EXHIBIT 99.1
INOTERA MEMORIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2009 and 2010
(With Report of Independent Registered Public Accounting Firm)
Report of Independent Registered Public Accounting Firm
The Board of Directors
Inotera Memories, Inc.
We have audited the accompanying balance sheets of Inotera Memories, Inc. (the “Company”) as of December 31, 2009 and 2010, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of 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 standards of the Public Company Accounting Oversight Board (United States). Those 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 Inotera Memories, Inc. as of December 31, 2009 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with the accounting principles generally accepted in the Republic of China.
As disclosed further in Notes 14 and 27(i) to the financial statements, the Company did not maintain a minimum current ratio of 1:1 and a maximum debt to equity ratio of 1.5:1 at December 31, 2010, as part of the financial covenants originally required of the Company under its syndicated bank loan agreements. On October 21, 2010, however, the syndicate banks formally agreed to waive the requirement of the Company to comply with its financial loan covenants for the financial statement period ended June 30, 2010. As of December 31, 2010, the Company was still in breach of the financial covenants to maintain a minimum current and leverage ratios. As the Company is required to cure these breaches no later than the end of June 2011, it will prepare to submit a formal letter to the managing bank to request for a waiver from complying with these financial covenants, so that the managing bank can convene a meeting of the Banks to discuss the aforesaid breach and to resolve before the expiration of the Remedial Period on whether a waiver of the breach will be granted. The potential consequences to the Company of a breach of any of its financial covenants pursuant to its syndicated bank loan agreements are also described in Notes 19(b)(iii) and 27(i) to the financial statements.
As described in Note 3 to the financial statements, effective January 1, 2009, the Company adopted the newly revised SFAS No. 10 “Inventories”, under which, the unallocated fixed overhead and direct labor cost of NT$12,903,228 thousand and gain from price recovery of inventories of NT$1,767,684 thousand were charged to costs of goods sold for the year ended December 31, 2010.
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 of such differences is presented in Note 27 to the financial statements.
KPMG
Taipei, Taiwan (the Republic of China)
March 28, 2011
INOTERA MEMORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2009 and 2010
(Expressed in thousands of New Taiwan Dollars)
|
| | | | | | | | | | | | | | | | |
| | December 31, | | | | December 31, |
| | 2009 | | 2010 | | | | 2009 | | 2010 |
Assets | | | | | | Liabilities and Stockholders’ Equity | | | | |
Current assets: | | | | | | Current liabilities: | | | | |
Cash and cash equivalents (notes 4 and 19) | | $ | 5,376,225 |
| | 5,108,667 |
| | Short-term loans (notes 12 and 19) | | $ | 5,930,000 |
| | - |
Current portion of lease receivables (notes 7 and 20) | | 5,857 |
| | 6,211 |
| | Notes and accounts payable (note 19) | | 3,653,580 |
| | 10,794,063 |
|
Accounts receivable-related parties (notes 19 and 20) | | 9,523,451 |
| | 5,729,041 |
| | Accounts payable-related parties (notes 19 and 20) | | 71,775 |
| | 112,880 |
|
Other receivables | | 45,085 |
| | 758,693 |
| | Accrued expenses (note 15) | | 1,331,031 |
| | 1,659,833 |
|
Other receivables-related parties (notes 7 and 20) | | 17,416 |
| | 14,106 |
| | Financial liabilities reported at fair value through profit or loss (notes 5 and 19) | | 567,642 |
| | 223,302 |
|
Inventories, net (note 6) | | 3,456,040 |
| | 4,505,664 |
| | Other payables-related parties (notes 19 and 20) | | 2,311,506 |
| | 4,947,134 |
|
Prepayments | | 492,917 |
| | 1,748,948 |
| | Current portion of bonds payable (notes 13 and 19) | | 1,978,854 |
| | 2,039,083 |
|
Deferred income tax assets-current, net (note 16) | | - | | - | | Current portion of long-term loans (notes 14 and 19) | | 13,250,880 |
| | 12,866,141 |
|
Total current assets | | 18,916,991 |
| | 17,871,330 |
| | Other current liabilities | | 23,833 |
| | 19,666 |
|
| | | | | | Current portion of lease payables (notes 9 and 20) | | 134,541 |
| | 149,323 |
|
Property, plant and equipment (notes 7, 8, 9, 14, 20 and 21): | | | | | | Total current liabilities | | 29,253,642 |
| | 32,811,425 |
|
Land | | 2,830,117 |
| | 2,830,117 |
| | | | | | |
Buildings | | 5,651,977 |
| | 5,738,572 |
| | Long-term liabilities: | | | | |
Machinery and equipment | | 163,605,838 |
| | 207,382,022 |
| | Bonds payable (notes 13 and 19) | | 16,022,885 |
| | 13,991,778 |
|
Vehicles | | 5,485 |
| | 5,485 |
| | Long-term loans (notes 14 and 19) | | 21,546,257 |
| | 39,512,012 |
|
Leased assets | | 2,656,223 |
| | 2,656,223 |
| | Long-term other payable-related parties (notes 19 and 20) | | 1,903,500 |
| | - |
Miscellaneous equipment | | 16,971,600 |
| | 18,216,290 |
| | Lease payables-long-term (notes 9 and 20) | | 2,813,506 |
| | 2,664,183 |
|
| | 191,721,240 |
| | 236,828,709 |
| | Total long-term liabilities | | 42,286,148 |
| | 56,167,973 |
|
Less: accumulated depreciation | | (99,526,348 | ) | | (129,452,518 | ) | | | | | | |
Less: accumulated impairment-machinery and equipment | | - | | (236,763 | ) | | Other liabilities: | | | | |
Construction in progress | | 5,489,946 |
| | 14,124,078 |
| | Accrued pension liabilities (note 15) | | 25,344 |
| | 16,964 |
|
Net property, plant and equipment | | 97,684,838 |
| | 121,263,506 |
| | Guarantee deposits | | 2,374 |
| | 3,647 |
|
| | | | | | Total other liabilities | | 27,718 |
| | 20,611 |
|
Intangible asset: | | | | | | Total liabilities | | 71,567,508 |
| | 89,000,009 |
|
Technical know-how (note 10) | | 1,446,844 |
| | 723,422 |
| | | | | | |
| | | | | | Stockholders’ equity (note 17): | | | | |
Other assets: | | | | | | Common stock | | 39,775,120 |
| | 46,378,990 |
|
Idle assets (notes 8, 14 and 20) | | 1,686,190 |
| | 1,686,190 |
| | Capital collected in advance | | - | | 3,940 |
|
Refundable deposits | | 2,471 |
| | 80,905 |
| | Capital surplus | | 33,121,318 |
| | 41,615,903 |
|
Deferred charges | | 18,624 |
| | 10,400 |
| | Legal reserve | | 2,364,141 |
| | 2,364,141 |
|
Lease receivables-long-term (notes 7 and 20) | | 317,288 |
| | 311,077 |
| | Special reserve | | 542,605 |
| | 542,605 |
|
Overdue receivables (note 11) | | - | | - | | Accumulated deficit (note16) | | (26,974,986 | ) | | (37,636,298 | ) |
Deferred income tax assets-non-current, net (note 16) | | 322,460 |
| | 322,460 |
| | Total stockholders’ equity | | 48,828,198 |
| | 53,269,281 |
|
Total other assets | | 2,347,033 |
| | 2,411,032 |
| | Commitments and contingencies (note 22) | | | | |
| | | | | | Subsequent event (note 24) | | | | |
Total Assets | | $ | 120,395,706 |
| | 142,269,290 |
| | Total Liabilities and Stockholders’ Equity | | $ | 120,395,706 |
| | 142,269,290 |
|
See accompanying notes to financial statements.
INOTERA MEMORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Expressed in thousands of New Taiwan Dollars, except for loss per share)
|
| | | | | | | | | |
| For the years ended December 31, |
| 2008 | | 2009 | | 2010 |
Operating revenues | | | | | |
Sales revenue | $ | 37,587,140 |
| | 36,107,257 |
| | 41,455,431 |
|
Sales returns | (6,400 | ) | | (3,219 | ) | | (1,410 | ) |
Sales allowances | (41,122 | ) | | (452 | ) | | (2 | ) |
Net operating revenues (note 20) | 37,539,618 |
| | 36,103,586 |
| | 41,454,019 |
|
Cost of goods sold (notes 6, 9, 17 and 20) | (51,440,189 | ) | | (44,742,915 | ) | | (48,856,906 | ) |
Gross loss | (13,900,571 | ) | | (8,639,329 | ) | | (7,402,887 | ) |
Operating expenses (note 17): | | | | | |
Administrative and general expenses | (3,682,210 | ) | | (320,472 | ) | | (333,070 | ) |
Research and development expenses (note 10) | (488,026 | ) | | (681,033 | ) | | (1,477,893 | ) |
Total operating expenses | (4,170,236 | ) | | (1,001,505 | ) | | (1,810,963 | ) |
Operating loss | (18,070,807 | ) | | (9,640,834 | ) | | (9,213,850 | ) |
Non-operating income and gains: | | | | | |
Interest income (notes 7 and 20) | 103,333 |
| | 74,001 |
| | 32,232 |
|
Foreign exchange gain, net | - |
| | - |
| | 111,990 |
|
Gain on valuation of financial assets (note 5) | - |
| | - |
| | 2,713 |
|
Others (notes 7, 9 and 20) | 51,913 |
| | 131,916 |
| | 94,345 |
|
Total non-operating income and gains | 155,246 |
| | 205,917 |
| | 241,280 |
|
Non-operating expenses and losses: | | | | | |
Interest expenses (notes 8, 9 and 20) | (2,140,017 | ) | | (1,622,682 | ) | | (1,305,063 | ) |
Foreign exchange loss, net | (299,459 | ) | | (86,988 | ) | | - |
|
Loss on inventory obsolescence and devaluation | (853,946 | ) | | - |
| | - |
|
Impairment loss (note 8) | - |
| | (1,098 | ) | | (236,763 | ) |
Loss on valuation of financial assets (note 5) | (538,811 | ) | | (80,091 | ) | | - |
|
Loss on valuation of financial liabilities (note 5) | - |
| | (229,677 | ) | | (91,439 | ) |
Others | (20,012 | ) | | (21,474 | ) | | (55,477 | ) |
Total non-operating expenses and losses | (3,852,245 | ) | | (2,042,010 | ) | | (1,688,742 | ) |
Loss before income tax | (21,767,806 | ) | | (11,476,927 | ) | | (10,661,312 | ) |
Income tax expense (note 16) | (8,092 | ) | | - |
| | - |
|
Net loss | $ | (21,775,898 | ) | | (11,476,927 | ) | | (10,661,312 | ) |
Basic loss per share (note 18) | | | | | |
Before tax | $ | (6.52 | ) | | (3.19 | ) | | (2.34 | ) |
After tax | $ | (6.52 | ) | | (3.19 | ) | | (2.34 | ) |
See accompanying notes to financial statements.
INOTERA MEMORIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Expressed in thousands of New Taiwan Dollars)
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Retained earnings | | |
| Common stock | | Capital collected in advance | | Capital surplus | | Legal reserve | | Special reserve | | Accumulated deficit | | Total |
| | | | | | | | | | | | | |
Balance as of January 1, 2008 | $ | 33,375,120 |
| | - |
| | 29,317,836 |
| | 2,271,456 |
| | 542,605 |
| | 6,370,524 |
| | 71,877,541 |
|
Appropriation | | | | | | | | | | | | | |
Legal reserve | - |
| | - |
| | - |
| | 92,685 |
| | - |
| | (92,685 | ) | | - |
|
Recognition of compensation costs from exercise of employee stock options | - |
| | - |
| | 15,839 |
| | - |
| | - |
| | - |
| | 15,839 |
|
Net loss for the year ended December 31, 2008 | - |
| | - |
| | - |
| | - |
| | - |
| | (21,775,898 | ) | | (21,775,898 | ) |
Balance as of December 31, 2008 | 33,375,120 |
| | - |
| | 29,333,675 |
| | 2,364,141 |
| | 542,605 |
| | (15,498,059 | ) | | 50,117,482 |
|
Increase in capital through offering of GDSs | 6,400,000 |
| | - |
| | 3,704,546 |
| | - |
| | - |
| | - |
| | 10,104,546 |
|
Recognition of compensation costs from exercise of employee stock options | - |
| | - |
| | 83,097 |
| | - |
| | - |
| | - |
| | 83,097 |
|
Net loss for the year ended December 31, 2009 | - |
| | - |
| | - |
| | - |
| | - |
| | (11,476,927 | ) | | (11,476,927 | ) |
Balance as of December 31, 2009 | 39,775,120 |
| | - |
| | 33,121,318 |
| | 2,364,141 |
| | 542,605 |
| | (26,974,986 | ) | | 48,828,198 |
|
Capital increase in cash | 6,400,000 |
| | - |
| | 7,995,000 |
| | - |
| | - |
| | - |
| | 14,395,000 |
|
Shares issued from exercise of employee stock options | 203,870 |
| | 3,940 |
| | - |
| | - |
| | - |
| | - |
| | 207,810 |
|
Recognition of compensation costs from exercise of employee stock options | - |
| | - |
| | 499,585 |
| | - |
| | - |
| | - |
| | 499,585 |
|
Net loss for the year ended December 31, 2010 | - |
| | - |
| | - |
| | - |
| | - |
| | (10,661,312 | ) | | (10,661,312 | ) |
Balance as of December 31, 2010 | $ | 46,378,990 |
| | 3,940 |
| | 41,615,903 |
| | 2,364,141 |
| | 542,605 |
| | (37,636,298 | ) | | 53,269,281 |
|
See accompanying notes to financial statements.
INOTERA MEMORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 2008, 2009 and 2010
(Expressed in thousands of New Taiwan Dollars)
|
| | | | | | | | | |
| For the years ended December 31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Cash flows from operating activities: | | | | | |
Net loss | $ | (21,775,898 | ) | | (11,476,927 | ) | | (10,661,312 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities | | | | | |
Depreciation | 27,711,438 |
| | 29,603,228 |
| | 31,137,115 |
|
Amortization of deferred charges | 13,020 |
| | 244,132 |
| | 776,469 |
|
Amortization of deferred charges-bank loan syndication and underwriter’s charge on debt securities offering | 61,280 |
| | - |
| | - |
|
Compensation costs arising from share-based payments | 15,839 |
| | 83,097 |
| | 499,585 |
|
(Gain from price recovery) loss on obsolescence of inventories | 853,946 |
| | (1,767,684 | ) | | 797,068 |
|
Loss on doubtful accounts | 3,345,946 |
| | - |
| | - |
|
Loss (Gain) on disposal of fixed and idle assets | 2,226 |
| | (8,526 | ) | | (30,771 | ) |
Loss on impairment of fixed assets and idle assets | - |
| | 1,098 |
| | 236,763 |
|
Unrealized foreign currency exchange loss (gain), net | 1,205,419 |
| | (292,456 | ) | | (510,742 | ) |
Interest income from capital lease | (19,489 | ) | | (19,175 | ) | | (18,841 | ) |
Interest expense from capital lease | 5,605 |
| | 291,824 |
| | 294,788 |
|
Valuation gain on financial instruments, net | 538,811 |
| | - |
| | - |
|
Net cash received from settlement on maturity of financial assets | 510,956 |
| | - |
| | - |
|
Gain on terminated capital lease agreement | - |
| | (7,833 | ) | | - |
|
Change in operating assets and liabilities: | | | | | |
Increase (decrease) in financial liabilities reported at fair value through profit or loss, net | - |
| | 311,838 |
| | (344,340 | ) |
Increase in accounts receivable | (387,997 | ) | | - |
| | - |
|
(Increase) decrease in accounts receivable-related parties | 948,709 |
| | (6,870,447 | ) | | 3,538,254 |
|
Decrease (Increase) in other receivables | 20,468 |
| | 144,773 |
| | (713,608 | ) |
Decrease in other receivables-related parties | (11,958 | ) | | 9,373 |
| | 3,310 |
|
Decrease (increase) in inventories | 248,358 |
| | 1,249,526 |
| | (1,846,692 | ) |
Decrease (increase) in prepayments | 502,267 |
| | 669,188 |
| | (1,256,031 | ) |
Decrease (increase) in notes and accounts payable | (268,607 | ) | | 170,720 |
| | 570,300 |
|
Increase (decrease) in accounts payable-related parties | (108,785 | ) | | 68,101 |
| | (3,786 | ) |
(Decrease) increase in accrued expenses | (247,309 | ) | | 174,586 |
| | 333,325 |
|
Increase (decrease) in other payables-related parties | (32,637 | ) | | 13,473 |
| | (25,244 | ) |
Decrease in other current liabilities | (56,648 | ) | | (5,015 | ) | | (4,167 | ) |
Decrease (increase) in deferred income tax assets, net | 3,322 |
| | (17,305 | ) | | - |
|
Decrease in accrued pension liabilities | (7,976 | ) | | (6,027 | ) | | (8,380 | ) |
Net cash provided by operating activities | 13,070,306 |
| | 12,563,562 |
| | 22,763,063 |
|
Cash flows from investing activities: | | | | | |
Purchases of property, plant and equipment | (23,878,505 | ) | | (7,817,644 | ) | | (49,180,961 | ) |
Proceeds from disposal of fixed and idle assets | - |
| | - |
| | 267,047 |
|
Decrease (increase) in refundable deposits | 24,004 |
| | 1,957 |
| | (78,434 | ) |
Decrease in lending to related parties | (2,834,920 | ) | | 2,834,920 |
| | - |
|
Increase in deferred charges and intangible assets | (6,000 | ) | | (1,629,700 | ) | | - |
|
Decrease in lease receivables | 24,698 |
| | 24,698 |
| | 24,698 |
|
Net cash used in investing activities | (26,670,723 | ) | | (6,585,769 | ) | | (48,967,650 | ) |
Cash flows from financing activities: | | | | | |
Increase (decrease) in short-term loans | 3,984,700 |
| | 1,945,300 |
| | (5,930,000 | ) |
Proceeds from long-term loans | 15,820,400 |
| | 1,670,000 |
| | 31,395,000 |
|
Repayment of long-term loans | (10,112,910 | ) | | (15,800,729 | ) | | (13,222,688 | ) |
Decrease in bonds payable | - |
| | (1,980,000 | ) | | (1,980,000 | ) |
(Decrease) increase in guarantee deposits | 2,360 |
| | (4,559 | ) | | 1,273 |
|
(Decrease) increase in lending from related parties | 3,298,700 |
| | (1,917,000 | ) | | 1,618,300 |
|
Decrease in lease payables | (9,310 | ) | | - |
| | (429,329 | ) |
Capital collected in advance | - |
| | - |
| | 3,940 |
|
Proceeds from capital increase in cash | - |
| | 10,104,546 |
| | 14,598,870 |
|
Net cash (used in) provided by financing activities | 12,983,940 |
| | (5,982,442 | ) | | 26,055,366 |
|
Effect of foreign currency exchange translation | 2,726 |
| | (28,892 | ) | | (118,337 | ) |
Decrease in cash and cash equivalents | - |
| | (33,541 | ) | | (267,558 | ) |
Cash and cash equivalents at beginning of year | (6,023,517 | ) | | 5,409,766 |
| | 5,376,225 |
|
Cash and cash equivalents at end of year | $ | 5,409,766 |
| | 5,376,225 |
| | 5,108,667 |
|
Supplemental cash flow information: | | | | | |
Interest paid | $2,551,326 | | 1,317,695 |
| | 1,405,454 |
|
Less : capitalized interest | 126,580 |
| | 12,426 |
| | 107,009 |
|
|
| | | | | | | | | |
Interest paid excluding capitalized interest | $ | 2,424,746 |
| | 1,305,269 |
| | 1,298,445 |
|
Income tax paid | $ | 67,259 |
| | 18,596 |
| | 1,329 |
|
Non-cash investing and financing activities: | | | | | |
Current portion of long-term loans | $ | 15,844,193 |
| | 13,250,880 |
| | 13,031,208 |
|
Current portion of lease payables | $ | 3,874 |
| | 134,541 |
| | 149,323 |
|
Current portion of lease receivable | $ | 5,523 |
| | 5,857 |
| | 6,211 |
|
Current portion of bonds payable | $ | 1,978,472 |
| | 1,978,854 |
| | 2,039,083 |
|
Adjustment to write-off the leased assets from the termination of capital lease agreement | - |
| | 115,885 |
| | - |
|
Adjustment to write-off the lease payables from the termination of capital lease agreement | - |
| | (123,718 | ) | | - |
|
Gain on terminated capital lease agreement | - |
| | (7,833 | ) | | - |
|
Increase in lease assets arising from new capital lease agreement | - |
| | (2,656,223 | ) | | - |
|
Increase in lease payable arising from new capital lease agreement | - |
| | 2,948,047 |
| | - |
|
Adjustment to recognize interest expense arising from new capital lease | - |
| | 291,824 |
| | - |
|
Investing activities affecting both cash and non-cash items: | | | | | |
Acquisition of property, plant and equipment | $19,692,368 | | 10,593,282 |
| | 55,188,822 |
|
Decrease (increase) in payables to equipment suppliers | 4,186,137 |
| | (2,775,638 | ) | | (6,007,861 | ) |
Cash paid for acquisition of property, plant and equipment | $ | 23,878,505 |
| | 7,817,644 |
| | 49,180,961 |
|
See accompanying notes to financial statements.
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008, 2009 AND 2010
(All amounts are expressed in thousands of New Taiwan Dollars,
except for per share information or unless otherwise specified)
| |
(1) | Organization and Principal Activities |
Inotera Memories, Inc. (the “Company”) was legally established with the approval by the Ministry of Economic Affairs on January 23, 2003. The Company’s main operating activities are manufacturing and selling semiconductor products. In January 2006, the Company was granted approval of its application to list its shares on the Taiwan Stock Exchange (TSE). The Company’s shares were initially listed on the TSE on March 17, 2006. On May 16, 2006 and August 4, 2009, the Company offered its equity shares in the form of global depositary shares (GDSs) for trading in the Multilateral Trading Facility (MTF) market on the Luxembourg Stock Exchange (LSE).
As of December 31, 2009 and 2010, the Company had 3,112 and 3,457 employees, respectively.
| |
(2) | Summary of Significant Accounting Policies |
The accompanying financial statements are prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Entity Accounting Act, Regulation on Handling Business Entity Accounting, and accounting principles generally accepted in the Republic of China (ROC).
The significant accounting policies followed by the Company are as follows:
The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
| |
(b) | Foreign currency transactions and translation |
The Company’s reporting and functional currency is New Taiwan Dollar. Foreign currency transactions during the period are translated at the exchange rates on the transaction dates. Foreign currency-denominated assets and liabilities are translated into New Taiwan Dollars at the exchange rate prevailing on the balance sheet date. The resulting translation gains or losses are recognized as non-operating income or expenses.
2
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(c) | Basis for classifying assets and liabilities as current or non-current |
Cash and assets that are held primarily for the purpose of being traded or are expected to be realized within 12 months after the balance sheet date are classified as current assets; all other assets are classified as non-current assets.
Liabilities that are held primarily for the purpose of being traded or are expected to be settled within 12 months after the balance sheet date are classified as current liabilities; all other liabilities are classified as non-current liabilities.
The Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) may have been impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. The Company recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount.
The Company reverses an impairment loss recognized in prior periods for assets if there is any indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods.
Commercial paper and corporate bonds with agreements to repurchase with maturities of less than three months from the date of purchase are classified as cash equivalents, which are highly liquid investment with no significant level of market or credit risk from potential interest rate changes.
| |
(f) | Financial assets / liabilities reported at fair value through profit or loss |
Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with the changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.
Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the net effect of the fair valuation of derivatives is positive, the derivative is recognized as a financial asset; but when the net effect is negative, the derivative is recognized as a financial liability.
3
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(g) | Allowance for doubtful accounts |
Allowance for doubtful accounts is provided according to the status of collectability of each account. The amount is determined by considering the past collection experience, credit ratings of the customers, and aging analysis of the outstanding receivables.
For the period up to December 31, 2008, inventories are stated at the lower of cost or market value. Cost is determined by using the monthly weighted-average method. Market value represents replacement cost or net realizable value. The market value of raw materials and supplies are determined on the basis of replacement cost. The market value of finished goods and work in process are determined on the basis of net realizable value. An allowance for supplies inventory obsolescence is provided based on the aging analysis on supplies inventory, in which full allowance is made for inventory items aging over six months.
Effective January 1, 2009, inventory costs include the expenditures required until the inventories are ready for sale or production. The fixed production overheads are allocated to finished goods and work in process based on the normal capacity of the production facilities. The variable production overheads are allocated based on actual output. Inventories are measured at the lower of cost and net realizable value. Net realizable value is based on the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and selling expenses.
| |
(i) | Property, plant and equipment / Depreciation |
Property, plant and equipment are stated at cost less accumulated depreciation. Interest costs related to the construction of property, plant and equipment are capitalized and included in the cost of the related assets. Regular maintenance and repairs are expensed when incurred; major addition, improvement and replacement expenditures are capitalized.
Depreciation of property, plant and equipment is provided over their estimated useful lives by using the straight-line method. In accordance with the Interpretation Rule (97) 340 issued by the Accounting Research and Development Foundation (ARDF), on November 12, 2008, the estimated useful lives, depreciation method and residual value of these assets are reviewed at least at each financial year-end. Any change in the estimated useful lives, depreciation method and residual value of these assets is treated as a change in an accounting estimate. The estimated economic useful lives of the assets are as follows:
| |
(i) | Buildings: 8 to 50 years. |
| |
(iii) | Machinery and equipment: 3 to 5 years. |
4
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(iv) | Leased assets: over the lease term |
| |
(v) | Miscellaneous equipment: 3 to 15 years. |
Gains or losses on disposal of property, plant and equipment are recorded as non-operating income or expenses.
| |
(j) | Intangible asset - Technical know-how |
An intangible asset is measured initially at cost. Subsequent to initial recognition, an intangible asset is measured at its cost less any accumulated amortization and any accumulated impairment losses.
The amortizable amount of the Company’s intangible asset is determined based on its initial cost. Amortization is recognized as an expense on a straight-line basis over the estimated useful life of an intangible asset of 27 months from the date that it is made available for use. The amortization period and method for an intangible asset with a finite useful life are reviewed at least at each financial year-end and changes thereon are accounted for as changes in accounting estimates.
A lease is deemed to be a capital lease if it conforms to any one of the following classification criteria:
| |
(i) | the lease transfers ownership of the leased assets to the lessee by the end of the lease term; |
| |
(ii) | the lease contains a bargain purchase option; |
| |
(iii) | the lease term is equal to 75% of or more of the total estimated economic life of the leased assets; this criterion should not be applied to leases in which the leased asset has been used for more than 75% of its estimated economic life before the lease begins; |
| |
(iv) | the present value of the rental plus the bargain purchase price or the guaranteed residual value is at least 90% of the fair market value of the leased assets at the inception date of the lease. |
For the lessor, a capital lease must also conform to any one of the four classification criteria specified above and both of the following two further criteria:
| |
(i) | collectibility of the lease payments is reasonably predictable; and |
| |
(ii) | no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. |
Under a capital lease, the Company, as the lessee, capitalizes the leased assets based on (a) the present value of all future installment rental payments (minus executory cost born by lessor) plus
5
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
bargain purchase price or lessee’s guaranteed residual value or (b) the fair market value of leased assets at the lease inception date, whichever is lower. The depreciation period is restricted to the lease term, rather than the estimated useful life of the assets, unless the lease provides for transfer of title or includes a bargain purchase option.
Under a capital lease, the Company, as the lessor, records all installments plus bargain purchase price or guaranteed residual value as the lease receivables. The implicit interest rate is used to calculate the present value of lease receivables as the cost of leased assets transferred. The difference between the total amount of lease receivables and the cost of leased assets transferred is recognized as unrealized interest income and is then recognized as realized interest income using the interest method over the lease term.
(l)Employee retirement plan
The Company has established an employee noncontributory defined benefit retirement plan (the “Plan”) covering full-time employees in the Republic of China. 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 last six months before the employee’s retirement. Each employee gets 2 months’ salary for each service year for the first 15 years, and 1 month’s salary for each service year thereafter. A lump-sum retirement benefit is paid through the retirement fund.
Starting from July 1, 2005, the enforcement of the newly enacted Labor Pension Act (the “New Act”) stipulates those employees covered by the defined contribution plan as follows:
| |
(i) | Employees who were covered by the Plan and opt to be subject to the pension mechanism under the New Act; |
| |
(ii) | Employees who are employed after the enforcement date of the New Act. |
In accordance with the New Act, the rate of contribution by an employer to an individual labor pension fund account per month shall not be less than 6% of the worker’s monthly wages. The Plan has not been modified to conform to the New Act. For those provisions of the New Act not currently included in the Plan, the Company follows the New Act. The Company contributes monthly to the individual labor pension fund at the rate of 6% of paid salaries and wages. This fund is deposited with Bureau of Labor Insurance.
The Company applies the guidance in Statement of Financial Accounting Standards (SFAS) No. 18 “Accounting for Pensions” for its defined benefit retirement plan. SFAS No. 18 requires an actuarial calculation of the Company’s pension obligation at the end of each year. Based on the actuarial calculation, the Company recognizes a minimum pension liability and net periodic pension costs. The Company provides monthly contributions to the retirement fund at the rate of 2% of paid salaries and wages. This fund is deposited with Bank of Taiwan.
6
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(m) | Bonus to employees and remuneration to directors and supervisors |
Under the Interpretation Rule (96) 052 issued by the ARDF, which is effective from January 1, 2008, the appropriations of bonus to employees and remuneration to directors and supervisors from current year’s earnings are accrued under operating expense or cost of goods sold in the year when earnings are incurred based on the estimated amounts. The differences between the approved amount in the shareholders meeting in the following year and the accrued amount in the current year, if any, are treated as a change in accounting estimate and are charged to profit or loss in the following year.
Share-based payments, including those under the employee stock option plans, are accounted for under SFAS No. 39 “Share-Based Payment”, which is effective from January 1, 2008. The Interpretation Rules (92) 070, 071, and 072 issued by the ARDF are applied for those share-based payments under the employee stock option plans with grant dates before January 1, 2008. Under SFAS No. 39, share-based payments are accounted for as follows:
| |
(i) | The share-based awards are measured at fair value on grant date. The grant-date fair value of equity-settled awards is expensed over the vesting period with the corresponding increase in equity. Also, the vesting period is estimated based on the vesting conditions of the share-based option plan that must be satisfied. These vesting conditions include service conditions and performance conditions. In determining the grant-date fair value of equity-settled awards, vesting conditions other than market conditions are not taken into account. |
| |
(ii) | Fair value is measured using the Black-Scholes option pricing model, which considers management’s best estimate of the exercise price, expected term, underlying shares price, expected volatility, expected dividends, and risk-free interest rate to the model. |
| |
(iii) | The Company is not required to apply SFAS No. 39 retroactively to share-based payment transactions that occurred before January 1, 2008; however, the disclosure of pro forma net income and earnings per share is still required. |
| |
(i) | Power line installation costs are deferred and amortized over the estimated useful lives or the agreement terms. |
| |
(ii) | Bank charges related to syndicated loans are deferred and amortized over the terms of the loans. Under SFAS No. 34 “Financial Instrument”, bank charges are recognized as a net of liabilities. |
7
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Revenue is generally recognized when it is realized or realizable and earned when all of the following criteria are met:
(i)persuasive evidence of an arrangement exists,
(ii)shipment has occurred or services have been rendered,
(iii)the seller’s price to the buyer is fixed or determinable, and
(iv)collectibility is reasonably assured.
Rental income is recognized when services are provided.
The Company has adopted SFAS No. 22 “Income Taxes”, under which, income taxes are accounted for using the asset and liability method. Deferred income tax is determined based on differences between the financial statements 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 of 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 asset will not be realized, a valuation allowance is recognized accordingly.
Deferred income tax assets and liabilities are classified as current or non-current 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 the asset or liability.
Any tax credits arising from purchases of machinery and equipment, research and development expenditures, and personnel training expenditures are recognized using the flow-through method.
According to the ROC Income Tax Law, undistributed earnings calculated on tax basis, if any, is subject to an additional 10 percent retained earnings tax. This surtax is charged to income tax expense in the following year when the appropriation of earnings is approved by the stockholders.
8
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Loss per common share is computed by dividing net loss by weighted-average number of outstanding shares during the year.
Stock options and stock bonus to employees accrued in current year’s earnings and awaiting approval by the shareholders in the following year, are potential common shares. Both basic and diluted loss per share is disclosed if those potential common shares are dilutive, otherwise, only basic earnings (loss) per share are disclosed. Diluted loss per share is computed by taking basic loss per share into consideration, plus the additional common shares that would have been outstanding if the potentially dilutive shares are issued.
The number of outstanding shares is retroactively adjusted for common stock issued through the distribution of stock dividends out of unappropriated earnings and capital surplus.
| |
(3) | Reasons for and Cumulative Effect of Accounting Principle Change |
| |
(a) | Effective January 1, 2008, the Company adopted SFAS No. 39 “Share-Based Payment” and Interpretation Rule (96) 052 issued by ARDF, which define the classification, measurement and disclosure of share-based payment transactions, bonus to employees and remuneration to directors and supervisors. The adoption of this new accounting principle increased net loss by $15,839 thousand and decreased earnings per share by $0.005 for the year ended December 31, 2008. In addition, under the Interpretation Rule (97) 169 issued by ARDF, the basic or diluted earnings per share are not retroactively adjusted for common stock issued through employee stock bonus. However, employee stock bonus is considered in the calculation of diluted earnings per share if those potential common shares are dilutive. |
| |
(b) | Effective January 1, 2009, the Company adopted the newly revised SFAS No. 10 “Inventories” with no retroactive presentation requirement. The adoption of this new accounting principle resulted in the inclusion to the cost of goods sold of the unallocated fixed overhead and direct labor cost of $12,903,228 and gain from price recovery of inventories of $1,767,684 for the year ended December 31, 2009. |
9
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(4) | Cash and Cash Equivalents |
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
| | | |
Cash on hand - petty cash | $ | 30 |
| | 15 |
|
Cash in bank - checking account | 3,631 |
| | 17,637 |
|
Cash in bank - demand deposit account | 400 |
| | 824 |
|
Cash in bank - foreign currency account | 5,372,164 |
| | 4,317,570 |
|
Cash equivalents - commercial paper | - |
| | 172,421 |
|
Cash equivalents - repurchase agreements collateralized by corporate bonds | - |
| | 600,200 |
|
| $ | 5,376,225 |
| | 5,108,667 |
|
| | | |
| |
(5) | Financial Liabilities Reported at Fair Value through Profit or Loss - Current |
Financial liabilities reported at fair value with changes in fair value recorded through profit or loss as of December 31, 2009 and 2010, consisted of the following:
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
Financial liabilities | | | |
Interest rate swaps | $ | 567,642 |
| | 223,302 |
|
| |
(a) | The Company entered into several interest rate swaps agreements (IRS) with banks to manage the risk from fluctuations of interest rates for long-term loans. |
| |
(b) | As of December 31, 2009 and 2010, derivative financial instruments that did not qualify for hedge accounting were accounted for as financial liabilities reported at fair value through profit or loss, details of which were as follows: |
|
| | | | | | | |
December 31, 2009 |
Notional amount (in thousands) | | Maturity Date | | Range of Interest Rates Paid | | Range of Interest Rates Received | |
| | | | | | | |
USD 80,000 | | 2010.8.26 | | 3.26%~3.295% | | USD 3-month LIBOR | |
NTD 26,500,000 | | 2012.2.21 | | 2.18%~2.432% | | NTD 90-day commercial paper in secondary market average rate | |
10
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
|
| | | | | | | |
December 31, 2010 |
Notional amount (in thousands) | | Maturity Date | | Range of Interest Rates Paid | | Range of Interest Rates Received | |
| | | | | | | |
NTD 19,500,000 | | 2012.2.21 | | 2.18%~2.432% | | NTD 90-day commercial paper in secondary market average rate | |
| |
(c) | For the years ended December 31, 2008, 2009 and 2010, the Company recognized net gain (loss) on valuation of financial instruments as follows: |
|
| | | | | | | | | | | | | | | | | | |
| For the years ended December31, |
| 2008 | | 2009 | | 2010 |
| Realized | | Unrealized | | Realized | | Unrealized | | Realized | | Unrealized |
| | | | | | | | | | | |
Foreign exchange forward contracts | $ | 69,788 |
| | 151,819 |
| | (37,243 | ) | | - |
| | - |
| | - |
|
Foreign exchange swaps | - |
| | - |
| | (42,848 | ) | | - |
| | 2,713 |
| | - |
|
Interest rate swaps | (344 | ) | | (760,074 | ) | | (414,123 | ) | | 184,446 |
| | (348,610 | ) | | 257,171 |
|
| $ | 69,444 |
| | (608,255 | ) | | (494,214 | ) | | 184,446 |
| | (345,897 | ) | | 257,171 |
|
|
| | | | | | | |
| | December 31, |
| | 2009 | | 2010 |
| | | | |
Work in process | | $ | 3,303,814 |
| | 4,919,468 |
|
Less: allowance for inventory | | (132,672 | ) | | (928,856 | ) |
Sub-total | | 3,171,142 |
| | 3,990,612 |
|
Raw materials | | 283,342 |
| | 513,213 |
|
Less: allowance for inventory | | (427 | ) | | (1,311 | ) |
Sub-total | | 282,915 |
| | 511,902 |
|
Materials and supplies in transit | | 1,983 |
| | 3,150 |
|
| | $ | 3,456,040 |
| | 4,505,664 |
|
The Company recognized the loss on obsolescence and the devaluation of inventories of $853,946 under non-operating expenses and losses for the year ended December 31, 2008. However, it has been reclassified to cost of goods sold in order to conform with the presentation of the financial statements as of and for the year ended December 31, 2009, for purposes of comparison. In addition, in 2009, the net realizable value of inventories has increased because the factor that caused the inventory devaluation in prior period has improved, therefore, the Company recognized a gain from recovery in the value of inventories of $1,767,684, which was credited to cost of goods sold for the year ended December 31, 2009. Also, in 2010, the carrying value of inventories exceeded than the net realizable value thereof, therefore, the Company recognized a loss from devaluation of inventories of $797,068, which was debited to cost of goods sold for the year ended December 31, 2010.
11
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(a) | The Company signed a long-term lease agreement with Nanya Technology Corp. (NTC) to lease out a portion of the building and land (including supplemental equipment) located at No. 667, Fuhsing 3rd Road, Hwa-Ya Technology Park, Kueishan Valley, Taoyuan County. The lease term is effective from July 1, 2005, and will expire on December 31, 2034 (including the period when the lease is automatically extended), a total lease period of 354 months. The lease agreement for the building is treated as a capital lease because the present value of the periodic rental payments since the inception date is at least 90% of the market value of the leased assets. The land is treated as an operating lease because the fair value of the land is 25 percent or more of the total fair value of the leased property at the inception of the lease. The monthly rentals for the lease of building and land were $2,058 and $310, respectively. |
| |
(b) | The initial total amount of lease receivables for the capital lease of the building was $728,587, with implicit interest rate of 5.88%. The cost of leased assets transferred was $345,637 (including the net book value of the building and miscellaneous equipment of $277,372 and $68,265, respectively). The difference of $382,950 between the total amount of lease receivables and the cost of leased assets transferred was recognized as unrealized interest income and is amortized over the lease period. Interest income recognized for the years ended December 31, 2008, 2009 and 2010 amounted to $19,489, $19,175 and $18,841, respectively, which was classified under non-operating income and gains - interest income. |
| |
(c) | The details of lease receivables as of December 31, 2009 and 2010, were as follows: |
|
| | | | | | | | | | | | |
| December 31, |
| 2009 | | 2010 |
| Current | | Non-current | | Current | | Non-current |
| | | | | | | |
Gross lease receivables | $ | 24,698 |
| | 592,749 |
| | 24,698 |
| | 568,051 |
|
Less: unrealized interest income | (18,841 | ) | | (275,461 | ) | | (18,487 | ) | | (256,974 | ) |
Net lease receivables | $ | 5,857 |
| | 317,288 |
| | 6,211 |
| | 311,077 |
|
| |
(d) | For the years ended December 31, 2008, 2009 and 2010, the rent revenues (classified under non-operating income and gains - others) from the operating lease of the land were $3,719. |
| |
(d) | As of December 31, 2009 and 2010, the uncollected rent revenues (classified under other receivables - related parties) were $310 and $0, respectively. |
12
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(e) | Future gross lease receivables for leases classified as capital lease or operating lease as of December 31, 2010, were as follows: |
|
| | | | | | | |
| | December 31, 2010 |
Duration | | Capital lease | | Operating lease |
| | | | |
2011.1.1~2011.12.31 | | $ | 24,698 |
| | 3,719 |
|
2012.1.1~2012.12.31 | | 24,698 |
| | 3,719 |
|
2013.1.1~2013.12.31 | | 24,698 |
| | 3,719 |
|
2014.1.1~2014.12.31 | | 24,698 |
| | 3,719 |
|
On and after 2015.1.1 | | 493,957 |
| | 74,370 |
|
Total | | $ | 592,749 |
| | 89,246 |
|
| |
(8) | Property, Plant and Equipment and Idle Assets |
| |
(a) | For the year ended December 31, 2010, the Company recognized impairment loss on fixed assets of $236,763 because some machinery and equipment cannot be used for the next generation manufacturing process. This factor is expected to cause a decrease in cash inflows from the use of the related machinery so that the recoverable amount of those machinery and equipment would be lower than its carrying amount. The recoverable amount of the machinery was based on its value in use, determined using a discount rate of 13.49%. |
| |
(b) | In March 2007, the Company has secured the approval to purchase two parcels of land numbered 21 and 33 located in Taoyuan Hi-Tech Industrial Park Tang Wei District, for $1,686,190 from the Taoyuan County Government. Asia Pacific Development Co. was engaged by the Taoyuan County Government to handle the sale of the land in this industrial park. As the land is not being used in operation, it was classified as an idle asset. |
| |
(c) | Fixed and intangible assets are normally assessed for any impairment each year. Also, idle assets-machinery and equipment based on book value were provided with a 100% impairment loss provision. |
| |
(d) | Idle assets as of December 31, 2009 and 2010 consisted of the following: |
|
| | | | | | | |
| | December 31, |
| | 2009 | | 2010 |
| | | | |
Land | | $ | 1,686,190 |
| | 1,686,190 |
|
Original cost of machinery and equipment | | 99,569 |
| | 53,876 |
|
Less: accumulated depreciation | | (63,026 | ) | | (45,654 | ) |
impairment loss | | (36,543 | ) | | (8,222 | ) |
| | $ | 1,686,190 |
| | 1,686,190 |
|
13
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(e) | The bases for the capitalization of interests for the years ended December 31, 2008, 2009 and 2010, were as follows: |
|
| | | | | | | | | |
| For the years ended December31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Total interest expenses | $ | 2,266,597 |
| | 1,635,108 |
| | 1,412,072 |
|
Capitalized interest (charged to construction in progress) | 126,580 |
| | 12,426 |
| | 107,009 |
|
Capitalized interest rates | 2.9490%~3.6625% |
| | 1.5938%~2.3679% |
| | 1.8815%~2.1342% |
|
| |
(f) | The property, plant and equipment pledged to secure bank loans were described in note 14. |
| |
(9) | Leased Assets and Lease Payables |
| |
(a) | The Company signed a long-term lease agreement with NTC to lease and use a portion of the building and land located on the land numbered 348, 348-2 and 348-4, Hwa-Ya Section, Kueishan Valley, Taoyuan County. The lease term commences on July 1, 2005, and will expire on February 28, 2029 (including the period when the agreement can be automatically extended), a total lease period of 284 months. The lease agreement for the building is treated as a capital lease because (a) the present value of the periodic rental payments made since the inception date is at least 90% of the market value of the leased assets and (b) the lease term is equal to 75% or more of the total estimated economic life of the leased assets. The lease for the land is treated as an operating lease because the fair value of the land is 25 percent or more of the total fair value of the leased property at the inception of the lease. The monthly rentals for the leased building and land were $775 and $357, respectively. On June 18, 2009, the July 1, 2005 lease agreement was terminated and a new lease agreement was executed by the same parties. This new lease agreement, including the same properties as those of the old lease agreement, covers a lease term commencing retroactively from January 1, 2009. Management had valuated this new lease agreement for purposes of accounting. The result thereof disclosed that the total present value of lease payables from the lease of the building was $135,996; the implicit interest rate was 4.46% and the fair value of the leased assets at the beginning of the lease period was $135,996. Therefore, the Company recognized a gain of $7,833 on the terminated capital lease agreement, which was classified under non-operating income and gains - others. |
| |
(b) | On June 18, 2009, the Company signed an amended long-term lease agreement with NTC and MeiYa Technology Corp. (MTC) which was originally contracted by NTC directly with MTC on the lease of building, facilities and land located on the land numbered 348, 348-1 and 348-3, Hwa-Ya Section, Kueishan Valley, Taoyuan County. This amended lease agreement, which took effect retroactively from January 1, 2009, includes the renewal term. Initial lease term is from January 1, 2009 to December 31, 2018 but the Company is entitled to renew this amended lease agreement for an unlimited number of consecutive additional terms of five years each by providing written notice of the Company’s intention to renew the lease term commencing from January 1, 2019. In addition, the Company has an exclusive option to purchase the leased assets for a total purchase price of US$50,000 thousand on and after January 1, 2024. Also, the rental due for the entire year of 2009 has been waived. Initial yearly rentals for the leased building including |
facilities and land were US$13,010 thousand and US$1,990 thousand, respectively from January 1, 2010 to December 31, 2018; the first yearly renewal rentals for the leased building including facilities and land
14
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
were US$8,010 thousand and US$1,990 thousand, respectively from January 1, 2019 to December 31, 2023; the subsequent yearly renewal rentals for the leased building including facilities and land were US$10 thousand and US$1,990 thousand commencing from January 1, 2024. The amended lease agreement for the building including facilities is treated as a capital lease because (a) the present value of the periodic rental payments made since the inception date is at least 90% of the market value of the leased assets and (b) the lease term is equal to 75% or more of the total estimated economic life of the leased assets. The land is treated as an operating lease because the fair value of the land is 25 percent or more of the total fair value of the leased property at the inception of the lease. The total present value of lease payables from the capital lease of the building including facilities was $2,656,223; the implicit interest rate was 10.56%. The fair value of the leased assets at the beginning of the lease period was $2,656,223. The Company recognized interest expenses from lease payables of $291,824 and $294,788, for the years ended December 31, 2009 and 2010, respectively.
| |
(c) | As of December 31, 2009 and 2010, the details of these lease payables were as follows: |
|
| | | | | | | |
| | December 31, |
| | 2009 | | 2010 |
| | | | |
Lease payables | | $ | 2,948,047 |
| | 2,813,506 |
|
Less: current portion of lease payables | | (134,541 | ) | | (149,323 | ) |
Lease payables—long-term | | $ | 2,813,506 |
| | 2,664,183 |
|
| |
(d) | For the years ended December 31, 2008, 2009 and 2010, the lease expenses for the operating lease of the land (classified under manufacturing overhead) were $4,288, $0 and $63,351, respectively. |
| |
(e) | Future lease payments (excluding interest component) classified as capital lease or operating lease as of December 31, 2010, were as follows: |
|
| | | | | | | |
| | December 31, 2010 |
Duration | | Capital lease | | Operating lease |
| | | | (in thousands of US Dollars) |
2011.1.1~2011.12.31 | | $ | 149,323 |
| | 1,990 |
|
2012.1.1~2012.12.31 | | 165,728 |
| | 1,990 |
|
2013.1.1~2013.12.31 | | 183,935 |
| | 1,990 |
|
2014.1.1~2014.12.31 | | 204,143 |
| | 1,990 |
|
On and after 2015.1.1 | | 2,110,377 |
| | 19,900 |
|
Total | | $ | 2,813,506 |
| | 27,860 |
|
15
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(10) | Intangible Asset - Technical know-how |
The cost and accumulated amortization of an intangible asset as of and for the years ended December 31, 2009 and 2010, were as follows:
|
| | | |
| Technical know-how |
Cost: | |
Balance of January 1, 2009 | - |
|
Acquisition | 1,627,700 |
|
Balance of December 31, 2009 | $ | 1,627,700 |
|
Balance of December 31, 2010 | $ | 1,627,700 |
|
Accumulated amortization: |
Balance of January 1, 2009 | - |
|
Amortization expense in 2009 | 180,856 |
|
Balance of December 31, 2009 | 180,856 |
|
Amortization expense in 2010 | 723,422 |
|
Balance of December 31, 2010 | $ | 904,278 |
|
Net book value: | |
Balance of December 31, 2009 | $ | 1,446,844 |
|
Balance of December 31, 2010 | $ | 723,422 |
|
For the years ended December 31, 2009 and 2010, the amortization expenses (classified under operating expenses - research and development expenses) were $180,856 and $723,422, respectively.
On January 23, 2009, Qimonda AG filed an application with the local court in Germany to open insolvency proceedings. Consequently, full allowance for doubtful accounts was provided on all outstanding accounts receivable from Qimonda AG totaling $3,345,946, which was originally classified under accounts receivable. As of December 31, 2009, such receivable, together with the related allowance for doubtful accounts, were reclassified to other assets - overdue receivables.
|
| | | | | | |
| | December 31, |
| | 2009 | | 2010 |
| | | | |
Short-term borrowing from credit facility | | $ | 5,930,000 |
| | - |
Annual interest rate | | 0.53%~0.95% |
| | - |
16
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2009 and 2010, the unused credit facility for short-term loans amounted to $21,145,369 and $21,312,475, respectively.
Bonds payable as of December 31, 2009 and 2010, consisted of the following:
|
| | | | | | | | |
| | December 31, |
| | 2009 | | 2010 | |
| | | | | |
Domestic unsecured corporate bonds | | $ | 18,001,739 |
| | 16,030,861 |
| |
Less: current portion of bonds payable | | (1,978,854 | ) | | (2,039,083 | ) | |
Total | | $ | 16,022,885 |
| | 13,991,778 |
| |
The details of bonds payable, which do not include any financial covenants, were as follows:
|
| | | | | | | | | | | | | |
| | The first domestic unsecured corporate bond in 2006 | | The second domestic unsecured corporate bond in 2006 | | The first domestic unsecured corporate bond in 2007 | | The second domestic unsecured corporate bond in 2007 |
| | | | | | | | |
Principal | | $ | 6,000,000 |
| | 4,000,000 |
| | 5,000,000 |
| | 5,000,000 |
|
2009.12.31 (including current portion) | | 4,016,937 |
| | 3,996,000 |
| | 4,994,635 |
| | 4,994,167 |
|
2009.12.31 Current portion | | 1,978,854 |
| | - |
| | - |
| | - |
|
2010.12.31 (including current portion) | | 2,039,083 |
| | 3,998,000 |
| | 4,997,111 |
| | 4,996,667 |
|
2010.12.31 Current portion | | 2,039,083 |
| | - |
| | - |
| | - |
|
Par value | | 1,000 |
| | 1,000 |
| | 1,000 |
| | 1,000 |
|
Duration | | 2006.12.19 ~ 2011.12.19 | | 2007.01.05 ~ 2012.01.05 | | 2007.03.30 ~ 2012.03.30 | | 2007.05.09 ~ 2012.05.09 |
Coupon rate and interest payment | | Interest payable annually at 2.20% | | Interest payable annually at 2.23% | | Interest payable annually at 2.17% | | Interest payable annually at 2.20% |
Repayment term | | Repayable in three annual installments: at the rate of 33%, 33%, and 34%, respectively; starting from 3 years after the issuance date | | Repayable on maturity date | | Repayable on maturity date | | Repayable on maturity date |
17
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Long-term loans as of December 31, 2009 and 2010, consisted of the following:
|
| | | | | | | | | | |
Bank | | Duration | | Nature | | Interest rate | | December 31, 2009 |
| | | | | | | | |
Mega International Commercial Bank (the managing bank) | (1) | March 30, 2007~ March 30, 2012 | | Machinery loan | | 0.9755%~1.6842% | | 22,482,071 |
|
Mega International Commercial Bank (the managing bank) | (1) | March 30, 2007~ March 30, 2012 | | Machinery loan | | 1.5476%~1.6913% | | 10,645,066 |
|
Taichung Bank | (3) | April 24, 2009~ December 24, 2010 | | Operating use | | 1.91%~2.00% | | 1,070,000 |
|
Taichung Bank | (3) | April 24, 2009~ December 24, 2010 | | Operating use | | 2.01%~2.10% | | 600,000 |
|
| | | | | | | | 34,797,137 |
|
Less: current portion of long-term loans | | | | | | | | (13,250,880 | ) |
| | | | | | | | $ | 21,546,257 |
|
|
| | | | | | | | | | |
Bank | | Duration | | Nature | | Interest rate | | December 31, 2010 |
| | | | | | | | |
Mega International Commercial Bank (the managing bank) | (1) | March 30, 2007~ March 30, 2012 | | Machinery loan | | 1.6327%~1.6842% | | $ | 13,490,192 |
|
Mega International Commercial Bank (the managing bank) | (1) | March 30, 2007~ March 30, 2012 | | Machinery loan | | 1.6148%~1.6279% | | 5,808,961 |
|
Mega International Commercial Bank (the managing bank) | (2) | May 27, 2010~ May 27, 2015 | | Machinery loan | | 1.6842% | | 31,409,000 |
|
Taichung Bank | (3) | December 24, 2010~ December 24, 2013 | | Operating use | | 1.755% | | 1,070,000 |
|
Taichung Bank | (3) | December 24, 2010~ December 24, 2013 | | Operating use | | 1.855% | | 600,000 |
|
| | | | | | | | 52,378,153 |
|
Less: current portion of long-term loans | | | | | | | (12,866,141 | ) |
| | | | | | | | $ | 39,512,012 |
|
| |
(1) | The Company signed a syndicated loan agreement with Mega International Commercial Bank, the managing bank of the syndicated loan, and 24 other banks on March 5, 2007 ( as of December 31, 2010, the actual number of banks had increased to 27 in total). As of December 31, 2010, the Company applied for drawings of US$400,000 thousand and $26,997,000. The details of this loan are as follows: |
| |
(a) | Credit line: US$400,000 thousand and $27,000,000. |
| |
(b) | Interest rate for Tranche A: USD 3-month or 6-month London Inter-bank Offered Rate (“LIBOR”) plus margin. |
| |
(c) | Interest rate for Tranche B: 90-day or 180-day commercial paper rate in the secondary market which appears on Moneyline Telerate, plus margin. |
18
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(d) | The interest rates under items 1(b) and 1(c) above shall not be lower than the minimum limit of 1.6% |
| |
(f) | Repayment: The principal is payable in 6 semi-annual installments starting from 30 months after the first drawing date. |
| |
(g) | The Company has issued a promissory note for this syndicated loan. |
| |
(h) | As of December 31, 2010, the Company’s repayments amounted to US$200,001 thousand and $13,498,500. |
| |
(i) | The long-term loan is secured by machinery and equipment. As of December 31, 2009 and 2010, the net book value of these pledged assets amounted to $34,501,992 and $29,922,295, respectively. |
| |
(2) | The Company signed another syndicated loan agreement with Mega International Commercial Bank, the managing bank of the syndicated loan, and 24 other banks on May 10, 2010. As of December 31, 2010, the Company applied for drawings of $31,500,000. The details of this loan are as follows: |
| |
(a) | Credit line: $35,000,000. |
| |
(b) | Interest rate: 90-day or 180-day commercial paper rate in the secondary market which appears on Moneyline Telerate, plus margin. |
| |
(c) | The interest rates above shall not be lower than the minimum limit of 1.6%. |
| |
(e) | Repayment: The principal is payable in 7 semi-annual installments starting from 24 months after the first drawing date. |
| |
(f) | The Company has issued a promissory note for this syndicated loan. |
| |
(g) | The long-term loan is secured by machinery and equipment. As of December 31, 2010, the net book value of these pledged assets amounted to $40,299,412. |
19
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
According to the above two long-term loan agreements, the Company was required to maintain certain financial ratios. If the Company fails to maintain these financial ratios, the syndicated banks may determine to declare the unpaid principal, interest, fees and other sums payable by the Company under the Loan Agreement to be immediately due and payable. These financial ratios are as follows:
| |
(a) | Current Ratio (total current assets to total current liabilities): not less than one (1) to one (1) (under the syndicated loan agreement on May 27, 2010, compliance with the current ratio will commence from calendar year of 2012). |
| |
(b) | Leverage Ratio (total liabilities plus contingent liabilities to tangible net worth): not higher than one and a half (1.5) to one (1). |
| |
(c) | Interest Coverage Ratio (EBITDA to interest expenses): shall not be less than four (4) to one (1). |
In the event that any of the above financial covenants is breached, the Company is required to cure the breach, no later than the end of November in the relevant calendar year, for a breach in respect of any semi-annual financial statements, and for a breach in respect of any annual financial statements, no later than the end of June of the following calendar year, or to submit a formal letter to the managing bank at least two months prior to the expiration of the Remedial Period, so that the managing bank can convene a meeting of the Banks to discuss the aforesaid breach and to resolve before the expiration of the Remedial Period on whether a waiver of the breach will be granted.
On June 29, 2009, the syndicate banks formally agreed further to waive the Company’s obligation to comply with its financial loan covenants under its first syndicate loan of US$400,000 thousand and $27,000,000 relating to the financial statements for the six-month period ended June 30, 2009 and the full year ended December 31, 2009. Also, on October 21, 2010, the syndicate banks formally agreed further to waive the Company’s obligation to comply with its financial loan covenants under the syndicate loan relating to the financial statements for the six-month period ended June 30, 2010.
In addition, the long-term loan agreements require that (i) no material adverse change shall be made to the supply agreement signed by the Company, Nanya Technology Corporation (NTC), and Micron Technology Inc., and (ii) NTC and Micron Technology Inc. and their affiliates, taken as a whole, directly or indirectly, shall remain the largest shareholders of the Company and retain control over the Company. No such changes occurred as of December 31, 2010.
20
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(3) | On April 24, 2009, the Company contracted with Taichung Bank, under which, Taichung Bank granted mortgage loan and unsecured loan facility to the Company totaling $1,670,000. The mortgage loan is secured by a land (accounted for as idle asset) that is intended for the construction of the third Fab. Each of these loans, with a term of two years and which bears interest rate based on two-year time deposit floating rate, is payable in lump sum on maturity date. On December 24, 2010, the Company renewed the loan agreement with Taichung Bank, under which, Taichung Bank agreed to prolong the term of mortgage loan and unsecured loan facility granted to the Company to a term of three years. These mortgage loan and unsecured loan facility, which bear interest rate based on 90-day or 180-day commercial paper rate in the secondary market appearing on Moneyline Telerate plus margin, are payable in lump sum on maturity date and do not include any financial covenants. |
| |
(15) | Accrued Pension Liabilities |
| |
(a) | The pension costs and related accounts for the years ended December 31, 2008, 2009 and 2010, were as follows: |
|
| | | | | | | | | |
| December 31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Balance of the retirement fund | $ | 71,972 |
| | 82,729 |
| | 95,830 |
|
Periodic pension costs | | | | | |
Defined benefit plan cost | 5,528 |
| | 5,923 |
| | 2,571 |
|
Defined contribution plan cost | 97,495 |
| | 99,801 |
| | 102,823 |
|
Accrued pension liabilities-defined benefit plan | 31,371 |
| | 25,344 |
| | 16,964 |
|
Accrued expenses-defined contribution plan | 26,799 |
| | 25,252 |
| | 28,336 |
|
| |
(b) | The funded status was reconciled to accrued pension liability as of December 31, 2009 and 2010 as follows: |
|
| | | | | | | | |
| | December 31, | |
| | 2009 | | 2010 | |
Benefit obligation: | | | | | |
Vested benefit obligation | | $ | (5,586 | ) | | (5,931 | ) | |
Non-vested benefit obligation | | (40,418 | ) | | (48,552 | ) | |
Accumulated benefit obligation | | (46,004 | ) | | (54,483 | ) | |
Projected compensation increase | | (44,994 | ) | | (48,988 | ) | |
Projected benefit obligation | | (90,998 | ) | | (103,471 | ) | |
Fair value of plan assets | | 84,379 |
| | 97,027 |
| |
Funded status | | (6,619 | ) | | (6,444 | ) | |
Unamortized pension gain or losses | | (18,725 | ) | | (10,520 | ) | |
Accrued pension liability | | $ | (25,344 | ) | | (16,964 | ) | |
21
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(c) | As of December 31, 2009 and 2010, the actuarial present value of the vested benefits for the Company’s employees in accordance with the retirement benefit plan was approximately $6,520 and $6,374, respectively. |
| |
(d) | Major assumptions used to determine the pension plan funded status for the years ended December 31, 2008, 2009, and 2010, were as follows: |
|
| | | | | |
| For the years ended December 31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Discount rate | 2.75% | | 2.75% | | 2.75% |
Rate of increase in compensation | 3.00% | | 3.00% | | 3.00% |
Expected long-term rate of return on plan assets | 2.75% | | 2.75% | | 2.75% |
| |
(a) | The Company’s earnings are subject to income tax at a statutory rate of 25% before 2010. However, based on the amended Income Tax Act publicly announced on June 15, 2010, the statutory income tax rate has been reduced further from 20% to 17% commencing from 2010. In 2008, 2009 and 2010, the Company is subject to income tax at a statutory rate of 25%, 25% and 17%, respectively, and is also subject to the requirements of the “Income Basic Tax Act” in calculating the basic tax. For the years ended December 31, 2008, 2009 and 2010, the components of income tax expense were as follows: |
|
| | | | | | | | |
| For the years ended December 31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Income tax expense-current | $ | 4,770 |
| | 17,305 |
| | - |
Income tax expense (benefit)-deferred | 3,322 |
| | (17,305 | ) | | - |
Income tax expense | $ | 8,092 |
| | - |
| | - |
22
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
The components of deferred income tax expense for the years ended December 31, 2008, 2009 and 2010, were as follows:
|
| | | | | | | | | |
| For years ended December 31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Investment tax credit | $ | (1,861,024 | ) | | 6,582,547 |
| | (272,860 | ) |
Loss carry forward | (3,935,252 | ) | | (2,636,759 | ) | | (2,008,726 | ) |
Decrease (increase) in allowance for inventory devaluation and obsolescence | (213,487 | ) | | 353,537 |
| | (131,509 | ) |
Allowance for doubtful accounts | (821,287 | ) | | 13,580 |
| | 90,066 |
|
Valuation (gain) loss on financial instruments | (170,145 | ) | | (4,046 | ) | | 75,567 |
|
Accumulated impairment loss of idle and fixed assets | 4,117 |
| | 3,300 |
| | (38,966 | ) |
Unrealized depreciation for tax filing | - |
| | (211,635 | ) | | 190,663 |
|
Unrealized interest expenses | - |
| | (58,365 | ) | | 58,365 |
|
Allowance for valuation of deferred tax assets | 7,306,292 |
| | (5,380,766 | ) | | 1,035,022 |
|
Decrease in unrealized foreign exchange gain or loss | (309,523 | ) | | 168,375 |
| | 148,655 |
|
Unallocated overhead and labor | - |
| | - |
| | (48,177 | ) |
Deferred income tax effect of change in income tax rate | - |
| | 1,150,951 |
| | 900,476 |
|
Others | 3,631 |
| | 1,976 |
| | 1,424 |
|
Deferred income tax expense | $ | 3,322 |
| | (17,305 | ) | | - |
|
| |
(b) | The income tax expense calculated at a statutory income tax rate on loss before income tax was reconciled with the income tax as reported in the accompanying financial statements for the years ended December 31, 2008, 2009 and 2010, as follows: |
|
| | | | | | | | | |
| For years ended December31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Income tax calculated based on pretax financial loss | $ | (5,441,951 | ) | | (2,869,232 | ) | | (1,812,423 | ) |
Expiry (increase in) of income tax credit on purchase of machinery and equipment | (1,944,441 | ) | | 6,582,547 |
| | (272,860 | ) |
Difference between estimated and actually reported income tax expense | 1,944 |
| | 110 |
| | 7 |
|
(Decrease) increase in valuation allowance for deferred income tax assets | 7,306,292 |
| | (5,380,766 | ) | | 1,035,022 |
|
Effect of changes in income tax rate | - |
| | 1,743,461 |
| | 1,046,077 |
|
10% surtax on undistributed earnings | 83,417 |
| | | | |
Prior year income tax adjustment | 2,826 |
| | (76,196 | ) | | 4,064 |
|
Others | 5 |
| | 76 |
| | 113 |
|
Income tax expense | $ | 8,092 |
| | - |
| | - |
|
23
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(c) | As of December 31, 2009 and 2010, the components of deferred income tax assets or (liabilities) were as follows: |
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
| | | |
Current deferred income tax assets: | | | |
Unused investment tax credit | $ | 1,577,345 |
| | 3,975,405 |
|
Allowance for inventory devaluation and obsolescence | 26,620 |
| | 158,129 |
|
Allowance for uncollectible accounts | 643,450 |
| | 553,384 |
|
Unrealized valuation loss on financial assets | 113,528 |
| | 37,961 |
|
Unrealized foreign exchange loss | 59,426 |
| | - |
|
Unrealized interest expense | 58,365 |
| | - |
|
Unallocated overhead and labor | - |
| | 48,177 |
|
Valuation allowance for deterred income tax assets | (2,478,734 | ) | | (4,766,185 | ) |
Current deferred income tax assets, net | - |
| | 6,871 |
|
Current deferred income tax liabilities: | | | |
Unrealized foreign exchange benefit | - |
| | (6,871 | ) |
Net current deferred income tax assets | - |
| | - |
|
Non-current deferred income tax assets | | | |
Unused investment tax credit | $ | 5,894,773 |
| | 3,769,573 |
|
Loss carry forward | 5,784,961 |
| | 6,925,943 |
|
Allowance for impairment loss on idle assets | 1,511 |
| | 29,477 |
|
Unrealized foreign exchange loss | 69,280 |
| | - |
|
Unrealized depreciation for tax filing | 211,635 |
| | - |
|
Others | 5,068 |
| | 2,884 |
|
Valuation allowance for deferred income tax assets | (11,644,768 | ) | | (10,392,339 | ) |
Non-current deferred income tax assets | 322,460 |
| | 335,538 |
|
Non-current deferred income tax liabilities | | | |
Unrealized foreign exchange benefit | - |
| | (13,078 | ) |
Net non-current deferred income tax assets | $ | 322,460 |
| | 322,460 |
|
Full valuation allowance was provided for most of the components of deferred tax assets as management believes that they are not expected to be realized in future years.
24
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(d) | Under the ROC Statute for Upgrading Industries, the Company’s unused investment tax credits as of December 31, 2010, were as follows: |
|
| | | | | | | | |
Year | | Purchasing machinery and equipment | | Personnel training and research and development expenditures | | Expiry Year |
| | | | | | |
2007 | | 3,946,683 |
| | 28,722 | | 2011 |
2008 | | 1,587,701 |
| | 22,788 | | 2012 |
2009 | | 376,714 |
| | 47,414 | | 2013 |
2010 | | 1,734,956 |
| | - | | 2014 |
| | $ | 7,646,054 |
| | 98,924 | | |
ROC Income Tax Law provides an investment tax credit to companies that purchase certain types of equipment and machinery. Such tax credit can be used to reduce by up to 50% of income tax liability for each of the four years commencing from the year of equipment purchase, and can be used further to reduce by up to 100% of such income tax liability in the fifth year.
| |
(e) | As of December 31, 2010, unused loss carry forward tax credits available to the Company were as follows: |
|
| | | | | | |
Year | | Unused loss carry forward tax credits | | Expiry Year |
| | | | |
2008 | | $ | 16,011,859 |
| | 2018 |
2009 | | 12,234,762 |
| | 2019 |
2010 | | 12,494,219 |
| | 2020 |
| | $ | 40,740,840 |
| | |
| |
(f) | The Company’s income tax returns have been examined by the ROC tax authority through 2008. |
| |
(g) | Undistributed earnings, imputation credit account (ICA) and creditable ratio |
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
| | | |
Accumulated deficit after 1997 | $ | (26,974,986 | ) | | (37,636,298 | ) |
Imputation credit account | $ | 181,287 |
| | 181,295 |
|
| | | |
| 2009 | | 2010 |
| | | |
Creditable ratio | - % |
| | - % |
|
25
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(h) | The stockholders approved a resolution during their meetings on June 29, 2005, and June 29, 2007, allowing the Company to avail of the Income Tax Holiday for qualifying investment projects under Article 9 of the Statute for Upgrading Industries. Therefore, the Company has availed of the five-year Income Tax Holiday commencing from June 1, 2005 and January 1, 2006, for the taxable income that is derived only from the sale of products produced from its Fab-1 - Phases 2 and Fab-1 - Phases 3 investment projects, respectively. In addition, on June 23, 2010 the Company was approved by Ministry of Finance, R.O.C. to avail of the tax holiday commencing from January 1, 2011, from its Fab1 - Phase 4 and Fab- 2. |
|
| |
| Duration of Income Tax Holiday |
| |
Inotera Fab-1-Phase 2 | June 2005 to May 2010 |
Inotera Fab-1-Phase 3 | January 2006 to December 2010 |
Inotera Fab-1-Phase 4 and Fab-2 | January 2011 to December 2015 |
| |
On December 9, 2010, the board of directors approved to increase the Company’s capital arising from the exercise by employees of the stock options granted to them under the Employee Stock Option Plan (ESOP). Accordingly, the Company issued 20,387 thousand shares at an issuance price of $10 per share. Also, the process for the registration thereof was completed.
On December 15, 2009, the board of directors approved to increase the Company’s capital through the issuance of 640 million company shares for cash at an issuance price of $22.5 per share. The capital surplus generated from this capital increase amounted to $7,995,000 (after deducting commissions and offering expenses payable by the Company). The proceeds from this capital increase were collected on February 6, 2010. Also, the process for the registration thereof was completed.
On June 18, 2009, the board of directors approved to increase the Company’s capital through the offering of Global Depository Shares (GDSs). This offering was approved by the SFB on June 16, 2009. On August 4, 2009, the Company issued 64 million GDSs at an issuance price of US$4.8757 per share, which were subsequently listed on the MTF market of the LSE. Total issuance of GDSs amounted to US$312,045 thousand and each GDS offers the holder the right to receive 10 shares of the Company. On August 4, 2009, the net proceeds from this offering amounted to US$308,366 thousand or $10,104,546 (after deducting commissions and offering expenses payable by the Company). The excess of the net proceeds over the par value of the shares issued of $3,704,546 was recorded as capital surplus.
26
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
On May 16, 2006 and August 4, 2009, the Company issued 40 million and 64 million GDSs, respectively, representing 1,040 million common shares of the Company and these GDSs were offered for trading in the MTF market of the LSE. Each GDS offers the holder the right to receive 10 shares of the Company.
As of December 31, 2009 and 2010, the Company’s government registered total authorized capital both amounted to $60,000,000, and total issued common stock amounted to $39,775,120 and $46,378,990, respectively, with $10 par value per share.
As of December 31, 2009 and 2010, the capital surplus consisted of the following:
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
Paid-in capital in excess of par value | $ | 33,022,382 |
| | 41,017,382 |
|
Premium from exercise of employee stock options | - |
| | 224,963 |
|
Compensation cost from exercise of employee stock option plans | 98,936 |
| | 160,987 |
|
Expired employee share purchase option | - |
| | 212,571 |
|
Total | $ | 33,121,318 |
| | 41,615,903 |
|
According to the ROC Company Law, realized capital surplus can be transferred to common stock after deducting the accumulated deficit, if any. Realized capital surplus includes the additional paid-in capital from issuance of common stock in excess of the common stock’s par value, donation from others, and additional paid-in capital - treasury stock. The Company’s paid-in capital in excess of par value is transferrable to common stock annually but shall not exceed 10% of total issued and outstanding common stock according to Regulations Governing the Offering and Issuance of Securities by Securities Issuers.
| |
(c) | Earnings appropriation and distribution |
The Company’s annual net profit, after providing for income tax and covering the losses of previous years, is first set aside for legal reserve at the rate of 10% thereof until the accumulated balance of legal reserve equals the total issued capital. Thereafter, 1% to 15% of the remainder of the profit, if any, after providing for any special reserves pursuant to relevant laws and regulations, if necessary, is appropriated as bonus to employees, and such bonus to employees is recognized as the Company’s expenses in the current year commencing from the year 2008. The remainder plus the undistributed earnings of the previous years are distributed or left undistributed for business purposes according to the resolution of the stockholders’ dividend distribution plan, which are initially proposed by the Board of Directors and adopted by the shareholders in the Annual Stockholders’ Meeting.
27
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
As it belongs to a highly capital-intensive industry with strong growth potential, the Company adopts a dividend distribution policy which is in line with its capital budget and long-term financial plans. This policy requires that the distribution of cash dividends shall be equal to at least fifty percent (50%) of the Company’s total dividend distribution every year.
Based on the resolutions approved by the stockholders during their meetings on June 18, 2009 and May 27, 2010, no appropriations were made of earnings in 2008 and 2009 as the Company had no earnings available for appropriations but an accumulated deficit as of December 31, 2008 and 2009, respectively.
| |
(d) | Share-based payment transactions |
On August 29, 2007, December 13, 2007, September 30, 2008, April 30, 2009 and October 15, 2010, 98,000, 2,000, 80,000, 14,500 and 56,182 units of stock options, respectively, were granted to qualified full-time employees of the Company. Each option entitles the holder to subscribe for one thousand common shares of the Company when exercisable. The original exercise price is $31.05, $26.50, $10.00, $17.40 and $15.40 per share, respectively. As the Company issued additional GDSs, however, the exercise price granted before August 4, 2009 has been adjusted to $28.6, $24.8, $10.0 and $17.2 per share, respectively, according to its employee stock option plan rules. Also, as the Company issued additional shares from capital increase in cash on February 6, 2010, however, the exercise price granted before February 6, 2010 has been adjusted to $27.8, $24.5, $10.0 and $17.2 per share, respectively, according to its employee stock option plan rules. These stock options are valid for 8 years and exercisable at certain percentages after the second anniversary year from grant date. 50%, 75% and 100% of these stock options are vested after the second, third and fourth anniversary dates, respectively. On December 15, 2009, the board of directors approved to increase the Company’s capital stock by issuing 640 million Company shares according to Article 267 of the Company Law, to retain 10% of 640 million Company shares for employees, to set January 6, 2010 as the grant date and employee purchase price of $22.5 per share.
Options granted and capital increase in cash allocated for employees for the years ended December 31, 2008, 2009 and 2010 were priced using the Black-Scholes pricing model and the inputs to the model were as follows:
|
| | | | | | | | | | | |
| Employee Stock Option Plan | | |
| The first batch for the year ended December 31, 2007 | | The second batch for the year ended December 31, 2007 | | The first batch for the year ended December 31, 2008 | | The first batch for the year ending December 31, 2009 | | The first batch for the year ending December 31, 2010 | | Capital increase in cash allocated for employees |
| | | | | | | | | | | |
Assumptions | | | | | | | | | | | |
Expected dividend yield | - % | | - % | | - % | | - % | | - % | | - % |
Grant-date share price | 31.05 | | 26.50 | | 10.00 | | 17.40 | | 15.40 | | 28.20 |
Expected volatility | 40.23% | | 38.41% | | 40.76% | | 47.01% | | 50.93%~53.53% | | 32.39% |
Risk-free interest rate | 2.5317% | | 2.4820% | | 2.0140% | | 1.1089% | | 0.8674% | | 1.0182% |
Expected term | 5.375 years | | 5.375 years | | 5.375 years | | 5.375 years | | 5~6 years | | 0.08 years |
Estimated percentage of forfeiture | 16.11% | | 16.06% | | 16.11% | | 17.57% | | 16.11% | | - % |
28
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
The details of these employee stock option plans for the years ended December 31, 2008, 2009 and 2010, were as follows:
|
| | | | | | | | | | | | | | | |
| For years ended December 31, |
| 2008 | | 2009 | | 2010 |
| Number of options (Units) | | Weighted-average exercise price | | Number of options (Units) | | Weighted-average exercise price | | Number of options (Units) | | Weighted-average exercise price |
| | | | | | | | | | | |
Outstanding at January 1, 2008, 2009 and 2010 | $95,174 | | 30.95 | | 156,102 |
| | 20.56 | | 150,989 |
| | 19.31 |
Options granted | 80,000 |
| | 10.00 | | 14,500 |
| | 17.20 | | 56,182 |
| | 15.40 |
Option exercised | - |
| | - | | - |
| | - | | (20,781 | ) | | 10.00 |
Options forfeited | (19,072 | ) | | 28.14 | | (19,613 | ) | | 17.79 | | (13,542 | ) | | 17.79 |
Outstanding at December 31, 2008, 2009 and 2010 | 156,102 |
| | 20.56 | | 150,989 |
| | 19.31 | | 172,848 |
| | 18.95 |
Options exercisable, end of year | - |
| | | | 34,254 |
| | | | 79,450 |
| | |
Weighted-average fair value of options granted | $ | 3.5 |
| | | | 7.50 |
| | | | 7.24 |
| | |
As of December 31, 2009 and 2010, the details of the Company’s outstanding stock options, which were treated as a compensatory plan, were as a follows:
|
| | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 |
| | | Options outstanding | | | | Options exercisable |
| Range of exercise price | | Number of options | | Remaining periods | | Exercise price | | Number of options | | Exercise price |
| | | | | | | | | | | |
| $ | 28.60 |
| | 69,034 |
| | 5.66 |
| | 28.60 |
| | 34,343 |
| | 28.60 |
|
| $ | 24.80 |
| | 1,747 |
| | 5.95 |
| | 24.80 |
| | 911 |
| | 24.80 |
|
| $ | 10.00 |
| | 66,989 |
| | 6.75 |
| | 10.00 |
| | - |
| | - |
|
| $ | 17.20 |
| | 13,219 |
| | 7.33 |
| | 17.20 |
| | - |
| | - |
|
|
| | | | | | | | | | | | | | | | | | |
| | | December 31, 2010 |
| | | Options outstanding | | | | Options exercisable |
| Range of exercise price | | Number of options | | Remaining periods | | Exercise price | | Number of options | | Exercise price |
| | | | | | | | | | | |
| $ | 27.80 |
| | 64,336 |
| | 4.66 |
| | 27.80 |
| | 48,035 |
| | 27.80 |
|
| $ | 24.50 |
| | 1,517 |
| | 4.95 |
| | 24.50 |
| | 866 |
| | 24.50 |
|
| $ | 10.00 |
| | 40,444 |
| | 5.75 |
| | 10.00 |
| | 30,549 |
| | 10,00 |
|
| $ | 17.20 |
| | 11,465 |
| | 6.33 |
| | 17.20 |
| | - |
| | - |
|
| $ | 15.40 |
| | 55,086 |
| | 7.79 |
| | 15.40 |
| | - |
| | - |
|
Compensation costs for share-based - employee stock option plan payments of $15,839, $83,097 and $134,785 were recognized for the years ended December 31, 2008, 2009 and 2010, respectively. Also, compensation costs for share-based - capital increase in cash allocated for employees payments of $0, $0 and $364,800 were recognized for the years ended December 31, 2008, 2009 and 2010, respectively.
29
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Pro forma results of the Company for the years ended December 31, 2008, 2009 and 2010, assuming employee stock options granted before January 1, 2008 were accounted for under SFAS No. 39, were as follows:
|
| | | | | | | | | | |
| For the years ended December 31, |
| | 2008 | | 2009 | | 2010 |
| | | | | | |
Net loss | | | | | | |
As reported | | $ | (21,775,898 | ) | | (11,476,927 | ) | | (10,661,312 | ) |
Pro forma | | $ | (22,090,678 | ) | | (11,713,256 | ) | | (10,799,818 | ) |
Basic after income tax loss per share | | | | | | |
As reported | | $ | (6.52 | ) | | (3.19 | ) | | (2.34 | ) |
Pro forma | | $ | (6.62 | ) | | (3.25 | ) | | (2.37 | ) |
For the years ended December 31, 2008, 2009 and 2010, the weighted-average number of outstanding common shares and the common stock equivalents for calculating the basic loss per share consisted of the following:
|
| | | | | | | | | | | | | | |
| | For the year ended December 31, 2008 | |
| | Amount | | | | Loss per share | |
| | Loss before income tax | | Loss after income tax | | Total weighted-average outstanding shares | | Before income tax | | After income tax | |
| | | | | | | | | | |
Basic loss per share | | $ | (21,767,806 | ) | | (21,775,898 | ) | | 3,337,512 | | (6.52) | | (6.52) |
|
| | | | | | | | | | | | | | |
| | For the year ended December 31, 2009 | |
| | Amount | | | | Loss per share | |
| | Loss before income tax | | Loss after income tax | | Total weighted-average outstanding shares | | Before income tax | | After income tax | |
| | | | | | | | | | |
Basic loss per share | | $ | (11,476,927 | ) | | (11,476,927 | ) | | 3,600,527 | | (3.19) | | (3.19) |
|
| | | | | | | | | | | | | | |
| | For the year ended December 31, 2010 | |
| | Amount | | | | Loss per share | |
| | Loss before income tax | | Loss after income tax | | Total weighted-average outstanding shares | | Before income tax | | After income tax | |
| | | | | | | | | | |
Basic loss per share | | $ | (10,661,312 | ) | | (10,661,312 | ) | | 4,555,673 | | (2.34) | | (2.34) |
The Company has issued employee stock options, which are potential common shares. Only basic loss per share is disclosed because these potential common shares are not dilutive for the years ended December 31, 2008, 2009 and 2010.
30
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(19) | Financial Instrument Information |
| |
(a) | Fair value of financial instruments |
The book value of short-term financial instruments including cash and cash equivalents, accounts receivable/ payable (including related parties), financing from related parties and short-term loans, is believed to be not materially different from the fair value because the maturity dates of these short-term financial instruments are within one year from the balance sheet date.
As of December 31, 2009 and 2010, the fair value of Company’s financial assets and liabilities were as follows:
|
| | | | | | | | | | | | | | | | | | |
| December 31, |
| 2009 | | 2010 |
| | | Fair value | | | | Fair value |
| Book value | | Market value in active market | | Value determined by using broker quote/carrying value | | Book value | | Market value in active market | | Value determined by using broker quote/carrying value |
| | | | | | | | | | | |
Non-derivative financial instruments: | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 5,376,225 |
| | 5,376,225 |
| | - |
| | 5,018,667 |
| | 5,018,667 |
| | - |
|
Accounts receivable-related parties | 9,523,451 |
| | - |
| | 9,523,451 |
| | 5,729,041 |
| | - |
| | 5,729,041 |
|
Financial liabilities: | | | | | | | | | | | |
Short-term loans | 5,930,000 |
| | - |
| | 5,930,000 |
| | | | - |
| | |
Notes and accounts payable (including accounts payable-related parties) | 3,725,355 |
| | - |
| | 3,725,355 |
| | 10,906,943 |
| | - |
| | 10,906,943 |
|
Bonds payable (including current portion of bonds payable) | 18,001,739 |
| | - |
| | 17,895,625 |
| | 16,030,861 |
| | - |
| | 16,060,989 |
|
Long-tern loans (including current portion of long-term loans) | 34,797,137 |
| | - |
| | 34,797,137 |
| | 52,378,153 |
| | - |
| | 52,378,153 |
|
Long-term other account payable-related parities (including other payables-related parties) | 2,593,000 |
| | - |
| | 2,593,000 |
| | 1,923,491 |
| | - |
| | 1,923,491 |
|
Other payables-related parties (lending from related parties) | 1,381,700 |
| | - |
| | 1,381,700 |
| | 3,000,000 |
| | - |
| | 3,000,000 |
|
Derivative financial instruments: | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | |
Interest rate swaps | 567,642 |
| | - |
| | 567,642 |
| | 223,302 |
| | - |
| | 223,302 |
|
The methods and assumptions used to estimate the fair value of each class of financial instruments were as follows:
| |
(i) | The fair value of financial instruments traded in active markets is based on quoted market prices. If the financial instruments are not traded in an active market, then the fair value is determined by certain valuation techniques, using assumptions under existing market conditions. |
31
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(ii) | The discounted present value of anticipated cash flows is adopted as the fair value of long-term debt. The discounting rates used in calculating the present value are similar to those of the Company’s existing long-term loans (including current portion of long-term loans) and long-term other payable - related parties, whose interest rates fluctuates depending on the current market rates. |
| |
(b) | Financial risk information |
All derivative financial instruments are intended to manage fluctuations in foreign exchange rates and interest rates. Gains or losses from these managing instruments are likely to be offset by gains or losses from the hedged items. Thus, market price risks are believed to be low.
The Company signed a “Supply Agreement” with NTC and Micron. Under these agreements, the Company commits to supply its production mostly to NTC and Micron. As sales are made to these two major customers, credit risk is therefore concentrated on these major customers. Based on the results of the Company’s assessment of this risk and the good credits of these two major customers, its exposure to credit risk is low.
Credit risks of financial instrument transactions represent the positive net settlement amount of those contracts with positive fair values at the balance sheet date. The positive net settlement amount represents the loss to the Company if the counter-parties breached the contracts. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable financial institutions. Management believes its exposure related to the potential default by those counter-parties is low.
The Company might not have sufficient operating capital to meet its financial commitments. However, the Company signed a syndicated loan agreement with syndicate banks in order to avail of a new credit line of $35,000,000 on May 10, 2010, and renewed its mortgage loan and unsecured loan aggregating $1,670,000 with Taichung Bank on December 24, 2010. Aside from these loans, the Company has unused credit facility for short-term loans. For these reasons, the Company believes that these new credit facilities can provide sufficient funding to meet its future operating and capital expenditure needs. In addition, the syndicate banks have formally agreed to amend the syndicate loan agreements particularly with respect to the remedial period for the company's breach of financial covenants, and amendments to certain financial covenants under such agreements.
32
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Interest rate risk arises from short-term and long-term loans. Loans issued at variable rates expose the Company to cash flow interest rate risk. If the market interest rate increases by 1%, the cash outflow of the Company would increase by $553,782. The Company manages its cash flow interest rate risk by using floating-to-fixed interest-rate swaps. Such interest rate swaps are expected to manage the interest rate fluctuation risk on conversion of loans with floating rates to loans with fixed rates.
| |
(20) | Related-party Transactions |
| |
(a) | Names and relationship of related parties |
|
| | |
Name | | Relationship with the Company |
| | |
Nan Ya Plastics Corp. (NPC) | | Common director |
Nan Ya Printed Circuit Board Corp. (NYPCB) | | Common director |
Nanya Technology Corp. (NTC) | | One of the major stockholders |
MeiYa Technology Corp. (MTC) | | Common chairman; joint ventures between NTC and Micron |
Micron Technology, Inc. (Micron) (note) | | One of the major stockholders |
Micron Semiconductor Asia Pte. Ltd. (MSA) | | Subsidiary of Micron |
Qimonda AG (note) | | One of the major stockholders |
All board of directors, supervisors, president and vice presidents | | Main echelon of management |
(Note) Micron became a related party when Qimonda AG sold all of its equity ownership in the Company to Micron effective November 26, 2008.
33
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(b) | Significant related-party transactions |
| |
(i) | Sales revenue and accounts receivable |
Significant sales to related parties for the years ended December 31, 2008, 2009 and 2010, were as follows:
|
| | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| 2008 | | 2009 | | 2010 |
| Amount | | % of net sales | | Amount | | % of net sales | | Amount | | % of net sales |
| | | | | | | | | | | |
NTC | $ | 18,557,964 |
| | 49.44 |
| | 24,321,874 |
| | 67.36 |
| | 20,718,863 |
| | 49.98 |
|
Qimonda AG | 18,235,594 |
| | 48.58 |
| | - |
| | - |
| | - |
| | - |
|
Micron | 345,443 |
| | 0.92 |
| | 11,780,975 |
| | 32.63 |
| | 6,155,918 |
| | 14.85 |
|
MSA | - |
| | - |
| | - |
| | - |
| | 14,579,238 |
| | 35.17 |
|
| $ | 37,139,001 |
| | 98.94 |
| | 36,102,849 |
| | 99.99 |
| | 41,454,019 |
| | 100.00 |
|
The balances of accounts receivable resulting from the above transactions as of December 31, 2009 and 2010, consisted of the following:
|
| | | | | | | | | | |
| December 31, |
| 2009 | | 2010 |
| Amount | | % of accounts receivable —related parties | | Amount | | % of accounts receivable —related parties |
| | | | | | | |
NTC | $ | 5,313,083 |
| | 55.79 | | 2,895,343 |
| | 50.54 |
Micron | 4,210,368 |
| | 44.21 | | 2,833,698 |
| | 49.46 |
| $ | 9,523,451 |
| | 100.00 | | 5,729,041 |
| | 100.00 |
The normal credit term with the related parties above is 60 days after the end of each delivery month. Selling price is calculated using the transfer pricing formula in accordance with the “Supply Agreement”.
34
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(ii) | Purchases and accounts payable |
Significant purchases from related parties for the years ended December 31, 2008, 2009 and 2010, were as follows:
|
| | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| 2008 | | 2009 | | 2010 |
| Amount | | % of net purchases | | Amount | | % of net purchases | | Amount | | % of net purchases |
| | | | | | | | | | | |
NPC | $ | 247,902 |
| | 1.32 |
| | 27,239 |
| | 0.43 |
| | 163,406 |
| | 1.81 |
|
NTC | 2,485 |
| | 0.01 |
| | 21,549 |
| | 0.34 |
| | 14,289 |
| | 0.16 |
|
Qimonda AG | 450,620 |
| | 2.39 |
| | - |
| | - |
| | - |
| | - |
|
Micron | - |
| | - |
| | 75,053 |
| | 1.19 |
| | 139,361 |
| | 1.54 |
|
| $ | 701,007 |
| | 3.72 |
| | 123,841 |
| | 1.96 |
| | 317,056 |
| | 3.51 |
|
The balances of accounts payable as of December 31, 2009 and 2010, were as follows:
|
| | | | | | | | | | | | | |
| | December 31, |
| | 2009 | | 2010 |
| | Amount | | % of accounts payable | | Amount | | % of accounts payable |
| | | | | | | | |
NPC | | $ | 5,686 |
| | 0.15 |
| | 49,254 |
| | 0.45 |
|
NTC | | 279 |
| | 0.01 |
| | 1,382 |
| | 0.01 |
|
Micron | | 65,810 |
| | 1.77 |
| | 62,244 |
| | 0.57 |
|
| | $ | 71,775 |
| | 1.93 |
| | 112,880 |
| | 1.03 |
|
The Company pays NPC and NTC on the 15th of the month following the month of purchase and pays Micron within 30 days of the shipping date. Purchases from NPC included miscellaneous equipment. Purchase prices and payment terms of purchases from related parties are not materially different from those of non-related general suppliers.
(iii)Financing to/from related parties
Financing to/from related parties was as follows:
(1)Lending to related parties (classified under other receivables - related parties):
|
| | | | | | | | | | | | | | |
| For the year ended December 31, 2008 |
| Maximum balance | | Balance as of December 31, 2008 | | Interest rate | | Interest income | | Interest receivables as of December 31, 2008 |
| | | | | | | | | |
Micron | $ | 2,834,920 |
| | 2,793,100 |
| | 4.1575% | | 11,634 |
| | 11,612 |
|
35
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
|
| | | | | | | | | | | | |
| For the year ended December 31, 2009 |
| Maximum balance | | Balance as of December 31, 2009 | | Interest rate | | Interest income | | Interest receivables as of December 31, 2009 |
| | | | | | | | | |
Micron | $ | 2,989,790 |
| | - | | 3.2488%~4.1575% | | 41,608 |
| | - |
The Company signed a “Loan Agreement” with Micron on November 26, 2008. The details of this loan are as follows:
| |
i. | Credit line: US$85,000 thousand. |
| |
ii. | Interest rate: USD 3-month London Inter-bank Offered Rate (“LIBOR”) plus margin. |
This loan was fully collected on May 26, 2009.
(2)Lending from related parties (classified under other payables - related parties):
|
| | | | | | | | | | | | | | | |
| For the year ended December 31, 2008 |
| Maximum balance | | Balance as of December 31, 2008 | | Interest rate | | Interest expenses | | Accrued interest payable as of December 31, 2008 |
| | | | | | | | | |
NYPCB | $ | 60,000 |
| | - |
| | 2.7937%~1.9073% | | 14 |
| | - |
|
NPC | 3,298,700 |
| | 3,298,700 |
| | 2.8000% | | 289 |
| | 286 |
|
| | | $ | 3,298,700 |
| | | | 303 |
| | 286 |
|
| For the year ended December 31, 2009 |
| Maximum balance | | Balance as of December 31, 2009 | | Interest rate | | Interest expenses | | Accrued interest payable as of December 31, 2009 |
| | | | | | | | | |
NYPCB | $ | 35,400 |
| | - |
| | 0.9878%~0.9906% | | 44 |
| | - |
|
NPC | 3,857,000 |
| | 1,381,700 |
| | 0.9878%~1.3062% | | 9,236 |
| | 1,180 |
|
| | | $ | 1,381,700 |
| | | | 9,280 |
| | 1,180 |
|
|
| | | | | | | | | | | | | | |
| For the year ended December 31, 2010 |
| Maximum balance | | Balance as of December 31, 2010 | | Interest rate | | Interest expenses | | Accrued interest payable as of December 31, 2010 |
| | | | | | | | | |
NPC | $ | 3,025,300 |
| | 3,000,000 |
| | 0.9939%~1.12661% | | 2,509 |
| | 741 |
|
36
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(iv)Transactions of property, plant and equipment
(1) On May 1, 2009, the Company formally contracted with MTC to buy MTC’s machinery and equipment of $2,593,000, which is payable in two installments. The first installment of $689,500 was non-interest bearing and was paid on January 1, 2010. The final installment of $1,903,500 is payable on or before January 1, 2011 (classified under other payables - related parties) with interest at the rate based on the contract requirement. As of December 31, 2010, the unpaid interest expense (classified under other payables - related parties) was $19,991.
(2) On May 28, 2010, the Company signed a contract with NTC to purchase NTC’s pump equipment of $5,150. As of December 31, 2010, the total purchase price has fully been paid.
(3) In 2010, the Company sold idle assets - machinery and equipment for $14,157 to NTC. The gain on disposal of machinery and equipment amounted to $878, which was classified under non-operating income and gains - others. As of December 31, 2010, the uncollected receivable from this transaction amounted to $14,106, including value added tax, which was classified under other receivables.
(4) On December 16, 2009, the Company formally contracted with NTC to sell for $14,852 internet equipment with book value of $6,326, and realized a gain on disposal of $8,526, which was accounted for under other income - others. As of December 31, 2009 and 2010, the uncollected receivable of $15,595, including tax value add, and $0, respectively, was classified under other receivables - related parties.
(v)Lease contracts
The Company signed lease contracts with NTC with effective dates commencing from July 1, 2005 and January 1, 2009. Refer to notes 7 and 9 for details.
(vi)Other significant transactions
(1) Other receivables—related parties arising from other transactions were as follows:
|
| | | | | |
| December 31, |
| 2009 | | 2010 |
| | | |
NTC (equipment maintenance fees) | $ | 1,511 |
| | - |
37
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(2) Other payables—related parties arising from other transactions were as follows:
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
| | | |
NTC (utility expenses, general administrative expenses, back end cost, etc.) | $ | 43,876 |
| | 14,464 |
|
NPC (dormitory expenses, etc.) | 3,832 |
| | 4,222 |
|
Micron (technical service fee, etc) | - |
| | 4,216 |
|
| $ | 47,708 |
| | 22,902 |
|
(vii)Contracts with related parties
The Company signed a “Product Purchase and Capacity Reservation Agreement” with NTC and Qimonda AG. Under this agreement, these entities are each entitled to a contracted percentage of the Company’s production capacity. Likewise, the Company is committed to sell its production to these entities at a transfer price calculated in accordance with the formula stated in the agreement. This agreement took effect on July 15, 2003, and will continue to be in effect until terminated by either party with cause or when the Joint Venture Agreement and/or the License and Technical Cooperation Agreement between NTC and Qimonda AG are terminated. This agreement was terminated on October 11, 2008.
The Company signed a “Know-How Transfer Agreement” with NTC and Qimonda AG. Under this agreement, these entities allowed the Company to utilize their know-how in the semiconductor manufacturing process. This agreement took effect on July 15, 2003, and it will continue to be in effect until either of the following conditions has been fulfilled: 1) both corporations decide to terminate their Joint Venture Agreement or 2) three years after the completion of the know-how transfer. This agreement was terminated on October 11, 2008.
The Company signed a “Supply Agreement” with NTC and Micron. Under this agreement, these entities are each entitled to a contracted percentage of the Company’s production capacity. Likewise, the Company has committed to sell its production to these entities at a transfer price calculated in accordance with the formula stated in the agreement. Also, NTC and Micron have committed to buy all of the Company’s DRAM production. This agreement took effect on November 26, 2008, and will continue to be in effect until terminated by either party with cause or when the Joint Venture Agreement between NTC and Micron is terminated.
The Company signed a “Technology Transfer Agreement” with NTC and Micron. Under this agreement, these entities allowed the Company to utilize their technology in the semiconductor manufacturing process. This contract took effect on November 26, 2008 and it will continue to be in effect until terminated by either party with cause or when the Joint Venture Agreement between NTC and Micron is terminated.
38
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
The Company signed a service contract with NTC. Under this contract, NTC provides transaction support in the following areas: human resources, finance, engineering and construction, raw material, inventory, etc. The service fee is charged based on the actual type of service rendered. The contract took effect on July 15, 2003, and will continue to be in effect until terminated mutually by both parties.
On October 11, 2008, the Company signed a “Technology Transfer Agreement for 68-50 nm Process Nodes” with Micron. Under this agreement, the Company is required to pay Micron technology transfer fee of US$50,000 thousand for the transfer of “Stack” technology. As of December 31, 2010, this fee was fully paid and recognized as an intangible asset - technical know-how.
On June 18, 2009, the Company signed a “Tool Repurpose Agreement for 68-50nm Process Nodes” with NTC. This agreement took effect on June 18, 2009, and will continue to be in effect until terminated mutually by both parties. Under this agreement, the Company is required to pay NTC a tool repurpose fee of $191,418. This fee was fully paid as of December 31, 2010.
| |
(c) | Compensation of board of directors, supervisors and management personnel: |
For the years ended December 31, 2008, 2009 and 2010, the compensation of board of directors, supervisors, president and vice presidents, key management, were as follows:
|
| | | | | | | | | |
| For years ended December31, |
| 2008 | | 2009 | | 2010 |
| | | | | |
Salaries | $ | 23,661 |
| | 27,712 |
| | 24,121 |
|
Special compensation | 1,150 |
| | - |
| | - |
|
| $ | 24,811 |
| | 27,712 |
| | 24,121 |
|
Refer to note 14 for information on the Company’s assets pledged to secure loans.
39
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(22) | Commitments and Contingencies |
As of December 31, 2009 and 2010, the balances of outstanding letters of credit were as follows:
|
| | | | | | | | | | | |
| | | | December 31, |
Currency | | | | 2009 | | | 2010 | |
| | | | | | | | |
USD | | | | $ | 36,424 |
| thousand | | 24,154 |
| thousand |
JPY | | | | $ | 4,382,031 |
| thousand | | 433,127 |
| thousand |
EUR | | | | $ | 3,423 |
| thousand | | 2,742 |
| thousand |
| |
(23) | Significant Disaster Loss: None. |
Management has performed a preliminary assessment of the potential impact on the Company as a result of the March 11, 2011 earthquake that occurred in Japan. The Company is sourcing partially some material and parts of equipment from Japanese vendors. However, management believes the Company has sufficient safety stock and alternative sources to limit the near term impact. Management is also working closely with Japanese vendors and suppliers regarding the supply situation of chemical, raw wafer and parts of equipment. If the related supply can not be provided timely in the future, management believes it is reasonably possible this could have a material adverse impact on the Company's results of operations and cash flows. Nevertheless, management is closely monitoring the situation.
40
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(a) | The Company’s personnel, depreciation, and amortization expenses, categorized by function, were as follows: |
|
| | | | | | |
| For the year ended December 31, 2008 |
| Cost of goods sold | Operating expenses | Total |
Personnel expenses | | | |
Salaries | 1,926,869 |
| 235,858 |
| 2,162,727 |
|
Labor and health insurance | 138,064 |
| 10,668 |
| 148,732 |
|
Pension expenses | 91,400 |
| 11,623 |
| 103,023 |
|
Other personnel expenses | 61,574 |
| 5,118 |
| 66,692 |
|
Depreciation expenses | 27,622,504 |
| 88,934 |
| 27,711,438 |
|
Amortization expenses | 13,020 |
| - |
| 13,020 |
|
41
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
|
| | | | | | |
| For the year ended December 31, 2009 |
| Cost of goods sold | Operating expenses | Total |
Personnel expenses | | | |
Salaries | 1,897,567 |
| 269,158 |
| 2,166,725 |
|
Labor and health insurance | 144,911 |
| 14,340 |
| 159,251 |
|
Pension expenses | 93,505 |
| 12,219 |
| 105,724 |
|
Other personnel expenses | 59,872 |
| 5,025 |
| 64,897 |
|
Depreciation expenses | 29,516,520 |
| 86,708 |
| 29,603,228 |
|
Amortization expenses | 11,160 |
| 180,856 |
| 192,016 |
|
|
| | | | | | |
| For the year ended December 31, 2010 |
| Cost of goods sold | Operating expenses | Total |
Personnel expenses | | | |
Salaries | 2,695,004 |
| 366,468 |
| 3,061,472 |
|
Labor and health insurance | 156,707 |
| 16,085 |
| 172,792 |
|
Pension expenses | 94,210 |
| 11,184 |
| 105,394 |
|
Other personnel expenses | 63,113 |
| 5,224 |
| 68,337 |
|
Depreciation expenses | 31,077,056 |
| 60,059 |
| 31,137,115 |
|
Amortization expenses | 8,059 |
| 723,422 |
| 731,481 |
|
| |
(b) | As discussed in note 20(b)(vii) to the financial statements, the Company signed a service contract with NTC, under which, the General Administrative Office of General Administrative Office of the Formosa Group is entrusted to provide certain administrative services. For the years ended December 31, 2008, 2009 and 2010, service fees due to the General Administrative Office of the Formosa Group (sundry debtors by Formosa Plastics Corp. and NPC) amounted to $30,680, $24,316 and $35,838, respectively. |
42
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(c) | The Company’s significant foreign currency financial assets and liabilities were as follows: |
|
| | | | | | | | | | |
| December 31, |
| 2009 | | 2010 |
| Foreign currency (thousand) | | Exchange rate | | Foreign currency (thousand) | | Exchange rate |
| | | | | | | |
Foreign currency denominated financial assets: | | | | | | | |
USD | $ | 462,439 |
| | 32.0300 | | 277,297 |
| | 29.130 |
EUR | 1,740 |
| | 46.1900 | | 50,582 |
| | 38.920 |
JPY | 9,538 |
| | 0.3479 | | 837 |
| | 0.358 |
Foreign currency denominated financial liabilities: | | | | | | | |
USD | 383,488 |
| | 32.0300 | | 266,634 |
| | 29.130 |
EUR | 1,721 |
| | 46.1900 | | 103,844 |
| | 38.920 |
JPY | 2,699,336 |
| | 0.3479 | | 6,891,504 |
| | 0.358 |
Certain accounts in the financial statements as of and for the year ended December 31, 2008 and 2009, have been reclassified to conform with the presentation of the financial statements as of and for the year ended December 31, 2010, for purposes of comparison. These reclassifications have not materially affected the financial statements.
| |
(a) | Industrial information |
The Company’s main operating activities are to manufacture and to sell semiconductor product, which belong to a single industrial segment.
| |
(b) | Geographic information |
No geographic information was disclosed as the Company has no foreign operation segment.
43
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(c) | Export sales information |
Export sales by geographic areas in 2008, 2009 and 2010 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2008 | | 2009 | | 2010 |
Destination Area | | Amount | | % of net sales | | Amount | | % of net sales | | Amount | | % of net sales |
| | | | | | | | | | | | |
Asia | | - |
| | - |
| | - |
| | - |
| | 14,579,238 |
| | 35.17 |
|
Europe | | 18,636,211 |
| | 49.64 |
| | - |
| | - |
| | - |
| | - |
|
America | | 345,443 |
| | 0.92 |
| | 11,780,975 |
| | 32.63 |
| | 6,155,918 |
| | 14.85 |
|
| | $ | 18,981,654 |
| | 50.56 |
| | 11,780,975 |
| | 32.63 |
| | 20,735,156 |
| | 50.02 |
|
The major customers of the Company in 2008, 2009 and 2010, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2008 | | 2009 | | 2010 |
Client | | Amount | | % of net sales | | Amount | | % of net sales | | Amount | | % of net sales |
| | | | | | | | | | | | |
NTC | | $ | 18,557,964 |
| | 49.44 |
| | 24,321,874 |
| | 67.36 |
| | 20,718,863 |
| | 49.98 |
|
Micron | | - |
| | - |
| | 11,780,975 |
| | 32.63 |
| | 6,155,918 |
| | 14.85 |
|
Qimonda AG | | 18,636,211 |
| | 49.64 |
| | - |
| | - |
| | - |
| | - |
|
MSA | | - |
| | - |
| | - |
| | - |
| | 14,579,238 |
| | 35.17 |
|
Total | | $ | 37,194,175 |
| | 99.08 |
| | 36,102,849 |
| | 99.99 |
| | 41,454,019 |
| | 100.00 |
|
44
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(27) | Summary of Significant Differences between Accounting Principles Generally Accepted in the Republic of China and Generally Accepted Accounting Principles in the United States of America |
Under ROC GAAP, the expatriate employees payroll cost paid by a foreign joint venture partner/shareholder is not recorded nor treated as the shareholder’s capital surplus in the Company.
Under U.S. GAAP, the expatriate employees payroll cost paid by a foreign joint venture partner would be recorded as expense and treated as capital surplus in the Company.
Under ROC GAAP, the estimated fair value of a partially leased building used in evaluating the lease classification described under Note 2 (k) to the financial statements can be based on the proportionate fair value of the entire building.
Under U.S. GAAP, the fair value of a partially leased building used in determining the lease classification must be based on the specific fair value of the leased asset. In the event that the fair value of the partially leased building cannot be determined, the lease of a partial building should be treated as an operating lease. As a result, the leased asset described in Note 7 to the financial statements, which was treated as a capital lease under ROC GAAP, would be treated as an operating lease under U.S. GAAP.
| |
(c) | Related party transactions |
Under ROC GAAP, the transaction with the General Administrative Office of Formosa Group as described in Note 25(b) is not treated as a related party transaction.
Under U.S. GAAP, the transaction would be considered a related party transaction.
45
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Under ROC GAAP, basic loss per share are calculated by dividing net loss attributable to common shareholders by the weighted average number of shares outstanding during the year. The shares distributed for employee bonus are treated as outstanding at the beginning of each period. Diluted loss per share are calculated by taking basic loss per share into consideration plus additional common shares that would have been outstanding if the dilutive share equivalents had been issued. Net loss is also adjusted for the interest and other income or expenses derived from any underlying dilutive share equivalents. The weighted average shares outstanding are adjusted retroactively for stock dividends issued, capitalization of additional paid-in capital and employee bonus. Anti-dilutive effects are not included in the dilutive EPS calculation. Under the ARDF Interpretation No. 97-169 “Impacts of Employee Stock Bonuses on Earnings Per Share” which took effect in 2008, the shares distributed for employees bonus are treated as outstanding at grant date in the calculation of basic earnings (loss) per share after 2008. For employees bonus that may be distributed in shares, the number of shares to be distributed is taken into consideration assuming the distribution will be made entirely in shares when calculating for diluted earnings per share.
Under U.S. GAAP, when a simple capital structure exists, basic loss per share is calculated using the weighted average number of common shares outstanding. When a complex capital structure exists, diluted loss per share is based on the weighted average number of shares outstanding plus the number of additional shares that would have been outstanding if dilutive potential common shares had been issued, with appropriate adjustments to income or loss that would result from the assumed conversions of those potential common shares. The materiality of the dilutive effect is not considered.
Under ROC GAAP, the Company’s unrecognized actuarial gains and losses are not recognized as pension liabilities of a defined benefit post-retirement plan until the accumulated unrecognized amounts exceed certain thresholds.
Under US GAAP, an employer to recognize the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability in the balance sheet and to recognize changes in that funded status in other comprehensive income in the year in which the changes occur.
46
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(f) | Statement of cash flows |
Under ROC GAAP, deferred charges arising from bank charges on syndicate loans and underwriter handling charges are classified as investing activities. Also, the cash inflows and outflows from contracts such as forwards, swaps or other similar financial instruments held for dealing or trading purposes are presented under cash flows from operating activities.
Under US GAAP, bank charges on syndicate loans and underwriter handling charges are classified as financing activities. Also, the cash inflows and outflows from purchases and maturities of financial assets and liabilities at fair value through profit or loss are presented under cash flows from investing cash activities.
| |
(g) | Stock dividends to stockholders |
Under ROC GAAP, there is no such de minimis test for recording stock dividends using fair value method and for determining stock split, unlike U.S. GAAP.
Under US GAAP, generally if the ratio of distribution is less than 20% or 25% of the same class outstanding, stock dividends are recorded based on the fair value method, with the par value recorded in the capital stock account and the excess of fair value over the par value being recorded as additional paid-in capital. Distribution in excess of 20% or 25% is generally considered as a stock split.
| |
(h) | Write-down and valuation of inventory |
Under ROC GAAP, inventory is valued at the lower of cost or market. Market is determined on the basis of net realizable value. Reversals of previous write-downs are recognized in profit or loss in the period in which the reversal occurs.
Under US GAAP, inventory is valued at the lower of cost or market, with market limited to an amount that is not more than net realizable value nor less than net realizable value less a normal profit margin. The write-down establishes a new cost basis for the inventory. Reversals of previous write-downs are not permitted.
47
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(i) | Classification of loans with covenants |
Based on its financial statements as of December 31, 2010 and for the twelve-month period then ended, which are not yet submitted to the syndicate banks, Inotera did not meet the covenant requirements for leverage ratio of not higher than 1.5 to 1 and current ratio of not less than 1 to 1 under the two long-term loan agreements. As of December 31, 2010, the total liabilities plus contingent liabilities amounted to $89.00 million versus tangible net worth of $52.55 million or actual leverage ratio of 1.694 to 1 and the current assets amounted to $17.87 million versus current liabilities of $32.81 million or actual current ratio of 0.545 to 1. However, Inotera has obtained formal waiver from complying with all its financial covenants from syndicate banks for the six-month period ended June 30, 2010. Also, in its amended loan agreement with syndicate banks, Inotera is allowed to avail of the cure period of not over 6 months and 5 months if Inotera is in breach of its financial covenants in its annual financial statements and semi-annual financial statements, respectively. As of December 31, 2010, the Company was still in breach of the requirement to maintain minimum current and leverage ratios. As the Company is required to cure this breach no later than the end of June 30, 2011, the Company will prepare to submit a formal letter to the managing bank to request for a formal waiver before the expiration of the Remedial Period, so that the managing bank can convene a meeting of the Banks to discuss the aforesaid breach and to resolve before the expiration of the Remedial Period on whether a waiver of the breach will be granted.
Under ROC GAAP, there is no specific guidance on whether or not the debtor is deemed to be in default on the balance sheet date when the provisions of a long-term syndicate loan agreement requires the creditor/bank to review its audited semi-annual or annual financial statements before declaring the debtor is in default. In practice, however, such long-term loan is classified as non-current if the debtor (i) is able to secure from syndicate banks formal confirmations that they do not have any information that the debtor is in default of its financial covenant on the balance sheet date, and (ii) has not been formally notified by syndicate banks that it is in default of any loan covenant or the loan agreement contains a provision that the debtor is allowed to avail of the cure period of not over 6 months and 5 months if the debtor is in breach of its financial covenants in its annual financial statements and semi-annual financial statements, respectively.
Under US GAAP, current liability classification includes long-term obligations that are or can be callable by the creditor either because the debtor’s violation of a debt covenant at the balance sheet date makes the obligation callable, or because the violation, if not cured within a specific grace period, will make the obligation callable. Therefore, a callable loan shall be classified as current on balance sheet date, unless one of the following conditions is met:
| |
(i) | The creditor has waived or subsequently lost the right to demand repayment for more than one year from the balance sheet. |
48
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(ii) | For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable. |
Consequently, under US GAAP, loans totaling NT$ 37,852,012 and NT$ 19,876,257 at December 31, 2010 and 2009, respectively would be classified as current liabilities whereas under ROC GAAP they are classified as long-term liabilities.
| |
(j) | Uncertain tax positions |
Under ROC GAAP, uncertain tax positions are recognized based on the more likely than not criterion although for deferred tax assets, a valuation allowance is provided if it is more likely than not that all or some portion of the asset will not be realized.
Under US GAAP, an entity recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. The Company’s accounting policy is to accrue interest and penalties related to unrecognized tax benefits, if and when required, as a component of general and administrative expenses in the consolidated statements of income.
| |
(k) | Loss on impairment of long-lived assets to be held and use |
Under ROC GAAP, the loss on impairment of long-lived assets is classified as non-operating expenses and losses.
Under US GAAP, the loss on impairment of long-lived assets is classified as operating expense.
| |
(l) | Determination of impairment loss on long-lived assets to be held and use |
Under ROC GAAP, an impairment loss is recognized if an asset’s (CGU’s) carrying amount exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs to sell and value in use, which is based on the net present value of future cash flows.
Under US GAAP, an impairment loss is recognized if the asset’s (asset group’s) carrying amount exceeds the undiscounted cash flows of the asset (asset group). The impairment loss is calculated based on excess of the carrying amount over the fair value of the asset (asset group), which is based on the net present value of future cash flows.
49
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
| |
(m) | Employee Stock Options |
Prior to January 1, 2008, the employee stock options were accounted for based on Interpretations (92) 070, 071 and 072 issued by the Accounting Research and Development Foundation, under which, the intrinsic value method is adopted to recognize the compensation cost, which is the difference between the market price of the stock and the exercise price of the employee stock option on the measurement date. Any compensation cost is charged to expense over the employee vesting period and increases the stockholders’ equity accordingly. Effective from January 1, 2008, under ROC SFAS No. 39, “Accounting for Share-based Payment,” share-based payment transactions are measured at fair value and charged against profit and loss.
Under U.S. GAAP a fair-value based measurement method in accounting for share-based transactions with employees is also used, except for equity instruments held by employee share ownership plans.
ROC SFAS No. 22 “Accounting for Income Taxes” which was issued in June 1994, is substantially similar to U.S. GAAP. However, under ROC GAAP, the criteria for determining whether a valuation allowance for deferred tax asset is required are less stringent as compared to U.S. GAAP.
Under ROC GAAP, in accordance with ROC SFAS 22, there are no differences in the calculation of income tax provision and the corporate income tax rate of 25% for the years 2009 and 2008 and 17% for the year 2010 are adopted for both periods between annual financial statements and interim quarterly financial statements.
Companies in the ROC are subject to a 10% surtax on profits retained and earned after December 31, 1997. If the retained profits are distributed in the following year, no 10% surtax is due. Under ROC GAAP, income tax expense is recorded in the statement of operations in the following year if the earnings are not distributed.
50
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Under U.S. GAAP, a valuation allowance is not provided on tax assets to the extent that it is not “more likely than not” that such deferred tax assets will be realized. Also, if a company has experienced cumulative losses in recent years, it is not generally able to consider projections of future operating profits for the purpose of determining the valuation allowance for deferred income tax assets. A change in tax rate or law requires an adjustment to such deferred tax assets and liabilities in the period of enactment and is reported as part of the results of operations.
Under U.S. GAAP, income tax expense related to the 10% retained profit tax is recorded in the statement of operations in the year that the profits were earned based on management’s estimate of the amount of profits to be retained. The income tax expense, including the tax effects of temporary differences, is measured by using the rate that includes the estimated tax on undistributed earnings.
Under ROC GAAP, transaction costs are deducted from the initial measurement of financial instruments that are not measured at fair value through profit or loss. Transaction costs are those incremental costs directly attributable to acquiring or issuing a financial instrument, and exclude internal administrative or holding costs.
Under U.S. GAAP, directly related transaction costs for financial instruments not measured at fair value upon initial recognition are included in the determination of cost. Unlike ROC GAAP, certain internal costs of originating loans that are related directly to specified activities performed by the lender are included in capitalized initial direct costs. However, for financial liabilities, the transaction costs are deferred as an asset, unlike ROC.
| |
(p) | Capitalization of interest expense |
Under ROC GAAP, capital increase in cash for which government approval is obtained specifically for the construction or expansion of plant facilities and for purposes of availing an investment tax credit thereof is deducted from the total capital expenditures relating to such construction or expansion for purposes of capitalizing the interest expense incurred from existing borrowings.
Under U.S. GAAP, capital increase in cash for which government approval is obtained specifically for the construction or expansion of plant facilities and for purposes of availing an investment tax credit thereof is not deducted from the total capital expenditures relating to such construction or expansion for purposes of capitalizing the interest expense incurred from existing borrowings.
51
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Additional US GAAP disclosures
| |
(1) | Valuation allowance for deferred income tax assets |
| |
(i) | The change in valuation allowance for deferred tax assets was as follows: |
|
| | | |
| Amount |
| |
Balance as of January 1, 2009 | $ | 20,060,088 |
|
Reduction in 2009 | (5,500,330 | ) |
Balance as of December 31, 2009 | 14,559,758 |
|
Increase in 2010 | 968,034 |
|
Balance as of December 31, 2010 | $ | 15,527,792 |
|
According to originally amended Income Tax Act publicly announced on May 27, 2009, the statutory income tax rate has been reduced from 25% to 20% commencing from 2010. Also, based on the amended Income Tax Act publicly announced on June 15, 2010, the statutory income tax rate has been reduced further from 20% to 17% commencing from 2010. For these reasons, the Company had written down the deferred tax assets of approximately $1,046,077 and $1,743,461 against the related valuation allowance for deferred tax assets as of December 31, 2009 and 2010, respectively, for the effect in the reduction of such income tax rate.
The valuation allowance for deferred tax assets are allocated on a pro-rata basis between gross current and non-current deferred tax assets as follows:
|
| | | | | | |
| December 31, |
| 2009 | | 2010 |
| | | |
Valuation allowance for deferred tax assets - current | $ | (1,121,671 | ) | | (5,021,064 | ) |
Valuation allowance for deferred tax assets - noncurrent | (13,438,087 | ) | | (10,506,728 | ) |
Total | $ | (14,559,758 | ) | | (15,527,792 | ) |
| |
(2) | Basis of Presentation and Liquidity |
Under US GAAP the Company incurred a significant net loss for the year ended December 31, 2010, had a significant accumulated deficit, and its total current liabilities exceeded its total current assets by $52,812,953 at December 31, 2010. These conditions and facts initially raise doubt about the Company’s ability to continue as a going concern. Management’s plans for additional sources of liquidity include:
| |
(a) | Use of Formosa Group’s unconditional credit line of $15,500,000. |
| |
(b) | Draw down loans for cash to strengthen liquidity. Additional credit facilities in the form of short |
52
INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
term loans are normally granted every year to the Company by syndicate banks, aside from the syndicate loans which were already provided by these syndicate banks to the Company as of December 31, 2010. The unused balance from these facilities amounted to approximately $19,000,000 as of December 31, 2010. Based on prior years’ experience, management expects that these facilities will continue to be available to the Company even if and when the Company is not in compliance with the relevant financial covenants from the syndicated loan agreements, as it was the case from time to time in previous years. Banks continue to extend their credit facilities to the Company due partly to the Company’s affiliation with the Formosa Group which has a high financial standing in the banking community.
| |
(c) | Use of credit facilities from other banks of approximately $2,000,000. |
| |
(d) | The completion of the full wafer-start migration from 70 nanometer to 50 nanometer process technology in December 2010 is expected to have its full effect in improving production efficiency and reducing operating costs from the beginning of 2011. This, in turn, is expected to have a positive impact on operating results in 2011. On a quarter to quarter basis, fully-loaded cost per chip decreased by approximately 24% in the 4th quarter of 2010 as compared to the 4th quarter of 2009. As the volume of wafer production and the number of good bits per wafer increases significantly, operating cash flow is expected to improve assuming a stable or improving DRAM pricing environment. In order to further strengthen cost competitiveness and revenue generation, the Company continues to migrate to more advanced technologies. |
As a result of the necessary investment in connection with the technology conversion from 70nm trench to 50nm stack process technology, the company reached a historical high in annual capital expenditures of approximately $55,000,000 in 2010. With this capex behind it, upcoming technology conversions are expected to be less capital-intensive for the foreseeable future. 2011 capital expenditures for the full conversion to 42nm plus a 3xnm pilot are expected to be $17,000,000, approximately 70% down from 2010.
Consequently, management believes free cash flows provided by the Company’s operation in 2011 will increase as compared to 2010.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.
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INOTERA MEMORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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(3) | Date through Which Subsequent Events Have Been Evaluated |
The management of the Company has evaluated the subsequent events as disclosed in the financial statements through March 28, 2011.
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(28) | Event (Unaudited) Subsequent to the Date of the Report of the Independent Registered Public Accounting Firm |
The Company's operations have been adversely affected by the recent market conditions particularly for the DRAM industry. For the nine month period ended September 30, 2011, the Company has incurred an unaudited net loss of approximately $15 billion and its unaudited net cash provided from operating activities approximated $10 billion compared to approximately $18.7 billion for the comparable period of the prior year. As of September 30, 2011, the Company's unaudited current liabilities exceeded its unaudited current assets by approximately $37.7 billion, its unaudited cash and equivalents amounted to $0.7 billion and it continues to be unable to maintain certain financial covenants required in its debt agreements. Management plans to adopt the following strategies for improving the Company's operations and financial situation.
(i)Obtain additional equity capital and/or draw down on credit facilities to strengthen liquidity.
(ii)Transition to advanced DRAM process technology and product diversities to enhance cash flow.
Management believes the Company's operating results and financial structure will improve by executing the above plans. As of September 30, 2011, the Company has an unconditional $28 billion unused credit line available to it (that increases as and when necessary) with the Formosa Group as well as available unused bank lines of credit. Management continues to believe the Company, in combination with the strategies described above, will have sufficient sources of liquidity to meet its obligations as they become due for at least the next 12 months.