OPTO TECH CORPORATION AND REPORT OF INDEPENDENT … · 2011-06-30 · Accumulated impairment (...

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OPTO TECH CORPORATION

FINANCIAL STATEMENTS

AND REPORT OF INDEPENDENT ACCOUNTANTS

DECEMBER 31, 2010 AND 2009

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

accompanying financial statements have been translated into English from the original Chinese version

prepared and used in the Republic of China. In the event of any discrepancy between the English

version and the original Chinese version or any differences in the interpretation of the two versions, the

Chinese-language auditors’ report and financial statements shall prevail.

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Report of Independent Accountants Translated from Chinese

(10)PWCR10003754

To the Board of Directors and Stockholders of Opto Tech Corporation

We have audited the accompanying balance sheets of Opto Tech Corporation as of December 31, 2010 and

2009, and the related statements of income, of changes in stockholders’ equity, and of cash flows for the years

then ended. These financial statements are the responsibility of the Company’s management. Our responsibility

is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the “Rules Governing the Examination of Financial

Statements by Certified Public Accountants” and generally accepted auditing standards in the Republic of China.

Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing

the accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the

financial position of Opto Tech Corporation as of December 31, 2010 and 2009, and the results of its operations

and its cash flows for the years then ended in conformity with the “Rules Governing the Preparation of

Financial Statements by Securities Issuers”, “Business Entity Accounting Law”, “Regulation on Business Entity

Accounting Handling” and generally accepted accounting principles in the Republic of China.

As discussed in Note 3 to the financial statements, effective January 1, 2009, the Company adopted the

amendments to R.O.C. SFAS No. 10, “Accounting for Inventories”.

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The Company has also prepared consolidated financial statements of Opto Tech Corporation and its

subsidiaries (not presented herein) as of and for the years ended December 31, 2010 and 2009. In our report

dated March 24, 2011, we expressed an unqualified opinion with explanatory paragraph on those consolidated

financial statements.

PricewaterhouseCoopers, Taiwan

March 24, 2011

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

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

2010 2009 2010 2009ASSETS LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Assets Current Liabilities Cash and cash equivalents (Note 4(1)) 2,655,171$ 2,928,311$ Short-term loans (Note 4(10)) 501,274$ 871,795$ Financial assets at fair value through profit or loss - current (Note 4(2)) 300,694 50,304 Financial liabilities at fair value through profit or loss - current (Note 4(2) 39 - Notes receivable - net 24,458 30,285 Notes payable 24,710 13,585 Notes receivable - related parties - net (Note 5) 489 - Accounts payable 931,350 727,348 Accounts receivable - net (Note 4(3)) 1,883,359 1,660,842 Accounts payable - related parties (Note 5) 798,395 628,423 Accounts receivable - related parties - net (Note 5) 167,827 185,547 Income tax payable (Note 4(18)) 17,103 - Other receivables (Note 4(18)) 22,024 11,735 Accrued expenses 368,336 236,877 Other receivables - related parties (Note 5) - 83,710 Other payables 96,935 48,053 Other financial assets - current (Note 6) 141,470 16,962 Unearned revenue collected in advance (Note 5) 27,591 58,855 Inventories - net (Note 4(4)) 1,350,533 1,077,622 Long-term liabilities - current portion (Note 4(11)) 660,714 335,714 Prepaid expenses 2,886 17,689 Other current liabilities 35,255 29,584 Prepayments 10,955 17,048 Total current liabilities 3,461,702 2,950,234 Deferred income tax assets - current (Note 4(18)) 52,119 66,890 Other current assets 3,067 2,614 Long-term Liability Total current assets 6,615,052 6,149,559 Long-term loans (Notes 4(11), 6 and 7) 1,266,272 1,914,886

1,266,272 1,914,886 Funds and Investments Available-for-sale financial assets - non-current (Note 4(5) 79,849 109,579 Other Liabilities Financial assets carried at cost - non-current (Note 4(6)) 573,262 580,738 Accrued pension liabilities (Note 4(12)) 149,089 109,573 Long-term investments - accounted for under the equity method (Note 4(7) 1,126,525 1,074,345 Guarantee deposits 50 76 Total funds and investments 1,779,636 1,764,662 Other liabilities - others(Note 4(7)) 4,126 90,901

Total other liabilities 153,265 200,550

Property, Plant and Equipment (Notes 4(8), 5 and 6) TOTAL LIABILITIES 4,881,239 5,065,670 Cost Land - 12,493 Stockholders' Equity Buildings 1,708,415 1,725,202 Capital Machinery 3,234,201 3,328,351 Common stock (Notes 4(13)(17)) 5,490,051 5,456,783 Utility facilities 954,340 939,806 Capital Reserves (Note 4(14)) Pollution prevention equipment 618,998 609,430 Paid-in capital in excess of par 315,058 304,558 Transportation equipment 4,751 6,223 Additional paid-in capital - treasury stock transactions (Note 4(16)) 60,625 60,625 Office equipment 47,550 74,581 Capital reserve from long-term investments 106,819 57,419 Other equipment 1,418,349 1,406,940 Capital reserve from employee stock options (Note 4(17)) 75,639 41,988 Cost and revaluation increments 7,986,604 8,103,026 Retained Earnings Less: Accumulated depreciation 5,339,008)( 5,239,886)( Legal reserve 148,030 126,982 Accumulated impairment 9,314)( 8,832)( Special reserve 42,914 113,890 Construction in progress and prepayments for equipment 445,086 153,261 Unappropriated earnings (Notes 4(15)(18)) 1,015,299 456,692 Total property, plant and equipment 3,083,368 3,007,569 Other Adjustments to Stockholders' Equity

Cumulative translation adjustments 7,678)( 65,466 Intangible asset Unrecognized pension cost (Note 4(12)) 93,124)( 59,214)( Deferred pension costs (Note 4(12)) 2,182 2,400 Unrealized gain or loss on available-for-sale financial assets (Note 4(5)) 52,220)( 25,371)(

Treasury stock (Note 4(16)) 26,699)( 26,699)(

Other assets TOTAL STOCKHOLDERS' EQUITY 7,074,714 6,573,119 Idle assets (Note 4(9)) 108,212 245,861 Deposits out 10,443 8,780 Commitments and Contingent Liabilities (Note 7) Deferred expenses (Note 5) 23,154 37,308 Deferred income tax assets - non-current (Note 4(18)) 333,906 422,650 Total other assets 475,715 714,599

TOTAL ASSETS 11,955,953$ 11,638,789$ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,955,953$ 11,638,789$

The accompanying notes are an integral part of these financial statementsSee report of independent accountants dated March 24, 2011.

OPTO TECH CORPORATIONBALANCE SHEETS

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

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OPTO TECH CORPORATION STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR EARNINGS PER SHARE AMOUNTS)

2010 2009

The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 24, 2011.

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Operating Revenues

Sales revenue $ 7,403,390 $ 5,348,973

Sales returns ( 11,573) ( 84,918)

Sales discounts ( 80,396) ( 84,847)

Net sales revenue (Note 5) 7,311,421 5,179,208

Other operating revenues 362,232 228,400

Total operating revenues 7,673,653 5,407,608

Operating Costs Cost of goods sold (Notes 4(4)(20) and 5) ( 5,503,286) ( 4,135,673)

Other operating costs ( 284,023) ( 187,906)

Total operating costs ( 5,787,309) ( 4,323,579)

Gross profit 1,886,344 1,084,029

Unrealized gain from intercompany transactions ( 4,125) ( 938)

Realized gain from intercompany transactions 938 2,410

Gross profit, net 1,883,157 1,085,501

Operating Expenses (Note 4(20)) Selling expenses ( 268,213) ( 123,576)

General and administrative expenses ( 606,197) ( 491,257)

Research and development expenses ( 155,995) ( 131,916)

Total operating expenses ( 1,030,405) ( 746,749)

Operating income 852,752 338,752

Non-operating income and gains Interest income 8,451 4,605

Investment income accounted for under the equity method (Note 4(7)) 108,705 -

Dividend income 6,981 9,414

Gain on sale of investments 408 5,560

Foreign exchange gain - 6,342

Gain on valuation of financial assets 391 -

Miscellaneous income (Note 5) 17,438 75,243

Total non-operating income and gains 142,374 101,164

Non-operating expenses and losses Interest expense ( 37,151) ( 45,863)

Investment loss accounted for under the equity method (Note 4(7)) - ( 58,284)

Other investment loss (Note 4(6)) ( 7,476) ( 2,794)

Loss on disposal of property, plant and equipment ( 5,778) ( 3,890)

Foreign exchange loss ( 86,908) -

Financing charges ( 2,500) ( 2,467)

Depreciation of idle assets ( 1,150) ( 4,177)

Impairment loss ( 42,685) ( 17,255)

Loss on valuation of financial assets - ( 1,834)

Loss on valuation of financial liabilities ( 39) -

Miscellaneous losses ( 929) ( 5,615)

Total non-operating expenses and losses ( 184,616) ( 142,179)

Income before income tax 810,510 297,737

Income tax expense (Note 4(18)) ( 122,395) ( 87,257)

Net income $ 688,115 $ 210,480

Before Tax After Tax Before Tax After Tax Basic earnings per share (Note 4(19))

Net income $ 1.48 $ 1.26 $ 0.57 $ 0.40

Diluted earnings per share (Note 4(19)) Net income $ 1.47 $ 1.25 $ 0.57 $ 0.40

Pro forma information based on the assumption that the Company’s shares held by its subsidiary are not treated as treasury stocks: Net income $ 801,873 $ 679,478 $ 317,170 $ 229,913

Basic earnings per share Net income $ 1.47 $ 1.24 $ 0.60 $ 0.44

Diluted earnings per share Net income $ 1.45 $ 1.23 $ 0.60 $ 0.44


STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

Capital Reserves Retained Earnings Other Adjustments to Stockholders’ Equity

Common stock

Paid-in capital in

excess of par

Additional paid-in capital - treasury stock transactions

Capital reserve from

long-term investments

Capital reserve from

employee stock

options Legal

reserve Special reserve

Unappropriated earnings

Unrealized gain or loss on

available-for-sale financial

assets

Cumulative translation

adjustments Unrecognized pension cost

Treasury stock

Total

Note 1: Directors＇and supervisors’ remuneration of $8,183 and employees’ bonuses of $24,551 have been deducted from the statement of income. Note 2: Directors＇and supervisors’ remuneration of $8,535 and employees’ bonuses of $25,605 have been deducted from the statement of income.

The accompanying notes are an integral part of these financial statements.

See report of independent accountants dated March 24, 2011.

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Balance at January 1, 2009 $ 5,237,448 $ 89,417 $ 60,625 $ 60,315 $ 21,585 $ 92,095 $ 7,012 $ 518,913 ( $ 109,672 ) $ 86,300 ( $ 31,425) ( $ 26,699) $ 6,005,914 Distribution of 2008 earnings:

(Note 1) Legal reserve - - - - - 34,887 - ( 34,887) - - - - - Special reserve - - - - - - 106,878 ( 106,878) - - - - - Cash dividends - - - - - - - ( 130,936) - - - - ( 130,936) Changes in equity of investees

accounted for under the equity method:

Changes in capital reserve - - - ( 2,896) - - - - - - - - ( 2,896) Changes in cumulative

translation adjustments - - - - - - - - - ( 20,834) - - ( 20,834) Exercise of employee stock

options 32,255 - - - 20,403 - - - - - - - 52,658 Proceeds from capital increase

by cash 187,080 215,141 - - - - - - - - - - 402,221 Change in net loss on

unrecognized pension cost - - - - - - - - - - ( 27,789) - ( 27,789) Change in unrealized gain or

loss on available-for-sale financial assets - - - - - - - - 84,301 - - - 84,301

Net income for 2009 - - - - - - - 210,480 - - - - 210,480 Balance at December 31, 2009 $ 5,456,783 $ 304,558 $ 60,625 $ 57,419 $ 41,988 $ 126,982 $ 113,890 $ 456,692 ( $ 25,371 ) $ 65,466 ( $ 59,214) ( $ 26,699) $ 6,573,119 Balance at January 1, 2010 $ 5,456,783 $ 304,558 $ 60,625 $ 57,419 $ 41,988 $ 126,982 $ 113,890 $ 456,692 ( $ 25,371 ) $ 65,466 ( $ 59,214) ( $ 26,699) $ 6,573,119 Distribution of 2009 earnings:

(Note 2) Legal reserve - - - - - 21,048 - ( 21,048) - - - - - Special reserve - - - - - - ( 70,976) 70,976 - - - - - Cash dividends - - - - - - - ( 136,559) - - - - ( 136,559) Changes in equity of investees

accounted for under the equity method: Changes in capital reserve - - - 49,400 - - - - - - - - 49,400

Changes in cumulative translation adjustments - - - - - - - - - ( 73,144) - - ( 73,144)

Offset amount of retained earnings due to the insufficiency of recognized additional paid-in capital of investees - - - - - - - ( 42,877) - - - - ( 42,877)

Exercise of employee stock options 23,268 - - - 33,651 - - - - - - - 56,919

Increase in capital by cash infusion 10,000 10,500 - - - - - - - - - - 20,500

Change in net loss on unrecognized pension cost - - - - - - - - - - ( 33,910) - ( 33,910)

Change in unrealized gain or loss on available-for-sale financial assets - - - - - - - - ( 26,849 ) - - - ( 26,849)

Net income for 2010 - - - - - - - 688,115 - - - - 688,115 Balance at December 31, 2010 $ 5,490,051 $ 315,058 $ 60,625 $ 106,819 $ 75,639 $148,030 $ 42,914 $ 1,015,299 ( $ 52,220 ) ( $ 7,678) ( $ 93,124) ( $ 26,699) $ 7,074,714

OPTO TECH CORPORATION STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

2010 2009

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CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 688,115 $ 210,480

Adjustments to reconcile net income to net cash provided by operating activities

Bad debts expense (recovery of bad debts expense) 68,465 ( 57,615)

Depreciation of property, plant and equipment 502,494 504,313

Depreciation of idle assets 1,150 4,177

Amortization 21,209 24,192 Investment (income) loss accounted for under equity method

and cash dividends received ( 100,134) 65,493 Net (income) loss on valuation of financial assets and

liabilities ( 352) 1,834

Gain on price recovery of inventories ( 90,154) ( 73,112)

Reclassification to financial charges from deferred expenses 1,650 1,516

Impairment loss 42,685 17,255

Other investment loss 7,476 2,794

Gain on sale of investments ( 358) ( 5,560) Loss on disposal of property, plant and equipment and

deferred expenses 5,778 3,890

Compensation cost of employee stock options 19,327 -

Changes in assets and liabilities

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

current ( 249,540) ( 49,996)

Notes receivable – net 5,827 3,667

Notes receivable – related parties – net ( 489) -

Accounts receivable – net ( 291,181) ( 349,589)

Accounts receivable – related parties – net 17,919 45,440

Other receivables ( 10,289) ( 712)

Other receivables – related parties 83,710 31,301

Inventories ( 182,757) 405,558

Prepaid expenses 14,803 ( 12,825)

Prepayments 6,093 2,735

Other current assets ( 453) ( 2,061)

Deferred income tax assets 103,515 86,673

Increase (decrease) in:

Notes payable 11,125 13,585

Accounts payable 204,002 199,594

Accounts payable – related parties 169,972 256,100

Income tax payable 17,103 -

Accrued expenses 131,459 ( 17,904)

Other payables 48,883 9,296

Unearned revenue collected in advance ( 31,264) 58,427

Other current liabilities 6,371 ( 2,406)

Accrued pension liabilities 5,824 3,820

Deferred credit - gain from intercompany transactions 3,187 ( 1,472)

Net cash provided by operating activities 1,231,171 1,378,888

(Continued)

OPTO TECH CORPORATION STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)

2010 2009

The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 24, 2011.

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CASH FLOWS FROM INVESTING ACTIVITIES

(Decrease) increase in restricted cash and cash equivalents ($ 124,508) $ 43,252

Increase in financial assets carried at cost - ( 3,205)

Proceeds from disposal of financial assets carried at cost 1 5,556

Proceeds from disposal of available-for-sale financial assets 2,778 -Increase in long-term investments accounted for under the equity method ( 108,629) -

Acquisition of property, plant and equipment ( 609,270) ( 202,561) Proceeds from disposal of property, plant and equipment and

deferred expenses 123,784 1,443

Increase in deposits out ( 1,663) ( 7,677)

Increase in deferred expenses ( 14,176) ( 24,188)

Net cash used in investing activities ( 731,683) ( 187,380)

CASH FLOWS FROM FINANCING ACTIVITIES

Decrease in short-term loans ( 370,521) ( 201,790)

(Decrease) increase in long-term loans (including long-term loans maturing within one year) ( 323,614) 567,700

Decrease in guarantee deposits ( 26) ( 14)

Exercise of employee stock options 37,592 52,658

Proceeds from capital increase by cash infusion 20,500 402,221

Payments of cash dividends ( 136,559) ( 130,936)

Net cash (used in) provided by financing activities ( 772,628) 689,839

Net (decrease) increase in cash and cash equivalents ( 273,140) 1,881,347

Cash and cash equivalents at beginning of year 2,928,311 1,046,964

Cash and cash equivalents at end of year $ 2,655,171 $ 2,928,311

Supplemental disclosures of cash flow information

Interest paid $ 41,042 $ 54,763

Less: Interest capitalized ( 3,040) ( 3,628)

Interest paid (net of interest capitalized) $ 38,002 $ 51,135

Income tax paid $ 761 $ -

Investing and financing activities not affecting cash flows

Long-term liabilities maturing within one year $ 660,714 $ 335,714

Reclassification of property, plant and equipment to deferred expenses $ 2,811 $ 3,968

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NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2010 AND 2009

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,

EXCEPT AS OTHERWISE INDICATED)

1. HISTORY AND ORGANIZATION

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

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

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

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

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

31, 2010, the Company had approximately 1,360 employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Governing the Preparation of Financial Statements by Securities Issuers”, “Business Entity

Accounting Law”, “Regulation on Business Entity Accounting Handling” and generally accepted

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

summarized below:

1) Translation of financial statements of foreign subsidiaries

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

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

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

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

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

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

2) Foreign currency transactions

A. The Company maintains its accounts in New Taiwan dollars. Transactions denominated in

foreign currencies are translated into New Taiwan dollars at the spot exchange rates prevailing

at the transaction dates. Exchange gains or losses due to the difference between the exchange

rate on the transaction date and the exchange rate on the date of actual receipt and payment are

recognized in current year’s profit or loss.

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

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

losses are recognized in profit or loss.

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

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

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

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

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

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

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

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

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

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

are classified as non-current assets:

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

are intended to be sold within the normal operating cycle;

b) Assets held mainly for trading purposes;

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

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

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

balance sheet date.

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

they are classified as non-current liabilities:

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

normal operating cycle;

b) Liabilities arising mainly from trading activities;

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

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

twelve months after the balance sheet date.

4) Cash and cash equivalents

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

A. Readily convertible to cash; and

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

value resulting from fluctuations in interest rates.

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

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

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

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

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

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

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

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6) Available-for-sale financial assets

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

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

attributable to the acquisition of the financial asset.

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

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

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

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

and the GreTai Securities Market at the balance sheet date.

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

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

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

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

7) Financial assets carried at cost

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

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

attributable to the acquisition of the financial asset.

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

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

the asset subsequently increases.

8) Accounts receivable

Accounts receivable are claims resulting from the sale of goods or services. The fair value of

accounts receivable is calculated based on the imputed interest rate. Accounts receivable which

are collectible within one year, and where the difference between the fair value and the value at

maturity is insignificant are measured at carrying value.

9) Allowance for doubtful accounts

Allowance for doubtful accounts is provided according to the evaluation of the collectibility of

notes, accounts and other receivables, taking into account the bad debts incurred in prior years

and the aging analysis of the receivables.

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10) Inventories

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

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

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

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

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

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

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

is provided when necessary.

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

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

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

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

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

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

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

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

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

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

statements.

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

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

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

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

fully recovered.

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

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

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

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

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

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

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

equivalent percentage of shareholding in these investees.

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

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

adjustments” under stockholders’ equity.

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

method is described in Note 2(14).

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12) Property, plant and equipment

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

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

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

economic service lives. Salvage value of the fully depreciated assets that are still in use is

depreciated based on the re-estimated economic service lives. The estimated useful lives are

30~50 years for buildings and 3~10 years for the other property, plant and equipment.

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

and repairs are expensed as incurred.

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

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

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

non-operating expense.

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

2(14).

13) Deferred assets

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

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

their estimated useful lives of 2~21 years.

14) Impairment of non-financial assets

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

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

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

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

disposal costs. The value in use is the present value of estimated future cash flows to be derived

from continuing use of the asset and from its disposal at the end of its useful life. When the

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

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

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

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

following years.

15) Warranty

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

the current year’s operating expense.

16) Pension plan

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

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

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

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

～ 14 ～

straight-line basis over 25 years. Under the defined contribution pension plan, net periodic

pension costs are recognized as incurred.

17) Income tax

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

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

liabilities is included in current period’s income tax.

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

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

recognized in the year the related expenditures are incurred.

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

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

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

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

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

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

operations in the current period.

18) Treasury stock

A. When the Company acquires its issued stocks, the cost is debited as “treasury stock” and

recognized as a reduction to stockholders’ equity. Treasury stocks acquired are stated at cost

using the weighted-average method.

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

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

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

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

amount is charged against retained earnings.

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

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

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

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

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

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

then the remaining amount is charged against retained earnings.

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

19) Share-based payment - employee compensation plan

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

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

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

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

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

～ 15 ～

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

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

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

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

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

during that period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

and ex-dividends.

21) Revenues and expenses

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

realizable. Costs and expenses are recognized as incurred.

22) Use of estimates

The preparation of financial statements in conformity with generally accepted accounting

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

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

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

Actual results could differ from those assumptions and estimates.

23) Settlement date accounting

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

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

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

profit or loss.

～ 16 ～

3. CHANGES IN ACCOUNTING PRINCIPLES

Effective January 1, 2009, the Company adopted the amendments to R.O.C. SFAS No. 10,

“Accounting for Inventories”. As a result of this change in accounting principle, operating costs and

non-operating income and gains related to inventories decreased by $73,112 and $67,606,

respectively, for the year ended December 31, 2009. In addition, investment loss increased by

$1,483 due to the subsidiaries’ adoption of the amendments to R.O.C. SFAS No. 10. Overall, net

income increased by $3,590 and earnings per share increased by $0.01 for the year ended December

31, 2009.

4. DETAILS OF SIGNIFICANT ACCOUNTS

1) Cash and cash equivalents

December 31,

2010 2009

Cash on hand $ 100 $ 100

Checking and demand deposits 824,371 775,727

Time deposits 1,210,700 797,484

Cash equivalents - Repurchase bonds 620,000 1,355,000

$ 2,655,171 $ 2,928,311

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

December 31,

2010 2009Financial assets at fair value through profit or loss -current

Financial assets held for trading

Funds $ 300,000 $ 50,000

Adjustment of financial assets held for trading

Funds 327 -

Currency swap 367 -

Forward exchange contracts - 304

$ 300,694 $ 50,304Financial liabilities at fair value through profit or loss - current

Adjustment of financial liabilities held for trading

Forward exchange contracts $ 39 $ -

3) Accounts receivable

December 31,

2010 2009

Accounts receivable $ 2,037,774 $ 1,748,720

Less: Allowance for doubtful accounts ( 154,415) ( 87,878)

$ 1,883,359 $ 1,660,842

～ 17 ～

4) Inventories

December 31,

2010 2009Raw materials $ 655,200 $ 519,135

Supplies 180,110 116,649

Work in process 191,738 190,734

Semi-finished goods 178,488 179,288

Finished goods 449,187 466,159

1,654,723 1,471,965Less: Allowance for obsolescence

and market value decline ( 304,190) ( 394,343)

$ 1,350,533 $ 1,077,622

The related expenses and losses of inventories are as follows:

For the years ended December 31,

2010 2009

Cost of goods sold $ 5,736,441 $ 4,188,566

Gain on price recovery of inventories ( 90,154) ( 73,112)

Others ( 143,001) 20,219

$ 5,503,286 $ 4,135,673

5) Available-for-sale financial assets

December 31,

2010 2009

Non-current items:

Listed (TSE and OTC) stocks

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

AXT, Inc. - 2,881

132,069 134,950

Adjustment of available-for-sale financial assets ( 52,220) ( 25,371)

$ 79,849 $ 109,579

～ 18 ～

6) Financial assets carried at cost

December 31,

2010 2009

Non-current items:

Unlisted stocks

Nichia Corp. $ 379,252 $ 379,252

Lu Zhu Development Co., Ltd. 126,963 127,648

Giga Epitaxy Technology Corp. 33,000 33,000

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

Oriental System Technology Inc. 8,698 13,206

Formosa Industrial Computing, Inc. 5,349 7,632

$ 573,262 $ 580,738

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

value cannot be measured reliably.

B. For the year ended December 31, 2010, the Company recognized impairment loss of $4,508,

$2,283 and $685 on its investment in Oriental System Technology Inc., Formosa Industrial

Computing, Inc. and Lu Zhu Development Co., Ltd, respectively, because the value of the

Company had been impaired, and recovery was unlikely.

C. For the year ended December 31, 2009, the Company recognized impairment loss of $2,794

on its investment in Pictologic Inc., because the value of the Company had been impaired,

and recovery was unlikely.

D. On July 24, 2009, the Company did not agree with the division of Omniad Media

Incorporation. Pursuant to the Company Law, the Company exercised the right of purchase

request. Omniad Media Incorporation purchased the Company’s stocks, and paid the common

stocks of Top Increasing Technology Co., Ltd. to the Company as compensation.

～ 19 ～

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

A. Information on long-term investments as of December 31, 2010 and 2009 are summarized

below:

December 31, 2010 December 31, 2009

Investee company

Carrying

amount

% of

ownership

Carrying

amount

% of

ownership

OPTO Technology International

Group Co., Ltd. $ 694,962 100.00% $ 783,744 100.00%

Viking Tech Corporation 132,934 9.90% 117,603 9.90%

Jyu Shin Investment Co., Ltd. 231,344 100.00% 112,153 100.00%

Ho Chung Investment Co., Ltd. 67,285 100.00% 60,845 100.00%

Source Ever limited - 100.00% - -

Opto Tech (H.K.) Co., Ltd. - - - -

Opto Tech (Macao) Co., Ltd. - - - -

$ 1,126,525 $1,074,345

Shown as “other liability – other”:

CS Bright Corporation $ - - ($ 89,964) 28.37%

B. Investment income (loss) accounted for under the equity method for the years ended

December 31, 2010 and 2009 is set forth below:


Investee company 2010 2009

OPTO Technology

International Group Co., Ltd. ($ 68,225) ($ 62,876)

Viking Tech Corporation 22,924 4,163

Jyu Shin Investment Co., Ltd. 38,732 2,475

Ho Chung Investment Co., Ltd. 17,170 ( 4,277)

Source Ever limited - -

Opto Tech (H.K.) Co., Ltd. - ( 187)

Opto Tech (Macao) Co., Ltd. - 9,586

CS Bright Corporation 98,104 ( 7,168)

$ 108,705 ($ 58,284)

C. CS Bright Corporation covered its losses by reducing capital on August 23, 2010. After the

capital reduction, the holding shares of the Company decreased from 1,962,883 to 1. On

August 24, 2010, CS Bright Corporation then increased its capital, but the Company did not

participate in the capital increase. Therefore, the ownership ratio decreased to 0.00002%. On

November 25, 2010, the Company sold the remaining 1 share to Jyu Shin investment Co. Ltd.,

which was a subsidiary of the Company, and the holding shares of the Company decreased to

0. On the other hand, Jyu Shin investment Co. Ltd., which was a 100% owned subsidiary of

～ 20 ～

the Company, participated in the capital increase of CS Bright Corporation, and the

ownership was 94.02%. On November 11, 2010, Jyu Shin investment Co. Ltd. acquired the

outside shares, and the ownership increased to 99.87%. Because the Company had the control

ability over CS Bright Corporation, the Company recognized the entire losses incurred by

such entity that would not be covered by other stockholders. As of December 31, 2009, the

related balance of the long-term investment was ($89,964), which was shown as “other

liability – other”.

D. Source Ever Limited, an offshore trading company in the British Virgin Islands (BVI) and a

100% owned subsidiary of the Company, was incorporated on April 26, 2010.

E. To improve the group’s operating efficiency, the Company reorganized on November 1, 2009.

The Company’s subsidiaries, Opto Tech (H.K.) Co., Ltd. and Opto Tech (Macao) Co., Ltd.,

became the subsidiaries of Opto Tech (Cayman) Co., Ltd. (a subsidiary of the Company).

After the reorganization, these subsidiaries became indirect subsidiaries of the Company.

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

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

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

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

Tech Corporation, the total ownership percentage in Viking Tech Corporation exceeded 20%.

Accordingly, the Company’s investment in Viking Tech Corporation is accounted for under

the equity method.

8) Property, plant and equipment

December 31, 2010

Asset Initial cost Accumulateddepreciation

Accumulated impairment Carrying value

Buildings $ 1,708,415 ($ 571,649) ($ 59) $ 1,136,707

Machinery 3,234,201 ( 2,254,735) ( 9,074) 970,392

Utility facilities 954,340 ( 800,007) - 154,333

Pollution prevention facilities 618,998 ( 565,008) - 53,990

Transportation equipment 4,751 ( 3,460) ( 64) 1,227

Office equipment 47,550 ( 29,720) ( 19) 17,811

Other equipment 1,418,349 ( 1,114,429) ( 98) 303,822

Construction in progress and prepayments for equipment 445,086 - - 445,086

$ 8,431,690 ($5,339,008) ($ 9,314) $ 3,083,368

～ 21 ～

December 31, 2009

Asset Initial cost Accumulateddepreciation


Land $ 12,493 $ - $ - $ 12,493

Buildings 1,725,202 ( 521,273) ( 59) 1,203,870

Machinery 3,328,351 ( 2,351,474) ( 8,306) 968,571

Utility facilities 939,806 ( 715,375) - 224,431

Pollution prevention facilities 609,430 ( 547,568) - 61,862

Transportation equipment 6,223 ( 4,606) ( 64) 1,553

Office equipment 74,581 ( 60,416) ( 282) 13,883

Other equipment 1,406,940 ( 1,039,174) ( 121) 367,645

Construction in progress and prepayments for equipment 153,261 - - 153,261

$ 8,256,287 ($5,239,886) ($ 8,832) $ 3,007,569

Interest capitalized to property, plant and equipment amounted to $3,040 and $3,628 for the years

ended December 31, 2010 and 2009, respectively.

9) Idle assets

December 31, 2010

Cost Accumulateddepreciation


Machinery $ 1,353,294 ($ 318,153) ($ 926,929) $ 108,212

December 31, 2009

Cost Accumulateddepreciation


Machinery $ 2,226,455 ($ 527,856) ($1,452,738) $ 245,861

10) Short-term loans

December 31,

2010 2009

Unsecured loans $ 501,274 $ 871,795

Interest rate 0.69%-1.69% 0.82%-2.44% `

～ 22 ～

11) Long-term loans

December 31,

Bank Credit line Period 2010 2009 Syndicated loans with 8 financial

institutions including Taishin International Bank $ 2,000,000

2008.02.15~

2013.03.06 $ 1,601,986 $ 1,930,600

Yuanta Commercial Bank 200,000

2009.05.26~

2012.05.26 150,000 200,000

Ta Chong Bank 200,000

2009.10.01~

2011.10.01 125,000 70,000

China Development Industrial Bank 100,000

2009.11.19~

2011.05.19 50,000 50,000

1,926,986 2,250,600

Less: Current portion ( 660,714) ( 335,714)

$ 1,266,272 $ 1,914,886

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

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

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

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

to the 8 banks including Taishin International Bank.

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

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

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

to Note 7.

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

12) Pension plans

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

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

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

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

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

months prior to retirement. The Company contributes monthly an amount equal to 7.76% of

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

Taiwan. The pension costs under the defined benefit pension plan for the years ended

December 31, 2010 and 2009 were $29,487 and $14,980, respectively. The fund balance with

Bank of Taiwan was $211,345 and $194,452 as of December 31, 2010 and 2009, respectively.

～ 23 ～

The following sets forth the pension information based on the actuarial report:

a) Actuarial assumptions


2010 2009

Discount rate 2.00% 2.25%

Expected rate of return on plan assets 2.00% 2.25%

Rate of compensation increase 3.5% 3.5%

Unrecognized net transition obligation is amortized on a straight-line basis over 25 years.

b) Funded status of the pension plan

December 31,

2010 2009

Benefit obligation

Vested benefit obligation ($ 176,782) ($ 137,592)

Non-vested benefit obligation ( 183,652) ( 166,433)

Accumulated benefit obligation ( 360,434) ( 304,025)

Effect of future salary increments ( 187,442) ( 169,088)

Projected benefit obligation ( 547,876) ( 473,113)

Fair value of plan assets 211,345 194,452

Funded status ( 336,531) ( 278,661)

Unrecognized net transition obligation ( 2,182) ( 2,399)

Unrecognized gain on plan assets 284,929 233,101

Additional minimum pension liability ( 95,305) ( 61,614)

Accrued pension liabilities ($ 149,089) ($ 109,573)

Vested benefit $ 242,682 $ 197,088

c) Net pension cost comprises the following:


2010 2009

Service cost $ 14,990 $ 10,840

Interest cost 10,645 7,870

Expected rate of return on plan assets ( 4,375) ( 5,229)

Amortization of unrecognized loss on plan assets 8,445 1,717

Amortization of unrecognized net transition obligation ( 218) ( 218)

Net pension cost $ 29,487 $ 14,980

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

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

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

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

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

～ 24 ～

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

the years ended December 31, 2010 and 2009 were $25,077 and $21,791, respectively.

13) Common stock

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

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

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

31, 2009. With the price per share at $20.5, the Company issued 1,000 thousand shares amounting

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

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

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

three years and applied for initial public offerings. As of December 31, 2010, the Company’s

authorized capital was $10,000,000, and paid-in capital was $5,490,051, consisting of 549,005

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

14) Capital reserve

The R.O.C. Securities and Exchange Law requires that capital reserve shall be exclusively used to

cover any accumulated deficit or to increase capital and shall not be used for any other purpose.

However, capital reserve arising from paid-in capital in excess of par value on issuance of

common stock and donations can be capitalized once a year, provided that the Company has no

accumulated deficit and the amount to be capitalized does not exceed 10% of the paid-in capital.

15) Retained earnings

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

be distributed as follows:

1) Offset prior years’ operating losses.

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

legal reserve equals the total capital of the Company.

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

by the stockholders.

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

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

distributed amount.

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

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

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

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

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

than 20% of the dividends distributed.

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

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

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

～ 25 ～

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

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

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

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

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

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

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

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

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

should be made to the special reserve.

D. Legal reserve can only be used to cover accumulated losses or to increase capital. Legal

reserve can be used to increase capital only if the accumulated amount of legal reserve is more

than 50% of paid-in capital, and the amount is limited to 50% of its balance.

E. The appropriation of 2009 and 2008 earnings had been resolved at the stockholders’ meeting

on June 15, 2010 and June 16, 2009, respectively. Details are summarized below:

2009 2008

Amount

Dividends per share

(in dollars)

Amount

Dividends per share

(in dollars) Legal reserve $ 21,048 $ 34,887

Special reserve ( 70,976) 106,878

Cash dividends 136,559 $ 0.25 130,936 $ 0.25

Total $ 86,631 $ 272,701

The appropriations of 2009 earnings are the same with that of the resolution of the Board of

Directors on April 21, 2010.

F. The estimated amounts of employees’ bonus and directors’ and supervisors’ remuneration for

the year ended December 31, 2010 are $102,938 and $34,313, respectively, based on 15% and

5% (as prescribed in the Company’s Articles of Incorporation) of net income for the year

ended December 31, 2010, after taking into account the legal reserve and other factors. The

calculation of shares of stock bonus distributed is based on the closing price of the Company’s

common stock at the previous day of the 2011 stockholders’ meeting after taking into account

the effects of ex-rights and ex-dividends. The estimated amounts of employees’ bonus and

directors’ and supervisors’ remuneration are recognized as operating expenses for the year

ended December 31, 2010. Whereas, if the estimated amounts are different from the amounts

approved by the stockholders subsequently, the difference is recognized as gain or loss in

2011. The actual appropriation of 2009 earnings as mentioned in the paragraph above, and the

employees’ bonus and directors’ and supervisors’ remuneration for the year ended December

31, 2009 resolved by the stockholders during their meeting are the same with the amount

recognized in the financial statements for the year ended December 31, 2009.

～ 26 ～

G. As of March 24, 2011, the appropriation of 2010 earnings had not been resolved by the Board

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

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

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

16) Treasury stock

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

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

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

capital in excess of par value and realized capital reserve. As of December 31, 2010, the

shares bought back as treasury stock amounted to $0.

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

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

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

retired within 6 months of acquisition.

C. As of December 31, 2010 and 2009, the total number of the Company’s shares held by its

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

book value of $24.11 (in dollars) per share, and fair value of $20.80 and $28.60 (in dollars)

per share, respectively.

17) Employee stock options

The Company recognized compensation costs under the stock-based employee compensation plan

for the years ended December 31, 2010 and 2009 amounting to $19,327 and $0, respectively. The

exercise price under the stock-based employee compensation plan is based on the closing price of

the Company’s common stock at the grant date and is subject to adjustments due to changes in the

number of common shares and issuance of cash dividends. The vesting period of the Company’s

employee stock option plan is 7 years. The employees may exercise the stock options in

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

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

For the years ended December 31, 2010 2009

Stock options No. of shares (in thousands)

Weighted- average

exercise price (in dollars)

No. of shares (in thousands)

Weighted- average


Options outstanding at beginning of year 11,850 $ 25.30 15,737 $ 23.51

Options granted 13,910 22.00 - -

Options exercised ( 2,327) 16.16 ( 3,225) 16.33

Options revoked ( 1,455) ( 662)

Options outstanding at end of year 21,978 11,850

Options exercisable at end of year 6,275 7,477

～ 27 ～

B. Details of the employee stock options outstanding as of December 31, 2010 and 2009 are set

forth below:

Stock options outstanding as at

December 31, 2010 Stock options exercisable as at

December 31, 2010

Range of exercise price

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

Weighted- average expected remaining

vesting period(in years)

Weighted- average



Weighted- average


$ 16.10 - - $ 16.10 - $ 16.10

27.70 8,272 4 27.70 6,275 27.70

22.00 13,706 7 22.00 - 22.00

Stock options outstanding as at

December 31, 2009 Stock options exercisable as at

December 31, 2009

Range of exercise price

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

Weighted- average expected remaining

vesting period(in years)

Weighted- average



Weighted- average


$ 16.30 2,473 1 $ 16.30 2,473 $ 16.30

27.70 9,377 5 27.70 5,004 27.70

On June 16 and July 24, 2009, the Board of Directors of the Company approved the issuance

of employee stock options authorized in 2004 and 2007. The exercise prices were adjusted

from $16.50 and $27.90 to $16.30 and $27.70, respectively, on July 8 and August 1, 2009.

On June 15, 2010, the Board of Directors of the Company approved the issuance of employee

stock options authorized in 2004. The exercise price was adjusted from $16.30 to $16.10, on

July 12, 2010. The exercise price of the options authorized in 2007 remains the same.

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

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

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

For the years ended December 31, 2010 2009

Net income Net income stated in the statement of income $ 688,115 $ 210,480

Pro forma net income $ 673,959 171,283

Basic earnings per share(EPS)

(in dollars)

EPS stated in the statement of income

$ 1.26 $ 0.40

Pro forma EPS $ 1.23 $ 0.33

Diluted EPS (in dollars)

EPS stated in the statement of income $ 1.25 $ 0.40

Pro forma EPS $ 1.22 $ 0.33

～ 28 ～

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

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

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

estimation of the fair value are as follows:


2010 2009

Risk-free interest rate 2.77% 2.77%

Expected vesting period 7 years 6.5 years

Expected price volatility 44.40% 44.40%

Dividend yield rate 0.00% 0.00% 18) Income tax

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


2010 2009

Income tax expense from continuing operations $ 122,395 $ 87,257

Income tax expense overstated - 779

(Less) add : Net change in deferred income tax assets ( 47,085) 7,379

Income tax effect of revised tax law ( 56,430) ( 94,052)

Prepaid and withholding taxes from foreign income which will not be realized ( 1,016) ( 1,363)

Prepaid and withholding taxes ( 761) ( 1,669)

Income tax refundable, shown as “other receivables” ($ 17,103) ($ 1,669)

B. Deferred income tax assets and liabilities

December 31,

2010 2009

Deferred income tax assets – current $ 105,320 $ 126,282

Deferred income tax assets – non-current 466,510 623,483

Valuation allowance ( 185,805) ( 260,225)

$ 386,025 $ 489,540

～ 29 ～

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

deferred income tax assets and liabilities are as follows:

December 31,

2010 2009

Amount Tax effect Amount Tax effect Current items:

Unrealized gains on sales to affiliated companies $ 4,125 $ 701 $ 938 $ 188

Unrealized losses on foreign exchange transactions 45,684 7,766 1,739 348

Unrealized gains on valuation of financial assets and liabilities ( 655) ( 111) ( 304) ( 61)

Loss on inventory value decline 280,218 47,637 370,371 74,074

Over provision of allowance for bad debts 260,420 44,271 233,776 46,755

Service warranty expense 29,739 5,056 24,891 4,978

Less: Valuation allowance ( 53,201) ( 59,392)

$ 52,119 $ 66,890

Non-current items:

Investment loss $ 140,772 $ 23,931 $ 142,595 $ 28,519

Impairment loss 171,053 29,079 484,030 96,806

Net pension costs 48,999 8,329 43,175 8,634

Loss carryforwards 1,509,375 256,594 1,588,016 317,603

Investment tax credits 148,577 171,921

Less: Valuation allowance ( 132,604) ( 200,833)

$ 333,906 $ 422,650

～ 30 ～

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

Details as of December 31, 2010 are as follows:

Year of

approval Qualifying item

Total tax

credits

Unused tax

credits

Final year

tax credits

are due

2007 Research and development $ 43,707 $ 43,707 2011

Machinery and equipment 13,036 13,036 〞

Employees’ training 598 598 〞

$ 57,341 $ 57,341




$ 58,133 $ 58,133




29,347 29,347

2010 Machinery and equipment $ 3,756 $ 3,756 2014

$ 148,577 $ 148,577

E. As of December 31, 2010, losses available to be carried forward were as follows:

Year in which loss was incurred

Amount filed/approved

Losses available to be

carried forwardUnused loss

carryforwards

Final year lossescan be

carried forward

2003 $ 467,252 $ 79,433 $ 50,473 2013

2004 861,121 146,391 146,391 2014

2005 162,697 27,658 27,658 2015

2008 119,259 20,274 20,274 2018

2009 69,400 11,798 11,798 2019 $ 1,679,729 $ 285,554 $ 256,594

F. As of December 31, 2010, the Company’s income tax returns through 2008 have been

assessed and approved by the Tax Authority.

～ 31 ～

G. Details of unappropriated retained earnings as of December 31, 2010 and 2009 are

summarized below:

December 31,

2010 2009

On or after January 1, 1998

Earnings subjected to 10% income tax $ 327,184 $ 246,212

Earnings not subjected to 10% income tax 688,115 210,480

$ 1,015,299 $ 456,692

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

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

information:

December 31,

2010 2009 Balance of shareholders account of

deductible tax $ 3,020 $ 1,957

2010 Expected creditable tax ratio 1.98%

2009 Actual creditable tax ratio 0.43%

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

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

amendment. Details as of December 31, 2010 are as follows:

Approval date and no.

Date of tax-exempt related equipment ready for production

Tax-exempt period

Cost of tax-exempt related equipment

Gung-Jung-Tz No. 0930012176 on May 5, 2004 May 4, 2004

January 1, 2008 ~ December 31, 2011 $ 657,913

Gung-Jung-Tz No. 0950008215 on March 31, 2006 March 29, 2006

January 1, 2010 ~ December 31, 2013 396,132

$ 1,054,045

～ 32 ～

19) Earnings per share

For the year ended December 31, 2010

Weighted-average

outstanding

Net income common shares Earnings per share (in dollars)

Before tax After tax (in thousands) Before tax After tax Basic earnings per share

Net income attributable to common stockholders $ 810,510 $ 688,115 545,902 $ 1.48 $ 1.26

Dilutive effect of common stock equivalents:

Stock options - - 810

Employees’ bonus - - 4,949

Diluted earnings per share

Net income attributable to common stockholders plus dilutive effect of common stock equivalents $ 810,510 $ 688,115 551,661 $ 1.47 $ 1.25


Weighted-average

outstanding

Net loss common shares Earnings per share (in dollars)

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

Basic earnings per share Net income attributable to

common stockholders $ 297,737 $ 210,480 523,903 $ 0.57 $ 0.40

Dilutive effect of common stock equivalents:

Stock options - - 1,088

Employees’ bonus - - 895

Diluted income per share

Net income attributable to common stockholders plus dilutive effect of common stock equivalents $ 297,737 $ 210,480 525,886 $ 0.57 $ 0.40

～ 33 ～

20) Personnel, depreciation and amortization expenses

Personnel, depreciation and amortization expenses are summarized as follows:


Operating

cost Operating expense

Non-operating expenses and

losses Total

Personnel expenses

Salaries $ 504,204 $ 411,290 $ - $ 915,494

Labor and health insurance 43,466 18,959 - 62,425

Pension 32,181 22,383 - 54,564

Others 14,786 5,993 - 20,779

$ 594,637 $ 458,625 $ - $ 1,053,262

Depreciation $ 364,236 $ 138,258 $ 1,150 $ 503,644

Amortization $ 12,595 $ 8,614 $ - $ 21,209


Operating

cost Operating expense

Non-operating expenses and

losses Total

Personnel expenses

Salaries $ 381,012 $ 257,632 $ - $ 638,644

Labor and health insurance 35,322 17,812 - 53,134

Pension 21,765 15,006 - 36,771

Others 9,046 3,505 - 12,551

$ 447,145 $ 293,955 $ - $ 741,100

Depreciation $ 332,729 $ 171,584 $ 4,177 $ 508,490

Amortization $ 15,364 $ 8,828 $ - $ 24,192

～ 34 ～

5. RELATED PARTY TRANSACTIONS 1) Names of the related parties and their relationship with the Company

Names of related parties Relationship with the Company

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

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

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

Source Ever Ltd. Subsidiary of the Company

CS Bright Corporation (CSB) Indirect subsidiary of the Company; subsidiary of Jyu Shin Investment Co., Ltd. (Note 1)

Graceful Business Co., Ltd. (Graceful) Indirect subsidiary of the Company; subsidiary of Opto (liquidated in July 2009)

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

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

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

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

Opto Tech (H.K.) Co., Ltd. (Opto H.K.) Indirect subsidiary of the Company; subsidiary of Cayman (Note 2)

Opto Tech (Macao) Co., Ltd. (Opto Macao) Indirect subsidiary of the Company; subsidiary of Cayman (Note 2)

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

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

Indirect subsidiary of the Company; subsidiary of Opto Grand

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

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

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

Oriental System Technology Inc. (OST) The Company is a supervisor of OST

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

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

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

Lanyo Technology Co., Ltd. (Lanyo Tech) The Company is a director of Lanyo Tech but recalled on March 20, 2009

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

Shunag Xin is a director of the Company

Nichia Taiwan Corp. Nichia Taiwan Corp. is a director of the Company

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

Nichia Corp. Nichia Corp. is the parent company of

Nichia Taiwan Corp.

Note 1: The Company was reorganized on August 24, 2010. This company (formerly a subsidiary of the

Company) became the subsidiary of Jyu Shin Investment Co., Ltd.

Note 2: The Company was reorganized on November 1, 2009. This company (formerly a

subsidiary of the Company) became the subsidiary of Opto Tech (Cayman) Co., Ltd.

～ 35 ～

2) Significant related party transactions and balances

A. Sales


2010 2009

Amount % of net sales Amount % of net sales

Nichia Taiwan Corp. $ 346,990 5 $ 240,120 4

Shin-Etsu Opto 299,913 4 165,565 3

Opto Plus 23,446 - 29,274 1

Nichia Corp. 21,791 - 6,732 -

Opto Tech Suzhou 7,068 - 27,197 1

Opto Macao 5,441 - 14,264 -

OST 1,171 - 660 -

United Radiant 410 - - -

$ 706,230 9 $ 483,812 9

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

charged to non-related parties. For the years ended December 31, 2010 and 2009, the credit

term is 45~136 days and 46~100 days for related parties, and both 90~150 days for

non-related parties.

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

companies have been eliminated.

B. Purchases


2010 2009

Amount % of net

purchases Amount % of net

purchases

Nichia Taiwan Corp. $ 1,350,575 28 $ 821,539 26

Shin-Etsu Opto 363,775 7 228,704 7

Nichia Corp. 193,101 4 110,091 4

Opto Tech Suzhou 32,476 1 10,478 -

OST 13,501 - 9,298 -

CSB 7,383 - 1,301 -

Viking Tech 178 - 258 -

$ 1,960,989 40 $ 1,181,669 37

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

those charged by non-related parties. For the years ended December 31, 2010 and 2009, the

credit term was 90~120 days and 75~120 days for the related parties, and both 90~120 days

for non-related parties.

～ 36 ～

C. Notes receivable December 31,

2010 2009

Amount % of notes receivable Amount

% of notes receivable

OST $ 489 2 $ - -

D. Accounts receivable

December 31,

2010 2009

Amount % of accounts

receivable Amount % of accounts

receivable

Nichia Taiwan Corp. $ 116,685 6 $ 109,585 6

Shin-Etsu Opto 44,648 2 64,977 4

Opto Plus 3,621 - 1,928 -

Opto Tech Suzhou 2,572 - 9,394 1

OST 441 - 316 -

United Radiant 283 - - -

Opto Macao 31 - - -

CSB - - 83,710 5

168,281 8 269,910 16Less: Allowance for doubtful

accounts ( 454) - ( 653) -Reclassified to other accounts receivable - - ( 83,710) ( 5)

$ 167,827 8 $ 185,547 11

As of December 31, 2010 and 2009, the accounts receivable from CS Bright Corporation was

reclassified to other receivables because it exceeded the normal credit term.

E. Other receivables December 31,

2010 2009

Amount % of other receivables Amount

% of other receivables

CSB $ - - $ 83,710 88Less: Allowance for doubtful

accounts - - - -

$ - - $ 83,710 88

～ 37 ～

F. Accounts payable

December 31,

2010 2009

Amount % of accounts

payable Amount % of accounts

payable Nichia Taiwan Corp. $ 627,032 37 $ 485,298 36

Shin-Etsu Opto 106,116 6 86,117 6

Nichia Corp. 56,593 3 53,290 4

OST 4,975 - 3,398 -

CSB 2,349 - - -

Opto Tech Suzhou 1,257 - 136 -

Viking Tech 73 - 184 -

$ 798,395 46 $ 628,423 46

G. Unearned revenue collected in advance

December 31,

2010 2009

Amount

% of unearned revenue

collected in advance Amount

% of unearned revenue

collected in advance

Opto Macao $ 1,938 7 $ - -

Shin-Etsu Opto 27 - - -

$ 1,965 7 $ - -

H. Disposal of assets

For the year ended December 31, 2010 Asset Selling price Gain (loss) on disposal

Opto Tech Suzhou Deferred assets (LED mold)

$ 1,309 ($ 91)

OST Machinery 25 4

$ 1,334 ($ 87)

For the year ended December 31, 2009: None.

I. Loans granted to related parties

Loans granted to related parties as of December 31, 2010 and 2009 are as follows:

December 31,

2010 2009 Opto Tech Suzhou $ 306,390 $ 368,460

CSB 227,430 143,040

Opto Macao 87,540 144,380

Opto Plus 43,770 -

$ 665,130 $ 655,880

～ 38 ～

J. Compensation of key management


2010 2009 Salary $ 18,042 $ 17,290

Bonus 2,906 1,950

Expense for performing the business 4,243 3,658

Appropriation of earnings 20,300 4,353

$ 45,491 $ 27,251

(1) Salaries include salaries and wages, job allowances, pension, and severance pay.

(2) Bonuses include all kinds of incentives.

(3) Expenses for performing the business include transportation fee, special fund, all kinds of

allowances, and benefits provided such as housing and vehicles.

(4) Appropriation of earnings is the estimated amounts of employees’ bonus and directors’ and

supervisors’ remuneration for the years ended December 31, 2010 and 2009.

(5) Please refer to the Company’s annual report for more details.

6. PLEDGED ASSETS

The Company’s assets pledged as collateral as of December 31, 2010 and 2009 are as follows:

Carrying value Purpose

December 31,

2010 December 31,

2009 Creditor Bank Type

Buildings $ 982,588 $ 1,019,300 Taishin International Bank and 7 other banks

Long-term loans

Restricted assets – Special account for payment

123,970 16,962 Taishin International Bank and 7 other banks

Long-term loans

Restricted assets – Time deposits

17,500 - Chang Hwa Commercial Bank

Loans granted for subsidiaries

$ 1,124,058 $ 1,036,262

7. COMMITMENTS AND CONTINGENT LIABILITIES

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

B. As of December 31, 2010, the guarantees provided by the Company through banks were as

follows:

Guarantor Nature of Guarantee Amount

Chang Hwa Commercial Bank Customs duty $ 20,000

～ 39 ～

C. As of December 31, 2010, the outstanding letters of credit issued for the importation of raw

materials and machinery were as follows:

Currency Amount NTD $ 197,467

USD 4,961

JPY 32,501

D. As of December 31, 2010, the Company had signed major contracts for the purchase of case

facilities. Details are as follows:

Case Currency Total amount Paid amount Unpaid amountTetrad epitaxy facility USD $ 6,300 $ 3,150 $ 3,150

During the second quarter of 2010, the total price of the contract was increased by USD $1,700

due to a revision of the contract.

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

period from 1997 to 2029. Total rent payable as of December 31, 2010, are as follows:

Year Amount 2011 $ 16,205

2012 17,678

2013 17,678

2014 17,678

2015 17,678

After 2015 (Note) 61,489

$ 148,406

Note: Total rent payable of $80,513 was discounted based on the standard rate of Bank of Taiwan

of 2.676% as of December 31, 2010.

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

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

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

value of tangible assets at $0.5 billion or above. If the Company breaches the above debt

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

However, the Company may request for a waiver and it may be exempted from the breach after a

resolution by the majority of the banks.

G. As of December 31, 2010, and 2009, the promissory notes issued by the Company for loans,

performance guarantee for purchases and loans granted for subsidiaries amounted to $9,918,836

and $9,232,309, respectively.

8. SIGNIFICANT DISASTER LOSS

None.

9. SIGNIFICANT SUBSEQUENT EVENTS

None.

～ 40 ～

10. OTHERS

1) Financial statement presentation

Certain accounts in the December 31, 2009 financial statements were reclassified to conform

with the December 31, 2010 financial statement presentation.

～ 41 ～

2) The fair values of the financial instruments

December 31, 2010 December 31, 2009

Fair value Fair value

Book value

Quotations in an

active market

Estimated

using a

valuation

technique Book value

Quotations in an

active market

Estimated

using a

valuation

technique

Non-derivative financial instruments

Assets

Financial assets with fair values equal to book values $ 4,897,865 $ - $ 4,897,865 $ 4,920,011 $ - $ 4,920,011

Financial assets at fair value through profit or loss 300,327 300,327 - 50,000 50,000 -

Available-for-sale financial assets 79,849 79,849 - 109,579 109,579 -

Financial assets carried at cost 573,262 - - 580,738 - -

Deposits out 10,443 - 10,443 8,780 - 8,780

Liabilities

Financial liabilities with fair values equal to book values 3,416,969 - 3,416,969 2,891,379 - 2,891,379

Long-term loans 1,266,272 - 1,266,272 1,914,886 - 1,914,886

Guarantee deposits 50 - 50 76 - 76

Derivative financial instruments

Assets

Financial assets at fair value through profit or loss

Currency swap contracts 367 367 - - - -

Forward exchange contracts - - - 304 304 -

Liabilities

Financial liabilities at fair value through profit or loss

Forward exchange contracts 39 39 - - - -

～ 42 ～

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

are summarized below:

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

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

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

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

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

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

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

are determined by the quoted market price.

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

insignificant.

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

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

value.

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

values are determined by the quoted market price.

3) As of December 31, 2010 and 2009, the financial assets with fair value risk due to the change of

interest amounted to $1,848,200 and $2,152,484, respectively, and the financial liabilities with

fair value risk due to the change of interest were both $0. As of December 31, 2010 and 2009,

the financial assets with cash flow risk due to the change of interest were $702,718 and

$564,792, respectively, and the financial liabilities with cash flow risk due to the change of

interest were $2,428,260 and $3,122,395, respectively.

4) For available-for-sale financial assets, during the years ended December 31, 2010 and 2009, the

amount of gain or loss recognized directly in equity were ($26,849) and $84,301, respectively.

5) Procedure of financial risk control and hedge

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

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

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

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

operating activities.

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

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

strategies to control financial risk:

(A) Exchange rate risk

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

denominated in foreign currencies. The percentage of foreign currency denominated

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

66% and 77%, respectively.

～ 43 ～

(B) Price risk

The price risk of the Company is low.

(C) Credit risk

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

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

and notes receivable continuously.

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

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

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

maximum credit risk is equal to the book value.

(D) Liquidity risk

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

stabilization of capital through bank loans and cash and cash equivalents. As of December

31, 2010 and 2009, current loans are 48% and 39% of the total loans, respectively.

6) Information of material financial risk

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

financial assets carried at cost – non-current and

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

(A) Market risk

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

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

no significant market risk.

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

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

～ 44 ～

The business that the Company is engaged in is related to several non-functional

currencies, and is influenced by the fluctuation of exchange rates. The information of

assets and liabilities dominated in foreign currencies, which are significantly affected by

the fluctuation of exchange rates is as follows:

December 31,

2010 2009

Foreign currency Exchange rate

Foreign currency

Exchange rate

Financial Assets

Currency item

USD：NTD $ 58,249 29.0800 $ 44,239 31.9400

JPY：NTD 1,670,921 0.3562 479,830 0.3452Long-term

investments-accounted for under the equity method

USD：NTD 23,857 29.0800 24,500 31.9900

Financial Liabilities

Currency item

USD：NTD 35,790 29.1800 32,592 32.0400

JPY：NTD 1,767,235 0.3602 847,504 0.3492

(B) Credit risk

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

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

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

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

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

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

(C) Liquidity risk

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

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

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

fair values.

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

Company expects to have liquidity risk.

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

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

independent of changes in market interest rates.

～ 45 ～

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

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

(A) Market risk

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

significant market risk.

(B) Credit risk

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

credit risk.

(C) Liquidity risk

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

significant liquidity risk.


The receivables of the Company are all due within one year. There is no cash flow risk

due to the change of interest.

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

(A) Market risk

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

significant market risk.

(B) Credit risk

None.

(C) Liquidity risk

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

significant liquidity risk.


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

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

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

～ 46 ～

7) Information on derivative financial instruments

The transaction of derivative financial instruments during the year ended December 31, 2010 is as follows (in thousands of dollars): Terms of transaction Future cash flows

Derivative financial instruments

Par value, amount of the contract or nominal principal

Date of contract

Date of performance

Price of performance/

agreed exchange rate

Loss recognized for the year ended December

31, 2010 Cash outflow Cash inflow

Advanced forward exchange contracts

USD$ 1,000

2010.12.02

2010.12.02~2011.01.06

$ 30.325

($ 39)

USD$ 1,000 $ 30,325

Currency swap contracts

USD$ 1,000

2010.12.17

2010.12.17~2011.06.21

29.855

367

29,855 USD 1,000

$ 328

～ 47 ～

11. SUPPLEMENTARY DISCLOSURES 1) Significant transactions

A. Loans granted during the year ended December 31, 2010:

Number

(Note 1)

Creditor Borrower General

ledger account

Maximum outstanding

balance during

the year ended

December 31, 2010

Balance atDecember 31, 2010

Interest rate

Nature of loan

(Note 2)

Business relationship

Reason for short-term financing

Allowancefor doubtful

accounts

Limit on loans

granted to a single

party (Note 3)

Ceiling on total loans

granted (Note 4)

Nature of loan

Amount oftransactions

with the borrower

Collateral

Item Value

0 Opto Tech Corp.

CS Bright Crop.

Other receivables –related parties

$ 83,710 $ - - 2 - $ - Operating needs

$ -

None $ - $ 353,736 $ 707,471

1 CS BrightCrop.

Opto Plus Other receivables –related parties

78,191 49,477 5.000% 1 Sales Purchases

26,748

(69,430)

None

-(Note 5)

〞

- 69,430 -

(Note 6)

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

(1) The Company is “0”.

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

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

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

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

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

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

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

the subsidiaries’ latest net asset values.

Note 5: The balance of loans amounting to $49,447, which CS Bright Corp. (the subsidiary of Opto Tech Corp.) granted to Opto Plus (the indirect subsidiary of Opto Tech Corp.) was overdue. In accordance with EITF

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

investment loss.

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

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

～ 48 ～

B. Endorsements and guarantees provided for the year ended December 31, 2010:

Number

(Note 1) Endorser/ guarantor

Party being endorsed/

guaranteed

Relationship with the endorser/ guarantor (Note 2)

Limit on endorsements/

guarantees provided for a single party

(Note 3)

Maximum outstanding endorsement/

guarantee amount during the year ended

December 31, 2010

Outstanding endorsement/

guarantee amount atDecember 31, 2010

Amount of endorsements/

guarantees secured with collateral

Ratio of accumulatedendorsement/

guarantee amount to net asset value of

the Company

Ceiling on total amount of endorsements/

guarantees provided (Note 3)

0 Opto Tech Corp

Opto Tech (Suzhou) Co., Ltd.

3 $ 1,414,943 $ 370,415 $ 306,390 $ - 4.33 $ 3,537,357

0 〞. CS Bright Corp. 3 1,414,943 230,460 227,430 - 3.21 3,537,357

0 〞 Opto Tech (Macao) Co., Ltd.

3 1,414,943 144,945 87,540 - 1.24 3,537,357

0 〞 Opto Plus Technology Co., Ltd.

3 1,414,943 48,052 43,770 - 0.62 3,537,357

$ 665,130 9.40

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

(1) The Company is “0”.

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

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

(1) Having business relationship.

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

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

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

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

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

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

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

(1) 7,074,714 thousand dollars × 20% ＝ 1,414,943 thousand dollars

(2) 7,074,714 thousand dollars × 50% ＝ 3,537,357 thousand dollars

～ 49 ～

C. Marketable securities held as at December 31, 2010:

As of December 31, 2010

Securities held by

Type of marketable securities Name of marketable securities

Relationship of the securities issuer with the Company

General ledger account

Number of shares(in thousands) Book value

Ownership (%)

Market value or equity per share

(in dollars)

Remark Opto Tech Corp. stock United Radiant Technology

Corp. The Company is the

director of this company.

Available-for-sale financial assets-non-current

8,882 $ 79,849 5.59 $ 79,849 None

〞〞 AXT, Inc. None. 〞 124 - - - Note

79,849

〞〞 Nichia Corp. This company is the parent company of Nichia Taiwan Corp.

Financial assets carried at cost-non-current

10 379,252 0.47 $ 677,301 None

〞〞 Lu Zhu Development Co., Ltd.

The Company is the director of this company.

〞 15,870 126,963 6.38 126,378 〞

〞〞 Giga Epitaxy Technology Corp.


〞 3,300 33,000 4.55 29,636 〞

〞〞 Shin-Etsu Opto Electronic Co., Ltd.


〞 2,000 20,000 10.00 63.294 〞

〞〞 Oriental System Technology Inc.

The Company is the supervisor of this company.

〞 1,966 8,698 14.14 9,040 〞

〞〞 Formosa Industrial Computing, Inc.

None 〞 699 5,349 4.49 5,394 〞

〞〞 Top Increasing Technology Co., Ltd.

None 〞 10,000 - 16,67 - 〞

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

〞〞 Pictologic Inc. None 〞 400 - 1.71 2,656 〞

〞〞 Lanyo Technology Co., Ltd. None. 〞 120 - 7.75 510 〞

〞〞 Action Media Technologies Inc.

None.

〞 75 - 1.96

-

〞

$ 573,262

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

～ 50 ～


Securities held by





Ownership (%)


(in dollars)

Remark Opto Tech Corp. stock Opto Technology

International Group Co., Ltd.

Subsidiary of the Company

Long-term investment accounted for under equity method

28,770 $ 694,962 100.00 $ 694,962 Note 1

〞〞 Ho Chung Investment Corp. Subsidiary of the Company

〞 23,830 67,285 100.00 67,285 None

〞〞 Jyu Shin Investment Co., Ltd. Subsidiary of the Company

〞 12,569 231,344 100.00 231,344 〞

〞〞 Viking Tech Corporation Investee of the Company accounted for under the equity method

〞 7,209 132,934 9.90 132,934 〞

〞〞 Source Ever Limited Subsidiary of the Company

〞 - - 100.00 - Note 2

〞〞 CS Bright Corp. Indirect subsidiary of the Company

〞 - - - - Note 3

Jyu Shin Investment Co., Ltd.

stock CS Bright Corp. Subsidiary of the Company


4,994 103,494 99.87 103,494 Note 3


〞 6,198 110,673

8.51 110,673 None

Ho Chung Investment Corp.

stock Opto Tech Corp. Parent company of the Company

Financial assets at fair value through profit or loss - current

1,107 23,031 0.20 23,031 〞



2,726 50,343 3.74 50,343 〞

〞〞 VML Technologies B.V. Investee of the Company accounted for under the equity method

〞 6 - 25.00 - 〞

〞〞 Brilliance Semiconductor, Inc.

None Financial assets carried at cost-non-current

15 293 0.06 - 〞

Note 1: On October 21, 2010, the Company increased its capital by USD 2,000 thousand dollars by cash to its subsidiary - Opto Technology International Group Co., Ltd.

Note 2: Source Ever Limited, an offshore trading company in BVI and a 100% owned subsidiary of the Company, was incorporated on April 26, 2010.

Note 3: CS Bright Corp. covered losses by reducing its capital on August 23, 2010. After the capital reduction, the holding shares of the Company decreased from 1,962,883 to 1. On August 24, 2010, CS Bright Corp. then increased its capital, but the Company did not participate in the capital increase. Therefore, the ownership ratio decreased to 0.00002%. On November 25, 2010, the Company sold the remaining 1 share to Jyu Shin investment Co. Ltd., which was the subsidiary of the Company, and the holding shares of the Company decreased to 0. On the other hand, Jyu Shin investment Co., Ltd., which was a 100% owned subsidiary of the Company, participated in the capital increase of CS Bright Corp., and the ownership was 94.02%, and the number of shares amounted to 4,701 thousand. On November 11, 2010, Jyu Shin investment Co. Ltd. acquired the outside shares, and the ownership increased to 99.87%.

～ 51 ～


Securities held by





Ownership (%)


(in dollars)

Remark CS Bright Corp. stock Bright Investment

International Ltd. Subsidiary of the

Company Long-term investment

accounted for under equity method

USD 4,980 $ 889 100.00 $ 889 None

Bright Investment International Ltd.

stock Everyung Investment Ltd. Subsidiary of the Company


USD 4,980 USD 1,729 71.43 USD 1,729 Note 1

Everyung Investment Ltd.

stock Opto Plus Technology Co., Ltd.



USD 6,980 USD 2,420 100.00 USD 2,420 Note 2

Opto Technology International Group Co., Ltd.

stock Opto Tech (Cayman) Co., Ltd.



USD 6,670 USD 906 100.00 USD 906 None

〞〞 Opto Grand (Cayman) Co., Ltd.

〞〞 USD 20,000 USD 22,145 100.00 USD 22,145 〞

〞〞 Everyung Investment Ltd. 〞〞 USD 2,000 USD 692 28.57 USD 692 Note 1

Opto Tech (Cayman) Co., Ltd.

stock Opto Tech (Suzhou) Co., Ltd. Subsidiary of the Company


USD 6,000 USD 132 100.00 USD 132 None

〞〞 Opto Tech (H.K.) Co., Ltd. 〞〞 USD 288 USD 283 100.00 USD 283 〞

〞〞 Opto Tech (Macao) Co., Ltd. 〞〞 USD 372 USD 480

100.00 USD 480 〞

Opto Grand (Cayman) Co., Ltd

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



USD 20,000 USD 22,131 100.00 USD 22,131 〞

Note 1: On October 26, 2010, Opto Technology International Group Co., Ltd. increased its capital by USD 2,000 thousand dollars by cash to its subsidiary - Everyung Investment Ltd., and the ownership is 28.57%.

Therefore, the ownership of Everyung Investment Ltd., which is held by Bright Investment International Ltd. decreased to 71.43%.

Note 2: On November 4, 2010, Everyung Investment Ltd. increased its capital by USD 2,000 thousand dollars by cash to its subsidiary of the company - Opto Plus Technology Co., Ltd.

D. Acquisition or sale of the same security with the accumulated cost exceeding $100 million or 20% of the Company’s paid-in capital during the year ended December 31, 2010: None.

E. Acquisition of real estate properties exceeding $100 million or 20% of the Company’s paid-in capital during the year ended December 31, 2010: None.

F. Disposal of real estate properties exceeding $100 million or 20% of the Company’s paid-in capital during the year ended December 31, 2010: None.

～ 52 ～

G. Purchases from or sales to related parties exceeding $100 million or 20% of the Company’s paid-in capital during the year ended December 31, 2010:

Transaction

Differences in transaction terms compared to third

party transactions Notes/accounts

receivable (payable)

Purchaser/seller Counterparty Relationship with the Company Purchases

(sales)

Amount

Percentage of

total purchases

(sales) Credit term Unit price Credit term

Balance

Percentage of total

notes/accounts receivable (payable)

Opto Tech Corp. Nichia Taiwan Corp.

This company is the director of theCompany

Purchases $ 1,350,575 28- 120 days equivalent to normal transaction

- ($ 627,032) ( 37)

Opto Tech Corp. Shin-Etsu Opto Electronic Co., Ltd.

The Company is the director of thiscompany

〞 363,775 7- 90 days 〞 - ( 106,116) ( 6)

Opto Tech Corp. Nichia Corp. Nichia Corp. is the parent company of Nichia Taiwan Corp.

〞 193,101 4- 120 days 〞 - ( 56,593) ( 3)

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

Sales ( 346,990) ( 5) 136 days 〞 - 116,685 6

Opto Tech Corp. Shin-Etsu Opto Electronic Co., Ltd.

The Company is the director of thiscompany

〞 ( 299,913) ( 4) 90 days 〞 - 44,648 2

H. Receivables from related parties exceeding $100 million or 20% of the Company’s paid-in capital during the year ended December 31, 2010:

Creditor Counterparty Relationship with the

Company

Balance as at December 31,

2010 Turnover rate

Overdue receivables Amount collectedsubsequent to the

balance sheet date

Allowance for doubtful accounts Amount Action taken

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

$ 116,685 3.07 $ - - $ - $ -

I. Derivative financial instruments undertaken during the year ended December 31, 2010: Please refer to Note 10(7).

～ 53 ～

2) Information on investee companies for the year ended December 31, 2010

Investee Location Main activities

Initial investment amount

Shares held as at December 31, 2010

Net income (loss) of the

investee

Investment income (loss)

recognized by the

Company Remark

Balance as at

12/31/10 Balance

as at 12/31/09 No. of shares(in thousands)

Ownership (%) Book value

Opto Tech Corp. holds—

Opto Technology International Group Co., Ltd.

Cayman Islands

Holding Company $ 946,104 $ 884,484 28,770 100.00 $ 694,962 ($ 68,225) ($ 68,225) Subsidiary of the Company

Ho Chung Investment Co., Ltd.

Taiwan Investment business 288,300 288,300 23,830 100.00 67,285 8,533 17,170


Jyu Shin Investment Co., Ltd.

Taiwan Investment business 125,687 78,678 12,569 100.00 231,344 38,732 38,732 Subsidiary of the Company

CS Bright Corporation Taiwan Manufacture and Sales of Displays, SMD Lamps and other LED related products

- 577,247 - - - 54,939 98,104 Subsidiary of the Company

Note 1 Note 2

Source Ever Limited B.V.I. International trading - - - 100.00 - - - Subsidiary of the Company

Note 3 Viking Tech

Corporation Taiwan R&D, Manufacture and Sales of SMD Chip

Resistor, DIP Power Resistor, High Frequency Ceramic Chip Inductor, SMD Ferrite Inductor, Power Inductor, Capacitor Integrated Passive Devices

291,301 291,301 7,209 9.90 132,934 229,635 22,924 Long-term investment

accounted for under equity

method Note 1: For the year ended December 31, 2010, the Company recognized investment income of $ 14,394 from its subsidiary, CS Bright Corporation, based on the Company’s ownership. Besides, the Company received

$83,710 from China Semiconductor Corporation, which was originally evaluated as uncollectible, and was recognized as investment income. Note 2: CS Bright Corporation covered losses by reducing capital on August 23, 2010. After the capital reduction, the holding shares of the Corporation decreased from 1,962,883 to 1. On August 24, 2010, CS Bright

Corporation then increased capital, but the Corporation did not participate in the capital increase. Therefore, the ownership ratio decreased to 0.00002%. On November 25, 2010, the Company sold the remaining 1 share to Jyu Shin investment Co. Ltd., which is the subsidiary of the Company, and the holding shares of the Company decreased to 0.

Note 3: Source Ever Limited, an offshore trading company in BVI and a 100% owned subsidiary of the Company, was incorporated on April 26, 2010.

～ 54 ～





investee


recognized by the

Company Remark

Balance as at

12/31/10 Balance



Ho Chung Investment Co., Ltd. holds—

CS Bright Corporation Taiwan Manufacture and Sales of Displays, SMD Lamps and other LED related products

$ - $ 25,285 - - $ - $ 54,939

$ 10,372 Long-term investment


method (Note 1)

Viking Tech Corporation

Taiwan R&D, Manufacture and Sales of SMD Chip Resistor, DIP Power Resistor, High Frequency Ceramic Chip Inductor, SMD Ferrite Inductor, Power Inductor, Capacitor Integrated Passive Devices



method VML Technologies B.V.

Holland Manufacture and Design of system products 37,436 37,436 6 25.00 - ( 6,317) ( 2,092) Long-term investment


method Jyu Shin Investment Co., Ltd. holds—

CS Bright Corporation Taiwan Manufacture and Sales of Displays, SMD

Lamps and other LED related products 50,170 - 4,994 99.87 103,494 54,939 19,544 Subsidiary of

the Company (Note 1)

Viking Tech Corporation

Taiwan R&D, Manufacture and Sales of SMD Chip Resistor, DIP Power Resistor, High Frequency Ceramic Chip Inductor, SMD Ferrite Inductor, Power Inductor, Capacitor Integrated Passive Devices



method CS Bright Corporation holds—

Gigantic Pacific Investments Ltd.

B.V. I. Investment business - 281,707 - - - 26,158

26,158 Indirect subsidiary (Note 2)

Bright Investment International Ltd.

B.V. I. Investment business 168,421 168,421 USD 4,980 100.00 889 8,776 8,776 Indirect subsidiary

Note 1: CS Bright Corporation covered losses by reducing its capital on August 23, 2010. After the capital reduction, the holding shares of Ho Chung Investment Co., Ltd. decreased from 2,528,473 to 0. On August 24, 2010, CS Bright Corporation then increased its capital, but Ho Chung Investment Co., Ltd. did not participate in the capital increase. Therefore, the ownership ratio decreased to 0%. On the other hand, Jyu Shin investment Co., Ltd., which was a 100% owned subsidiary of the Company, participated in the capital increase of CS Bright Corporation, and the ownership was 94.02%, and the number of shares amounted to 4,701 thousands. On November 11, 2010, Jyu Shin investment Co. Ltd. acquired the outside shares, and the ownership increased to 99.87%.

Note 2: Gigantic Pacific Investments Ltd., an indirect subsidiary of CS Bright Corporation, was liquidated in October, 2010.

～ 55 ～





investee


recognized by the

Company Remark

Balance as at

12/31/10 Balance



Gigantic Pacific Investments Ltd. holds—

Shaoxing Yilida Electronics Co., Ltd.

China Manufacture and Sales of LED and Electronic Products

USD$ - USD$ 5,069 USD$ - - USD$ - USD$ - USD$ - Indirect

subsidiary (Note 1)

Bright Investment International Ltd. holds—


B.V. I. Investment business USD 4,980 USD 4,980 USD 4,980 71.43 USD 1,729

USD 241

USD 278 Indirect subsidiary

Everyung Investment Ltd. holds—

Opto Plus Technology Co., Ltd.

China Manufacture and Sales of LED and Electronic Products

USD 6,980 USD 4,980 USD 6,980 100.00 USD 2,420

USD 241

USD 241 Indirect subsidiary

Opto Technology International Group Co., Ltd. holds—

Opto Tech (Cayman) Co., Ltd.

Cayman Islands

Holding Company USD 6,670 USD 6,670 USD 6,670 100.00 USD 906

(USD 1,286) (USD 1,286) Indirect subsidiary

Opto Grand (Cayman) Co., Ltd.

Cayman Islands

Holding Company USD 20,000 USD 20,000 USD 20,000 100.00 USD 22,145

(USD 841) (USD 841) Indirect subsidiary


B.V. I. Investment business USD 2,000 - USD 2,000 28.57 USD 692

USD 241 (USD 38) Indirect subsidiary (Note 2)

Opto Tech (Cayman) Co., Ltd. holds—


China Research, Design and Manufacture of LED Display, Wireless Communication Equipment and related parts

Opto Tech (Hong Kong) Co., Ltd.

Hong Kong International trading USD 6,000 USD 6,000 USD 6,000 100.00 USD 132

(USD 1,526) (USD1,526) Indirect subsidiary

Opto Tech (Macao) Co., Ltd.

Macao International trading USD 288 USD 288 USD 288 100.00 USD 283


Opto Grand (Cayman) Co., Ltd. holds—

USD 372 USD 372 USD 372 100.00 USD 480

USD 241 USD 241 Indirect subsidiary

Opto Tech Semiconductor (Ningbo) Co., Ltd.

China Manufacture and Sales of LED and Electronic products

USD 20,000 USD 20,000 USD 20,000 100.00 USD 22,131


Note 1: Shaoxing Yilida Electronics Co., Ltd., an indirect subsidiary of CS Bright Corp., was liquidated in January 2010.

Note 2: On October 26, 2010, Opto Technology International Group Co., Ltd. increased its capital by USD 2,000 thousand dollars by cash to its subsidiary - Everyung Investment Ltd., and the ownership ratio is 28.57%.

～ 56 ～

2) Information on Mainland China investments

A. Information on Mainland China investments for the year ended December 31, 2010

Investee in Mainland China Main activities Paid-in capital

Investment method

Accumulated amount of

remittance to Mainland China as of January 1, 2010

Amount remittedto Mainland China

during the year

Amount remitted back to Taiwan during

the year

Accumulated amount of remittance to

Mainland China as of December 31, 2010

Ownership held by the Company (direct and indirect)

Investment income (loss) recognized by the Company for the year

(Note 2)

Book value of investments in

Mainland China as of December

31, 2010

Accumulated amount of

investment income remitted back to

Taiwan as of December 31, 2010


Research, Design and Manufacture of LED Display, Wireless Communication Equipment and related parts

$ 207,510

USD 6,000

Note 1(2) $ 207,510

USD 6,000

$ - $ -

$ 207,510

USD 6,000

100.00% ($ 48,096)

(USD 1,526)

$ 3,845

USD 132

$ -

Opto Tech Semiconductor (Ningbo) Co., Ltd.

Manufacture and Sales of LED and Electronic products

651,721

USD 20,000

Note 1(2) 651,721

USD 20,000

- - 651,721

USD 20,000

100.00% ( 26,506)

(USD 841)

644,676

USD 22,131

-

Shaoxing Yilida Electronics Co., Ltd. (Note 3)

〞

176,753

USD 5,069

Note 1(2) 176,753

USD 5,069

- 33,225

USD 1,037

143,528

USD 4,032

- -

USD -

-

-

-

Opto Plus Technology Co., Ltd.

〞

168,617

USD 4,980

Note 1(2) 168,617

USD 4,980

61,620

USD 2,000

- 230,237

USD 6,980

99.87% 7,596

USD 241

70,495

USD 2,420

-

Accumulated amount of remittance from Taiwan to Mainland China as of December 31, 2010

Investment amount approved by the Investment Commission of the

Ministry of Economic Affairs (MOEA)

Ceiling on investments in Mainland China imposed by

the Investment Commission of MOEA

$ 1,232, 996 USD 35,000 $ 4,244,828

Note 1: The investment methods are classified into five categories as follows:

(1) Remitting investment funds to the investee company in Mainland China through the third area.

(2) Setting up a company in the third area, which then invested in the investee company in Mainland China.

(3) Through investing in an existing company in the third area, which then invested in the investee company in Mainland China.

(4) Directly investing in the investee company in Mainland China.

(5) Other.

Note 2: The investment income or loss was recognized by indirect weighted ownership based on the financial statements of these investees which were not audited by the independent accountants of the parent company for the corresponding

periods.

Note 3: Shaoxing Yilida Electronics Co., Ltd., an indirect subsidiary of CS Bright Corp., was liquidated in January 2010.

B. The significant events occurring due to investment through the third area and the investees in Mainland China for the year ended December 31, 2010 were as follows:

(1)The Company sold semi-finished goods and finished goods of LED to Opto Tech (Suzhou) Co., Ltd. during the year ended December 31, 2010, amounting to $7,068, comprising 0.09% of net sales of the Company. As of December 31, 2010,

accounts receivable from Opto Tech (Suzhou) Co., Ltd. was $2,572, comprising 0.13% of the accounts receivable of the Company. The Company sold semi-finished goods to Opto Plus Technology Co., Ltd., amounting to $23,446,

comprising 0.31% of net sales of the Company. As of December 31, 2010, accounts receivable from Opto Plus Technology Co., Ltd. was $3,621, comprising 0.18% of the accounts receivable of the Company.

(2)The Company purchased semi-finished goods from Opto Tech (Suzhou) Co., Ltd. during the year ended December 31, 2010, amounting to $32,476, comprising 0.67% of net purchases of the Company. As of December 31, 2010, accounts

payable from Opto Tech (Suzhou) Co., Ltd. was $1,257, comprising 0.07% of the accounts payable of the Company.

～ 57 ～

12. SEGMENT INFORMATION

1) Financial information by industry


Semiconductor

department System

department Other

department Total Operating income from

the parent company $ 6,766,969 $ 906,673 $ 11 $ 7,673,653

Gains and losses from departments

$ 925,392 ($ 40,638) ($ 138,322)

$ 746,432

Gains and losses from investments

101,229

Interest expenses ( 37,151)

Income before income tax from continuing operations

$ 810,510

Identifiable assets $ 4,391,569 $ 497,153 $ 5,287,595 $ 10,176,317

Funds and long-term investments

1,779,636

Total assets $ 11,955,953

Depreciation $ 318,534 $ 29,179 $ 155,931 $ 503,644

Capital expenditures $ 535,726 $ 8,469 $ 79,251 $ 623,446


Semiconductor

department System

department Other

department Total Operating income from

the parent company $ 4,570,277 $ 837,253 $ 78 $ 5,407,608

Gains and losses from departments

$ 402,592 $ 38,346 ($ 36,260)

$ 404,678

Gains and losses from investments

( 61,078)

Interest expenses ( 45,863)

Income before income tax from continuing operations

$ 297,737

Identifiable assets $ 3,661,597 $ 563,430 $ 5,649,100 $ 9,874,127

Funds and long-term investments

1,764,662

Total assets $ 11,638,789

Depreciation $ 283,480 $ 29,890 $ 195,120 $ 508,490

Capital expenditures $ 164,851 $ 24,048 $ 37,850 $ 226,749

～ 58 ～

2) Financial information by geographic area

The Company has no overseas operations. Therefore, R.O.C. SFAS No. 20, “Disclosure of

Segment Financial Information” is not applicable.

3) Export sales by geographic area for the years ended December 31, 2010 and 2009

For the years ended December 31, Area 2010 2009

Southeast Asia $ 3,428,595 $ 2,409,527

Northeast Asia 740,295 556,247

America 481,244 492,893

Europe 43,930 155,776

Others (all of them are less than 10%) 98,280 56,673

$ 4,792,344 $ 3,671,116

4) Information on major customers

The customers accounting for more than 10% of the Company’s operating revenues for the years

ended December 31, 2010 and 2009 are set forth below:


Customer

Sales amount

% of total

operating revenues Sales department

Company A $ 977,000 12.73 Semiconductor department

Company B 834,520 10.88 Semiconductor department


Customer

Sales amount

% of total

operating revenues Sales department

Company A $ 644,677 11.92 Semiconductor department

OPTO TECH CORPORATION AND REPORT OF INDEPENDENT … · 2011-06-30 · Accumulated impairment (...

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