInterest expenseForeign exchange loss, netFinancing expensesDepreciation on idle assets (Note 4(30))Impairment loss (Notes 4(8) and 4(16))Loss on valuation of financial assets, net (Note 4(2))Loss on valuation of financial liabilities, net (Note 4(18))Miscellaneous expenses (Note 4(30))Total non-operating expenses

Income before income taxIncome tax expense (Note 4(19))Consolidated net incomeAttributable to:

Equity holders of the CompanyMinority interests


NetIncome


NetIncome


NetIncome

Earnings per share (Note 4(27))Basic earnings per share

Equity holders of the CompanyDiluted earnings per share

Equity holders of the Company

The accompanying notes are an integral part of these consolidated financial statements.See report of independent accountants dated March 26, 2013.

www.teco.com.tw 169

5

TEC

OEL

ECTR

IC&

MA

CH

INER

YC

O.,

LTD

.AN

DSU

BSI

DIA

RIE

SC

ON

SOLI

DAT

EDST

ATEM

ENTS

OF

CH

AN

GES

INST

OC

KH

OLD

ERS’

EQU

ITY

FOR

THE

YEA

RS

END

EDD

ECEM

BER

31,2

012

AN

D20

11(E

XPR

ESSE

DIN

THO

USA

ND

SO

FD

OLL

AR

S)

(Con

tinue

d)

Cap

ital

Ret

aine

dEa

rnin

gsO

ther

Equi

tyA

djus

tmen

ts

Com

mon

stoc

k

Subs

crip

tion

for

com

mon

stoc

kre

ceiv

edin

adva

nce

Cap

ital

rese

rves

Lega

lres

erve

Und

istri

bute

dea

rnin

gs

Cum

ulat

ive

trans

latio

nad

just

men

tsU

nrec

ogni

zed

pens

ion

cost

Unr

ealiz

edga

inor

loss

onfin

anci

alIn

stru

men

ts

Unr

ealiz

edre

valu

atio

nin

crem

ents

Trea

sury

stoc

kM

inor

ityin

tere

stTo

tal

2011

-New

Taiw

ando

llars

Bal

ance

atJa

nuar

y1,

2011

App

ropr

iatio

nsof

2010

neti

ncom

e(N

ote)

Lega

lres

erve

Cas

hdi

vide

nds

Exer

cise

ofem

ploy

eest

ock

optio

nsEf

fect

ofch

ange

sin

owne

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ppe

rcen

tage

ofin

vest

eeco

mpa

nies

Effe

ctof

chan

gesi

nun

real

ized

gain

onfin

anci

alin

strum

ents

Effe

ctof

chan

gesi

nca

pita

lres

erve

sof

inve

stee

com

pani

esEf

fect

ofch

ange

sin

inve

stee

s’un

real

ized

gain

onfin

anci

alin

strum

ents

Fore

ign

curre

ncy

trans

latio

nad

justm

ents

Effe

ctof

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gesi

nun

reco

gniz

edpe

nsio

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stEf

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ofch

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sin

inve

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s’un

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sin

min

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inte

rest

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onso

lidat

edne

tinc

ome

for2

011

Bal

ance

atD

ecem

ber3

1,20

11

2012

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ando

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Bal

ance

atJa

nuar

y1,

2012

App

ropr

iatio

nsof

2011

neti

ncom

e(N

ote)

Lega

lres

erve

Cas

hdi

vide

nds

Exer

cise

ofem

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ock

optio

nsEf

fect

ofch

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sin

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rcen

tage

ofin

vest

eeco

mpa

nies

Effe

ctof

chan

gesi

nun

real

ized

gain

onfin

anci

alin

strum

ents

Effe

ctof

chan

gesi

nin

vest

ees’

unre

aliz

edga

inon

finan

cial

instr

umen

tsFo

reig

ncu

rrenc

ytra

nsla

tion

adju

stmen

ts

Effe

ctof

chan

gesi

nun

reco

gniz

edpe

nsio

nco

stEf

fect

ofch

ange

sin

inve

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s’un

reco

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nco

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suan

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stoc

kop

tions

embe

dded

inco

nver

tible

bond

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fect

ofch

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sin

min

ority

inte

rest

sC

onso

lidat

edne

tinc

ome

for2

012

Bal

ance

atD

ecem

ber3

1,20

12

Not

e:Fo

rthe

year

send

edD

ecem

ber3

1,20

11an

d20

10,d

irect

ors’

and

supe

rvis

ors’

rem

uner

atio

nam

ount

ing

to$1

00,1

96an

d$8

9,92

3,re

spec

tivel

y,an

dem

ploy

ees’

bonu

sam

ount

ing

to$2

25,4

40an

d$2

02,3

27,r

espe

ctiv

ely,

had

been

dedu

cted

from

the

cons

olid

ated

stat

emen

tofi

ncom

e.


6

TEC

OEL

ECTR

IC&

MA

CH

INER

YC

O.,

LTD

.AN

DSU

BSI

DIA

RIE

SC

ON

SOLI

DAT

EDST

ATEM

ENTS

OF

CH

AN

GES

INST

OC

KH

OLD

ERS’

EQU

ITY

(CO

NTI

NU

ED)

FOR

THE

YEA

REN

DED

DEC

EMB

ER31

,201

2(E

XPR

ESSE

DIN

THO

USA

ND

SO

FD

OLL

AR

S)

Cap

ital

Ret

aine

dEa

rnin

gsO

ther

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tyA

djus

tmen

ts

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mon

stoc

k

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for

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ceiv

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rese

rves

Lega

lres

erve

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istri

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dea

rnin

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trans

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nad

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men

tsU

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cost

Unr

ealiz

edga

inor

loss

onfin

anci

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stru

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ts

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ealiz

edre

valu

atio

nin

crem

ents

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sury

stock

Min

ority

inte

rest

Tota

l20

12-U

Sdo

llars

(Una

udite

d-N

ote

2)B

alan

ceat

Janu

ary

1,20

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ppro

pria

tions

of20

11ne

tinc

ome

(Not

e)Le

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eser

veC

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divi

dend

sEx

erci

seof

empl

oyee

stoc

kop

tions

Effe

ctof

chan

gesi

now

ners

hip

perc

enta

geof

inve

stee

com

pani

esEf

fect

ofde

crea

sein

unre

aliz

edga

inon

finan

cial

inst

rum

ents

Effe

ctof

chan

gesi

nin

vest

ees’

unre

aliz

edga

inon

finan

cial

inst

rum

ents

Fore

ign

curr

ency

trans

latio

nad

just

men

tsEf

fect

ofch

ange

sin

unre

cogn

ized

pens

ion

cost

Effe

ctof

chan

gesi

nin

vest

ees’

unre

cogn

ized

pens

ion

cost

Issu

ance

ofst

ock

optio

nsem

bedd

edin

conv

ertib

lebo

nds

Effe

ctof

chan

gesi

nm

inor

ityin

tere

sts

Con

solid

ated

neti

ncom

efo

r201

2B

alan

ceat

Dec

embe

r31,

2012

Not

e:Fo

rthe

year

send

edD

ecem

ber3

1,20

11an

d20

10,d

irect

ors’

and

supe

rvis

ors’

rem

uner

atio

nam

ount

ing

to$3

,450

and

$3,0

97,r

espe

ctiv

ely,

and

empl

oyee

s’bo

nusa

mou

ntin

gto

$7,7

63an

d$6

,967

,res

pect

ivel

y,ha

dbe

ende

duct

edfro

mth

eco

nsol

idat

edst

atem

ento

finc

ome.

The

acco

mpa

nyin

gno

tesa

rean

inte

gral

part

ofth

ese

cons

olid

ated

finan

cial

stat

emen

ts.

See

repo

rtof

inde

pend

enta

ccou

ntan

tsda

ted

Mar

ch26

,201

3.


TECO ELECTRIC & MACHINERY CO., LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS


New Taiwan Dollars US Dollars

(Unaudited-Note 2)Cash flows from operating activities

Consolidated net incomeAdjustments to reconcile consolidated net income to net cash provided

by operating activities:Loss (gain) on valuation of financial assets(Gain) loss on valuation of financial liabilitiesBad debts provision (reversal of allowance for doubtful accounts)Provision for decline in value of inventoriesInvestment income accounted for under the equity methodCash dividends from investee companies accounted for under the

equity methodGain on disposal of investments, netImpairment lossDepreciation, amortization and loss on disposal of property,plant and equipment, net

Amortization of discount on bonds payable -Changes in assets and liabilities

Financial assets at fair value through profit or loss - currentNotes receivableNotes receivable - related partiesAccounts receivableAccounts receivable - related partiesOther receivablesOther receivables-related partiesOther financial assets - currentInventoriesConstruction in progress, netPrepaid expensesDeferred income tax assets (liabilities), netOther current assetsNotes payableNotes paypale - related partiesAccounts payableAccounts payable - related partiesIncome tax payableAccrued expenses and other payablesReceipts in advanceOther current liabilitiesAccrued pension liabilitiesOther liabilities-other

Net cash provided by operating activities

Cash flows from investing activitiesDecrease (increase) in available-for-sale financial assets - current(Increase) decrease in other receivables-related partiesIncrease in pledged fixed depositsProceeds from disposal of available-for-sale financial assets - non-currentIncrease in available-for-sale financial assets - non-currentProceeds from disposal of financial assets carried at cost-non-currentIncrease in and proceeds from capital reduction of financial assets carried

at cost - non-current, netProceeds from disposal of long-term equity investments accounted for

under the equity methodIncrease in and proceeds from capital reduction of long-term equity

investments accounted for under the equity method, netProceeds from disposal of property, plant and equipmentAcquisition of property, plant and equipmentIncrease in other intangible assets and deferred expensesIncrease in refundable depositsIncrease in long-term notes and accounts receivable -Increase in restricted assets -Increase in other assets - other -Acquisition of subsidiaries

Net cash used in investing activities

(Continued)


TECO ELECTRIC & MACHINERY CO., LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


New Taiwan Dollars US Dollars

(Unaudited-Note 2)Cash flows from financing activities

Increase in short-term loansIncrease (decrease) in long-term loansDecrease in guarantee deposits receivedPayment of cash dividendsIncrease in corporate bonds payableProceeds from exercise of employee stock options

Net cash used in financing activitiesExchange rate effectNet increase in cash and cash equivalentsCash and cash equivalents at beginning of the yearCash and cash equivalents at end of the year

Supplemental disclosures of cash flow informationInterest (net of amount capitalized) paid during the yearIncome tax paid during the year

Investing activities that resulted in partial cash flowsDisposal of available-for-sale financial assets-non-currentAdd: other receivables at beginning of the yearLess: other receivables at end of the yearCash received

Increase in available-for-sale financial assets-non-currentAdd: other payables at beginning of the yearLess: other payables at end of the yearCash paid

Acquisition of property, plant and equipmentAdd: other payables at beginning of the year

liability under capital lease at beginning of the yearLess: other payables at end of the year

liability under capital lease at end of the yearCash paid

The book value of net assets through merging with subsidiariesCash and cash equivalentsOther current assetsFunds and investmentsProperty, Plant and EquipmentIntangible AssetsOther AssetsOther current liabilitiesLong-term LiabilitiesOther LiabilitiesInvestment cost before mergerMinority interests

Acquisition price of subsudiaryCash balance of subsudiaries

The accompanying notes are an integral part of these consolidated financial statements.

See report of independent accountants dated March 26, 2013.

www.teco.com.tw 173

9

TECO ELECTRIC & MACHINERY CO., LTD. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012 AND 2011(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,

EXCEPT AS OTHERWISE INDICATED)

1. HISTORY AND ORGANIZATION

TECO ELECTRIC & MACHINERY CO., LTD. (the Company) was incorporated on June 12,1956 under the provisions of the Company Law of the Republic of China (R.O.C.) as acompany limited by shares. The Company primarily engages in the manufacture, installation,wholesale, retail of various types of electrical and mechanical equipment, general mechanicalequipment, air-conditioning units, electronic equipment, telecommunication equipment, officeequipment, and home appliances. In 2003, Taian Electric & Machinery Co., Ltd. was mergedwith the Company. In 2012, An Yang Electric Co., Ltd. and Taitec Technology Co., Ltd. weremerged with the Company. As of December 31, 2012, the Company and its subsidiariesincluded in the consolidated financial statements had approximately 14,000 employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements of the Company and its subsidiaries(collectively referred herein as the Group) are prepared in conformity with the “RulesGoverning the Preparation of Financial Statements by Securities Issuers” and generallyaccepted accounting principles in the Republic of China. The Group’s significant accountingpolicies are summarized as follows:

(1) Basis for preparation of consolidated financial statements

A. Principle on preparation of consolidated financial statements

All majority-owned subsidiaries wherein the Group owns more than 50% ownershipand controlled entities are included in the consolidated financial statements. EffectiveJanuary 1, 2008, the Group prepares consolidated financial statements on a quarterlybasis, and the proportionate consolidation method is applied to the jointly controlledentity at the balance sheet date. The income (loss) of the subsidiaries is included inthe consolidated statement of income effective on the date the Group gains control overthe subsidiaries. The income (loss) of the subsidiaries is excluded from theconsolidated statement of income effective the date on which the Group loses controlover the subsidiaries. Significant inter-company transactions, assets and liabilitiesarising from inter-company transactions are eliminated.


B. Subsidiaries included in the consolidated financial statements(A) The details are as follows:

% of shares heldas of Dec. 31,

Subsidiary Relationship Main activities 2012 2011 Remark1. Teco Holding USA Inc. Note 1 Holding company 100% 100%

(1) Teco Westinghouse MotorCompany

Note 2 Manufacturing and salesof motors and generators

100% 100%

A.Teco Westinghouse MotorCompany S.A. de C.V.

Note 3 " 100% 100%

(2) Teco Westinghouse MotorIndustrial Canada

Note 2 " 100% 100%

2. United View Global InvestmentCo., Ltd.

Note 1 Holding company 100% 100%

(1) Great Teco Motor (PTE) Ltd. Note 2 " 100% 100%A. Suzhou Teco Electric &

Machinery Co., Ltd.Note 3 Manufacturing and sales

of motors and generators

100% 100%

B. Wuxi Teco Electric &Machinery Co., Ltd.

Note 3 " 82.35% 82.35%

C. Jiangxi Teco Electric &Machinery Co., Ltd.

Note 3 Manufacturing and salesof motors

91.67% 91.67%

D. Qingdao Teco PrecisionMechatronics Co., Ltd.


85.31% 85.31%

E. Fujian Teco Precision Co.,Ltd.

Note 3 Manufacturing and salesof electric components

100% 100%

F. Shanghai TECO Electric &Machinery Co.,Ltd.

Note 3 Agents and sales ofmotors

100% -

(2) Asia Air Tech Industrial (Pte)Ltd.


A. Teco (Dong Guang) AirConditioningEquipment Co., Ltd.

Note 3 Manufacturing and salesof air-conditioningmechanical equipment

100% 100%

(3) Teco Australia Pty. Ltd. Note 2 Manufacturing and salesof motors and homeappliances

99.99% 99.99%

A. Teco (New Zealand)Limited

Note 3 " 100% 100%



Subsidiary Relationship Main activities 2012 2011 Remark(4) P.T Teco Elektro Indonesia Note 2 Manufacturing and sales

of motors and homeappliances

100% 100%

(5) Teco Industrial (Malaysia)Sdn. Bhd.


100% 100%

(6) Tecoson IndustrialDevelopment

Note 2 Investment inSouth-East Asia andHong Kong

100% 100%

A. Tecoson HK Co., Ltd. Note 3 Various investments 100% 100%(7) Asia Electric and Machinery

(Pte) Ltd.Note 2 Holding company 100% 100%

A. Nanchang Teco Electric& Machinery Co., Ltd.

Note 3 Manufacturing and salesof home appliances

100% 100%

B. Xiamen Teco TechnologyCo., Ltd.

Note 3 Distribution of motorsand home appliances

100% 100%

C. Asia InnovativeTechnology Co., Ltd.

Note 3 Distribution of LCD 100% 100%

D. Qingdao Teco CenturyAdvanced High-techMechatronics Co., Ltd.

Note 3 Manufacturingand sales of centrifugalcompressor andcentrifugal chiller

50% 50% Note 5

E. Tianjin Teco TechnologyCo., Ltd.

Note 3 Operations center inCentral China

100% 100%

F. Jiangxi TECO AirConditioning Equipment

Co., Ltd.

Note 3 Manufacturing and salesof variousair-conditioning units

100% 100%

(8) Great Teco, S.L. Note 2 Distribution of LCD 100% 100%(9) Teco Electronic & Machinery

B.V.Note 2 " 100% 100%

A. Teco Electronic &Machinery GmbH

Note 3 Salse of motors 100% -

3. Tesen Electric & Machinery Co.,Ltd.

Note 1 Manufacturing and salesof home appliances

100% 100%

4. Tong-An Assets Management &Development Co., Ltd.

Note 1 Real estate business 100% 100%


12


Subsidiary Relationship Main activities 2012 2011 Remark5. Teco Electric Europe Limited Note 1 Distribution of motors 100% 100%6. Teco Electric & Machinery (Pte)

Ltd.Note 1 " 100% 100%

(1) Tong Yuan Electronic &Machinery Sdn. Bhd.

Note 8 Sales of motors inSingapore

- 100%

(2) P.T Teco Multiguna Electro Note 2 " 87.5% 87.5%(3) Teco (Thai) Co. Note 2 " 55% 55%(4) STE Marketing Sdn. Bhd. Note 2 " 100% 100%(5) Teco (Vietnam) Electric &

Machinery Company Ltd.Note 2 Manufacturing of

motors

60% 60%

(6) TYM Electric & MachinerySdn. Bhd.

Note 2 Distribution of motors 100% 100%

7. Tong Dai Co., Ltd. Note 1 " 92.63% 92.63%8. Tong Tai Jung Co., Ltd. Note 1 " 60% 60%9. Teco Electro Devices Co., Ltd. Note 1 Manufacturing and sales

of motors

64.08% 64.36%

(1) Teco Electro Devices Co.,Ltd.

Note 2 Trading and variousinvestments

100% 100%

A. Taichang Teco ElectroDevices Co.


100% 100%

10. Yatec Engineering Corporation Note 1 Development andmaintenance of variouselectric appliances

64.95% 64.95%

11. Taian (Subic) Electric Co., Inc. Note 1 Manufacturing and salesof switches

76.7% 76.7%

12. An Yang Electric Co., Ltd. Note 6 Manufacturing and salesof electricity distributionmachines

- -

13. Taian-Etacom Technology Co.,Ltd.

Note 1 Manufacturing ofbusway and relatedcomponents

84.73% 84.73%

14. Taitec Technology Co., Ltd. Note 6 Manufacturing ofelectricity distributionmachines

- -

www.teco.com.tw 177

13


Subsidiary Relationship Main activities 2012 2011 Remark15. Taian (Malaysia) Electric Sdn.

Bhd.Note 1 Manufacturing of

switches

66.85% 66.85%

16. Micropac Worldwide (BVI) Note 1 International trading 100% 100%(1) An-Tai International Note 2 Investment holdings 100% 100%

AInvestment (Singapore)ACo., Ltd.

A. Tai-An Technology(Wuxi) Co., Ltd.

Note 3 Manufacturing and salesof fiber electricequipment

100% 100%

a. Teco SichuanTrading Co., Ltd.

Note 3 Sales of homeappliances

100% 100%

17. Great Teco Whirlpool Co., Ltd. Note 1 Distribution ofWhirlpool’s homeappliances

- 60%

18. E-Joy International Co., Ltd. Note 1 Wholesale and retail ofelectric appliances

95.24% 79.37%

19. A-Ok Technical Co., Ltd. Note 1 Repair of electricappliances

86.67% 86.67%

20. Media Vision Inc. Note 7 Design oftelecommunica-tions equipped withwires and wireless

- 78.63%

21. Information Technology TotalServices Co., Ltd.

Note 1 E-business service,mailing and datamanagement

71.30% 71.30%

22. GD Teco Taiwan Co., Ltd. Note 1 Manufacturing of ICprojects

100% 100%

23. Teco International InvestmentCo., Ltd.

Note 1 Various investments 100% 100%

(1) Tasia (Pte) Ltd. Note 2 " 100% 100%A. Sankyo Co., Ltd. Note 3 Sales of home

appliances

100% 100%

24. Tong-An Investment Co., Ltd. Note 1 Various investments 100% 100%(1) Jack Property Service &

Management CompanyNote 2 Building management

servicing

50% 50%



Subsidiary Relationship Main activities 2012 2011 Remark(2) Teco Capital Investment

(SAMOA) Co., Ltd.Note 2 Holding company 100% 100%

A. Qingdao TECOInnovation Co., Ltd.

Note 3 Science Parkdevelopment andbusiness operationsconsulting services

100% 100%

(3) Tecocapital Investment Co.,Ltd.


A. Technical InformationInternational Co., Ltd.

Note 3 Development and salesof software

70% 30%

25. Tecnos International ConsultantCo., Ltd.

Note 1 Business managementconsulting

73.54% 68.28%

26. An-Tai International InvestmentCo., Ltd.

Note 1 Various investments 100% 100%

27. Taiwan Pelican Express Co.,Ltd.

Note 4 Delivery and logisticservices

40.31% 61.12%

(1) Pelecanus Express Pte. Ltd. Note 2 Holding company 100% 100%

A. Beijing Pelican ExpressCo., Ltd.

Note 3 Storage services 100% 100%

28. Teco Technology (Vietnam)Co., Ltd.


100% 100%

29. Teco Nanotech Co., Ltd. Note 1 Producing nanotechtechnologies and sales

89.11% 38.60%

30. Tecom Co., Ltd. Note 1 Touch-tone phonesystem and billing box

63.52% 27.11%

(1) Tecom InternationalInvestment Co., Ltd.

Note 3 Business of investmentin various undertakings

100% 100%

A. WondaLink Inc. Note 3 Wired CommunicationEquipment andApparatusManufacturing,Telecommunication Equipmentand ApparatusManufacturing,Electronic Parts and

80% 80%



Subsidiary Relationship Main activities 2012 2011 RemarkComponentsManufacturing,International Trade,Restrained TelecomRadio FrequencyEquipments andMaterials Import ,Intellectual Property ,Product Designing

(2) Baycom Opto-ElectronicsTechnology Co., Ltd.

Note 2 Manufacturer of fiberoptic communicationsproducts, providing a fullrange of fiber opticalcables, interconnect,Transceiver/Mediaconverter, patch cord, LCconnectors & adapter.

51.19% 28.64%

A. GDH Co., LTD Note 3 Research, manufactureand sales of optical fiberfabric

61.76% 61.76%

(3) Tecom Global TechInvestment (B.V.I) Limited


100% 100%

A. Wuhan Tecom Co., Ltd. Note 3 Communication networkinformation technologydevelopment, sales andtechnology servicesbusiness

100% 100%

(4) Tecom Global TechInvestment Pte Limited


100% 100%

A. Tecom Tech (Wuxi) Co,.Ltd.

Note 3 R & D, manufacture ofbroadband accessnetwork communicationsystem equipment,asynchronous transfermode, IP datacommunication systems,

100% 100%



Subsidiary Relationship Main activities 2012 2011 Remarkmobile communicationhandsets, base stations,switching equipment anddigital trunking systemequipment, high-endrouters, Gigabit switchthan the above network,program-controlledswitchboards ; for sale ofproducts to providetechnology services

(5) Tecom Tech Investment(B.V.I) Limited


100% 100%

A. Tecom Tech Investment(BVI) Linited

Note 3 Flat panel displays, ITproducts, printed circuitboard assembly,manufacture , testing andcommunication productsand equipment R & Dreproduction

100% 100%

B. Beijing TecomInnovation TechnologyCo., Ltd.

Note 3 Intelligent home systemsand spare parts of theInternet of Things,fixed-line mobile phonemulti-networkintegration of familyrelated systems and spareparts, the broadbandaccess networkcommunication systemhardware, software andaccessories, wirelessnetwork communicationsystem hardware andsoftware, and zerocommunication system

100% 100%



Subsidiary Relationship Main activities 2012 2011 Remarkhardware and softwareandspare parts businesscommunicationstelephone system, batchsystems and spare partsand spare partswholesale, import andexport of goods andtechnology import andexport, import and exportagency, to providetechnical advice,technical training,technology services

Note 1: The Company holds more than 50% of the investees’ voting stock.Note 2: The subsidiaries hold more than 50% of the investees’ voting stock.Note 3: The indirect subsidiaries hold more than 50% of the investees’ voting stock.Note 4: The Company holds more than 50% of the investees’ ownership if the preferred stock is

converted to common stock. The Company holds more than 50% of the investees’ownership if the preferred stock is converted to common stock. The Company hasconverted the preferred stock to common stock in October 2, 2011. The Company soldpart of its ownership in Taiwan Pelican Express Co., Ltd. in August, 2012, so that itsownership does not reach 50% of the voting shares of Taiwan Pelican Express Co., Ltd.However, the Company still has control over the finance, operations and personnel affairsof Taiwan Pelican Express Co., Ltd., so Taiwan Pelican Express Co., Ltd. continues tobe included in the consolidated entities.

Note 5: In accordance with R.O.C. SFAS No. 31, “Interests in Joint Ventures”, the Companyadopted the proportionate consolidation method to consolidate the jointly controlledentity.

Note 6: The investees were merged with the Company in July 2011.Note 7: The investees were liquidated in the Company in December 2012.Note 8: The investees were liquidated in the Company in April 2012.


Note 9: Although the Group holds below 50% ownership in Tecom, it has all of the seats in theBoard of Directors of TECO, and therefore has control over Tecom. Tecom is includedin the consolidated financial statements.

Note 10: The Board of Directors meeting of the subsidiary made a resolution on October 16,2012 to close the operations of Tecom Tech (WUXI) Co., Ltd. Accordingly, theinvestments in Tecom Tech (WUXI) Co., Ltd were reclassified to ‘long-term equityinvestments to be disposed of’ at net realizable value on the balance sheet date. And theassets and liabilities of Tecom Tech (WUXI) Co., Ltd. were presented separately in theconsolidated financial statements.

(B) Total operating revenues of $2,451,323 and $5,042,684 for the years ended December 31, 2012and 2011, respectively, total assets of $2,205,303 and $5,661,726 as of December 31, 2012 and2011, respectively, were accounted for based on the subsidiaries’ financial statements that wereaudited by other auditors.


(C) Subsidiaries changed in the consolidated financial statements:

% of shares heldas of December 31,

Subsidiary Relationship Main activities 2012 2011 RemarkTeco Nanotech Co., Ltd. Note 1 Note 4 89.11% 38.60% Note 5Technical Information

International Co., Ltd.Note 3 Note 4 70% 30% Note 5

Shanghai TECO Electric &Machinery Co., Ltd.

Note 3 Note 4 100% - Note 6

Teco Electric and MachineryGmbH

Note 3 Note 4 100% - Note 6

Tecom Co., Ltd. Note 1 Note 4 63.52% 27.11% Note 5Tecom International

Investment Co., Ltd.Note 2 Note 4 100% 100% Note 7

Baycom Opto-ElectronicsTechnology Co., Ltd.

Note 2 Note 4 51.19% 28.64% Note 7

Tecom Global TechInvestment (B.V.I)Limited

Note 2 Note 4 100% 100% Note 7

Tecom Global TechInvestment Pte Limited


Tecom Tech Investment(B.V.I) Limited


WondaLink Inc. Note 3 Note 4 80% 80% Note 7Wuhan Tecom Co., Ltd. Note 3 Note 4 100% 100% Note 7Tecom Tech (Wuxi) Co,.

Ltd.Note 3 Note 4 100% 100% Note 7

Tecom Tech Investment(BVI) Linited


Beijing Tecom InnovationTechnology Co., Ltd.


GDH Co., Ltd. Note 3 Note 4 61.76% 61.76% Note 7Note 1: The company hold more than 50% of the investees’ voting stock.Note 2: The subsidiaries hold more than 50% of the investees’ voting stock.Note 3: The indirect subsidiaries hold more than 50% of the investees’ voting stock.Note 4: Please refer to Note 2(1)B(A).Note 5: The subsidiaries were included in the consolidated financial statements as

their respective total assets and operating revenues exceed the materialitythreshold of the Company’s total assets and operating revenues.


Note 6: The company is established in 2012.Note 7: The investees were merged with the Company in 2012.

(D) Subsidiaries excluded in the consolidated financial statements:

% of shares heldas of December 31,

Subsidiary Relationship Main activities 2012 2011 Remark1. Tong Yuan Electric &

Machinery Sdn. Bhd.Note 2 Note 3 - 100% Note 4

2. Teco Whirlpool Note 1 Note 3 - 60% "3. COSMO Instruments

Co., Ltd.Note 1 Note 3 - 78.63% "

Note 1: The company hold more than 50% of the investees’ voting stock.Note 2: The subsidiaries hold more than 50% of the investees’ voting stock.Note 3: Please refer to Note 2(1)B(A).Note 4: The company has been liquidation of the company to stop the company's revenue

and expenses in the consolidated financial statements from the date of completionof the liquidation of the company.

C. Subsidiaries not included in the consolidated financial statementsSubsidiary Ownership (%) Reason for non-consolidation

1. Teco Appliance (HK) Co., Ltd. 99.99% Note 12. Taian Electric Co., Ltd. 100% "3. Taiwan Pei Li Tone Co., Ltd. 68.03% "4. An-Sheng Travel Co., Ltd. 96% "5. Titco International Corporation - Note 1-Note 26. Taian-Jaya Electric Sdn. Bhd. 95% Note 17. TECO (PHILIPINES) 3C &

APPLIANCES, INC.60% "

8. Teco Group Science-Techology (HangZhou) Co., Ltd.

100% "

9. Nanchang Dong-Huan Management &Consulting Co., Ltd.

100% "

10. Hubbell-Taian Co., Ltd. 49.99% "11. Antech Automation Corp. 100% "12. Hubbell-Anmex International(s) Pte.

Ltd.100% "

13. Information Technology Total Service(BVI) Co., Ltd.

100% "

14. Universal Mail Service Ltd. 100% "15. Unison Service Corporation 100% "16. Information Technology Total Service

(Hang Zhu) Co., Ltd.100% "


17. Information Technology (Wuxi) Co.,Ltd.

100% "

18. Information Technology Total Service(Xiamen) Ltd.

100% "

19. Grey back International Property Inc. 54.83% "20. Ecolectric International Co., Ltd. 50% "21. TTMC Co., Ltd. 100% "22. Qingdao Jie Zheng Property Service &

Management Company100% "

Note1:The above subsidiaries were not included in the consolidated financial statements astheir respective total assets and operating revenues did not exceed the materialitythreshold of the Company’s total assets and operating revenues.

Note2: The company was liquidated in April, 2012.

D. Adjustments for subsidiaries with different balance sheet dates: None.

E. Adjustments for subsidiaries with different accounting policy: None.

F. Special operating risks in foreign subsidiaries: None.

G. Nature and extent of the restrictions on fund remittance from subsidiaries to the parentcompany: None.

H. Contents of subsidiaries’ securities issued by the parent company: Please refer to Note 4(28).I. Information on convertible bonds and common stock issued by subsidiaries:None.

(2) Translation of financial statements of foreign subsidiaries

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars using theexchange rates at the balance sheet date. Equity accounts are translated at historical rates exceptfor beginning retained earnings, which is carried forward from prior year’s balance. Dividendsare translated at the rates prevailing at the date of declaration. Profit and loss accounts aretranslated at weighted-average rates of the year. The resulting translation differences areincluded in “cumulative translation adjustments” under stockholders’ equity.

(3) Foreign currency transactions

A. Transactions denominated in foreign currencies are translated into functional currency at thespot exchange rates prevailing at the transaction dates. Exchange gains or loss due to thedifferece between the exchange rate on the transaction date and the exchange rate on the dateof actual receipt and payment are recognized in current year’s profit or loss.

B. Receivables, other monetary assets and liabilities denominated in foreign currencies aretranslated at the spot exchange rates prevailing at the balance sheet date. Exchange gains orlosses are recognized in profit or loss.

C. When a gain or loss on a non-monetary item is recognized in profit or loss, any exchangecomponent of that gain or loss shall be recognized in profit or loss. Conversely, when a gainor loss on a non-monetary item is recognized directly in equity, any exchange component ofthat gain or loss shall be recognized directly in equity. However, non-monetary items thatare measured on a historical cost basis are translated using the exchange rate at thetransaction date.


(4) Criteria for classifying current or non-current items

A. Assets that meet one of the following criteria are classified as current assets;otherwise, they are classified as non-current assets:(A) Assets expected to be realized, used or intended to be sold during the normal

course of business;(B) Assets held mainly for trading purposes;(C) Assets expected to be realized within 12 months from the balance sheet date;(D) Unrestricted cash and cash equivalents.

B. Liabilities that meet one of the following criteria are classified as current liabilities;otherwise, they are classified as non-current liabilities:(A) Liabilities incurred within the Company’s operating activities and expected to be

paid during the normal course of business;(B) Liabilities incurred mainly for trading activities;(C) Liabilities expected to be paid within 12 months from the balance sheet date;(D) Liabilities for which the repayment date cannot be extended unconditionally to

more than 12 months after the balance sheet date.(5) Cash and cash equivalents

Cash and cash equivalents are short-term, highly liquid investments which are readilyconvertible to known amounts of cash and which are subject to insignificant risk ofchanges in value resulting from fluctuations in interest rates.

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

A. Equity instruments are recognized and derecognized using trade date accounting,whereas, derivative financial instruments are recognized and derecognized usingsettlement date accounting. These financial instruments are recognized initially atfair value.

B. These financial instruments are subsequently remeasured and stated at fair value, andthe gain or loss is recognized in profit or loss. The fair value of listed and OTCstocks is based on latest quoted fair prices at the balance sheet date. The fair valueof open-end funds is based on the net asset value at the balance sheet date.

C. Derivative financial instruments that do not qualify for hedge accounting are initiallyrecognized at fair value at the balance sheet date, and the gain or loss is recognizedimmediately in profit or loss.

D. Effective July 1, 2008, the Group adopted the amended R.O.C. SFAS No. 34, whichpermits an entity to reclassify non-derivative financial assets (other than thosedesignated at fair value through profit or loss by the entity upon initial recognition)out of the fair value through profit or loss category in particular circumstances.



A. Available-for-sale financial assets are recognized and derecognized using trade dateaccounting and are recognized initially at its fair value plus transaction costs that aredirectly attributable to the acquisition of the financial asset.

B. The financial assets are remeasured and stated at fair value, and the unrealized gainor loss is recognized in equity. The gains or losses are recognized immediatelywhen the financial assets are derecognized. The fair value of listed and OTC stocksis based on latest quoted fair prices at the balance sheet date. The fair value ofopen-end funds is based on the net asset value at the balance sheet date.

C. If there is any objective evidence that the financial asset is impaired, the impairmentloss is recognized in profit or loss. If, in a subsequent period, the amount of theimpairment loss decreases, the previously recognized impairment loss shall bereversed as equity adjustments.

(8) Financial assets and financial liabilities carried at cost

A. Financial assets and financial liabilities carried at cost are recognized andderecognized using trade date accounting and are recognized initially at its fair valueplus transaction costs that are directly attributable to the acquisition or issuance ofthe financial assets or financial liabilities.

B. If there is any objective evidence that the financial assets are impaired, theimpairment loss is recognized in profit or loss. Such impairment loss cannot bereversed.

(9) Settlement date accounting

Any change in the fair value during the period between the trade date and the settlementdate / balance sheet date is not recognized for financial assets carried at cost or amortizedcost. For financial assets and financial liabilities at fair value through profit or loss, thechange in fair value is recognized in profit or loss. For available-for-sale financialassets, the change in fair value is recognized directly in equity.


A. Notes, accounts and other receivables are initially recognized at fair value andsubsequently amortized using the effective interest method. Impairment is deductedfrom the receivable balance, and assessed at the end of each reporting period whenthere is objective evidence that, as a result of one or more events that occurred afterthe initial recognition of the receivable, the estimated future cash flows of the assethave been affected.

B. Starting from January 1, 2012, the amount of the impairment loss recognized is thedifference between the asset’s carrying amount and the present value of estimatedfuture cash flows, after taking into account the related collateral and guarantees,discounted at the receivable’s original effective interest rate. The carrying amountof the receivable is reduced through the use of an allowance account.


(11) Inventories

The perpetual inventory system is adopted for inventory recognition. Inventories arestated at cost. The cost is determined using the weighted-average method. Fixedmanufacturing overhead is allocated over the normal capacity of the productionequipment. If production fluctuates over interim periods, the cost variances resultingfrom such fluctuation are deferred in the interim statements. At the end of year,inventories are evaluated at the lower of cost or net realizable value, and the individualitem approach is used in the comparison of cost and net realizable value. Thecalculation of net realizable value is based on the estimated selling price in the normalcourse of business, net of estimated costs of completion and estimated selling expenses.

(12) Construction in progress and partial construction billings

A. Construction in progress are stated at cost and the related interests are capitalized inaccordance with the generally accepted accounting principles in the Republic ofChina.

B. If the balance of construction in progress exceeds the balance of partial constructionbillings, partial construction billings is deducted from construction in progress andpresented as current assets. If the balance of partial construction billings exceedsthe balance of construction in progress, construction in progress is deducted frompartial construction billings and presented as current liabilities.

(13) Non-current assets held for sale

Non-current assets are classified as assets held for sale when their carrying amount is tobe recovered principally through a sale transaction rather than through continuing use.They are stated at the lower of carrying amount and fair value less costs to sell.

(14)Long-term equity investments accounted for under the equity methodA. Long-term equity investments in which the Company holds more than 20% of the

investee company's voting shares or has the ability to exercise significant influenceon the investee’s operational decisions are accounted for under the equity method.The excess of the initial investment cost over the acquired net asset value of theinvestee attributable to goodwill is no longer amortized and carries on tests ofimpairment every year, effective January 1, 2006. Retrospective adjustment of theamount of goodwill amortized in previous years is not required. The excess ofacquired net asset value of investee over the initial investment cost is allocatedproportionately and applied as a reduction to the book value of identifiablenon-current assets, and any remaining amount of such excess after this allocation iscredited to extraordinary gains. However, negative goodwill acquired prior toDecember 31, 2005 is continuously amortized.

B. Investment loss on the non-controlled entities over which the Company has theability to exercise significant influence is recognized to the extent that the amount oflong-term investments in such investees is written down to zero. However, if theCompany continues to provide endorsements, guarantees or financial support forsuch investees, the investment loss is recognized continuously in proportion to the


Company’s equity interest in such investees. In the case of controlled entities, theCompany recognizes all the losses incurred by such entities that will not be coveredby other stockholders. When the operations of such investees become profitable,the profit shall be allocated to the Company to the extent that the amount of lossespreviously recognized by the Company is fully recovered.

C. The capital reserve and long-term equity investment amounts are adjusted by thevariance between the investment cost and net assets of the investee due to thedisproportionate acquisition or decrease of shares in connection with the capitalincrease or decrease by the investee company. If the balance of capital reserve fromlong-term investment is not sufficient to cover the amount, it is then charged toretained earnings.

D. The financial statements of foreign investments accounted for under the equitymethod are translated into New Taiwan dollars. The Company recognizes itsproportionate share in the translation adjustment based on its percentage ofownership in the investee company, which is recorded in the cumulative translationadjustment account in stockholders’ equity.


A. With the exception of certain fixed assets which are carried at governmentrevaluation increments, property, plant and equipment are stated at cost. Interestsincurred on the loans used to bring the assets to the condition and location necessaryfor their intended uses are capitalized. The land value incremental reserve resultingfrom the revaluation increment is recorded as long-term liability.

B. Depreciation is provided on the average method over the estimated useful lives of theassets. The estimated useful lives of fixed assets are 2 to 60 years.

C. If the lease contract qualifies as a capital lease, the lessee should capitalize the leasedproperty as an asset and recognize the lease liability. If the lease contract contains abargain purchase option or allows the transfer of ownership at the end of the term,then the depreciation should be determined based on the leased property’s usefuleconomic lives.

D. Major renewals and improvements are capitalized and depreciated accordingly.Maintenance and repairs are expensed as incurred. When an asset is sold or retired,the cost and accumulated depreciation are removed from the respective accounts andthe resulting gain or loss is included in current non-operating income (expense).

E. Fixed assets not used in operations are reclassified as other assets and the relateddepreciation is charged to non-operating expense.

F. When transferring the Company’s land to a wholly-owned subsidiary, the landrevaluation balance and the related land value increment tax and reserve aretransferred and no gain or loss is recognized.

(16) Intangible assets

Intangible assets are stated at cost. For goodwill, please refer to Note 2(14)A. Otherintangible assets are amortized on the straight-line basis over their estimated usefuleconomic lives.


(17) Deferred charges

Deferred charges are stated at cost and amortized over the estimated useful economiclives based on the straight-line method.

(18) Impairment of non-financial assets

A. Impairment loss is recognized when the recoverable amount of an asset is less thanits book value. The recoverable amount is the higher of the fair value less costs tosell and value in use of an asset. When the impairment no longer exists, theimpairment loss recognized in prior years shall be recovered.

B. The recoverable amount of goodwill should be estimated at the same date each year,and the impairment loss on goodwill is not recoverable.

(19) Convertible bondsFor the bonds payable issued after January 1, 2006, the issuer of a financial instrumentshall classify the instrument, or its component parts, on initial recognition as a financialliability, a financial asset or an equity instrument in accordance with the substance of thecontractual arrangement and the definitions of a financial liability, a financial asset and anequity instrument. These bonds are accounted for as follows:A. The difference between the issue price and face value of convertible corporate bonds

is accounted for as premium or discount which is required to be amortized over theperiod from the date of issuance to maturity date using the interest method and isrecorded as “interest expense”.

B. The value of any derivative features (such as a call option and put option) embeddedin the compound financial instrument is recognized as “financial assets or financialliabilities at fair value through profit or loss”. These derivative features aresubsequently remeasured and stated at fair value on each balance sheet date, and thegain or loss is recognized in “gain or loss on valuation of financial assets or financialliabilities”. At the maturity of the redemption period, if the fair value of commonstock exceeds the redemption price, the fair value of the put option is recognized as“paid-in capital”, however, if the fair value of common stock is lower than theredemption price, the fair value of the put option is recognized in “gain or loss”.

C. Conversion option and conversion price resetting option embedded in the bondsissued by the Company, which are convertible to an equity instrument, arerecognized in “capital reserve from stock warrants”. When conversion price is reset,the fair value of the additional common stocks that have to be issued after theresetting is recognized as a current loss. When a bondholder exercises his/herconversion rights, the liability component of the bonds (including corporate bondsand embedded derivatives) shall be revalued at fair value on the conversion date, andthe resulting difference shall be recognized as “gain or loss” in the current period.The book value of the common stock issued due to the conversion shall be based onthe adjusted book value of the above-mentioned liability component plus the bookvalue of the stock warrants.


D. Costs incurred on issuance of convertible bonds are proportionally charged to theliabilities and equities of the underlying instruments based on initial recognitioncosts.

(20) Long-term liabilities

A. Long-term liabilities maturing within 12 months after the balance sheet date areclassified as long-term, if they meet the following two requirements: (a) TheCompany intends to refinance or extend their maturity dates beyond 12 months; and(b) the Company has refinanced or extended the maturity date before the balancesheet date.

B. Long-term liabilities have to be reclassified as short-term, if the Company does notcomply with the terms of the contract such that liabilities have to be paidimmediately. However, long-term liabilities can be classified as long-term, if thecreditors agree to extend their maturity dates beyond 12 months, and the Companyhas the ability to correct the breach of the contract.


A. Under the defined benefit pension plan, net periodic pension costs are recognized inaccordance with the actuarial calculations. Net periodic pension costs includeservice cost, interest cost, expected return on plan assets, amortization ofunrecognized net transition obligation and gains or losses on plan assets. Theunrecognized net transition obligation is amortized equally over 18 years.

B. Under the defined contribution pension plan, net periodic pension costs arerecognized as incurred.

(22) Income tax

A. Income tax is provided based on accounting income after adjusting for permanentdifferences. The provision for income tax includes deferred tax resulting fromitems reported in different periods for tax and financial reporting purposes. Over orunder provision of prior years' income tax liabilities is included in the current year'sincome tax expense. When a change in the tax laws is enacted, the deferred taxliability or asset is recomputed accordingly in the period of change. The differencebetween the new amount and the original amount, that is, the effect of changes in thedeferred tax liability or asset, is reported as an adjustment to current income taxexpense (benefit).

B. Income tax credits arising from the acquisition of equipment or technology, andexpenditures for research and development, employee training and development andinvestment in qualified stocks are recorded as deferred income tax assets and creditedto income tax expense in the period the related expenditures are incurred.

C. An additional 10% corporate income tax is recognized if the current earnings are notdistributed in the following year. The 10% additional corporate income tax isrecorded as income tax expense after the appropriation of earnings is approved by thestockholders.


D. Based on the “Income Basic Tax Act”, if the regular income tax is equal or more thanthe basic tax, the income tax payable shall be calculated in accordance with theIncome Tax Act and other relevant laws. Whereas, if the regular income tax is lessthan basic tax, the income tax payable shall be equal to the basic tax. Thedifference between the regular income tax and basic tax shall not be subject todeductions of investment tax credits granted under the provisions of other laws.

(23) Treasury stock

A. Treasury stock is stated at cost, which is accounted for on a weighted-average basis,and the amount is charged against retained earnings.

B. If the grant date of treasury stock reserved for employees was after January 1, 2008,the treasury stock shall be accounted for in accordance with the R.O.C. SFAS No. 39,“Accounting for Share-based Payment”.

C. Upon retirement of treasury stock, if the acquisition cost is above the book value, thedifference should be credited to “capital reserve-treasury stock”. If the acquisitioncost is below the book value, the difference should first be offset against capitalreserve from the same class of treasury stock transactions, and the remainder, if any,is debited to retained earnings.

D. The Company's common stock owned by its subsidiary is treated the same astreasury stock.

(24) Share-based payment - employee compensation plan

A. The employee stock options granted from January 1, 2004 through December 31,2007 are accounted for in accordance with EITF 92-070, EITF 92-071 and EITF92-072 of the Accounting Research and Development Foundation, R.O.C., datedMarch 17, 2003, “Accounting for Employee Stock Options”, prescribed by theR.O.C. Accounting Research and Development Foundation. Under the share-basedemployee compensation plan, compensation cost is recognized using the intrinsicvalue method and pro forma disclosures of net income and earnings per share areprepared under the fair value method.

B. For employee stock options granted after January 1, 2008, the Group shall measurethe services received and recognize as salaries during the vesting period by using thefair value of the equity instruments granted.


(25) Employees’ bonuses and directors’ and supervisors’ remuneration

The costs of employees’ bonuses and directors’ and supervisors’ remuneration areaccounted for as expenses and liabilities, provided that such recognition is requiredunder legal or constructive obligation and the amounts can be estimated reasonably.However, if the accrued amounts for employees’ bonuses and directors’ and supervisors’remuneration are significantly different from the actual distributed amounts resolved bythe stockholders at their annual stockholders’ meeting subsequently, the differences shallbe recognized as gain or loss in the following year.

(26) Revenue, costs and expenses

A. Sales revenue is recognized when the earning process is substantially completed andpayment is realized or realizable.

B. Service revenue is recognized based on the percentage-of-completion method.Any expected loss on a contract is recognized as cost or expense immediately.

C. Percentage-of-completion method is adopted if the gains (losses) on long-termconstruction contracts can be reasonably estimated, otherwise, the completedcontract method is adopted. When the estimated contract costs exceed the contractprice, the resulting loss is included in the current net income under both methods.

D. Expenses are recorded as incurred.(27) Use of estimates

The preparation of financial statements in conformity with generally acceptedaccounting principles in the Republic of China requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities and thedisclosures of contingencies at the date of the financial statements and the amounts ofrevenues and expenses during the reporting period. Actual results could differ fromthose assumptions and estimates.


The operating segment information disclosed in these financial statements is consistentwith that reported in the Group’s management reports. The chief operatingdecision-maker, which is the Company’s Board of Directors, is responsible fordistributing resources to each operating segment and evaluating their performance. Inaccordance with R.O.C. SFAS No. 41, "Operating Segments", the Group discloses theinformation in the consolidated financial statements and not in the separate financialstatements.

3. CHANGES IN ACCOUNTING PRINCIPLES


Effective January 1, 2012, the Group adopted the newly amended R.O.C. SFAS No. 34,"Financial Instruments: Recognition and Measurement". Impairment loss (bad debtsallowance) is recognized when there is objective evidence of impairment for notes,accounts and other receivables. There is no significant impact on the consolidated net


30

income for the year ended December 31, 2012 as a result of this change in accountingprinciple.


Effective January 1, 2012, the Group adopted the newly amended R.O.C. SFAS No. 41,"Operating Segments" to supersede R.O.C. SFAS No. 20, "Segment Reporting". TheGroup restated the operating segment information for the year ended December 31, 2011.This change in accounting principle had no impact on the consolidated net income andearnings per share for the years ended December 31, 2012 and 2011.

4. DETAILS OF SIGNIFICANT ACCOUNTS

(1) Cash and cash equivalents

December 31,2012 2011

Cash on handCash in banksCash equivalents

Cash equivalents are short-term notes with maturities within three months from the dateof investment.

(2) Financial assets at fair value through profit or loss

December 31,2012 2011

Current items:Held for tradingListed and OTC stocksBeneficiary certificatesDerivative financial instruments

Adjustment of held for trading

A. The Group recognized net gain (loss) on valuation of financial assets amounting to$42,563 and ($10,332) for the years ended December 31, 2012 and 2011,respectively.

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B. The information on trading nature and contract of derivative financial instruments areas follows:

December 31, 2012


(Notional amount)Fair

ValueForward exchange:BUY USD/SELL JPY Jan. 31, 2013~ Mar. 29, 2013 JPYBUY USD/SELL TWD Jan. 3, 2013~Feb. 22, 2013 USD

SELL AUD /BUY USD Jan. 14, 2013 AUD

December 31, 2011


(Notional amount)FairValue

Forward exchange:SELL USD/BUY TWD Jan. 9, 2012~Feb. 9, 2012 USD

SELL EUR/BUY USD Jan. 3, 2012 EUR

SELL AUD/BUY USD Jan. 4, 2012~ Jan. 5, 2012 AUD

C. The Group entered into forward exchange contracts to hedge the change ofexchange rate arising from export sales. However, the transaction did not qualifyfor hedge accounting, therefore it was classified as held for trading, and accountedfor at fair value through profit or loss.

(3) Available-for-sale financial assetsDecember 31,

Name of investees 2012 2011Current items:A. Listed and OTC stocksB. Fund

Adjustment of available-for-sale financial assets

Non-current items:Listed and OTC stocksAdjustment of available-for-sale financial assets

A. The Group reclassified certain financial assets at fair value through profit or lossinto availabe-for-sale financial assets amounting to $110,010 on July 1, 2008, inaccordance with R.O.C. SFAS No. 34, issued in October 2008. The details are asfollows:


(a) As of December 31, 2012 and 2011, the fair value and the book value of thereclassified financial assets which had not been derecognized are as follows:

December 31,2012 2011

Listed and OTC stocks

(b) The information of the fair value recognized in income statement or equity is asfollows:


Recognizedin profit or loss

Recognizedin equity

Recognized inprofit or loss

Recognizedin equity

Listed and OTC stocksIf the financial assets had not been reclassified, the Group would haverecognized the income (loss) on valuation of financial assets after July 1, 2008as follows:

AmountJuly 1, 2008~December 31, 2011January 1, 2012~December 31, 2012

C. Certain financial assets are pledged for borrowings and commercial paperspayable. Please refer to Note 6, “Details of pledged assets”.

(4) Notes receivable-net

December 31,2012 2011

Notes receivableLess: allowance for doubtful accounts

Certain notes receivable are pledged for borrowings. Please refer to Note 6, “Details ofpledged assets”.

(5) Accounts receivable-net

December 31,2012 2011

Accounts receivableLess: allowance for doubtful accounts

Certain accounts receivable are pledged for borrowings. Please refer to Note 6, “Detailsof pledged assets”.


(6) Inventories-netDecember 31, 2012

Cost

Allowancefordecline in

value Book valueRaw materialsWork in processFinished goodsInventory in transitMerchandise inventories

December 31, 2011

Cost

Allowancefordecline in

value Book valueRaw materialsWork in processFinished goodsInventory in transitMerchandise inventories

1. Except for cost of goods sold, the inventories recognized as operating costsamounted to $27,415 and $82,920 for the years ended December 31, 2012 and 2011,respectively.

2. Certain inventories are pledged for borrowings. Please refer to Note 6, “Details ofpledged assets”.

(7) Construction in progress-netA. The balance of construction in progress which exceeded partial construction billings

is as follows:December 31,

2012 2011Construction in progressPartial construction billings

B. The balance of partial construction billings which exceeded construction in progressis as follows:

December 31,2012 2011

Partial construction billings

Construction in progress


34

C. As of December 31, 2012 and 2011, cumulative gain (loss) recognized under thepercentage-of-completion method for major contracts are summarized as follows:

December 31, 2012

Construction

Expectedcompletion

dateContract

price

Estimatedcontract

cost

Percentageof

completion

Cumulativegain (loss)

recognized

Construction A Aug. 2013 $ 2,237,039 $ 2,146,199 98% $ 88,614







Construction H May 2013 561,590 569,471 7% ( 7,881)

December 31, 2011

Construction

Expectedcompletion

dateContract

price

Estimatedcontract

cost

Percentageof

completion

Cumulativegain (loss)

recognized

Construction A June 2012 $ 2,258,773 $ 2,179,006 91% $ 72,815



Construction D May 2013 968,571 891,086 1% 847




Construction H May 2013 556,190 506,133 2% 1,109

Construction I June 2012 1,312,199 1,243,511 99% 68,562

Construction J June 2012 1,273,788 1,170,356 99% 102,244

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(8) Financial assets carried at costDecember 31, 2012

Number of Percentageof

ownershipOriginal

costPeriod-end

balanceNames of investeesshares

(in thousands)Current item:Unlisted stock

Evergreen Air Cargo Service

Non-current items:A. Emerging stocks

1. Taiwan High Speed RailwayCorporation2. CANDO Corporation

3. Industrial Bank of Taiwan4. Asia Pacific Telecom Group Co., Ltd.5.Others

B. Unlisted stocks1. Fubon Multimedia Technology Co.,2. Far Eastern Electronic Toll Collection

Co., Ltd.3. Straits Construction Investment

(Holdings) Ltd.4. Pacific Venture Group5. Pacific Technology Partners Fund6 Topcell Solar International Co., LTD.7. Others (Holdings) Ltd.

C. Private equity fundTotal


December 31, 2011Number of Percentage

ofownership

Originalcost

Period-endbalanceNames of investees

shares(in thousands)

Current item:Unlisted stock

Evergreen Air Cargo Service CorporationNon-current items:A. Emerging stocks

1. Taiwan High Speed RailwayCorporation2. CANDO Corporation

3. Industrial Bank of Taiwan4. Asia Pacific Telecom Group Co., Ltd.5.Others

B. Unlisted stocks1. Fubon Multimedia Technology Co.,Ltd.2. Far Eastern Electronic Toll Collection

Co., Ltd.3. Straits Construction Investment4. Baycom Opto-Elatronics Technology5. Topcell Solar International Co., LTD.6. Pacific Venture Group7. Pacific Technology Partners Fund8. Others

C. Private equity fundTotal

A. The above investments held by the Group were measured at cost since the fair valuecannot be measured reliably.

B. The Group recognized impairment on financial assets carried at cost-Vmax Telecom Co.,Ltd. and Far Eastern Electronic Toll Collection Co., Ltd., amounting to $139,236 and$200,705 for the year ended December 31, 2012.

C. Certain financial assets are pledged for commercial papers payable. Please refer toNote 6, “Details of pledged assets”.

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(9) Non-current assets held for sale

Subsidiary-Teco (Dong Guang) Air Conditioning Eqipment Co., Ltd. signed a real estate salecontract on November 15, 2012. As of December 31, 2012, the major types of assets thatmeet the criteria of classified as disposal groups held for sale are as follows:

December 31, 2012Property, plant and equipment

Buildings and equipmentMachineryMiscellaneous equipment

Other Assetsland use interestOther


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

A. The details are as follows:

December 31, 2012

Names of investees

Numberof shares

(in thousands)

Percentageof

ownershipOriginal

cost

Investmentincome(loss)

Period-endbalance

Marketvalue

a. Investments accounted for under the equity method:1. Tung Pei Industrial Co., Ltd.2. Creative Sensor Inc.3. Lien Chang Electronic Enterprise Co., Ltd.4. Century Development Corporation5. Others

Less: credit balance of long-term investments (gross amountbefore offset of other receivables-related parties)

b. Prepayments for long-term investmentsToppoly l Investment Co., Ltd.

December 31, 2011

Names of investees

Numberof shares

(in thousands)

Percentageof

ownershipOriginal

cost

Investmentincome(loss)

Period-endbalance

Marketvalue

Investments accounted for under the equity method:1. Tung Pei Industrial Co., Ltd.2. Tecom Co., Ltd.3. Creative Sensor Inc.4. Lien Chang Electronic Enterprise Co., Ltd.5. Century Development Corporation6. Vmax Telecom Co., Ltd.7. Others

Less: credit balance of long-term investments (gross amountbefore offset of other receivables-related parties)

b. Prepayments for long-term investmentsTecocapital Investment Co., Ltd.

B. The investment income totaling $130,310 and $288,346 for the years ended December 31,2012 and 2011, respectively, were based on the investees’ financial statements which wereaudited by other auditors. As of December 31, 2012 and 2011, the related investments werestated at $3,698,279 and $3,577,157, respectively, and the related investments with creditbalance were $33,563 and $4,721, respectively.

C. Since the Company has had no more significant influence on Vmax Telecom Co., Ltd.(investee accounted for under the equity method) from February, 2012, the Company ceasedto measure this investee under the equity method effective the date on which the Companylost significant influence on it. And because the fair value of common shares of VmaxTelecom Co., Ltd. cannot be measured reliably, such shares invested were reclassified to‘financial assets carried at cost – non-current’.

D. The Group owns a jointly controlled entity-Qingdao TECO Century Advanced High-techMechatronics Co., Ltd., and presents the consolidated financial statements separately bycategory. As of December 31, 2012 and 2011, the paid-in capital of the investee was both$680,938. The parties’ proportionate share of assets, liabilities, revenues and expenses as ofand for the years ended December 31, 2012 and 2011 are as follows:


As of and for the years ended December 31,2012 2011

Current assetsNon-current assetsCurrent liabilitiesNon-current liabilitiesOperating revenuesOperating costs and other income or

expense, net

E. As of December 31, 2012 and 2011, the Company's common stocks owned by itssubsidiaries, Tong-An Investment Co., Ltd. and others, both with a total cost of$346,912 (22,366,000 shares), were treated as treasury stock.

F. Certain long-term equity investments accounted for under the equity method are pledgedfor borrowings. Please refer to Note 6, “Details of pledged assets”.


40

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A. Certain assets were appraised in the years 1961, 1974 and 1980, and the revaluationincrement was recorded as other equity adjustment. As of December 31, 2012 and2011, the balance of revaluation increment was both $3,784,916.

B. For the years ended December 31, 2012 and 2011, capitalized interest amounted to $491and $543, respectively.

C. Certain lease contracts of the subsidiaries qualified as capital lease were recognized inaccordance with R.O.C. SFAS No. 2, “Leases”. The terms and restrictions on theleased property are as follows:(1) The lease period is from January 1, 2008 to May 31, 2014, and total liabilities

amounted to $879,321, which was determined based on the building cost of theleased assets and the related capitalized interests. The payment is negotiatedbetween both parties. As of December 31, 2012 and 2011, the unpaid balance wasas follows:

December 31,2012 2011

Liabilities under capital leaseLess: current portion

(2) The total leased assets amounting to $879,321 cannot be pledged during the leaseperiod to ensure the rights and the obligation between both sides.

D. Certain fixed assets are pledged for borrowings and letters of credit. Please refer toNote 6, “Details of pledged assets”.


42

(12) Leased assets

Originalcost

Accumulateddepreciation


Net bookvalue

December 31, 2012LandBuildingsMachinery andequipment


December 31, 2011LandBuildingsMachinery andequipment


A. Leased assets mainly consist of property, plant, and equipment located in Quanyingof Taoyuan County, Hsinchuang of New Taipei City, Sanchong Road at NankangDistrict and Songjiang Road at Zhongshan District of Taipei City.

B. Certain leased assets are pledged for borrowings and letters of credit. Please referto Note 6, “Details of pledged assets”.

(13) Idle assets

December 31,2012 2011

Farm land-Taoyuan CountyFarm land-Yunlin CountyBuildings, netMachinery and equipment, net

Less: accumulated impairment

The Company was unable to transfer the title of certain farmland to the Company’sname due to legal restrictions. As of December 31, 2012 and 2011, the land title wasregistered under an individual’s name. The Company entered into an agreement withthe said individual to secure the title and the first mortgage right.

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(14) Long-term notes and accounts receivable

December 31,2012 2011

Long-term notesOverdue receivablesLess: allowance for doubtful accounts

(15) Restricted of assets

(16) Impairment

A. For the years ended December 31, 2012 and 2011, the impairment loss recognized isas follows:

Recognized instatements of income

2012 2011Impairment loss on:Financial assets carried at cost-non-currentGoodwillFixed assets-Motor Division

B The impairment loss recognized by operating segment is as follows:

Recognized instatement of income

2012 2011Other industryUnrecognizable assets

December 31,2012 2011

Pledged depositRestricted bank deposit


44

C. The impairment loss on fixed assets and financial assets carried at cost - non-currentwas recognized as the recoverable amount was below the book value.

(17) Short-term loans

December 31,2012 2011

Credit loansSecured loans

Interest rates

(18) Financial liabilities at fair value through profit or loss

December 31,2012 2011

Current items:Held for tradingDerivative financial instruments

A. The Group recognized (loss) gain on valuation of financial liabilities amounting to($2,855) and $5,865 for the years ended December 31, 2012 and 2011, respectively.

B. The information of derivatives are as follows:

C. The Group entered into forward exchange contracts to hedge the change ofexchange rate arising from export sales. However, the transaction did not qualifyfor hedge accounting, therefore, it was classified as held for trading and accountedfor at fair value through profit or loss.

December 31, 2012

Contractperiod

Contract amount(Notionalamount)Nature Fair value

Forward exchange :SELL GBP/BUY USD Jan. 31, 2013 GBP 500,000 ($ 72)SELL EUR/BUY USD Jan. 31, 2013~ Mar. 28, 2013 EUR 4,500,000 ( 1,901)SELL USD/BUY TWD Jan. 3, 2013~ Mar. 22, 2013 USD 14,000,000 ( 239)BUY JPY / SELL TWD Jan. 22, 2013~ Mar. 18, 2013 JPY 39,100,000 ( 643)

($ 2,855)December 31, 2011

Contractperiod

Contract amount(Notionalamount)Nature Fair value

Forward exchange :SELL RMB/BUY USD Jan. 1, 2012 USD 413,000 ($ 44)BUY USD/SELL TWD Jan. 9, 2012~ Feb. 9, 2012 USD 19,000,000 ( 661)

($ 1,305)

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(19) Income tax

A. Deferred income tax assets and liabilities:

December 31,2012 2011

CurrentDeferred income tax assetsLess: valuation allowance


Non-currentDeferred income tax assetsLess: valuation allowance



46

B. The components of deferred income tax assets and liabilities are as follows:



Investment tax creditsUnrealized expensesProvision for decline in value of inventoriesOver provision of allowance for doubtful

accountsOthers




Investment tax creditsTax benefit of loss carryforwardsImpairment lossInvestment loss from long-terminvestments

Difference resulting from different useful livesof fixed assets between financial and tax basis

Permanent loss on long-term investmentsOthers


Deferred income tax liabilitiesInvestment income from foreign investmentsOthers

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Investment tax creditsUnrealized expensesProvision for decline in value of inventoriesOver provision of allowance for doubtful

accountsOthers




Investment tax creditsTax benefit of loss carryforwardsImpairment lossDifference resulting from different useful lives

of fixed assets between financial and tax basisPermanent loss on long-term investmentsOthers


Deferred income tax liabilitiesInvestment income from foreign investmentsOthers


C. The reconciliation between income tax expense and income tax payable are asfollows:

2012 2011Current year income tax expense based on

statutory incomestatutory incomeTax effect of permanent differencesTax effect of investment tax creditsOver (under) provision for income tax

payable in prior year and net change indeferred income tax assets (liabilities)

Current income tax expenseEffect of Income Basic Tax ActAdditional 10% corporate tax on

undistributed earningsIncome tax expenseAdd: Over provision for income tax payable

in prior yearsOthers

Less: Paid and prepaid income taxNet change in deferred income tax

assets (liabilities)Foreign income tax paid

Income tax refundable (listed as otherreceivables)

Income tax payable

D. As of December 31, 2012, the Company and its subsidiaries’ income tax returnsthrough various years between 2009 and 2011, respectively, have been assessed andapproved by the Tax Authority.

E. Certain subsidiaries’ products are entitled to a five-year exemption on income taxunder the “Incentives for Emerging, Important Strategic Industries inManufacturing and Technology Services”, which expires in December 2012.

F. Under the People’s Republic of China (PRC) tax regulations, the Company’ssubsidiaries in Mainland China are exempt from corporate income tax for the firstand second profit-making years and are subject to a 50% reduction of corporateincome tax from the third through fifth profit-making years. Certain Company’ssubsidiaries are eligible for the tax exemption.


G. As of December 31, 2012, the unused investment tax credits and tax benefit of losscarryforwards amounted to $213,969 and $734,895, respectively. The details are asfollows:



Year ofexpiration

Transportation construction projects,investments in important technologycompanies, research & developmentexpenditures and employees’ trainingexpenditures

2013

20142015

Qualified expenditures Total creditsUnused

tax creditsYear of

expirationTax benefit of loss carryforwards 2013

201420152016201720182019202020212022

(20)Bonds payableItem December 31, 2012

September 30,December 31, 2011

30,Issuance of convertible bondsDiscount of bonds payable

A. Domestic unsecured convertible bonds - 3(A) On July 12, 2012 to July 12, 2015, the Company issued 0% coupon, 3-year

unsecured convertible bonds with the principal amount of $3,000,000. Thebonds are repayable in full at face value at maturity. The bonds were listed onthe Taiwan Over-The-Counter Securities Exchange on July 12, 2012.

(B) Under the terms of the convertible bonds, the bondholders have the right to askfor the conversion of the bonds into common stocks of the Company during theperiod from the date after one month of issuance of bonds to 10 days before thematurity date, except the stop transfer period. The rights and obligations ofthe new shares converted form convertible bonds are the same as the issued andoutstanding common stock.

(C) The conversion price of the convertible bonds for $22.5 per share. Theconvertible debt issue continued after the conversion price of the event of the


50

company due to anti-dilution terms of provisions will depend on the method ofconversion, set the mode to be adjusted.

(D) The Company may repurchase all of the outstanding bonds at face value at anytime after the following events, provided that the amount of the outstandingbonds is less than 10% of the initial issuance amount of bonds during the periodfrom the day after three months after issuance of the bonds to 40 days beforethe maturity date of the bonds.

(E) Under the terms of the convertible bonds, all bonds (redeemed, matured andconverted) are retired and not to be re-issued.

B. The fair value of convertible option of $110,100,000 was separated from bondspayable, and was recognized in “Capital reserve from stock warrants” in accordancewith R.O.C. SFAS No. 36. The fair value of put and call options embedded inbonds payable was separated form bonds payable, and was recognized in “Financialassets or liabilities at fair value through profit or loss”.

(21) Long-term loans

December 31,2012 2011

Long-term loansLess: current portion

Commercial papers payableLess: unamortized discount

Interest rates

A. Under the long-term contracts with certain financial institutions, the Group isrequired to maintain certain financial ratios and capital requirements as well as meetcertain restrictions relative to significant asset acquisitions or disposals.

B. As of December 31, 2012 and 2011, a portion of loans due within one year wereclassified as long-term as these were refinanced before the balance sheet date.

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A. The Group has non-contributory and funded defined benefit plan in accordance withthe R.O.C. Labor Standards Law, covering all regular employees before theimplementation of the Labor Pension Act on July 1, 2005. The defined benefitplan will continue to cover the employees who choose to remain with the definedbenefit plan. Upon retirement, pension payments are calculated based on totalyears of service and average salary of the last six months prior to retirement. Twobase units are earned for the first 15 years of service and one unit for eachadditional year thereafter, with a maximum of 45 units. The Group contributes2%~6% of the employees’ monthly salary to an independent retirement trust fund,with the Bank of Taiwan, the trustee.

B. The related assumptions used for the actuarial valuation are as follows:

2012 2011Discount rate 1.75%~2.00% 1.90%~6.00%Average salary increase rate 0.50%~5.00% 0.50%~5.00%Expected return rate on plan assets 1.00%~2.75% 1.90%~2.50%

C. The reconciliation between the funded status and accrued pension liability as ofDecember 31, 2012 and 2011 are summarized as follows:

December 31,2012 2011

Benefit obligation:Vested benefit obligationNon-vested benefit obligationAccumulated benefit obligationAdditional benefits based on future

salary increasesProjected benefit obligation

Fair value of plan assetsFunded statusUnrecognized transition obligationPrior service cost unamortizedUnrecognized net pension lossAdditional pension liabilityAccrued pension liabilityVested obligation


52

D. The components of net pension cost for the years ended December 31, 2012 and2011 are as follows:

2012 2011Service costInterest costExpected return on plan assetsUnrecognized transition obligationPrior service cost amortizedUnrecognized pension loss amortizedCurtailment and settlement income

E. Effective July 1, 2005, the Group established a defined contribution pension planunder the R.O.C. Labor Pension Act for eligible employees holding Republic ofChina citizenship. The Group deposits the pension amount based on 6% of theemployees’ monthly salary into each employee’s personal pension account with theBureau of Labor Insurance. The pension cost under this plan amounted to$215,153 and $179,510 for the years ended December 31, 2012 and 2011,respectively.

F. The Company’s subsidiaries in Mainland China have a funded defined contributionplan. Monthly contributions to an independent fund administered by thegovernment in accordance with the pension regulations in the PRC are based onemployees’ monthly salaries and wages. The pension costs under this planamounted to $119,904 and $92,311 for the years ended December 31, 2012 and2011, respectively.

(23) Common stock

A. As of December 31, 2012, the Company’s issued and outstanding capital amountedto $18,471,209, with a par value of $10 (in dollars) per share.

B. As of December 31, 2012, 10,295,000 shares of employee stock options had beenexercised, but the registration procedure for 1,976,000 shares has not yet beencompleted.

C. On December 17, 1996, the Board of Directors of the Company adopted a resolutionthat allows certain stockholders to issue 5,540 thousand units of global depositoryreceipts (GDRs), represented by 55,399 thousand shares of common stock. A unitof GDR represents 10 shares of common stock. After obtaining approval fromSFB, these GDRs were listed on the Securities Exchange of London, with totalproceeds of US$107,644,000. The issuance of GDRs were presented by issuingcommon shares, therefore, there is about 7% dilutive effect on the common shares’equity. The main terms and conditions of the GDRs are as follows:

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(A) Voting rights

GDR holders may, pursuant to the Depositary Agreement and the relevant lawsand regulations of the R.O.C., exercise the voting rights pertaining to theunderlying common shares represented by the GDRs.

(B) Redemption of the underlying common shares represented by the GDRs

When the holders of the GDRs request the Depositary to redeem the GDRs inaccordance with the relevant R.O.C. regulations and the provisions in theDepositary Agreement, the Depositary may (i) deliver the underlying commonshares represented by the GDRs to the GDR holders, or (ii) sell the underlyingcommon shares represented by the GDRs in the R.O.C. stock market on behalfof the GDR holder. The payment of proceeds from such sale shall be madesubject to the relevant R.O.C. laws and regulations and the provisions in theDepositary Agreement.

(C) Distribution of dividends, preemptive rights and other rights

GDR holders own the same rights as common shareholders.

(D) There were 48 thousand units outstanding, representing 479 thousand commonshares as of December 31, 2012.

(24) Capital reserve

The R.O.C. Company Law requires that the capital reserve shall be exclusively used tooffset against accumulated deficit or to increase capital and shall not be used for anyother purpose. Capital reserve from paid-in capital in excess of par value and donatedsurplus can be transferred to common stock up to an annual limit of 10% of totalcommon stock.

(25) Share-based payment-employee compensation plan

A. As of December 31, 2012 and 2011, the Company’s share-based payment plans areas follows:

(A) Treasury stock transferred to employees:

Type of arrangement Grant date

Grant quantity(in thousands

of shares) Vesting conditionsPlan 1 Apr. 6, 2006 Vested immediatelyPlan 2 Jan. 4, 2007 "Plan 3 Mar. 30, 2007 "Plan 4 Oct. 3, 2007 "


54

(B) Employee stock options:

December 31, 2012

Grant date Grant quantityContractperiod

Vestingconditions

Actualturnover rate

Estimated futureturnover rate

Dec. 26, 200750,000 units


December 31, 2011

Grant date Grant quantityContractperiod

Vestingconditions

Actualturnover rate

Estimated futureturnover rate

Dec. 26, 200750,000 units


Note: Each unit entitles the holder to subscribe to 1,000 shares of the Company’s commonstock.

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


Weighted-average Weighted-averageNo. of shares exercise price No. of shares exercise price

Stock options (in thousands) (in dollars) (in thousands) (in dollars)Options outstanding at beginning of the

yearOptions grantedDistribution of stock dividends /

adjustments for number of sharesgranted for one unit of option

Options abandonedOptions exercisedOptions outstanding at end of the yearOptions exercisable at end of the yearOptions authorized but not granted at

end of the yearOptions revoked

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




$ 12.10 9,942 1 years $ 12.10 9,942 $ 12.10December 31, 2011

Stock options outstanding Stock options exercisableWeighted-average

Range of expected Weighted-average Weighted-averageexercise price No. of shares remaining exercise price No. of shares exercise price

(in dollars) (in thousands) vesting period (in dollars) (in thousands) (in dollars)

$ 12.70 22,504 2 years $ 12.70 22,504 $ 12.70c. Before January 1, 2008, the Company adopted the Black-Scholes option-pricing model

to estimate the fair value of the stock options. The weighted-average parameters areas follows:

Issue date December 26, 2007Stock price per share (in dollars) $ 15.1Exercise price per share (in dollars) 15.1Expected price volatility 34.99%Expected vesting period 6 yearsDividends yield rate 0%Risk-free interest rate 2.42%Fair value per share (in dollars) $ 5.75

B. The pro forma consolidated net income are $2,970,352 and $2,747,365 and earnings per shareattributable to equity holders of the Company are $1.63 and $1.52 (in dollars) per share forthe years ended December 31, 2012 and 2011, respectively, based on the assumption that thecompensation cost is accounted for using the fair value method for the stock options grantedbefore the adoption of R.O.C. SFAS No. 39, “Accounting for Share-based Payment”.

(26) Retained earnings and legal reserveA. As stipulated in the Company’s Articles of Incorporation, the current earnings, if any, shall be

distributed in the following order:

(A) Payment of taxes and duties.

(B) Covering prior years’ accumulated deficit, if any.

(C) After deducting items (a) and (b), set aside 10% of the remaining amount as legal reserve.

(D) Set aside a certain amount as special reserve, if any.

(E) After deducting items (a) to (d), appropriating 1%~5% of remaining earnings as directors’and supervisors’ compensation.


56

(F) After deducting items (a) to (d), appropriating 1%~10% of remaining earnings asemployees’ bonuses.

(G) Distributing the remaining amount plus prior years’ retained earnings to shareholdersaccording to their shareholding percentage. The distribution rate is principally 80%, ofwhich cash dividend shall account for 5% ~ 50% of the distributed amount.

(H) The Company may grant the employees of subsidiaries employee bonuses as describedabove if certain criteria prescribed by the Board of Directors are met.

B. The Company’s dividend policy is summarized below:As the Company operates in a volatile business environment and is in the stable growthstage, the residual dividend policy is adopted taking into consideration the Company’sfinancial structure, operating results and future expansion plans.

C. Legal reserve can only be used to cover accumulated losses or to increase capital. Legalreserve can be used to increase capital only if the accumulated amount of legal reserve ismore than 25% of paid-in capital, and the amount is limited to 25% of its balance.

D. (A) The appropriation of 2011 and 2010 earnings had been approved by the shareholdersduring their meeting on June 15, 2012 and June 10, 2011, respectively, as follows:

2011 2010Dividendsper share

Dividendsper share

Amount (in dollars) Amount (in dollars)Legal reserveCash dividends

(B) The estimated appropriation of 2012 earnings proposed by the Board of Directors onMarch 26, 2012, is as follows:

December 31, 2012Dividends per share

Amount (in dollars)Legal reserve $ 296,470Cash dividends 1,866,650 $ 1.0As of March 26 2012, the appropriation of 2012 earnings had not been approved by theBoard of Directors.

E. The estimated employees’ bonus amounted to $225,440 and $202,327, and the estimateddirectors’ and supervisors’ remuneration amounted to $100,196 and $89,923 for the yearsended December 31, 2012 and 20011, respectively. The appropriation of 2011 earningswas different with that approved by the Board of Directors on June 30, 2012 totaling $6,150The difference is attributed to stock options exercised between March 16, 2012 and theex-right date the shareholders approved the appropriation of 2011 earnings which increasedthe number of shares.

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F. The Group’s estimated employees’ bonus amounted to $343,814 and $329,541, and theestimated directors’ and supervisors’ remuneration amounted to $162,181 and $135,450for the years ended December 31, 2012 and 2011, respectively, which are recognized asoperating costs and operating expenses based on the net income within the rangestipulated in the Group’s Articles of Incorporation in consideration of the legal reserveand other factors. Information on the appropriation of the Company’s employees’bonus and directors’ and supervisors’ remuneration as proposed by the Board ofDirectors and approved by the stockholders will be posted in the “Market ObservationPost System” at the website of the Taiwan Stock Exchange.

G. As of December 31, 2012 and 2011, the undistributed earnings are as follows:

December 31,2012 2011

Before December 31, 1997On or after January 1, 1998

(a) Earnings that have not been imposed 10% tax(b) Earnings that have been imposed 10% tax

H. As of December 31, 2012 and 2011, the imputation tax credit account balance were$304,413 and $286,371, respectively, and the estimated and actual creditable tax ratio in2012 and 2011 were 7.06% and 6.49%, respectively.

(27) Earnings per share

Earnings per share for common stockholders are as follows:For the year ended December 31, 2012

Consolidated net incomeattributable to equity

holders of the Company

Weightedaverage

outstandingcommon shares

Earnings per share(in dollars)

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


Consolidated net income

Common stock equivalents withpotential dilutive effect:Employee stock options

Employees’ bonus

Diluted EPS



58


Consolidated net incomeattributable to equity

holders of the Company

Weightedaverage

outstandingcommon shares

Earnings per share(in dollars)

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



Common stock equivalents withpotential dilutive effect:Employees’ stock options

Employees’ bonus

Diluted EPS


(28) Treasury stock

As of December 31, 2012 and 2011, the Company’s common stock owned by its subsidiariesamounted to $346,912. The shares, total cost and market value of the Company’s commonstocks owned by its subsidiaries are as follows:


(in thousands)Cost

(in dollars)Market value(in dollars)



(in thousands)Cost

(in dollars)Market value(in dollars)


(29)Securities sales revenue and cost


Short-term securities sales revenueLong-term securities sales revenue

Short-term securities costLong-term securities cost

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(30)

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5. RELATED PARTY TRANSACTIONS(1) Names and relationship of related parties

Names of related parties Relationship with the Company Names of related parties Relationship with the CompanyTeco Nanotech Co., Ltd. Note 1 Tension Envelope Taiwan Co., Ltd. An investee company accounted

(Teco Nanotech) (Tension) for under the equity methodRoyal Host Taiwan Co., Ltd. An investee company accounted Universal Mailing Service Co., Ltd.

(Royal) for under the equity method (Universal)Tung Pei Industrial Co., Ltd.

(Tung Pei)Teco Information International

Investment Corp.Tecom Co., Ltd. (Tecom) (Teco Information)E-Value Commerce Co., Ltd. Note 2 Unison Service Corporation (Unison)

(E-Value) An investee company accounted Taiwan Pei Li Tone Co., Ltd.Samwha Industrial Systems Co., for under the equity method (Pei Li Tone)

Ltd. (Samwha) Information Technology Total ServicesTA Associates International Pte Ltd. (Hang Zhu) Co., Ltd.

(TA Associates) (ITTS Hang Zhu)E-Tone Technology Co., Ltd. Information Technology (Wuxi) Co.,

(E-Tone) Ltd. (ITTS Wuxi)Creative Sensor Inc. Royal Park Co., Ltd. (Royal Park)

(Creative Sensor) An-Hubbell-Taian Co., Ltd.Taian Electric Co., Ltd. (Taian) (An-Hubbell)Taian Shen Electric Co., Ltd. Tai-An International Trading

(Taian Shen) (Shanghai) Co., Ltd.Perkilangen Electric Aian Jaya Sdn. (Tai-An (Shanghai))

Bhd. (Perkilangen) Antech Automation Corp.PT. Taian Electronic Indonesia (Antech)

(PT. Taian) Sichuan Teco Changhong PrecisionAn-Sheng Travel Co., Ltd. Co., Ltd. (Sichuan Teco)

(An Sheng) Jason Technology (Asia) Co., Ltd.Teco Appliance (H.K.) Co., Ltd. (Jason Technology)

(Teco Appliance) Information Technology Total Service

Century Development Corporation (BVI) Co., Ltd. (ITTS BVI)(Century Development) Hubbell-Anmex International(s) Pte.

United Development Corporation Ltd. (Hubbell Anmex)Ltd. (United Development) Unison Services (BVI) Corporation

Lien Chang Electronic Enterprise (Unison Services)Co., Ltd. (Lien Chang) GreyBack International Property Inc.

Titco International Corporation (The company was liquidated in (GreyBack)(Titco) April 2012) Ching Chi International Limited

Yaskawa Teco Motor Engineering An investee company accounted (Ching Chi)Co. (Yaskawa) for under the equity method Teco Group Science-Technology

Vmax Telecom Co., Ltd. (Vmax) Note 3 (Hang Zhou) Co., Ltd.TECO (PHILIPPINES) 3C & An investee company accounted (Teco Hang Zhou)APPLIANCES, INC. for under the equity method EcoElectric International Co., Ltd.(TECO 3C) (EcoElectric International)

TA Associates International Pte Ltd. Nanchang Dong-Huan Management(TA Associates) & Consulting Co., Ltd.

Information Technology Total (Nanchang Dong-Huan)Services (Xiamen) , Ltd. Jianxi Teco-Lead PM Generetor

Manufacturing Co., Ltd.Note 1 : The Company invested in the capital increase of Teco Nanotech on January, 2012 resulting in acquiring controlling interests. As a result, Teco

Nanotech is included in the consolidated financial statements.Note 2 : The Company invested in the capital increase of Teco Nanotech on November, 2012 resulting in acquiring controlling interests. As a result, Teco

Nanotech is included in the consolidated financial statements.Note 3 : The Company lost significant influence in February, 2012. As a result, Vmax is no longer a related party.


Names of related parties Relationship with the Company Names of related parties Relationship with the CompanyTaiwan Glass Industry Corporation An investee company accounted Teco Image System Co., Ltd. Related party in substance

for under the equity method (Teco Image)TECO Middle East Electric and Baycom Opto-electronics Technology (Note2)

Machinery Limited Co. (TME) Co., Ltd. (Baycom)TTMC Co,.Ltd. Xian Lao Man Co., LTD. An investee company accountedVIBO Telecom Inc (VIBO) (The company was liquidated in Indirectly for under the equity method

September 2012) Kouraku Co., LTDNeovideo Technology Corporation An investee company accounted

(Neovideo Technology) for under the equity methodQingdao Jie Zheng Property Service &Management Company

A-Tel Inc. (A-Tel)Taiwan Litec Material Co.,Ltd (The company was liquidated in Tecom International Investment (Note2)

(Litec Material) August 2012) Co., Ltd. (Tecom International)MOS Burger Australia Pty Ltd. An investee company accounted Asia Pacific Telecom Co., Ltd. The chairman is the same as the

( Australia MOS ) for under the equity method (Asia Pacific Telecom) CEO of the CompanyKuenling Machinery Refrigerating An investor in a joint venture An-Shin Food Service Co., Ltd. The director is the same as

Co., Ltd. with the Company(Note1) (An-Shin) the Company(Kuenling Refrigerating)

Yuban & Co. (Yuban)Finetec Century Corporation

Note1 According to EITF 99-371 of the Accounting Rresearch and Development Foundation, Kuenling Refrigerating and Yuban & Co. were no longerrelated parties after the EITF was released.

Note 2 : The Company invested in the capital increase of Teco Nanotech on November, 2012 resulting in acquiring controlling interests. As a result, Teco

Nanotech is included in the consolidated financial statements.


(2) Significant transactions and balances with related parties

A. Sales


Amount



Asia Pacific TelecomTaian ShenYaskawaOthers

The sales terms, including pricing and collections, were negotiated in considerationof cost, market, competitors and other factors. The unrealized gain fromdownstream sales amounting to $14,439 and $6,952 for the years ended December31, 2012 and 2011, respectively, have been eliminated and listed as other currentliabilities.

B. Construction revenue


Amount



Century Development

These construction revenues are recognized under the percentage of completionmethod according to construction contracts, which were negotiated in considerationof the general market price and other factors.

C. Purchases


Amount

% of netoperating

costs Amount

% of netoperating

costsYaskawaOthers

The purchase terms, including pricing and payment, were negotiated in considerationof the general market price and other factors.


D. Compensation of directors and management personnel

Total compensation expenses were $376,489 and $384,188 for the years endedDecember 31, 2012 and 2011, respectively, including estimated bonuses to beappropriated from 2012 earnings with the actual amount to be finalized and approvedupon the resolution of the shareholders during their meeting in 2012. The otherinformation will be available in the annual report for the shareholders’ meeting.

E. Notes receivable-net

December 31,2012 2011

Amount




relatedparties)

Taian ShenOthers

F. Accounts receivable-net

December 31,2012 2011

Amount

% ofaccounts



% ofaccounts


relatedparties)

Asia Pacific TelecomOthers

Less : other receivablesallowance for doubtfulaccounts

As of December 31, 2012 and 2011, accounts receivable amounting to $91,903 and$0, respectively, were reclassified to other receivables as their aging were over thenormal credit term.

G. Other receivables

(A) Financing

For the year ended December 31, 2012Maximum balance Ending Interest InterestDate Amount Balance Rate Income Receivable

Royal Jan. 2012


64

For the year ended December 31, 2011Maximum balance Ending Interest InterestDate Amount Balance Rate Income Receivable

Royal Dec. 2011

(B) Overdue accounts receivables

December 31,2012 2011

Amount




relatedparties)

Sichuan ChanghongOthers

(C) Others

December 31,2012 2011

Amount




relatedparties)

Teco WhirlpoolTeco NanotechOthers

Less: allowance for doubtfulaccounts

credit balance of long-termequity investments

Other receivables mainly consist of receivables from leased property, etc.

H. Notes payable

December 31,2012 2011

Amount

% of notespayable

(includingrelatedparties) Amount

% of notespayable

(includingrelatedparties)

Century DevelopmentOthers

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I. Accounts payable

December 31,2012 2011

Amount

% ofaccountspayable


% ofaccountspayable


Tung PeiOthers

J. Accrued expenses

December 31,2012 2011

Amount

% ofaccountspayable


% ofaccountspayable


ITTS (Hangzhou)Others

K. Partial construction billings

December 31,2012 2011

Amount

% ofpartial

constructionbillings Amount

% ofpartial

constructionbillings

Century Development

Partial construction billings are receipts in advance from the air conditioner and thecybernation construction of Nan-Kang Software Park.

L. Receipts in advance (listed as other liabilities)

December 31,2012 2011

% ofother

liabilities

% ofother

liabilitiesAmount AmountTecom International

The receipts in advance represent the initial payment for the proposed sale of theshares of Baycom Opto-Electronics Technology Co., Ltd. to Tecom International.The selling price was determined by negotiation.


66

M. Endorsements and guarantees

December 31,2012 2011

TMEOthers

N. Operating lease transactions

For the years ended December 31,

Location Leased property Lessee 2012 2011Nankang, Taipei Building Tecom, etc.Taoyuan Land, building

and equipmentTeco ImageSystem, etc.

Songjiang, Taipei Building An-Shin

Other Building An-Shin, etc.

Rent was determined by negotiation and was collected pursuant to the provisionsset forth in the contract.


6. DETAILS OF PLEDGED ASSETS

December 31,

Assets 2012 2011 PurposePledged assets-

Available-for-sale financial assets-currentInnolux Corporation Commercial papers payable and

short-term loansNotes receivable Short-term loansAccounts receivable Short-term loansOther financial assets-currentDemand deposits Merchandise loans, Provisional

seizure Guarantee ofcompensation, Short-term loans,

exercise guarantee forconstruction, warranty margin,Engineering bond , and tariff

guaranteeTime deposits Short-term loans, engineering

guarantees, customs securitydeposit, warranty margin and

exercise guarantee forconstruction

Certificate of deposits Exercise guarantee forconstruction

Inventories Short-term loansAvailable-for-sale financial assets

-non-currentTeco Image System Co., Ltd. Commercial papers payable and

short-term loansFar Eastone Telecommunications Co., Ltd.

Innolux Corporation Long-term loansFinancial assets carried at cost-current

Taiwan High Speed Rail Corporation Long-term loansLong-term equity investments accounted for

under the equity methodCreative Sensor Short-term loans

Century Development

Fixed assets and leased assetsLand Long-term loans, short-term

loansBuildingsConstruction in progress and prepaymentsfor equipment

Short-term loans

Refundable deposits Exercise guarantee forconstruction and customs

security deposit and warrantymargin

Restricted assets False compensation seizureguarantee

Treasury stock Short-term loans


7. COMMITMENTS AND CONTINGENT LIABILITIES

In addition to those disclosed in Notes 4(11), 4(21) and 5, the significant commitmentsand contingent liabilities of the Group are as follows:

A. As of December 31, 2012, the outstanding letters of credit for materials andequipment purchases was $690,972.

B. As of December 31, 2012, the total purchase contracts for machinery and equipmentwith various companies amounted to $755,189, of which $468,169 had been paid(listed as prepayment for equipment).

C. The Company’s subsidiaries have entered into lease agreements for the plants,warehouse and offices. As of December 31, 2012, the future minimum rentalpayments are as follows:

Lease period AmountJanuary 1, 2013~December 31, 2013January 1, 2014 and afterwards

D. On September 30, 2011, the Company’s subsidiary—Tecom International applied tothe Taiwan Taoyuan District Court (the “Court”) for a provisional seizure on theproperty of PointRed Limited (“PointRed”) within a limit of $30,000, becausePointRed failed to fulfill the payment for its purchase of radio frequency remoteequipment from Tecom International. On October 16, 2011, the application wasapproved by the Court. So Tecom International applied for compulsoryenforcement for seizure on November 7, 2011, and was approved to seize PointRed’sproperty in the Taoyuan Farglory bonded warehouse and its bank deposits.Although PointRed disagreed to the Court’s decision and raised an objection to theCourt, it was dismissed. Therefore, PointRed raised another counter-appeal andobjection to the Court on January 20 and February 2, 2012, respectively. Inaddition, Tecom International filed a lawsuit on December 19, 2011 to ask for acompensation of US$7,238,270 from PointRed for this case, and to request anadvance payment of the compensation for US$16,000. The amount of advancepayment was requested for a change to US$1,050,000 on March 13, 2012. As ofMarch 26, 2013, the cases above were still in trail in the Court.

E. On July 26, 2012, Tecom International filed a lawsuit against Veetime Corp. withTaiwan District Court (the “Court”), because Veetime Corp. did not pay it a balanceof $16,352 under the contract for its sale of interest in Vmax to Veetime Corp. Asof March 26, 2013, this case was still in trail in the Court.


F. In August, 2012, Rullingnet Corporation Limited (“Rullingnet”) filed a lawsuitagainst Tecom International with Taiwan HsinChu District Court (the “Court”) to askfor termination of all ‘VL-1001’ purchase contracts signed with Tecom Internationaland a compensation of $50,492, for the ‘VL-1001’ products it commissioned TecomInternational to design and manufacture were defective, lots of consumers returnedthose products, but Tecom International did not fulfill fixing obligations. However,Tecom International believes that it has fulfilled all contract obligations, soRullingnet has no reason to ask for terminating those purchase contracts; conversely,Rullingnet should retrieve the rest goods it purchased and do the payment inaccordance with the contracts. As of March 26, 2013, this case was still in trail inthe Court.

G. On September 12, 2012, the Company’s indirect subsidiary—BaycomOpto-Electronics Technology Company Limited got a notice from Taiwan HsinChuDistrict Court (the “Court”), informing it has been brought into as a defendant of alawsuit filed by Upc Cablecom GmbH (“Cablecom”) relating to a compensationrequest for fiber optic cables sold by Baycom to The Swedish supplies Windsor Co.,Ltd. on September 29, 2000 were defective. On December 26, 2012, the attorneysappointed by Baycom made a statement of defense that the defect inspection reportwas the only evidence brought by Cablecom to prove those cables delivered byBaycom were defective; however, since it had been 12 years from that delivery, itwas extremely hard for both sides to bring new evidence to prove the quality of thosecables. Thus, the final decision for this case might depend on whether the defectinspection report above would be recognized by the Court or not. In addition, asthe defect inspection report pointed that those cables had undergone a processing,and Cablecom also did not deny the processing was made after delivery, Baycombelieves the defect inspection report should not be enough to be a sufficient evidenceto prove those cables were defective before delivery. As of March 26, 2013, thiscase was still in trail in the Court.

8. MAJOR CATASTROPHE

None.

9. SUBSEQUENT EVENTS

As of March 26, 2013, the book value of conversion bonds amounted to $353,400 havebeen converted into common stocks to 3,534,000 shares.

10. OTHERS

(1) Certain accounts in the 2011 consolidated financial statements were reclassified toconform with the 2012 consolidated financial statement presentation.


70

(2)

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The methods and assumptions used to estimate the fair values of the above financialinstruments are summarized as follows:

A. For short-term instruments, the fair values were determined based on theircarrying values because of the short maturities of the instruments. This methodwas applied to cash and cash equivalents, notes and accounts receivable(including related parties), other receivables (including related parties), otherfinancial assets-current, short-term loans, notes and accounts payable (includingrelated parties), accrued expenses and other payables (including related parties).

B. For refundable deposits, long-term loans (including current portion) andguarantee deposits received, the fair value was determined based on theircarrying values because the discounted cash values are approximately the sameas the carrying values.

C. The fair value of financial assets at fair value through profit or loss andavailable-for-sale financial assets was based on quotations in the active market.

D. The fair value of derivative financial instruments which include unrealized gainsor losses on unsettled contracts was determined based on the amount to bereceived or paid assuming that the contract was settled as of the reporting date.The fair value was provided by the counterparty financial institution.

(3) For available-for-sale financial assets, the amount of gain (loss) recognized directlyin equity during the years ended December 31, 2012 and 2011 was $351,245 and($761,303), respectively. As of December 31, 2012 and 2011, the financialliabilities with cash flow risk due to the change of interest amounted to $10,838,277and $13,631,976, respectively.

(4) Procedure of financial risk control and hedge

A. The main objective of financial risk control and hedge strategy is to reduce theloss of assets or liabilities resulting from the exchange rate and interest ratefluctuations. The Group achieves financial hedge by entering into derivativesand all activities of hedge follow the principles listed below to achieve riskcontrol:(A) Nature hedge.

(B) Not eroding the profit of the main business.

(C) Not entering into financial instruments other than the transaction currency.

(D) To execute the stop-loss point.

(E) To execute the operating process.

B. In monitoring control, the Board of Directors enacted procedures and authorizedmanagement to operate in compliance with the operating strategy and to ensure


that the risk of these transactions is within the tolerable range of the Group. If anyunusual event occurs, necessary actions should be taken and reported to the Board ofDirectors immediately.

(5) Information of major financial risk

A. Market risk

(A) Some of the Company’s transactions involve non-functional currencies. Theforeign currency denominated assets and liabilities which are significantlyinfluenced by the effect of exchange rate fluctuation are as follows:

December 31, 2012 December 31, 2011Foreigncurrencyamount

(in thousands)Exchange rate

(in dollars)

Foreigncurrencyamount

(in thousands)Exchange rate

(in dollars)Financial assetsMonetary items

USD:TWDUSD:RMBJPY:TWDUSD:CADUSD:SGDUSD:MYRUSD:P PESOEUR:TWDAUD: TWD

Financial liabilitiesMonetary items

USD:TWDJPY:TWDUSD:CADUSD:RMBUSD:AUDUSD:SGDUSD:VND

(B) The investments in equity financial instruments owned by the Group are exposedto price risk, but the possibility of market risk is low as a result of the setting ofa stop-loss point.

(C) The loans mostly belong to adjustable rate mortage and the Group adjusts theloan position at market rates. Therefore, the Group expects no significantmarket risk.

(D) The Group’s major import and export transactions are conducted in foreigncurrencies. The change in fair value will be caused by fluctuations in theforeign exchange rate. However, the amounts and periods of the Group’saccounts receivable and accounts payable are equivalent, so the market risk


could be offset. If the gap is raised, the Group would adopt the forwardcontract to hedge the risk, so the Group estimates there would be no market risk.

B. Credit risk

(A) The equity financial instruments have active markets and are transacted withfinancial institutions which are all in good credit standing. Therefore, thecredit risk is low.

(B) The receivables are all approved as a result of rigorous credit review procedures,and some of which are required to have adequate insurance or provide necessarycollaterals. Therefore, the Group expects no significant credit risk.

(C) Loan guarantees provided by the Group are in compliance with the Group’s“Procedures for Provision of Endorsements and Guarantees” and are provided toaffiliated companies and investees which the Group owns directly or indirectlymore than 50% ownership or with which the Group has normal businesstransactions. As the Group is aware of the credit conditions of these companies,it has not required to provide collateral for the loan guarantees. In the eventthat these companies fail to comply with banks’ loan agreements, the maximumloss to the Group is equal to the total loan guarantee amount.

C. Liquidity risk

The investments in equity financial instruments which have active markets areexpected to be sold easily and quickly in the market at the price close to the fairvalue. The investments in equity financial instruments without active markets areexposed to liquidity risk.

D. Cash flow risk due to changes in interest rate

The loans are mostly issued at floating interest rate. Accordingly, the future cashflow will fluctuate with the yield rate of these debt instruments. Therefore, there iscash flow risk due to changes in interest rate.


74

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www.teco.com.tw 239

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www.teco.com.tw 241

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www.teco.com.tw 255

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www.teco.com.tw 257

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www.teco.com.tw 263

99

B.S

igni

fican

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www.teco.com.tw 265

101

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(Con

tinue

d)


102

A-2

.For

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sact

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(Not

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www.teco.com.tw 267

103

B.F

orth

eye

aren

ded

Dec

embe

r31,

2011

:

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sact

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Num

ber

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(Con

tinue

d)


104

B-1

.For

the

year

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dD

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ontin

ued)

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Tran

sact

ions

Num

ber

(Not

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tinue

d)

www.teco.com.tw 269

105

B-2

.For

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12. SEGMENT FINANCIAL INFORMATION

(1) General information

The Company operates and makes decisions on the basis of products and service line,which the Company uses to identify reportable segments.The Company’s reportable segments include motor division and the home appliancedivision. The motor division primarily engages in the manufacturing and sales of motorsand generators. The home appliance division primarily engages in the manufacturing,installation, sales and service of home appliances.

(2)Segment performance

The Company uses the operating income as the basis for segment performance assessment.The operating income excludes non-recurring expenditures, unrealized gain or loss onfinancial instruments, interest income and interest expenses.

www.teco.com.tw 271

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(4) Reconciliation for segment profit (loss), assets and liabilitiesSales between segments are carried out at arm’s length. The revenue from externalparties reported to the chief operating decision-maker is measured in a mannerconsistent with that in the income statement.

A reconciliation of adjusted EBITDA to profit before tax and discontinued operationsis provided as follows:


Adjusted operating income of reportable segmentsAdjusted operating loss of other operating

segmentsTotal segmentsUnrealized loss on financial instrumentsInterest incomeInterest expenseInvestment income accounted for under the equity

methodImpairment lossOthersIncome before income tax

The amounts provided to the chief operating decision-maker, with respect to totalassets are measured in a manner consistent with that in the balance sheet. Investmentin shares (classified as available-for-sale financial assets, financial assets carried at cost,long-term equity investments accounted for under the equity method or financial assetsat fair value through profit or loss) held by the Group are not considered to be segmentassets as these are managed by the treasury function.

Reportable segments’ assets are reconciled to total assets as follows:


Segment assets of reportable segmentsOther segments assetsUnallocated:

Deferred income tax assetsAvailable-for-sale financial assetsFinancial assets carried at costLong-term equity investments accounted for

under the equity methodFinancial assets at fair value through profit

or lossGeneral assets

Total assets


The amounts provided to the chief operating decision-maker with respect to totalliabilities are measured in a manner consistent with that in the balance sheet. TheGroup’s interest-bearing liabilities are not considered to be segment liabilities as theseare managed by the treasury function.Reportable segments’ assets are reconciled to total liabilities as follows:


Segments liabilities of reportable segmentsOther segments liabilitiesUnallocated:

Deferred income tax liabilitiesIncome tax payableShort-term loansBonds PayableLong-term loansFinancial liabilities at fair value through

profit or lossTotal liabilities

(5) Revenue information by categoryRevenue from external customers are derived from the manufacture, installation,wholesale, retail of various types of electrical and mechanical equipment.

Breakdown of the revenue from all sources is as follows:


Sales revenuesConstruction revenuesService revenuesOthersTotal

(6) Information by geographic areas

Information by geographic areas of the Company for the years ended December 31,2012 and 2011 is as follows:


RevenuesNon-current

Assets RevenuesNon-current

AssetsTaiwanAmericaChinaOthersTotal


(7) Information on major customers

No single customer accounts for more than 10% of the consolidated operating revenuefor the years ended December 31, 2012 and 2011.

13. Disclosures relating to the adoption of IFRSsPursuant to the regulations of the Financial Supervisory Commission, Executive Yuan,R.O.C., effective January 1, 2013, a public company whose stock is listed on the TaiwanStock Exchange Corporation or traded in the GreTai Securities Market should preparefinancial statements in accordance with the International Financial Reporting Standards(“IFRSs”), International Accounting Standards (“IASs”), and relevant interpretations andinterpretative bulletins that are ratified by the Financial Supervisory Commission.The Company discloses the following information in advance prior to the adoption ofIFRSs under the requirements of Jin-Guan-Zheng-Shen-Zi Order No. 0990004943 of theFinancial Supervisory Commission, dated February 2, 2010 :


(1) Major contents and status of execution of the Company’s plan for IFRSs adoption:The Company has formed an IFRSs group headed by the Company’s general manager,which is responsible for setting up a plan relative to the Company’s transition to IFRSs.The major contents and status of execution of this plan are outlined below:

Working Items for IFRSs Adoption Status of Execution1. Formation of an IFRSs group Completed2. Setting up a plan relative to the Company’s transition to IFRSs3. Identification of the differences between current accounting

policies and IFRSs4. Identification of consolidated entities under the IFRSs framework5. Evaluation of the impact of each exemption and option on the

Company under IFRS 1 - First-time Adoption of InternationalFinancial Reporting Standards

6. Evaluation of needed information system adjustments7. Evaluation of needed internal control adjustments8. Establish IFRSs accounting policies9. Selection of exemptions and options available under IFRS 1 –

First-time Adoption of International Financial ReportingStandards

10. Preparation of statement of financial position on the date oftransition to IFRSs

11. Preparation of IFRSs comparative financial information for2012

In progress

12. Completion of relevant internal control (including financialreporting process and relevant information system) adjustments

Completed

(2) Material differences that may arise between current accounting policies used in thepreparation of financial statements and IFRSs and “Rules Governing the Preparation ofFinancial Statements by Securities Issuers” that will be used in the preparation of financialstatements in the future and the effects of those differences are outlined below:

The Company uses the IFRSs already recognized currently by the Financial SupervisoryCommission and the “Rules Governing the Preparation of Financial Statements bySecurities Issuers” that are expected to be applied in 2013 as the basis for evaluation ofmaterial differences in accounting policies as mentioned above. However, the Company’scurrent evaluation results may be different from the actual differences that may arise whennew issuances of or amendments to IFRSs that are subsequently recognized by theFinancial Supervisory Commission or amendments to the “Rules Governing the Preparationof Financial Statements by Securities Issuers” come in the future and therefore, the actualeffects of those differences may also change.


The effects of material differences identified by the Company that may arise betweencurrent accounting policies used in the preparation of financial statements and IFRSs and“Rules Governing the Preparation of Financial Statements by Securities Issuers” that willbe used in the preparation of financial statements in the future, and the effects ofexemptions selected by the Company under IFRS 1 - First-time Adoption of InternationalFinancial Reporting Standards (refer to Note 13(3)) are set forth below:

A. Reconciliation of balance sheet accounts with material differences in differentaccounting policies adopted as at January 1, 2012 and reasons for reconciliation areoutlined below:

ROC GAAP Adjustments IFRSs RemarkCash and cashequivalentsAvailable-for-salefinancial assetsFinancial assets carriedat costOther financialassets-currentDeferred income taxassets-currentLong-term equityinvestments accountedfor under the equitymethodInvestment propertyProperty, plant andequipmentDeferred pension costsLeased assetsIdle assets

Deferred income taxassets-non-current

Long-term prepaidrentsOther assetsOthers

Total assets

Accrued expenses

Provision-currentOther liabilities currentLand value incrementalreserveAccrued pensionliabilities


ROC GAAP Adjustments IFRSs RemarkDeferred income taxliabilities-non-currentProvision-non-currentOthers liabilities- othersOthers

Total liabilitiesCapital reservesSpecial reserve

Undistributed earnings

Cumulative translationadjustmentsUnrecognized pensioncostUnrealized gain or losson financial instrumentsUnrealized revaluationincrementsTreasury stock

Minority interests

OthersTotal stockholders’equity


(A) The Company’s time deposits that are due after three months should not be classifiedas cash and cash equivalents under IAS. Therefore, the Company reclassifies thosetime deposits amounting to $9,906 to the “other financial assets - current” account atthe date of transition to IFRSs.

(B) In accordance with the “Rules Governing the Preparation of Financial Statements bySecurities Issuers”, dated July 7, 2011, unlisted stocks and emerging stocks held bythe Company are measured at cost and recognized in “Financial assets carried at cost”.However, in accordance with IAS 39, “Financial Instruments: Recognition andMeasurement”, investments in equity instruments without an active market but withreliable fair value measurement (i.e. the variability of the estimation interval ofreasonable fair values of such equity instruments is insignificant, or the probability forthese estimates can be made reliably) should be measured at fair value. Therefore,the Company reclassifies unlisted stocks and emerging stocks from “Financial assetscarried at cost” to “Available-for-sale financial assets” at the date of transition toIFRSs in accordance with the amended “Rules Governing the Preparation of FinancialStatements by Securities Issuers”, dated December 22, 2011, and decreases othercomprehensive income and minority interest by $449,007 and $7,316, respectively,based on the difference between the fair value and previous carrying amount of suchstocks at the date of transition to IFRSs.

(C) In accordance with current accounting standards in R.O.C., a deferred tax asset orliability should, according to the classification of its related asset or liability, beclassified as current or noncurrent. However, a deferred tax asset or liability that isnot related to an asset or liability for financial reporting should be classified as currentor noncurrent according to the expected time period to realize or settle a deferred taxasset or liability. However, under IAS 1, “Presentation of Financial Statements”, anentity should not classify a deferred tax asset or liability as current. Therefore, theCompany reclassifies deferred tax asset - current amounting to $463,899 to the“Deferred tax asset - noncurrent” account at the date of transition to IFRSs.

(D) In accordance with current accounting standards in R.O.C., the excess of theaccumulated benefit obligation over the fair value of the pension plan (fund) assets atthe balance sheet date is the minimum amount of pension liability that is required tobe recognized on the balance sheet (“minimum pension liability”). However, IAS 19,“Employee Benefits”, has no regulation regarding the minimum pension liability.Therefore, the Company reverses the entry of “minimum pension liability” bydecreasing accrued pension liabilities, deferred pension cost and net loss onunrecognized pension cost by $68,868, $40,753 and $85,308, respectively, andincreasing long-term equity investments accounted for under the equity method andminority interest by $58,173 and $980, respectively, at the date of transition to IFRSs.

(E) In accordance with current accounting standards in R.O.C., the Company’s propertythat is leased to others and whose future use is not yet determined is presented in the‘Other assets’ account. In accordance with IAS 40, “Investment Property”, propertythat meets the definition of investment property is classified and accounted for as‘Investment property’. Therefore, the Company decreases the assets leased to othersand idle assets by $2,273,587 and $104,466, respectively, and increases property, plantand equipment - net and investment property by $159,853 and $2,218,200,respectively, at the date of transition to IFRSs.


(F) The current accounting standards in R.O.C. do not specify the rules on the recognitionfor the cost of accumulated unused compensated absences. The Companyrecognizes such cost as expense upon actual payment. However, IAS 19, “EmployeeBenefits”, requires that cost of accumulated unused compensated absences should beaccrued as expense at the end of the reporting period. Therefore, the Companydecreases retained earnings and minority interest by $60,572 and $7,767, respectively,and increases accrued expenses and deferred tax assets by $82,336 and $13,997,respectively, at the date of transition to IFRSs.

(G) The discount rate used to calculate pensions shall be determined with reference to thefactors specified in R.O.C. SFAS 18, paragraph 23. However, IAS 19, “EmployeeBenefits”, requires an entity to determine the rate used to discount employee benefitswith reference to market yields on high quality corporate bonds that match thecurrency at the end day of the reporting period and duration of its pension plan; whenthere is no deep market in corporate bonds, an entity is required to use market yieldson government bonds (at the end day of the reporting period) instead. In accordancewith the Company’s accounting policies, unrecognized transitional net benefitobligation should be amortized on a straight-line basis over the average remainingservice period of employees still in service and expected to receive pension benefits.However, as the Company is the first-time adopter of IFRSs, the transitionalprovisions in IAS 19, “Employee Benefits”, are not applicable to the Company.Accordingly, the Company has no unrecognized transitional liability. The Companyhas elected to recognize all cumulative actuarial gains and losses for all employeebenefit plans in ‘Retained earnings’. Therefore, the Company decreases retainedearnings and minority interest by $450,423 and $13,587, respectively, and increasesaccrued pension liabilities and deferred tax assets - non-current by $559,045 and$95,035, respectively, at the date of transition to IFRSs.

(H) Regarding tax rates that shall apply to the deferred tax assets or liabilities associatedwith unrealized gains or losses arising from transactions between parent company andsubsidiaries by buyer tax rate or seller tax rate, the current accounting standards inR.O.C. do not specify the rules for this issue; while, the Company adopts seller taxrate for computation. However, under IAS 12, “Income Taxes”, temporarydifferences in the consolidated financial statements are determined by comparing thecarrying amounts of assets and liabilities in those statements and applicable taxationbasis. The Company’s taxation basis is determined by reference to the Group entities’income tax returns. Accordingly, buyer tax rate shall apply to the deferred tax assetsor liabilities in the consolidated financial statements. Therefore, the Companyincreases deferred tax assets and retained earnings both by $53,805 at the date oftransition to IFRSs.

(I) The current accounting standards in R.O.C. specify that property, plant and equipmentare stated at the acquisition cost and could be revaluated pursuant to relevant decrees.However, in accordance with IAS 16, “Property, Plant and Equipment”, assetrevaluation is not applied to those assets that are measured subsequently using the costmodel. The Company selects the values of property, plant and equipment that arerevaluated in accordance with ROC GAAP before the date of transition to IFRSs astheir costs recognized at the revaluation date. Therefore, the Company reclassifiesunrealized revaluation increments amounting to $2,655,919 to the ‘Retained earnings’account at the date of transition to IFRSs.


(J) The Company selects to recognize the amount of cumulative translationdifferences arising from foreign operations as zero at the date of transition toIFRSs, and to treat translation differences subsequent to the date of transition toIFRSs in accordance with IAS 21, “The Effects of Changes in Foreign ExchangeRates”. Therefore, the Company decreases cumulative translation differencesby $1,081,867 and increases retained earnings by $1,081,867 at the date oftransition to IFRSs.

(K) The current accounting standards in R.O.C. regulate that reserve for landrevaluation increment tax should be presented under “Reserves - reserve for landrevaluation increment tax”. However, in accordance with IAS 12, “IncomeTaxes”, land revaluation increment tax is in the scope of income taxes, therefore,it should be presented under “Deferred income tax liabilities”. Therefore, theCompany reclassifies reserve for land revaluation increment tax amounting to$1,080,247 to the ‘Deferred income tax liabilities - non-current’ account at thedate of transition to IFRSs.

(L) The current accounting standards in R.O.C. specify that provision for warrantycost is presented under different liability accounts according to its nature.However, IFRSs requires that provision for warranty cost should be presentedseparately in the financial statements. Therefore, the Company reduces accruedexpenses, other current liabilities and other liabilities - other by $103,146,$68,826 and $57,528, respectively, and increases liability provisions - current andliability provisions - non-current by $88,644 and $140,856, respectively, at thedate of transition to IFRSs.

(M) In accordance with current accounting standards in R.O.C., royalties paid on theacquisition of land-use rights is presented under the ‘Other assets’ account. Inaccordance with IAS 17, “Leases”, such royalties meet the definition of long-termoperating leases, so they are presented under the ‘Long-term rental prepayments’account. Therefore, the Company reclassifies other assets amounting to$280,599 to the ‘Deferred expenses’ account at the date of transition to IFRSs.

(N) Upon the first-time adoption of ROC SFAS No. 30, “Accounting for TreasuryStocks”, shares of the Company held by a subsidiary before December 31, 2001should be recognized as treasury stock at book value of a subsidiary’s investmentin the Company, then at the lower of cost or market value. However, inaccordance with IAS 32, “Financial Instruments: Presentation”, those sharesshould be recognized directly as a deduction to equity based on the originalconsideration paid or received. Therefore, the Company increases treasurystock by $26,073 and reduces retained earnings by $26,073 at the date oftransition to IFRSs.

(O) In accordance with current accounting standards in R.O.C., if an investeecompany issues new shares and original shareholders do not purchase or acquirenew shares proportionately, but the investor company does not lose its significantinfluence over the investee company, the investment percentage, and therefore theequity in net assets for the investment that an investor company has invested, willbe changed. Such difference shall be used to adjust the ‘Additional paid-incapital’ and the ‘Long-term equity investments’ accounts. However, inaccordance with IAS 28, “Investments in Associates”, increase in investment


percentage is accounted for as an acquisition of investment; while, decrease ininvestment percentage is accounted for as a disposal of investment and anyrelated disposal gain or loss is recognized. Therefore, the Company reducesadditional paid-in capital by $18,293 and increases retained earnings and deferredtax liabilities - non-current by $15,183 and $3,110, respectively, at the date oftransition to IFRSs.

(P) Due to the transition differences of the investments accounted for under theequity method as explained in Items 2, 6, 7, 8 above, the Company reduceslong-term equity investments accounted for under the equity method, minorityinterest and undistributed earnings and unrealized gain on financial instrumentsby $166,377, $311, $125,155 and $40,911, respectively, at the date of transitionto IFRSs.

(Q) In accordance with the Jin-Guan-Zheng-Fa-Zi Order No. 1010012865, datedApril 6, 2012, the Company sets aside special reserve of $3,737,786 as it selectsto reclassify the transition differences mentioned in Items 9 and 10 above to the‘Retained earnings’ account.

(R) Prepayment on acquisition of property, plant and equipment is presented in‘Property, plant and equipment’ in accordance with the “Rules Governing thePreparation of Financial Statements by Securities Issuers”. However, suchprepayment should be presented in ‘Other non-current assets’ based on its natureunder IFRSs. Therefore, the Company reclassified the prepayment onequipment amounting to $522,735 from ‘Property, plant and equipment’ to ‘Othernon-current assets’ at the date of transition to IFRSs.

B. Reconciliation of balance sheet accounts with material differences in differentaccounting policies adopted as at December 31, 2012 and reasons for reconciliationare outlined below:

ROC GAAP Adjustments IFRSs RemarkCash and cashequivalentsAvailable-for-salefinancial assetsFinancial assets carriedat costOther financialassets-currentDeferred income taxassets-currentLong-term equityinvestments accountedfor under the equitymethodInvestment propertyProperty, plant andequipmentDeferred pension costsLeased assets


ROC GAAP Adjustments IFRSs RemarkIdle assets

Deferred income taxassets-non-current

Long-term prepaid rentsOther assetsOthers

Total assets

Accrued expenses

Provision-currentOther liabilities currentLand value incrementalreserve

Accrued pensionliabilities

Deferred income taxliabilities-non-currentProvision-non-currentOthers liabilities-otherOthers

Total liabilitiesCapital reservesSpecial reserve

Undistributed earnings

Cumulative translationadjustments

Unrecognized pensioncost

Unrealized gain or losson financial instruments


ROC GAAP Adjustments IFRSs RemarkUnrealized revaluationincrementsTreasury stock

Minority interests

OthersTotal stockholders’equity

C. Reconciliation of income statements accounts with material differences in differentaccounting policies adopted as at December 31, 2012 and reasons for reconciliationare outlined below:

ROC GAAP Adjustments IFRSs RemarkOperating revenues

Operating costs

Operating expenses

Operating incomeNon-operatingincome and expensesIncome beforeincome tax

Income tax expense

Consolidated netincome


(A) The company’s time deposits that are due after three months should not beclassified as cash and cash equivalents under IAS. Therefore, the Companyreclassifies those time deposits amounting to $9,910 to the “Other financial assets- current” account on December 31, 2012.

(B) In accordance with the “Rules Governing the Preparation of Financial Statementsby Securities Issuers”, dated July 7, 2011, unlisted stocks and emerging stocksheld by the Company are measured at cost and recognized in “Financial assetscarried at cost”. However, in accordance with IAS 39, “Financial Instruments:Recognition and Measurement”, investments in equity instruments without anactive market but with reliable fair value measurement.(i.e. the variability of theestimation interval of reasonable fair values of such equity instruments isinsignificant, or the probability for these estimates can be made reliably) shouldbe measured at fair value. Therefore, the Company decreases financial assetscarried at cost, unrealized gain or loss on financial instruments and minorityinterests by $8,069,920, $449,007 and $7,316, respectively, increasesavailable-for-sale financial assets by$7,613,597 at the date on January 1, 2012.And decreases financial assets carried at cost $397,633 and increasesavailable-for-sale financial assets, unrealized gain or loss on financial instrumentsand minority interests $113,899, $408,628 and $102,904, respectively, based onthe difference between the fair value and previous carrying amount of such stockson December 31, 2012.

(C) In accordance with current accounting standards in R.O.C., a deferred tax asset orliability should, according to the classification of its related asset or liability, beclassified as current or noncurrent. However, a deferred tax asset or liability thatis not related to an asset or liability for financial reporting should be classified ascurrent or noncurrent according to the expected time period to realize or settle adeferred tax asset or liability. However, under IAS 1, “Presentation of FinancialStatements”, an entity should not classify a deferred tax asset or liability ascurrent. Therefore, the Company reclassifies deferred tax asset - currentamounting to $482,428 to the “Deferred tax asset - non-current” account onDecember 31, 2012.

(D) In accordance with current accounting standards in R.O.C., the excess of theaccumulated benefit obligation over the fair value of the pension plan (fund)assets at the balance sheet date is the minimum amount of pension liability that isrequired to be recognized on the balance sheet (“minimum pension liability”).However, IAS 19, “Employee Benefits”, has no regulation regarding theminimum pension liability. Therefore, the Company reverses the entry of“minimum pension liability” by decreasing accrued pension liabilities, deferredpension cost by $256,214 and $2,921, respectively, and increasing net loss onunrecognized pension cost, long-term equity investments accounted for under theequity method and minority interest by $310,486, $58,173 and $980 respectively,at the date on December 31, 2012.

(E) In accordance with current accounting standards in R.O.C., the Company’sproperty that is leased to others and whose future use is not yet determined ispresented in the ‘Other assets’ account. In accordance with IAS 40, “InvestmentProperty”, property that meets the definition of investment property is classified


and accounted for as ‘Investment property’. Therefore, the Company decreasesthe assets leased to others and idle assets by $2,302,447 and $189,196,respectively, and increases property, plant and equipment - net and investmentproperty by $85,192 and $2,198,443, respectively, on December 31, 2012.

(F) The current accounting standards in R.O.C. do not specify the rules on therecognition for the cost of accumulated unused compensated absences. TheCompany recognizes such cost as expense upon actual payment. However, IAS19, “Employee Benefits”, requires that cost of accumulated unused compensatedabsences should be accrued as expense at the end of the reporting period.Therefore, the Company decreases retained earnings and minority interest by$60,572 and $7,767, respectively, and increases accrued expenses and deferredtax assets by $82,336 and $13,997, respectively. In additional due toaccumulated unused accumulated for unused vacation bouns costs decreasesminority interest and income tax expense by $6,005 and $1,193, and increaseaccrued expenses, deferred tax assets, operating cost and operating expense by$14,254, $2,423, $2,816 and $4,203, respectively on December 31, 2012.

(G) In accordance with the Company’s accounting policies, unrecognized transitionalnet benefit obligation should be amortized on a straight-line basis over theaverage remaining service period of employees still in service and expected toreceive pension benefits. However, as the Company is the first-time adopter ofIFRSs, the transitional provisions in IAS 19, “Employee Benefits”, are notapplicable to the Company. Accordingly, the Company has no unrecognizedtransitional liability.The Company has elected to recognize all cumulativeactuarial gains and losses for all employee benefit plans in ‘Retained earnings’ atthe opening IFRS balance sheet date.Therefore, the Company decreased retainedearnings and minority interest by $450,423 and $13,587, respectively, andincreased accrued pension liabilities and deferred income tax assets - non-currentby $559,045 and $95,035, respectively, on January 1, 2012. Further, theCompany’s consolidated subsidiary, Great Teco Whirlpool Co., Ltd, wasliquidated and dissolved on June 13, 2012; therefore, the Company increasedincome tax expense and minority interest by $1,470 and $4,788, respectively, anddecreased accrued pension liabilities, operating expenses and deferred income taxassets - non-current by $14,420, $8,651 and $2,451, respectively, on December 31,2012. In additional due to Tecom International invested in the capital increase at2012, resulting in acquiring controlling interests. As a result, included in theconsolidated financial statements. Decrease retained earnings by $35,374, andincrease accrued pension liabilities by $35,374.

(H) The discount rate used to calculate pensions shall be determined with reference tothe factors specified in R.O.C. SFAS 18, paragraph 23. However, IAS 19,“Employee Benefits”, requires an entity to determine the rate used to discountemployee benefits with reference to market yields on high quality corporate bondsthat match the currency at the end day of the reporting period and duration of itspension plan; when there is no deep market in corporate bonds, an entity isrequired to use market yields on government bonds (at the end day of thereporting period) instead. Therefore, the Company increases minority interest andincome tax expense by $1,467 and $12,424, respectively, and decreases accruedpension liabilities, deferred tax assets, operating cost and operating income by


$74,848, $12,724, $31,155 and $41,926, respectively, on December 31, 2012.

(I) Regarding tax rates that shall apply to the deferred tax assets or liabilitiesassociated with unrealized gains or losses arising from transactions betweenparent company and subsidiaries by buyer tax rate or seller tax rate, the currentaccounting standards in R.O.C. do not specify the rules for this issue; while, theCompany adopts seller tax rate for computation. However, under IAS 12,“Income Taxes”, temporary differences in the consolidated financial statementsare determined by comparing the carrying amounts of assets and liabilities inthose statements and applicable taxation basis. The Company’s taxation basis isdetermined by reference to the Group entities’ income tax returns. Accordingly,buyer tax rate shall apply to the deferred tax assets or liabilities in theconsolidated financial statements. Therefore, the Company increases deferredtax assets and retained earnings by $65,924 and $53,805, respectively, anddecreases income tax expense by $12,119 on December 31, 2012.

(J) The current accounting standards in R.O.C. specify that property, plant andequipment are stated at the acquisition cost and could be revaluated pursuant torelevant decrees. However, in accordance with IAS 16, “Property, Plant andEquipment”, asset revaluation is not applied to those assets that are measuredsubsequently using the cost model. The Company selects the values of property,plant and equipment that are revaluated in accordance with ROC GAAP beforethe date of transition to IFRSs as their costs recognized at the revaluation date.Therefore, the Company reclassifies unrealized revaluation increments amountingto $2,655,919 to the ‘Retained earnings’ account on December 31, 2012.

(K) The Company selects to recognize the amount of cumulative translationdifferences arising from foreign operations as zero at the date of transition toIFRSs, and to treat translation differences subsequent to the date of transition toIFRSs in accordance with IAS 21, “The Effects of Changes in Foreign ExchangeRates”. Therefore, the Company decreases cumulative translation differences by$1,081,867 and increases retained earnings by $1,081,867 on December 31, 2012.

(L) The current accounting standards in R.O.C. regulate that reserve for landrevaluation increment tax should be presented under “reserves - reserve for landrevaluation increment tax”. However, in accordance with IAS 12, “IncomeTaxes”, land revaluation increment tax is in the scope of income taxes, therefore,it should be presented under “deferred income tax liabilities”. Therefore, theCompany reclassifies reserve for land revaluation increment tax amounting to$1,080,247 to the ‘Deferred income tax liabilities - non-current’ account onDecember 31, 2012.

(M) The current accounting standards in R.O.C. specify that provision for warrantycost is presented under different liability accounts according to its nature.However, IFRSs requires that provision for warranty cost should be presentedseparately in the financial statements. Therefore, the Company reduces accruedexpenses, other current liabilities and other liabilities - other by $55,203, $66,846and $59,578, respectively, and increases liability provisions - current and liabilityprovisions - non-current by $75,833 and $105,794, respectively, on December 31,2012.


(N) In accordance with current accounting standards in R.O.C., royalties paid on theacquisition of the land-use rights is presented under the ‘Other assets’ account.In accordance with IAS 17, “Leases”, such royalties meet the definition oflong-term operating leases, so they are presented under the ‘Long-term rentalprepayments’ account. Therefore, the Company reclassifies other assetsamounting to $254,843 to the ‘Long-term rental prepayment’ account onDecember 31, 2012.

(O) Upon the first-time adoption of ROC SFAS No. 30, “Accounting for TreasuryStocks”, shares of the Company held by a subsidiary before December 31, 2001should be recognized as treasury stock at book value of a subsidiary’s investmentin the Company, then at the lower of cost or market value. However, inaccordance with IAS 32, “Financial Instruments: Presentation”, those sharesshould be recognized directly as a deduction to equity based on the originalconsideration paid or received. Therefore, the Company increases treasury stockby $26,073 and decreases retained earnings by $26,073 on December 31, 2012.

(P) In accordance with current accounting standards in R.O.C., if an investeecompany issues new shares and original shareholders do not purchase or acquirenew shares proportionately, but the investor company does not lose its significantinfluence over the investee company, the investment percentage, and therefore theequity in net assets for the investment that an investor company has invested, willbe changed. Such difference shall be used to adjust the ‘Additional paid-incapital’ and the ‘Long-term equity investments’ accounts. However, inaccordance with IAS 28, “Investments in Associates”, increase in investmentpercentage is accounted for as an acquisition of investment; while, decrease ininvestment percentage is accounted for as a disposal of investment and any relateddisposal gain or loss is recognized. Therefore, the Company reduces additionalpaid-in capital by $37,263 and increases retained earnings, deferred tax liabilitiesnon-current and gains on disposal of investments by $15,183, $6,335 and$15,745, respectively, on December 31, 2012.

(Q) Due to the transition differences for the investments accounted for under theequity method as explained in Items 2, 6, 7, 8 above, Therefore, the Companydecreases undistributed earnings, long-term equity investments accounted forunder the equity method and minority interests by $125,155, $112,834 and $311,respectively, and increases unrealized gain or loss on financial instruments by$12,632 at the date on January 1, 2012. And decreases investment incomeaccounted for under the equity method $39,014, unrealized gain or loss onfinancial instruments and long-term equity investments accounted for under theequity method by $9,943, $3,846 and $25,225, respectively, on December 31,2012.

(R) In accordance with the Jin-Guan-Zheng-Fa-Zi Order No. 1010012865, dated April6, 2012, the Company sets aside special reserve of $3,737,786 as it selects toreclassify the transition differences mentioned in Items 10 and 11 above to the‘Retained earnings’ account.

(S) Prepayment on acquisition of property, plant and equipment is presented in‘Property, plant and equipment’ in accordance with the “Rules Governing thePreparation of Financial Statements by Securities Issuers”. However, such


prepayment should be presented in ‘Other non-current assets’ based on its natureunder IFRSs. Therefore, the Company reclassified the prepayment onequipment amounting to $503,570 from ‘Property, plant and equipment’ to ‘Othernon-current assets’ on December 31, 2012.

(T) The Company in accordance with the above-mentioned conversion differences,the total annual consolidated net income due to increase by $5,938, and retainedearnings increased by $ 5,938 on December 31, 2012.

(3) The Company selects the following exemptions in accordance with IFRS 1, “First-timeAdoption of International Financial Reporting Standards” and “Rules Governing thePreparation of Financial Statements by Securities Issuers” that are expected to be appliedin 2013:

A. Business combinationsThe Company selects not to apply the requirements in IFRS 3, “BusinessCombinations”, retrospectively to business combinations that occur before the date oftransition to IFRSs.

B. Share-based payment transactionsThe Company selects not to apply the requirements in IFRS 2, “Share-basedPayment”, retrospectively to equity instruments that are vested before the date oftransition to IFRSs.

C. Costs recognizedThe Company selects the revaluated values of investment property that is revaluatedin accordance with ROC GAAP and recognized under the ‘Property, plant andequipment’ account before the date of transition to IFRSs as its costs recognized at therevaluation date.

D. Employee benefitsThe Company selects to recognize all accumulated actuarial gain or loss associatedwith employee benefits plans in retained earnings at the date of transition to IFRSs,and disclose present value of defined benefit obligation, fair value of plan assets, gainor loss on plan assets and experience adjustments in accordance with paragraph 120A(P), IAS 19, “Employee Benefits”, based on their prospective amounts for eachaccounting period from the date of transition to IFRSs.

E. Cumulative translation differencesThe Company selects to recognize the amount of cumulative translation differencesarising from foreign operations as zero at the date of transition to IFRSs, and to treattranslation differences subsequent to the date of transition to IFRSs in accordancewith IAS 21, “The Effects of Changes in Foreign Exchange Rates”.

F. Borrowing costsThe Company selects to apply the transitional regulations specified in Paragraphs 27and 28, IAS 23, “Borrowing Costs”, amended in 2007 from the date of transition toIFRSs.The selection of exemptions above might be different from the actual selection at thedate of transition to IFRSs due to the issuance of related decrees by the competentauthorities, changes in economic environments, or changes in the evaluation of effectof the Company’s selection of exemptions.

CONTENTS...TECO ELECTRIC & MACHINERY CO., LTD. 1 CONTENTS I.Letter to Shareholders 2 II. Company...

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