EXHIBIT 99.1
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2003 and 2004
(Independent Auditors’ Report)
Independent Auditors’ Report
The Board of Directors
Ulead Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Ulead Systems Inc. and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 consolidated financial statements referred to in the first paragraph above present fairly, in all material respects, the consolidated financial position of Ulead Systems Inc. and subsidiaries as of December 31, 2003 and 2004, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles in the Republic of China.
The accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 17 to the consolidated financial statements.
KPMG Certified Public Accountants
Taipei, Taiwan (the Republic of China)
July 20, 2005
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2004
(Expressed in thousands of New Taiwan dollars and US dollars)
2003 | 2004 | ||||||||
NT$ | NT$ | US$ note 2(o) | |||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and deposits (note 3) | 212,931 | 393,252 | 12,390 | ||||||
Short-term investments (notes 4 and 12) | 691,153 | 460,673 | 14,514 | ||||||
Notes and accounts receivable, net (note 5) | 237,840 | 239,209 | 7,537 | ||||||
Receivables from related parties (note 13) | 714 | — | — | ||||||
Other current financial assets | 5,813 | 2,038 | 64 | ||||||
Inventory, net | 38,914 | 43,854 | 1,382 | ||||||
Prepayments and other current assets (note 9) | 40,629 | 29,744 | 936 | ||||||
Net deferred tax assets (note 9) | 4,377 | 8,381 | 264 | ||||||
Total current assets | 1,232,371 | 1,177,151 | 37,087 | ||||||
Long-term investments (notes 6 and 12): | |||||||||
cost method | 130,695 | 90,212 | 2,842 | ||||||
Property, plant and equipment (note 7): | |||||||||
Land | 359,114 | 344,269 | 10,847 | ||||||
Buildings | 168,646 | 162,107 | 5,107 | ||||||
Computer equipment and others | 110,768 | 100,501 | 3,166 | ||||||
638,528 | 606,877 | 19,120 | |||||||
Less: accumulated depreciation | (78,758 | ) | (76,006 | ) | (2,394 | ) | |||
Net property, plant and equipment | 559,770 | 530,871 | 16,726 | ||||||
Other assets: | |||||||||
Leased assets, net (note 7) | 107,915 | 128,485 | 4,048 | ||||||
Net deferred tax assets, non-current (note 9) | 59,185 | 62,669 | 1,975 | ||||||
Cost of computer software and others | 65,149 | 53,456 | 1,684 | ||||||
Total other assets | 232,249 | 244,610 | 7,707 | ||||||
Total assets | 2,155,085 | 2,042,844 | 64,362 | ||||||
The accompanying notes to Consolidated Financial Statements are integral part of these financial statements.
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31, 2003 and 2004
(Expressed in thousands of New Taiwan dollars and US dollars except par value)
2003 | 2004 | ||||||||
NT$ | NT$ | US$ note 2(o) | |||||||
Liabilities and Stockholders’ Equity | |||||||||
Current liabilities: | |||||||||
Notes and accounts payable | 25,116 | 31,140 | 981 | ||||||
Accrued expenses and other current liabilities | 133,721 | 202,803 | 6,390 | ||||||
Total current liabilities | 158,837 | 233,943 | 7,371 | ||||||
Other liabilities: | |||||||||
Accrued pension liability (note 8) | 24,983 | 30,415 | 958 | ||||||
Minority interest | — | 10,240 | 323 | ||||||
Guarantee deposit received | 2,393 | 2,812 | 88 | ||||||
27,376 | 43,467 | 1,369 | |||||||
Total liabilities | 186,213 | 277,410 | 8,740 | ||||||
Stockholders’ equity: | |||||||||
Common stock, NT$ 10 par value (note 10) | 782,884 | 782,884 | 24,666 | ||||||
Capital surplus (note 10) | 1,107,709 | 1,114,745 | 35,121 | ||||||
Retained earnings (accumulated deficit) (note 10): | |||||||||
Legal reserve | 59,414 | 66,650 | 2,100 | ||||||
Unappropriated earnings (accumulated deficit) | 137,670 | (77,611 | ) | (2,445 | ) | ||||
197,084 | (10,961 | ) | (345 | ) | |||||
Cumulative translation adjustments | 22,214 | 9,248 | 291 | ||||||
Treasury stock (note 10) | (141,019 | ) | (130,482 | ) | (4,111 | ) | |||
Total stockholders’ equity | 1,968,872 | 1,765,434 | 55,622 | ||||||
Total liabilities and stockholders’ equity | 2,155,085 | 2,042,844 | 64,362 | ||||||
The accompanying notes to Consolidated Financial Statements are integral part of these financial statements.
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For The Years Ended December 31, 2003 and 2004
(Expressed in thousands of New Taiwan dollars and US dollars, except for per share data)
2003 | 2004 | |||||||
NT$ | NT$ | US$ note 2(o) | ||||||
Net revenues(notes 13 and 16) | 1,178,119 | 1,329,410 | 41,884 | |||||
Cost of revenues(note 15) | 162,989 | 150,442 | 4,739 | |||||
Gross profit | 1,015,130 | 1,178,968 | 37,145 | |||||
Operating expenses (notes 8 and 15): | ||||||||
Selling | 497,120 | 598,042 | 18,842 | |||||
General and administrative | 142,980 | 194,646 | 6,133 | |||||
Research and development | 327,261 | 350,560 | 11,044 | |||||
Total operating expenses | 967,361 | 1,143,248 | 36,019 | |||||
Operating income | 47,769 | 35,720 | 1,126 | |||||
Non-operating income: | ||||||||
Gain on disposal of short-term investments, net (note 4) | 75,492 | — | — | |||||
Foreign currency exchange gain, net | 20,185 | 300 | 9 | |||||
Rental income | 14,009 | 12,112 | 382 | |||||
Other income | 16,223 | 14,068 | 443 | |||||
125,909 | 26,480 | 834 | ||||||
Non-operating expenses and losses: | ||||||||
Loss on disposal of short-term investments, net (note 4) | — | 17,379 | 548 | |||||
Long-term investment-permanent impairment loss (note 6) | 41,795 | 40,000 | 1,260 | |||||
Provision for inventory obsolescence | 27,206 | 18,907 | 596 | |||||
Other loss | 6,505 | 4,046 | 127 | |||||
75,506 | 80,332 | 2,531 | ||||||
Income (losses) before income tax and minority interest | 98,172 | (18,132 | ) | (571 | ) | |||
Income tax expense (note 9) | 25,816 | 70,229 | 2,213 | |||||
Income (loss) before minority interest | 72,356 | (88,361 | ) | (2,784 | ) | |||
Minority interest in loss | — | (3,630 | ) | (114 | ) | |||
Net income (loss) | 72,356 | (84,731 | ) | (2,670 | ) | |||
Basic and diluted earnings (losses) per common share (in dollars) (note 11) | 1.01 | (1.19 | ) | (0.04 | ) | |||
The accompanying notes to Consolidated Financial Statements are integral part of these financial statements.
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For The Years Ended December 31, 2003 and 2004
(Expressed in thousands of New Taiwan dollars and US dollars and shares)
Capital Stock | Retained earnings | |||||||||||||||||||||
Common shares | Common stock | Capital surplus | Legal reserve | Unappropriated earnings (Accumulated deficits) | Cumulative translation adjustments | Treasury stock | Total | |||||||||||||||
Balance at January 1, 2003 | 78,288 | $ | 782,884 | 1,110,046 | 56,765 | 67,990 | 15,482 | (92,246 | ) | 1,940,921 | ||||||||||||
Appropriation for legal reserve | — | — | — | 2,649 | (2,649 | ) | — | — | — | |||||||||||||
Net income for 2003 | — | — | — | — | 72,356 | — | — | 72,356 | ||||||||||||||
Effect of disproportionate participation in investee’s capital increase | — | — | (199 | ) | — | — | — | — | (199 | ) | ||||||||||||
Disposal of investee | (2,138 | ) | (2,138 | ) | ||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | — | 6,732 | — | 6,732 | ||||||||||||||
Purchase of treasury stock | — | — | — | — | — | — | (72,991 | ) | (72,991 | ) | ||||||||||||
Treasury stock transferred to employees | — | — | — | — | (27 | ) | — | 24,218 | 24,191 | |||||||||||||
Balance at December 31, 2003 | 78,288 | 782,884 | 1,107,709 | 59,414 | 137,670 | 22,214 | (141,019 | ) | 1,968,872 | |||||||||||||
Appropriation for legal reserve | — | — | — | 7,236 | (7,236 | ) | — | — | — | |||||||||||||
Cash dividends | — | — | — | — | (107,232 | ) | — | — | (107,232 | ) | ||||||||||||
Employees’ profit share paid in cash | — | — | — | — | (12,325 | ) | — | — | (12,325 | ) | ||||||||||||
Directors’ and supervisors’ remuneration | — | — | — | — | (3,698 | ) | — | — | (3,698 | ) | ||||||||||||
Net loss for 2004 | — | — | — | — | (84,731 | ) | — | — | (84,731 | ) | ||||||||||||
Effect of disproportionate participation in investee’s capital increase | — | — | 9,068 | — | — | — | — | 9,068 | ||||||||||||||
Disposal of investee | (2,032 | ) | (2,032 | ) | ||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | — | (12,966 | ) | — | (12,966 | ) | ||||||||||||
Purchase of treasury stock | — | — | — | — | — | — | (24,217 | ) | (24,217 | ) | ||||||||||||
Treasury stock transferred to employees | — | — | — | — | (59 | ) | — | 34,754 | 34,695 | |||||||||||||
Balance at December 31, 2004 | 78,288 | 782,884 | 1,114,745 | 66,650 | (77,611 | ) | 9,248 | (130,482 | ) | 1,765,434 | ||||||||||||
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003 and 2004
(Expressed in thousands New Taiwan dollars and of US dollars)
2003 | 2004 | ||||||||
NT$ | NT$ | US$ note 2(o) | |||||||
Cash flows from operating activities: | |||||||||
Net income (loss) | 72,356 | (84,731 | ) | (2,670 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 39,274 | 46,906 | 1,478 | ||||||
Minority interest in loss | — | (3,630 | ) | (114 | ) | ||||
Provision for bad debts | 5,138 | 4,914 | 155 | ||||||
Provision for inventory devaluation | 27,206 | 18,907 | 596 | ||||||
Investment loss under cost method | 41,795 | 40,000 | 1,260 | ||||||
Loss (gain) from disposal of short-term investments, net Changes in assets and liabilities: | (75,492 | ) | 17,379 | 548 | |||||
Decrease (increase) in notes and accounts receivable (including related parties) | 71,505 | (5,569 | ) | (175 | ) | ||||
Increase in inventory | (26,151 | ) | (23,847 | ) | (751 | ) | |||
Increase (decrease) in prepayments, other current assets, and other current financial assets | (14,123 | ) | 14,660 | 462 | |||||
Decrease in net deferred income tax assets | (11,194 | ) | (7,488 | ) | (236 | ) | |||
Increase (decrease) in notes and accounts payable | (10,595 | ) | 6,024 | 190 | |||||
Increase in accrued expense and other current liabilities | 32,746 | 68,029 | 2,143 | ||||||
Others | (1,018 | ) | 4,751 | 148 | |||||
Net cash provided by operating activities | 151,447 | 96,305 | 3,034 | ||||||
Cash flows from investing activities: | |||||||||
Decrease (increase) in short-term investments | (83,193 | ) | 218,798 | 6,893 | |||||
Decrease (increase) in long-term investments | 4,703 | (7,246 | ) | (228 | ) | ||||
Acquisition of property, plant and equipment and computer software | (51,609 | ) | (26,498 | ) | (835 | ) | |||
Others | (1,022 | ) | 295 | 10 | |||||
Net cash provided by (used in) investing activities | (131,121 | ) | 185,349 | 5,840 | |||||
Cash flows from financing activities: | |||||||||
Purchase of treasury stock | (72,991 | ) | (24,217 | ) | (763 | ) | |||
Treasury stock transferred to employees | 24,191 | 34,695 | 1,093 | ||||||
Cash dividends payment | — | (106,179 | ) | (3,345 | ) | ||||
Employees’ profit sharing | — | (12,325 | ) | (388 | ) | ||||
Directors’ and supervisors’ remuneration | — | (3,698 | ) | (117 | ) | ||||
Others | (2,073 | ) | 23,357 | 736 | |||||
Net cash used in financing activities | (50,873 | ) | (88,367 | ) | (2,784 | ) | |||
Effect of exchange rate changes | 6,732 | (12,966 | ) | (409 | ) | ||||
Net increase (decrease) in cash and deposits | (23,815 | ) | 180,321 | 5,681 | |||||
Cash and deposits at beginning of year | 236,746 | 212,931 | 6,709 | ||||||
Cash and deposits at end of year | 212,931 | 393,252 | 12,390 | ||||||
Supplemental disclosure of cash flow information: | |||||||||
Cash paid for income tax | 34,135 | 60,774 | 1,915 | ||||||
Supplemental disclosure of non-cash investing and financial activities: | |||||||||
Long-term investments transferred to short-term investments | 50,085 | 7,729 | 244 | ||||||
The accompanying notes to Consolidated Financial Statements are integral part of these financial statements.
ULEAD SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of and for the years ended December 31, 2003 and 2004
(1) | Organization |
Ulead Systems Inc. (Ulead or the “Company”) was incorporated on August 5, 1989, under the Company Law of the Republic of China (ROC). Ulead’s primary operations include the design, production, and sale of multimedia and image editing software. Ulead sells products through PC original equipment manufacturers (“OEMs”), retail channels and directly to consumers through the websites. On September 19, 2001, Ulead’s common shares were publicly listed on the Taiwan Stock Exchange.
Ulead established subsidiaries in the U.S., Japan, Germany, and mainland China. The primary operations of these subsidiaries include the design, productions, research and development, and sale of multimedia and image editing software applications.
As of December 31, 2004, the number of employees hired by Ulead and subsidiaries was 558.
(2) | Summary of Significant Accounting Policies |
(a) | Basis of presentation |
The accompanying consolidated financial statements include the accounts of Ulead and its subsidiaries. All significant inter-company accounts and transaction have been eliminated. The accompanying consolidated financial statements are prepared in accordance with the accounting principles and practices generally accepted in the Republic of China (ROC GAAP). These consolidated financial statements are not intended to present the financial position and the related results of operations and cash flows of the Company and subsidiaries based on accounting principles and practices generally accepted in countries and jurisdictions other than the ROC.
(b) | Use of estimates |
The preparation of the accompanying consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. Economic conditions and events could cause actual results to differ significantly from such management estimates.
(Continued)
(c) | Foreign currency transactions and translation |
Ulead’s functional currency is the New Taiwan dollar. Ulead and its subsidiaries record transactions in their respective local currencies. The translation from the applicable foreign currency assets and liabilities to the New Taiwan dollar is performed using exchange rates in effect at the balance sheet date except for stockholders’ equity, which is translated at historical exchange rates. Revenue and expense accounts are translated using average exchange rates during the year. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of stockholders’ equity.
Foreign currency transactions are recorded at the exchange rates prevailing at the transaction dates. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated using the exchange rates prevailing on that date. The resulting exchange gains or losses from settlement of such transactions or translations of monetary assets and liabilities are reflected in the accompanying consolidated statements of operations.
(d) | Short-term investments |
Short-term investments consist of open-end mutual funds, convertible corporate bonds, and listed and over-the-counter (OTC) equity securities stated at the lower of cost or market value. The market values of convertible corporate bonds, and listed and OTC equity securities are valued using the average closing price of the last month of the accounting period. Open-end mutual funds are based on the net value of the assets at the balance sheet date. The cost of investments sold is determined using the weighted-average method.
(e) | Allowance for doubtful accounts |
The allowance for doubtful accounts is provided based on prior recovery experience, aging analysis, credit quality and result of the Company’s evaluation of collectibility of the outstanding balance of notes and accounts receivable.
(f) | Inventory |
Inventory includes manuals, related books, software package and material cost, including disk, CD duplication, packaging and labeling materials. Inventory is stated at the lower of cost or market value. Cost is determined using the weighted-average method. Market value for raw materials is determined by using the replacement cost. The market value of finished goods is determined based on net realizable value.
(g) | Long-term investments |
Long-term equity investments in which the Company owns less than 20% of the investee’s voting shares are accounted for using the cost method. If there is evidence indicating that a decline in the value of an investment is other than temporary, then the carrying amount of the investment is reduced to reflect its net realizable value. The related loss is recognized in the accompanying consolidated statement of operations.
The differences resulting from translation of the financial statements of foreign subsidiaries into New Taiwan dollar are recorded as cumulative translation adjustments, a separate component of stockholders’ equity.
When long-term investments are transferred to short-term investments, the transferred costs are stated at the lower of cost or market value. If the market value is less than the cost, the cost of investment is written down to the market value as a loss, and the market value becomes the new cost.
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(h) | Property, plant and equipment and leased assets |
Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expenses as incurred; significant additions, renewals, and improvements are treated as capital expenditures and depreciated accordingly. Gains (losses) on disposal of property, plant and equipment are accounted for as non-operating income (losses).
Property and equipment leased to other parties under operating leases are classified as leased assets.
Excluding land, depreciation of property, plant and equipment and leased assets is provided using the straight-line method less any salvage value over the following estimated useful lives: Buildings (including improvements) – 3 ~ 50 years, office equipment – 3 ~ 15 years, leasehold improvement – shorter of 5 years or the lease term, and other equipment – 3~ 5 years.
(i) | Software development and purchase costs |
Under ROC GAAP, the costs incurred in the research and development of software are expensed as incurred until technological feasibility has been established. Software development costs incurred subsequent to establishment of technological feasibility through the period of general marketability of the products are immaterial, and accordingly, the Company expenses all research and development costs.
The capitalized cost of software purchased for internal use is amortized using the straight-line method over the estimated useful lives of one to three years.
(j) | Employee retirements plan |
Ulead had established an employee noncontributory, defined benefit retirement plan covering full-time employees in the ROC. In accordance with the Plan, employees are eligible for retirement or are required to retire after meeting certain age or service requirements. Payments of retirement benefits are based on years of service and the average salary for the six-month period before the employees’ retirement. Each employee earns two months of salary for the first fifteen years of service, and one month of salary for each year of service thereafter. The maximum retirement benefit is 45 months of salary. Ulead contributes two percent of wages and salaries to a pension fund maintained with the Central Trust of China on a monthly basis. Retirement benefits are paid to eligible participants on a lump-sum basis upon retirement.
Ulead has adopted Republic of China Statement of Financial Accounting Standards (SFAS) No.18, “Accounting for Pensions” for its retirement plan. SFAS No.18 requires Ulead to perform an actuarial calculation on its pension obligation as of each fiscal year-end. Based on the actuarial calculation, Ulead recognizes a minimum pension liability and net periodic pension cost covering the service lives of the retirement plan participants.
Ulead Japan has an employees’ defined benefit plan, and provided a monthly provision based on the retirement plan, and recognized expenses as services incurred. Ulead Beijing and Ulead Xi’an have defined contribution plans based on local government regulation. Cash contributions to these plans are expensed as incurred.
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(k) | Recognition of income and cost |
The Company sells its software products through ‘OEMs’, retail channels via distributors and direct to end-users (mainly online sales). Revenue thereon is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, the product or service has been delivered and collectibility of the resulting receivable is reasonably assured.
For software product sales to OEMs, revenue is recognized based on evidence of products being sold by the OEMs to end customers or to the OEM’s sales channel partners.
Under certain OEM agreements, revenue from the fixed software licensing fee that is due to the Company is recognized upon delivery of the first copy or product master of the software, regardless of the number of copies requested by the customer.
The Company sells software products to retailers through its distributors either on a consignment or non-consignment basis. For consignment products shipments, revenue is recognized when ownership of the product is transferred from the Company to the retailer or end customer and the distributor has reported the actual sales of the retailer to the Company. For non-consignment product shipments, revenue is recognized when the product is shipped to the distributor. Expected returns are accrued in the year when sales are made based on past experience.
End users sales are made directly through the websites. The revenue thereon is recognized upon delivery of products and the receipt of payment through credit card authorization.
(l) | Income tax |
Income taxes are accounted for under the asset and liability method. Deferred income taxes are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, net operating loss carryforwards and income tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly.
Classification of the deferred income tax assets or liabilities as current or non-current is based on the classification of the related asset or liability. If the deferred income tax asset or liability is not directly related to a specific asset or liability, then the classification is based on the expected realization date of such deferred income tax assets or liability.
According to the Republic of China Income Tax Law, Ulead’s undistributed income, if any, earned after December 31, 1997, is subject to an additional 10 percent retained earning tax. This surtax is charged to income tax expense in the year when the stockholders approved a resolution not to distribute the earnings.
(m) | Treasury stock |
The Company has adopted Republic of China SFAS No.30, “Accounting for Treasury Stock” for treasury stock repurchased by the Company. Under this standard, treasury stock is accounted for under the cost method. The cost of treasury stock is shown as a deduction to stockholders’ equity, while any gain or loss from the sale of treasury stock is treated as an adjustment to capital surplus or retained earnings.
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(n) | Earnings per common share |
Earnings per share of common stock (“EPS”) is computed based on the weighted-average number of common shares in each period. EPS for prior periods is retroactively adjusted to reflect the effects of new shares issued from the capitalization of capital surplus, unappropriated earnings and employee bonuses.
(o) | Convenience translation into U.S. dollars |
The consolidated financial statements are stated in New Taiwan dollars. Translation of the 2004 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers, using the noon buying rate of the Federal Reserve Bank in New York on December 31, 2004, of NT$31.74 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be converted into U.S. dollars at this rate or any other rate of exchange.
(3) | Cash and Cash Deposits |
As of December 31, | ||||||
2003 | 2004 | |||||
NT$ | NT$ | US$ | ||||
Cash, checking accounts, and demand deposits | 195,731 | 344,824 | 10,864 | |||
Time deposits | 17,200 | 48,428 | 1,526 | |||
212,931 | 393,252 | 12,390 | ||||
(4) | Short-term Investments |
As of December 31, | ||||||
2003 | 2004 | |||||
NT$ | NT$ | US$ | ||||
Open-end mutual fund | 664,830 | 436,337 | 13,747 | |||
Listed and OTC equity securities | 26,323 | 24,336 | 767 | |||
691,153 | 460,673 | 14,514 | ||||
Fair value | 708,110 | 477,664 | 15,049 | |||
(a) | The equity investment in IA Style, Inc. (IA) was accounted for by using the cost method. However, High Tech Computer Corp. (HTCC) merged with IA on March 1, 2004, and IA had been dissolved. One HTCC share was issued in exchange for every 5.42 IA shares. Ulead reclassified its equity investment in HTCC to short term investment on merger date. The original investment cost of NT$7,729 thousand was adopted as the new cost because market value was higher than cost on reclassification date. |
(b) | The stock investment in Sysware Co., Ltd. was reclassified to short-term investments when the equity shares of Sysware Co., Ltd., started to be traded on the ROC OTC on January 6, 2003. The original investment cost of NT$50,085 thousand was adopted as the new cost because market value was higher than cost on the transfer date. |
(c) | Gain (loss) on sale of short-term investments in 2003 and 2004 amounted to NT$75,492 thousand, and NT$(17,379) (US$548) thousand respectively. |
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(5) | Notes and Accounts Receivable |
As of December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Notes receivable | 7,445 | 7,130 | 225 | ||||||
Accounts receivable | 243,356 | 236,883 | 7,463 | ||||||
250,801 | 244,013 | 7,688 | |||||||
Less: allowance for doubtful accounts | (12,961 | ) | (4,804 | ) | (151 | ) | |||
237,840 | 239,209 | 7,537 | |||||||
(6) | Long-term Investments |
As of December 31, | ||||||||||
2003 | 2004 | |||||||||
Investee | Percentage Of Ownership | Book Value | Percentage of Ownership | Book Value | ||||||
NT$ | NT$ | US$ | ||||||||
Cost method: | ||||||||||
PChome Online Information Co., Ltd. | 2.81 | 41,649 | 2.77 | 36,049 | 1,136 | |||||
Pacific Technology Partners L.P. | 0.44 | 15,307 | 0.45 | 19,051 | 600 | |||||
PChome Online Investment Co., Ltd. | 3.03 | 13,600 | 3.03 | 12,420 | 391 | |||||
Image DJ Co., Ltd. | 4.00 | 10,000 | 4.00 | 5,225 | 165 | |||||
Uniongroups Co., Ltd. | 5.98 | 635 | 5.98 | 635 | 20 | |||||
Others | — | 49,504 | — | 16,832 | 530 | |||||
130,695 | 90,212 | 2,842 | ||||||||
Because the value of the equity investments in certain investee companies’ accounted for under the cost method declined materially and permanently, the Company recognized realized loss thereon for the years ended December 31, 2003 and 2004, amounting to NT$41,795 thousand and NT$40,000 (US$1,260) thousand, respectively.
(7) | Property, Plant and Equipment, and Leased Assets |
(a) | As of December 31, 2003 and 2004, the details of leased assets were as follows: |
As of December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Land | 74,965 | 89,811 | 2,830 | ||||||
Buildings | 35,205 | 42,290 | 1,332 | ||||||
110,170 | 132,101 | 4,162 | |||||||
Less: accumulated depreciation | (2,255 | ) | (3,616 | ) | (114 | ) | |||
107,915 | 128,485 | 4,048 | |||||||
(b) | As of December 31, 2003 and 2004, insurance coverage for property, plant and equipment, and leased assets amounted to NT$288,618 thousand and NT$304,330 thousand, respectively. |
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(8) | Retirement Plan |
(a) | The following table sets forth the benefit obligation and accrued pension liabilities related to Ulead’s retirement plans as of December 31, 2003 and 2004: |
As of December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Benefit obligations: | |||||||||
Vested benefit obligation | (1,976 | ) | (2,989 | ) | (94 | ) | |||
Non-vested benefit obligation | (27,288 | ) | (34,924 | ) | (1,101 | ) | |||
Accumulated benefit obligation | (29,264 | ) | (37,913 | ) | (1,195 | ) | |||
Additions based on future salaries | (21,784 | ) | (32,326 | ) | (1,018 | ) | |||
Projected benefit obligation | (51,048 | ) | (70,239 | ) | (2,213 | ) | |||
Fair value of plan assets | 20,951 | 25,833 | 813 | ||||||
Funded status | (30,097 | ) | (44,406 | ) | (1,400 | ) | |||
Unrecognized pension loss | 5,114 | 13,991 | 442 | ||||||
Accrued pension liabilities | (24,983 | ) | (30,415 | ) | (958 | ) | |||
(b) | The net pension costs consisted of the following: |
Year ended December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Service cost | 9,668 | 10,074 | 317 | ||||||
Interest cost | 1,277 | 1,722 | 54 | ||||||
Actual return on plan assets | (53 | ) | (270 | ) | (8 | ) | |||
Amortization of net unrecognized transition cost | (267 | ) | (536 | ) | (17 | ) | |||
Net pension cost | 10,625 | 10,990 | 346 | ||||||
Ulead Beijing and Ulead Xi’an have defined contribution retirement plan based on local government regulation. Net pension costs for these plans, which are expensed when the service is rendered, amounted to NT$2,482 thousand and NT$3,579 thousand, for the years ended December 31, 2003 and 2004, respectively.
(c) | Actuarial assumptions were as follows: |
As of December 31, | ||||
2003 | 2004 | |||
Discount rate used in determining present values (%) | 3.50 | 3.50 | ||
Future salary increase rate (%) | 3.00 | 3.50 | ||
Expected long-term rate of return on plan assets (%) | 3.50 | 3.50 |
(d) | In compliance with the Labor Standards Law and Statement of Financial Accounting Standards No.18-Accounting for Pensions, the Company accrued pension liability based on actuarial results in 2003 and 2004. Pension expense incurred after July 2005 will be calculated in conformity with the new Labor Pension Act, which becomes effective then. |
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(9) | Income Taxes |
(a) | Ulead expansion of operations, through capital injections in 1998, for the production of image processing software, multimedia software, 3-D software, and Internet software meets the prescribed tax incentive criteria under the “Statute for Upgrading Industries”. During stockholders’ meeting held on June 17, 1998, the stockholder decided to avail the five-year income tax exemption benefit, which will end on September 30, 2005 based on the approval of the Ministry of Finance on July 11, 2000. The tax exemption income is subject to income tax at a rate of 0%. The tax emption income amounted to NT$1,485 thousands in 2003 and had no tax impact in 2004 due to loss incurred in the year. |
According to the PRC Tax Law, Ulead Xi’an is subject to income tax at a rate of 33% since it has not applied for preferential tax. Ulead Beijing is subject to income tax at a rate of 15% and can, from the year in which it begins to make profits, be exempted from income tax in the first and second years and allowed a 50% reduction in the third to fifth years. Ulead Beijing began to make profits and started its tax holiday period in 2001. The first year of 50% reduction of income tax was 2003.
(b) | The components of income (loss) before income taxes are summarized as follows: |
Year ended December 31, | ||||||||
2003 | 2004 | |||||||
NT$ | NT$ | US$ | ||||||
Domestic | 90,880 | (60,135 | ) | (1,894 | ) | |||
Foreign | 7,292 | 42,003 | 1,323 | |||||
Income (loss) before income taxes | 98,172 | (18,132 | ) | (571 | ) | |||
The components of income tax expense are summarized as follows:
Year ended December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Current | |||||||||
Domestic | 25,883 | 44,922 | 1,415 | ||||||
Foreign | 11,227 | 32,795 | 1,034 | ||||||
37,010 | 77,717 | 2,449 | |||||||
Deferred | |||||||||
Domestic | (7,359 | ) | (6,149 | ) | (194 | ) | |||
Foreign | (3,835 | ) | (1,339 | ) | (42 | ) | |||
(11,194 | ) | (7,488 | ) | (236 | ) | ||||
Income tax expense | 25,816 | 70,229 | 2,213 | ||||||
(c) | Income tax calculated based on income before income tax and minority interest at statutory rates was reconciled with income tax expense as follows: |
Year ended December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Income tax expense based on income before income tax and minority at statutory rates | 22,539 | 22,149 | 698 | ||||||
Investment tax credits | (52,539 | ) | (20,039 | ) | (632 | ) | |||
Increase in valuation allowance | 44,488 | 30,847 | 971 | ||||||
Tax on undistributed retained earnings | 16,091 | 1,052 | 33 | ||||||
Foreign withholding tax exceeding deductible amount | 13,370 | 46,787 | 1,474 | ||||||
Exemption from income tax on securities trading gain | (18,295 | ) | (4,526 | ) | (142 | ) | |||
Non-deductible expense | 2,248 | 2,602 | 81 | ||||||
Estimation difference | (1,191 | ) | (10,472 | ) | (328 | ) | |||
Other | (1,075 | ) | 1,829 | 58 | |||||
Income tax expense | 25,816 | 70,229 | 2,213 | ||||||
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(d) | The Components of deferred income tax assets were as follows: |
As of December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
Current deferred income tax assets: | |||||||||
Loss on valuation of inventory | 7,171 | 8,750 | 276 | ||||||
Other | 14,965 | 10,191 | 321 | ||||||
Valuation allowance | (17,759 | ) | (10,560 | ) | (333 | ) | |||
4,377 | 8,381 | 264 | |||||||
Non-current deferred income tax assets: | |||||||||
Investment tax credits | 187,459 | 221,936 | 6,992 | ||||||
Investment losses | 73,441 | 65,473 | 2,063 | ||||||
Net operating loss carryforwards | 75,892 | 67,892 | 2,139 | ||||||
Other | 6,870 | 8,546 | 269 | ||||||
Valuation allowance | (284,477 | ) | (301,178 | ) | (9,488 | ) | |||
59,185 | 62,669 | 1,975 | |||||||
Total gross deferred tax assets | 365,798 | 382,788 | 12,060 | ||||||
Total valuation allowance | (302,236 | ) | (311,738 | ) | (9,821 | ) | |||
63,562 | 71,050 | 2,239 | |||||||
Ulead established a valuation allowance amounting to NT$302,236 thousands and NT$311,738 thousand based on the expected future income as of December 31, 2003 and 2004. The valuation increased because Ulead determined it is more likely than not that these deferred tax assets will not be realized in the future.
(e) | According to the Statute for Upgrading Industries, expenditure for research and development and training of professional personnel entitles Ulead to tax credit. This tax credit may be applied over a period of five years except that it is limited to 50% of the income tax payable for the year. There is no limit on the amount of investment tax credit that may be applied in the final year. As of December 31, 2004, Ulead’s remaining investment tax credits and their related expiration years were as follows: |
Year Occurred | Total Creditable Amount | Remaining Creditable Amount | Expiry Year | |||||||
NT$ | US$ | NT$ | US$ | |||||||
2001(assessed) | 36,572 | 1,152 | 25,220 | 795 | 2005 | |||||
2002(filed) | 45,920 | 1,447 | 41,557 | 1,309 | 2006 | |||||
2003(filed) | 64,737 | 2,040 | 78,2658 | 2,466 | 2007 | |||||
2004(estimated) | 65,808 | 2,073 | 76,894 | 2,422 | 2008 | |||||
213,037 | 6,712 | 221,936 | 6,992 | |||||||
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(f) | Integrated income tax information |
As of ended December 31, | ||||||||
2003 | 2004 | |||||||
NT$ | NT$ | US$ | ||||||
Unappropriated earnings (Accumulated deficit): | ||||||||
Earned before January 1, 1998 | 28,136 | — | — | |||||
Earned after January 1, 1998 | 109,534 | (77,611 | ) | (2,445 | ) | |||
137,670 | (77,611 | ) | (2,445 | ) | ||||
Imputation credit account balance | 750 | (652 | ) | (21 | ) | |||
Year ended December 31, | ||||||
2003 | 2004 | |||||
Creditable ratio for earnings distribution to the ROC resident shareholders | — | % | — | % | ||
(actual | ) | (actual | ) |
On January 13, 2004, the local tax authorities has formally issued its assessment report, under which it granted the Company a tax refund for 1998 of NT$1,595 thousand, which exceeded the stockholders’ imputed credit account balance. Such refund resulted in a negative balance for the imputed tax account as of December 31, 2004.
(g) | As of December 31, 2004, Ulead, Ulead Beijing, Ulead Xi’An, and Yoyoung and Ulead USA have available net operating loss carry forwards amounting to US$1,255 thousand and $1,410 thousand, which can be used to reduce taxable income for the years are available up to 2009 and 2021, respectively; likewise, those of Ulead GMBH amounted to 3,081 thousand, which can be used indefinitely. |
(h) | Except for 2000, the ROC tax authorities have assessed Ulead’s income tax returns through 2001. The tax authorities made assessments of 2001 and 1999 tax returns in 2003 and of 1998 tax return in 2004. Based on the results of their assessments of Ulead’s 2001, 1999 and 1998 income tax returns, the tax authority have reduced Ulead’s unutilized tax credits for research and development by NT$4,527 thousand, $7,478 thousand, and NT$6,330 thousand, respectively. Ulead disagreed with these assessments and subsequently filed tax appeals. The reductions in the said unutilized tax credits were recognized by Ulead in the assessment years in the accompanying consolidated statements of operations. |
(10) | Stockholders’ Equity |
(a) | Common stock |
As of December 31, 2003 and 2004, the authorized and issued common stock par value of 10 New Taiwan dollars per share amounted to NT$1,450,000 thousand and NT$782,884 thousand, respectively.
(b) | Treasury stock |
Ulead purchased its own shares with a total cost of NT$72,991 thousand and NT$24,217 thousand, divided into 3,800,000 and 1,120,000 shares for the years ended December 31, 2003and 2004, respectively, for the purpose of transferring these shares to its employees. As of December 31,
11
2004, Ulead had purchased 9,326,000 shares of its own shares with total cost of NT$189,454 thousand, of which 3,406,000 treasury shares worth approximately NT$58,972 thousand have been transferred to its employees. As of December 31, 2004, the remaining treasury stock amounted to NT$130,482 thousand divided into 5,920,000 shares.
Pursuant to the ROC Securities and Exchange Law, the total quantity of treasury stock shall not exceed 10% of Ulead’s issued stock, while the total amount cannot exceed the sum of retained earnings, and capital surplus derived from premiums on capital stock plus other realized capital surplus. The treasury shares purchases with the intention of transferring to employees must be transferred within three years from the date of purchase. Otherwise, these shares shall be deemed as not issued by the Company, and cancelled. In addition, treasury stock cannot be pledged for debts and do not carry any shareholder rights until they are disposed of or transferred to employees.
(c) | Capital surplus |
Pursuant to the ROC Company Law, the capital surplus can be used to offset a deficit and capital surplus arising from premium on issuance of new shares and from endowments received by Ulead can be used to increase common stock. Furthermore, pursuant to the regulations of Securities and Futures Commission (“SFC”) the total amount of capital surplus capitalized per year may not exceed 10 percent of the paid-in capital. Additionally the capital surplus realized from a capital increase or other source shall be capitalized only in the following fiscal year after being registered by Ulead with the competent authority for approval.
(d) | Legal reserve |
According to the ROC Company Law, Ulead must appropriate 10 percent of its annual income as a legal reserve until the legal reserve balance equals the amount of authorized common stock. This appropriation for legal reserve shall be approved at the annual stockholders’ meeting. The legal reserve can only be used to offset an accumulated deficit and cannot be distributed as cash dividends.
(e) | Distribution of earnings and dividend policy |
According to Ulead’s articles of incorporation, 10% of its annual income, after offsetting any accumulated deficit shall be set aside as legal reserve, and special reserve is also appropriated according to relevant laws or regulations. The remainder of unappropriated earnings is to be distributed as follows: 87% as stockholders’ dividends, 10% as employees’ bonuses, and 3% as remuneration to directors and supervisors.
Ulead is currently in its growth state; the policy for dividend distribution should reflect factors such as current and future fund requirements for research and business expansion, and effects on diluted net income per share. The distribution ratio of cash dividends is more than 30% of the total dividends.
Based on a resolution of the stockholders’ meeting held on June 15, 2004, the distributable retained earnings in 2003 were appropriated for dividends, employees’ bonuses, and directors and supervisors’ remuneration as follows:
Year ended December 31, 2003 | ||
NTS | ||
Dividends per share- Cash | 1.5 | |
Employees’ bonuses – cash | 12,325 | |
Directors and supervisors’ remuneration | 3,698 | |
16,023 | ||
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The above earnings distribution conformed to the same resolution approved by the board of directors.
If employees’ bonuses and directors’ and supervisors’ remuneration were recorded as expenses in 2003, net income per share after tax would decrease from US dollar 0.03 to US dollar 0.02.
According to SFC regulations, starting in 2002, the related information regarding the appropriation of employees’ bonus and directors’ compensation determined by a meeting of the board of directors and approved in a stockholders’ meeting can be obtained from the Website of the Taiwan “Market Observation Post System”. Because the operating result in 2004 is a net loss, no distributable retained earnings are available for employees’ bonuses and directors’ compensation.
(11) | Earnings (losses) Per Common Share |
Earnings (losses) per common share in 2003 and 2004 were computed as follows:
Year ended December 31, | ||||||||||||
2003 | 2004 | |||||||||||
Pre-tax | After tax | Pre-tax | After tax | |||||||||
(in thousands) | ||||||||||||
Basic and diluted earnings (losses) per share: | ||||||||||||
Net income (loss) | 98,172 | 72,356 | (18,132 | ) | (84,731 | ) | ||||||
Weighted average number of shares outstanding (thousand shares): | ||||||||||||
Shares of common stock at the beginning of the year | 73,882 | 73,882 | 71,488 | 71,488 | ||||||||
Treasury stock | (1,943 | ) | (1,943 | ) | (23 | ) | (23 | ) | ||||
Weighted average number of shares outstanding during the year | 71,939 | 71,939 | 71,465 | 71,465 | ||||||||
Basic and diluted earnings (losses) per share (NT$) | 1.36 | 1.01 | (0.25 | ) | (1.19 | ) | ||||||
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(12) | Related Information about Financial Instruments |
As of December 31, 2003 and 2004, the Company did not invest in derivative financial instruments. The fair value of non-derivative financial assets and liabilities was estimated based on the book value, except for the following:
As of December 31, 2003 | As of December 31, 2004 | |||||||||||
Book value | Fair value | Book value | Fair value | |||||||||
NT$ | NT$ | NT$ | US$ | NT$ | US$ | |||||||
Financial assets: | ||||||||||||
Short-term investments | 691,153 | 708,110 | 460,673 | 14,514 | 477,664 | 15,049 | ||||||
Long-term investments with no market price | 130,695 | — | 90,212 | 2,842 | — | — |
The following assumptions were used by the Company in estimating fair values of the above financial instruments:
(a) | The fair value of open-end mutual funds is based on the net value of the assets at the balance sheet date. Listed and OTC equity securities are evaluated using the average closing price of the last month of the accounting period. |
(b) | If it is not practicable to determine the fair value of long-term equity investments which are not publicly traded, then their carrying value is adopted as the fair value. Refer to note 6 for information on the carrying amount. |
(13) | Related-party Transactions |
(a) | Name of related party and relationship with the Company |
Related party | Relationship | |
Microtek International Inc. (Microtek) | Largest shareholder of the Company |
(b) | Major transactions with related parties |
(i) | Sales to related parties were as follows: |
Year ended December31 | ||||||||||
2003 | 2004 | |||||||||
Amount | % of net sales | Amount | % of net sales | |||||||
NT$ | NT$ | US$ | ||||||||
Microtek | 2,750 | — | 2,726 | 86 | — | |||||
Sales prices to related parties were similar to those of general customers, and the collection period was approximately 60 days.
(ii) | As of December 31, 2003 and 2004, notes and accounts receivable resulting from the aforementioned transactions were as follows: |
Year ended December31 | ||||||||||
2003 | 2004 | |||||||||
Amount | % | Amount | % | |||||||
NT$ | NT$ | US$ | ||||||||
Microtek Taiwan | 714 | — | — | — | — |
14
(14) | Commitments and Contingencies |
As of December 31, 2004, the Company’s significant commitments were as follows:
(a) | The Company entered into certain technical cooperation agreements to acquire application software for research and development and computer software purchase and maintenance agreements for operating requirements. As of December 31, 2004, the balance of the financial statements from these agreements, which are applicable to those undelivered items amounted to $12,723. |
(b) | The Company is currently leasing certain premises for office use from third parties. The future rental commitments from these leases are as follows: |
Year | Amount | |
NT$ | ||
2005 | 27,529 | |
2006 | 21,041 | |
2007 | 18,131 | |
2008 | 16,973 | |
2009 | 16,973 | |
100,647 | ||
(c) | Litigation |
(i) | In November 2000, the Company’s Germany subsidiary, Ulead GmbH, signed an agreement to terminate the exclusive contract with a distributor in Germany (Buhl Data Services GmbH). Based on the distribution contract and the cancellation agreement of this contract, Buhl GmbH has the right to return all products to Ulead GmbH which are not sold and is entitled to receive a credit note for products returned. Because Buhl did not comply with the requirements of the contract to regularly send reports on the inventory level and the fact that certain goods which Buhl wanted to return were damaged, Ulead GmbH did not accept the products which Buhl wanted to return. In November 2001, Buhl took Ulead to court to claim for a payment of Euro 371 plus interest of 9 percent. This case is still pending in German court. The eventual outcome of this case is still uncertain. The Company has booked a provision of Euro 200k for returned deliveries. The Company is confident that this provision is sufficient to cover the risk regarding this lawsuit. |
(ii) | On February 2004, Virgin Records Limited and EMI Records Limited (“Opposers”) opposed the registration of Ulead’s trademark “BURN.Now” with the U.S. Patent and Trademark Office. In March 2005, these Opposers have withdrawn their opposition and Ulead does not need to pay any fee thereon. “BURN.NOW” is now allowed for trademark registration with the U.S. Patent and Trademark Office. |
(15) | Other |
The details of incurred operating costs and expenses, including employee, depreciation, and amortization expenses are summarized as follows:
15
Function | ||||||||||||
2003 (in thousands of NT$) | 2004 (in thousands of NT$) | |||||||||||
Nature | Operating costs | Operating expenses | Total | Operating costs | Operating expenses | Total | ||||||
Employee expenses | ||||||||||||
Salaries | 2,097 | 450,573 | 452,670 | — | 503,063 | 503,063 | ||||||
Labor and health insurance | 241 | 33,846 | 34,087 | — | 42,709 | 42,709 | ||||||
Pension | 75 | 11,043 | 11,118 | — | 12,648 | 12,648 | ||||||
Others | 97 | 16,134 | 16,231 | — | 11,454 | 11,454 | ||||||
Depreciation expenses | — | 20,882 | 20,882 | — | 22,220 | 22,220 | ||||||
Amortization expenses | — | 18,392 | 18,392 | — | 24,686 | 24,686 |
(16) | Segment Information |
(a) | The Company operates in a single industry. The main activities of the Company are the design, production and sale of computer software. |
(b) | Geographic information |
Gross export sales to geographic areas were summarized as follows:
Year ended December 31, | ||||||
Area | 2003 | 2004 | ||||
NT$ | NT$ | US$ | ||||
United States | 311,494 | 332,624 | 10,480 | |||
Asia-Pacific | 428,243 | 507,308 | 15,983 | |||
Europe | 276,581 | 313,119 | 9,865 | |||
Others | 1,315 | 22,736 | 716 | |||
1,017,633 | 1,175,787 | 37,044 | ||||
(c) | Major customers |
Sales to individual customers that accounted for over 10% of the Company’s operating revenue were summarized below:
Year ended December31 | ||||||||||
2003 | 2004 | |||||||||
Amount | % | Amount | % | |||||||
NT$ | NT$ | US$ | ||||||||
Softbank Commerce Corp. | 10,770 | 9 | 209,626 | 6,604 | 15 | |||||
(17) | Summary of Significant Differences between Accounting Principles Followed by the Company and Accounting Principles Generally Accepted in the United States of America |
The accompanying consolidated financial statements have been prepared in conformity with ROC GAAP, which differ in certain material respects from accounting principles generally accepted in the United States of America (US GAAP). These significant differences as they apply to the Company are as follows:
(a) | Sales |
(i) | Revenue recognition on software contracts with PCS (Post-Contract Customer Support generally referred to as telephone/email support, correction of errors such as bug fixing or debugging) that include unspecified software upgrade/enhancement. |
16
Under ROC GAAP, the periodic maintenance service (PCS) under the arrangement is treated as a separate service element and the fee is allocated based on VSOE or all of the fees are deferred. Even though the maintenance service is not defined under ROC GAAP, the technical support service that the Company provides may include the maintenance services such as error correction or updated service which are defined as PCS and unspecified upgrade/enhancement under US GAAP. The Company does not charge separately for PCS and has not established VSOE for PCS. Because the Company’s historical cost of providing PCS is insignificant the related revenue is recognized by the Company upon the delivery of software or first copy or product master.
Under U.S.GAAP, if the only undelivered elements is PCS and VSOE of PCS fair value does not exist, the Company recognizes revenue on delivery of software with all estimated costs of providing PCS accrued if the PCS fee is included with initial fee, PCS is for one year or less, the PCS cost during the contract is insignificant and unspecified upgrades/enhancement are expected to continue to be minimal and infrequent. If all of the forgoing criteria are not met, then the entire fee is recognized ratably.
(ii) | Revenue recognition on software contract with PCS and specified software upgrade/enhancement |
Under ROC GAAP, there are no specific provisions that prescribe the accounting for revenue on software contract with PCS and specified upgrade/enhancement. In practice, the revenue from this contract is recognized when the sales report is received from or invoice is issued to the customer based on the contract requirements.
Under U.S. GAAP, all revenues for this type of software contract with multiple-element arrangements is deferred if the VSOE of the fair value of the elements does not exist until (a) such sufficient VSOE does exist or (b) all elements of the arrangement have been delivered. If the only undelivered element is PCS, the entire fee should be recognized ratably.
(b) | Accrual for cost to provide PCS services |
Under ROC GAAP, the PCS is treated as a separate service element and the fee is allocated based on VSOE. The Company does not charge separately for PCS and has not established VSOE for PCS. Because the Company’s historical cost of providing PCS is insignificant, the cost to provide PCS is not accrued when the related revenue is recognized.
Under US GAAP, if the only undelivered element is PCS and VSOE of PCS does not exist, the Company accrues all the estimated costs of providing PCS when recognizes revenue on delivery of software if the PCS fee is included with initial fee, PCS is for one year or less, the PCS cost is insignificant and unspecified upgrades/enhancement are expected to continue to be minimal and infrequent.
(c) | Compensation |
(i) | Remuneration to directors and supervisors |
The Company’s articles of incorporation specify that remuneration to its directors and supervisors shall not exceed an amount up to 3% of annual distributable earnings. Under ROC GAAP, such remuneration is charged directly to retained earnings in the period when the stockholders approve such compensation and is also treated as part of financing activities in the statement of cash flow.
17
Under US GAAP, such compensation is recorded as compensation expense in the period when the related services are rendered and is treated as operating activities in the statement of cash flow.
(ii) | Employee bonuses |
Certain employees of the Company are entitled to bonuses ranging from 5% to 10% of annual distributable earnings in accordance with provisions of the Company’s articles of incorporation. Under ROC GAAP, employee bonuses are appropriated from retained earnings in the period when the stockholders’ approval is obtained, and are also treated as part of financing activities in the statement of cash flow.
Under US GAAP, employee bonuses are charged to income in the year when the service is rendered and are treated as operating activities in the statement of cash flow.
(iii) | Sale of treasury stock to employees |
The Company sells treasury stock to its employees at a predetermined price. Under ROC GAAP, the difference between market price and predetermined selling price of treasury stock at date of sale is not being accounted for.
Under US GAAP, such difference between market value and predetermined selling price is recognized as compensation expense.
(d) | Gain or loss related to capital surplus on disposition of investee |
The Company’s investee was formerly accounted for under equity method and was changed to cost method. Under ROC GAAP, for purpose of calculating the gain or loss on the disposition of the above investee currently accounted as cost method, amounts previously recorded in capital surplus related to the investee formally under equity method due to issuance of shares to third party and the change in interest of investee should be reclassified from equity and included in the calculation of the gain or loss.
Under US GAAP, when the Company disposed the above investee under cost method, the amounts previously recorded in aforementioned capital surplus under equity method related to the investee should not be reversed from equity for purpose of calculating the gain or loss on the disposition of the investee under cost method.
(e) | Gain on share exchange transaction |
Under ROC GAAP, historical cost is used to account for the share exchange of investment under cost method for the marketable securities if the historical cost of investment under cost method is less than the fair value of the marketable securities, resulting in no change of accounting basis and recognition of no gain or loss in earnings. The cost of subsequent sales is measured at historical cost.
Under US GAAP, fair value is used to account for the share exchange of the investment under cost method for the investment in marketable securities, resulting in a new accounting basis and recognition of gain or loss in earnings and is supported by EITF91-5 and is interpreted by FAS115. The cost of subsequent sales is measured at new accounting basis.
18
(f) | Pension cost |
Under ROC GAAP, the unrecognized transitional obligation/asset under defined benefit plan is either fully recognized in the earnings or amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. The Company chose to expense all the unrecognized transitional obligation.
Under US GAAP, the unrecognized transitional obligation/ asset is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under defined benefit plan.
(g) | Income tax |
Under ROC GAAP, the Company’s tax planning strategies are implicit in the estimate of expected future taxable income which was considered in determining the amount of valuation allowance for the deferred income tax asset, however, detailed implementation plans for the tax planning strategies are not required and requirements to implement such plans are less stringent than US GAAP.
Under US GAAP, a qualifying tax planning strategy must be prudent and feasible and the implementation of the tax-planning strategy must be primarily within the control of the Company. The Company’s tax planning strategies are not supported by detailed implementation plans and, therefore, the ability to sustain such strategies under the tax laws cannot be determined due to involvement in cross-boarder tax jurisdictions and tax law applications. Accordingly, the tax planning strategies are not used in estimate of expected future taxable income in determining the valuation allowance for deferred income tax assets.
Under ROC GAAP, 10 % surtax is assessed on taxable income but only to the extent such taxable income is not distributed before the end of the following year. Under ROC GAAP, the 10% surtax on undistributed earnings is recognized as an income tax expense on the date when shareholders resolved not to distribute the earnings.
Under US GAAP, tax is accrued at the undistributed rate until such time as dividends are declared. The tax on current year earnings is calculated for US GAAP at 32.5% and then 7.5% is reversed the following year when such earnings are declared as a dividend.
(h) | Marketable securities |
Under ROC GAAP, marketable securities are classified as short-term investments, which are carried at the lower of aggregate cost or fair market value. The fair market value is determined by the average price for one month before the balance sheet date.
Under US GAAP, marketable securities that have readily determinable fair values are to be classified as either trading, available-for-sale or held-to-maturity securities. The fair value is determined as of the balance sheet date. Marketable securities classified as available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income.
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(i) | US GAAP reconciliations |
1. Reconciliation of consolidated net income
For the years ended December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ note 2(o) | |||||||
(in thousands except per share data) | |||||||||
Net income (loss), under ROC GAAP | 72,356 | (84,731 | ) | (2,670 | ) | ||||
US GAAP adjustments: | |||||||||
(a) Sales | |||||||||
• Revenue recognized ratably over contract term | (7,095 | ) | (12 | ) | — | ||||
• Specified upgrade right - revenue deferred | (16,505 | ) | (20,084 | ) | (633 | ) | |||
(b) Accrued for cost to provide PCS services | (1,509 | ) | (1,044 | ) | (33 | ) | |||
(c) Compensation | |||||||||
• Remuneration to directors and supervisors | (3,698 | ) | — | — | |||||
• Employee bonuses | (12,325 | ) | — | — | |||||
• Treasury stock transferred to employee | (3,350 | ) | (11,459 | ) | (361 | ) | |||
(d) Gain or loss related to capital surplus on disposition of investee | (2,138 | ) | (2,032 | ) | (64 | ) | |||
(e) Gain on share exchange transaction | — | 4,098 | 83 | ||||||
(f) Pension cost | (225 | ) | (225 | ) | (7 | ) | |||
(g) Income tax effect | 124 | (62,690 | ) | (1,975 | ) | ||||
Net income (loss), under US GAAP | 25,635 | (179,656 | ) | (5,660 | ) | ||||
Basic and diluted earnings (loss) per share under US GAAP (in dollars) | 0.36 | (2.51 | ) | (0.08 | ) | ||||
Basic- and diluted-Weighted-average number of shares outstanding (in thousands) | 71,939 | 71,465 | 71,465 | ||||||
2. Reconciliation of consolidated stockholders’ equity | |||||||||
For the years ended December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ note 2(o) | |||||||
(in thousands except per share data) | |||||||||
Total stockholders’ equity, under ROC GAAP | 1,968,872 | 1,765,434 | 55,622 | ||||||
(a) Sales | |||||||||
• Revenue recognized ratably over contract term | (15,918 | ) | (15,930 | ) | (502 | ) | |||
• specified upgrade right – revenue deferred | (21,328 | ) | (41,412 | ) | (1,305 | ) | |||
(b) Accrued for cost to provide PCS services | (6,547 | ) | (7,591 | ) | (239 | ) | |||
(c) Compensation | |||||||||
• Remuneration to directors and supervisors | (3,698 | ) | — | — | |||||
• Employee bonuses | (12,325 | ) | — | — | |||||
(d) Gain on share exchange transaction, | — | 2,621 | 82 | ||||||
(e) Pension cost | 3,823 | 3,598 | 113 | ||||||
(f) Income tax assets | 1,098 | (61,592 | ) | (1,940 | ) | ||||
(g) Marketable securities | 14,386 | 14,519 | 457 | ||||||
Total stockholders’ equity, under US GAAP | 1,928,363 | 1,659,647 | 52,288 | ||||||
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3. Reconciliation of consolidated cash flow
For the years ended December 31, | |||||||||
2003 | 2004 | ||||||||
NT$ | NT$ | US$ | |||||||
(in thousands except per share data) | |||||||||
Cash flow from operating activities, ROC GAAP | 151,447 | 96,305 | 3,034 | ||||||
(c) Employees’ profit sharing | — | (12,325 | ) | (388 | ) | ||||
(c) Directors’ and supervisors’ remuneration | — | (3,698 | ) | (117 | ) | ||||
Cash flow from operating activities, US GAAP | 151,447 | 80,282 | 2,529 | ||||||
Cash flow from investing activities, ROC GAAP | (131,121 | ) | 185,349 | 5,840 | |||||
Cash flow from investing activities, US GAAP | (131,121 | ) | 185,349 | 5,840 | |||||
Cash flow from financing activities, ROC GAAP | (50,873 | ) | (88,367 | ) | (2,784 | ) | |||
(c) Employees’ profit sharing | — | 12,325 | 388 | ||||||
(c) Directors’ and supervisors’ remuneration | — | 3,698 | 117 | ||||||
Cash flow from financing activities, US GAAP | (50,873 | ) | (72,344 | ) | (2,279 | ) | |||
Foreign exchange effect, ROC GAAP and US GAAP | 6,732 | (12,966 | ) | (409 | ) | ||||
Net increase (decrease) in cash and deposits | (23,851 | ) | 180,321 | 5,681 | |||||
Cash and deposits at beginning of year | 236,746 | 212,931 | 6,709 | ||||||
Cash and deposits at end of year | 212,931 | 393,252 | 12,390 | ||||||
(j) | US GAAP Consolidated Financial Statements |
Consolidated Statements of Comprehensive Income
Years ended December 31, 2003 and 2004
(Expressed in thousands of New Taiwan dollars and US dollars)
2003 | 2004 | ||||||||
NT$ | NT$ | US$ note 2(o) | |||||||
Net income (loss) | 25,635 | (179,656 | ) | (5,660 | ) | ||||
Other comprehensive income (loss): | |||||||||
Unrealized holding gains (loss) on securities available-for-sale | (9,510 | ) | 133 | 4 | |||||
Foreign currency cumulative translation adjustment | 6,732 | (12,966 | ) | (408 | ) | ||||
(2,778 | ) | (12,833 | ) | (404 | ) | ||||
Comprehensive income(loss) | 22,857 | (192,489 | ) | (6,064 | )) | ||||
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