Lite-On IT Corp. and Subsidiaries · LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF...

Lite-On IT Corp. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2011 and 2010 and Independent Auditors’ Report

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Lite-On IT Corp.

We have audited the accompanying consolidated balance sheets of Lite-On IT Corp. (“Parent

Company”) and its subsidiaries as of December 31, 2011 and 2010, and the related consolidated

statements of income, changes in shareholders’ equity, and cash flows for the years then ended.

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

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

as stated in Note 2 to the consolidated financial statements, we did not audit the financial

statements of some subsidiaries as of and for the years ended December 31, 2011 and 2010. The

total assets of these subsidiaries were 12.17% (NT$5,479,582 thousand) and 11.95%

(NT$5,005,064 thousand) of the consolidated assets as of December 31, 2011 and 2010,

respectively, and their net sales were 22.19% (NT$13,597,745 thousand) and 19.14%

(NT$11,244,747 thousand) of consolidated net sales in 2011 and 2010, respectively. The

financial statements of these subsidiaries were audited by other auditors, whose reports have been

furnished to us, and our opinion, insofar as it relates to the subsidiaries’ amounts included herein, is

based solely on the reports of the other auditors.

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

Statements by Certified Public Accountants and auditing standards generally accepted in the

Republic of China. Those rules and standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material misstatement. An

audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audits and the reports of the other auditors provide a reasonable

basis for our opinion.

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In our opinion, based on our audits and the reports of the other auditors, the consolidated financial

statements referred to above present fairly, in all material respects, the financial position of Lite-On

IT Corp. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and

their cash flows for the years then ended, in conformity with the Guidelines Governing the

Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted

in the Republic of China.

March 23, 2012

Notice to Readers

The accompanying consolidated financial statements are intended only to present the financial

position, results of operations and cash flows in accordance with accounting principles and

practices generally accepted in the Republic of China and not those of any other jurisdictions.

The standards, procedures and practices to audit such consolidated financial statements are those

generally accepted and applied in the Republic of China.

For the convenience of readers, the auditors’ report and the accompanying consolidated financial

statements have been translated into English from the original Chinese version prepared and used

in the Republic of China. If there is any conflict between the English version and the original

Chinese version or any difference in the interpretation of the two versions, the Chinese-language

auditors’ report and consolidated financial statements shall prevail. Also, as stated in Note 2 to

the financial statements, the additional footnote disclosures that are not required under generally

accepted accounting principles were not translated into English.

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LITE-ON IT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

(In Thousands of New Taiwan Dollars, Except Par Value)

2011 2010 2011 2010

ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS' EQUITY Amount % Amount %

CURRENT ASSETS CURRENT LIABILITIES

Cash (Note 4) $ 16,111,240 36 $ 12,625,173 30 Financial liabilities at fair value through profit or loss - current

Financial assets at fair value through profit or loss - current (Notes 2, 5 and 18) $ 15,700 - $ 5,961 -

(Notes 2, 5 and 18) 6,531 - 317,535 1 Accounts payable (Note 19) 14,171,762 31 12,389,067 29

Accounts receivable, net (Notes 2, 3, 6 and 19) 8,886,955 20 9,681,686 23 Income tax payable (Notes 2 and 15) 701,599 2 957,232 2

Other receivables (Note 19) 353,898 1 429,050 1 Accrued expenses 3,157,460 7 3,268,915 8

Inventories, net (Notes 2 and 7) 7,940,234 17 6,553,425 16 Other payables (Note 19) 1,433,483 3 1,567,677 4

Deferred income tax assets - current (Notes 2 and 15) 422,266 1 356,501 1 Accrued warranty liabilities (Note 2) 746,973 2 719,295 2

Other current assets 345,868 1 265,398 - Other current liabilities 881,846 2 254,212 1

Total current assets 34,066,992 76 30,228,768 72 Total current liabilities 21,108,823 47 19,162,359 46

LONG-TERM INVESTMENTS OTHER LIABILITIES

Available-for-sale financial assets - noncurrent (Notes 2 and 8) 117,222 - 183,593 1 Accrued pension cost (Notes 2 and 12) 85,648 - 80,760 -

Investments accounted for by the equity method (Notes 2 and 9) 26,208 - - - Guarantee deposits received 17,032 - 43,563 -

Prepayments for long-term investments 9,108 - 4,378 - Deferred income tax liabilities - noncurrent (Notes 2 and 15) 252,062 1 172,627 -

Total long-term investments 152,538 - 187,971 1 Total other liabilities 354,742 1 296,950 -

PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 10) Total liabilities 21,463,565 48 19,459,309 46

Buildings 4,041,443 9 3,755,923 9

Machinery and equipment 3,486,163 8 3,112,844 7 PARENT COMPANY'S SHAREHOLDERS' EQUITY

Tooling equipment 343,357 1 360,505 1 Capital stock

Computer equipment 231,942 - 197,868 1 Parent Company's common stock with par value of NT$10.00;

Transportation equipment 10,489 - 10,353 - authorized - 1,500,000 thousand shares; issued and

Furniture and fixtures 102,852 - 49,287 - outstanding 904,755 thousand shares in 2011 and 900,827

Other equipment 393,546 1 386,478 1 thousand shares in 2010 9,047,548 20 9,008,266 22

Total cost 8,609,792 19 7,873,258 19 Advance receipts for common stock 7,918 - 15,415 -

Less: Accumulated depreciation 2,904,763 6 2,434,782 6 Total capital stock 9,055,466 20 9,023,681 22

Construction-in-progress and prepayments for equipment 48,426 - 138,680 - Capital surplus

Additional paid-in capital from share issuance in excess of par

Net property, plant and equipment 5,753,455 13 5,577,156 13 value 5,033,017 11 4,968,679 12

Long-term investments 12,157 - 12,157 -

INTANGIBLE ASSETS (Notes 2 and 11) Others 7,759 - 17,727 -

Patents 1,460,267 4 1,684,924 4 Total capital surplus 5,052,933 11 4,998,563 12

Goodwill 2,806,508 6 3,255,231 8 Retained earnings

Land use rights 76,210 - 71,601 - Legal reserve 3,068,016 7 2,773,526 7

Special reserve 103,927 - - -

Total intangible assets 4,342,985 10 5,011,756 12 Unappropriated earnings 5,636,259 12 5,412,190 13

Total retained earnings 8,808,202 19 8,185,716 20

OTHER ASSETS Other equity

Refundable deposits (Note 21) 21,536 - 16,687 - Cumulative translation adjustments 365,529 1 (91,575) -

Deferred charges (Note 2) 586,244 1 768,303 2 Unrealized loss on financial instruments (78,723) - (12,352) -

Restricted assets - noncurrent (Note 20) 92,071 - 101,829 - Treasury stock - 7,200 thousand shares - - (138,026) (1)

Total other equity 286,806 1 (241,953) (1)

Total other assets 699,851 1 886,819 2

Total Parent Company shareholders' equity 23,203,407 51 21,966,007 53

MINORITY INTEREST 348,849 1 467,154 1

Total shareholders' equity 23,552,256 52 22,433,161 54

TOTAL $ 45,015,821 100 $ 41,892,470 100 TOTAL $ 45,015,821 100 $ 41,892,470 100

The accompanying notes are an integral part of the consolidated financial statements.

(With Deloitte & Touche audit report dated March 23, 2012)

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CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2011 AND 2010

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2011 2010

Amount % Amount %

GROSS SALES $ 62,925,915 103 $ 60,107,399 102

LESS: SALES RETURNS 393,884 1 534,692 1

SALES ALLOWANCES 1,251,791 2 814,468 1

NET SALES (Notes 2 and 19) 61,280,240 100 58,758,239 100

COST OF SALES (Notes 2, 7, 16 and 19) 50,332,107 82 47,304,015 81

GROSS PROFIT 10,948,133 18 11,454,224 19

OPERATING EXPENSES (Notes 16 and 19)

Selling 4,613,610 8 4,687,335 8

General and administrative 1,779,577 3 1,734,366 3

Research and development 1,506,811 2 1,439,188 2

Total operating expenses 7,899,998 13 7,860,889 13

OPERATING INCOME 3,048,135 5 3,593,335 6

NONOPERATING INCOME AND GAINS

Interest income 231,445 1 140,198 -

Dividend income 4,736 - 3,694 -

Gain on disposal of property, plant and equipment 1,383 - 333 -

Gain on sale of investments - - 2,062 -

Exchange gain, net (Note 2) 116,436 - - -

Rental income 59,951 - 42,616 -

Income from scrap sales 142,629 - 116,196 -

Valuation gain on financial assets, net (Notes 2

and 5) 403,726 1 652,597 1

Miscellaneous income 627,309 1 206,249 1

Total nonoperating income and gains 1,587,615 3 1,163,945 2

NONOPERATING EXPENSES AND LOSSES

Interest expense 9,261 - 9,467 -

Investment loss recognized under the equity method,

net (Notes 2 and 9) 2,426 - - -

Loss on disposal of property, plant and equipment 43,702 - 26,806 -

Impairment loss (Notes 2 and 11) 453,533 1 - -

Exchange loss, net (Note 2) - - 373,936 1

(Continued)

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CONSOLIDATED STATEMENTS OF INCOME


(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2011 2010

Amount % Amount %

Valuation loss on financial liability, net (Notes 2

and 5) $ 396,522 1 $ 254,933 -

Miscellaneous expenses (Note 19) 118,261 - 262,485 1

Total nonoperating expenses and losses 1,023,705 2 927,627 2

CONSOLIDATED INCOME BEFORE INCOME

TAX 3,612,045 6 3,829,653 6

INCOME TAX (Notes 2 and 15) 784,587 1 699,902 1

CONSOLIDATED NET INCOME $ 2,827,458 5 $ 3,129,751 5

ATTRIBUTABLE TO:

Shareholders of Parent Company $ 2,800,395 5 $ 2,944,905 5

Minority interest 27,063 - 184,846 -

$ 2,827,458 5 $ 3,129,751 5

2011 2010

Before

Income

Tax

After

Income

Tax

Before

Income

Tax

After

Income

Tax

EARNINGS PER SHARE (NEW TAIWAN

DOLLARS; Note 17)

Basic $ 3.44 $ 3.10 $ 3.61 $ 3.28

Diluted $ 3.41 $ 3.07 $ 3.57 $ 3.25


(With Deloitte & Touche audit report dated March 23, 2012) (Concluded)

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


(In Thousands of New Taiwan Dollars)

Capital Surplus (Notes 2 and 13)

Additional Others Adjustment Items

Paid-in Capital Unrealized

Capital Stock (Note 13) from Share Cumulative Loss on

Issued and Advance Issuance in Retained Earnings (Note 13) Translation Financial Minority Total

Outstanding Receipts for Excess of Long-term Unappropriated Adjustments Instruments Treasury Stock Interest Shareholders’

Common Stock Common Stock Par Value Investments Others Legal Reserve Special Reserve Earnings (Note 2) (Notes 2 and 13) (Notes 2 and 14) (Note 2) Equity

BALANCE, JANUARY 1, 2010 $ 8,875,395 $ 23,895 $ 4,835,871 $ 12,157 $ 30,108 $ 2,595,593 $ - $ 3,984,672 $ 302,179 $ 7,514 $ (138,026 ) $ 367,148 $ 20,896,506

Appropriation of the 2009 earnings

Legal reserve - - - - - 177,933 - (177,933 ) - - - - -

Cash dividends - - - - - - - (1,295,101 ) - - - - (1,295,101 )

Stock dividends 44,353 - - - - - - (44,353 ) - - - - -

Issuance of common stock on the exercise of employee stock options 69,575 (23,895 ) 87,590 - (30,108 ) - - - - - - - 103,162

Exercise of employee stock options - 15,415 - - 17,727 - - - - - - - 33,142

Stock bonus to employees 18,943 - 45,218 - - - - - - - - - 64,161

Change in unrealized loss on available-for-sale financial assets - - - - - - - - - (19,866 ) - - (19,866 )

Consolidated net income in 2010 - - - - - - - 2,944,905 - - - 184,846 3,129,751

Change in translation adjustments - - - - - - - - (393,754 ) - - (84,840 ) (478,594 )

BALANCE, DECEMBER 31, 2010 9,008,266 15,415 4,968,679 12,157 17,727 2,773,526 - 5,412,190 (91,575 ) (12,352 ) (138,026 ) 467,154 22,433,161

Appropriation of the 2010 earnings Legal reserve - - - - - 294,490 - (294,490 ) - - - - -

Special reserve - - - - - - 103,927 (103,927 ) - - - - - Cash dividends - - - - - - - (2,107,104 ) - - - - (2,107,104 )

Stock dividends 44,832 - - - - - - (44,832 ) - - - - -

Issuance of common stock on the exercise of employee stock

options 34,467 (15,415 ) 39,339 - (17,727 ) - - - - - - - 40,664

Exercise of employee stock options - 7,918 - - 7,759 - - - - - - - 15,677

Stock bonus to employees 31,983 - 65,052 - - - - - - - - - 97,035

Change in unrealized loss on available-for-sale financial assets - - - - - - - - - (66,371 ) - - (66,371 )

Consolidated net income in 2011 - - - - - - - 2,800,395 - - - 27,063 2,827,458

Change in translation adjustments - - - - - - - - 457,104 - - (436 ) 456,668

Retirement of treasury stock (72,000 ) - (40,053 ) - - - - (25,973 ) - - 138,026 - -

Decrease in minority interest - - - - - - - - - - - (144,932 ) (144,932 )

BALANCE, DECEMBER 31, 2011 $ 9,047,548 $ 7,918 $ 5,033,017 $ 12,157 $ 7,759 $ 3,068,016 $ 103,927 $ 5,636,259 $ 365,529 $ (78,723 ) $ - $ 348,849 $ 23,552,256


(With Deloitte & Touche audit report dated March 23, 2012)

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CONSOLIDATED STATEMENTS OF CASH FLOWS



2011 2010

CASH FLOWS FROM OPERATING ACTIVITIES

Consolidated net income $ 2,827,458 $ 3,129,751

Adjustments to reconcile net income to net cash provided by operating

activities

Depreciation 661,805 625,838

Amortization 604,436 693,651

Allowance for loss on doubtful accounts 2,150 20,946

Allowance (reversal of allowance) for loss on valuation of

inventories 80,465 (113,088)

Loss on disposal of scrap inventory 8,420 151,720

Loss on physical count of inventories 219 2,189

Investment loss recognized under the equity method, net 2,426 -

Gain on disposal of investments, net - (2,062)

Loss on disposal of property, plant and equipment, net 42,319 26,473

Impairment loss on goodwill 453,533 -

Deferred income tax 13,670 246,269

Net changes in operating assets and liabilities

Financial assets held for trading 311,004 (268,325)

Financial liabilities held for trading 9,739 5,961

Accounts receivable 792,581 1,131,605

Other receivables 75,152 (18,988)

Inventories (1,475,913) (2,844,030)

Other current assets (80,470) (37,594)

Accounts payable 1,782,695 (1,359,251)

Income tax payable (255,633) (100,175)

Accrued expenses (111,455) (567,066)

Other payables 55,023 5,109

Accrued warranty liabilities 27,678 (63,566)

Other current liabilities 627,634 116,259

Accrued pension cost 4,888 2,701

Net cash provided by operating activities 6,459,824 784,327

CASH FLOWS FROM INVESTING ACTIVITIES

Increase in prepayments for long-term investments (4,551) (4,378)

Proceeds of the disposal of financial assets carried at cost - 1,496

Acquisition of investments accounted for by equity method (28,634) -

Acquisition of property, plant, and equipment (589,794) (586,149)

Proceeds of the disposal of property, plant, and equipment - 5,918

Decrease (increase) in refundable deposits (4,849) 1,139,337

Increase in deferred charges (192,759) (138,516)

Decrease in restricted assets 9,758 65,496

Net cash provided by (used in) investing activities (810,829) 483,204

(Continued)

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CONSOLIDATED STATEMENTS OF CASH FLOWS



2011 2010

CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in guarantee deposits received $ (26,531) $ 28,460

Cash dividends (2,107,104) (1,295,101)

Exercise of stock options 56,341 136,304

Decrease in minority interest (144,932) -

Net cash used in financing activities (2,222,226) (1,130,337)

EFFECT OF EXCHANGE RATE CHANGES 59,298 (158,971)

NET INCREASE (DECREASE) IN CASH 3,486,067 (21,777)

CASH, BEGINNING OF YEAR 12,625,173 12,646,950

CASH, END OF YEAR $ 16,111,240 $ 12,625,173

SUPPLEMENTAL CASH FLOW INFORMATION

Income tax paid $ 691,208 $ 553,808

Interest paid $ 9,261 $ 9,467

CASH PAID FOR THE ACQUISITION OF PROPERTY, PLANT, AND

EQUIPMENT

Acquisition of property, plant, and equipment $ 497,613 $ 982,309

Unpaid balance, beginning of year 470,103 73,943

Unpaid balance, end of year (377,922) (470,103)

Cash paid $ 589,794 $ 586,149


(With Deloitte & Touche audit report dated March 23, 2012) (Concluded)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

1. ORGANIZATION AND OPERATIONS

Lite-On IT Corp. (the “Parent Company”) was incorporated in March 1999 under the Company Law of the

Republic of China. The Parent Company was spun off from Lite-On Technology Corp. (LTC) to continue

the operations of LTC’s CD-ROM division. LTC owned 42.70% and 43.01% of the Parent Company’s

outstanding shares as of December 31, 2011 and 2010, respectively. The core business of the Parent

Company consists of information storage, equipment processing, electronic set manufacturing and

stationary machine wholesaling.

The Parent Company’s shares began to be traded on the GreTai Securities Market (an over-the-counter

securities exchange) in July 2001 and then became listed on the Taiwan Stock Exchange in November

2004.

As of December 31, 2011 and 2010, the Parent Company and its subsidiaries (hereinafter referred to

collectively as the “Group”) had 11,327 and 13,604 employees, respectively.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in conformity with the Guidelines Governing the

Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the

Republic of China (ROC).

For the convenience of readers, the accompanying consolidated financial statements have been translated

into English from the original Chinese version prepared and used in the Republic of China. If

inconsistencies arise between the English version and the Chinese version or if differences arise in the

interpretations between the two versions, the Chinese version of the financial statements shall prevail.

However, the accompanying financial statements do not include the English translation of the additional

footnote disclosures that are not required under generally accepted accounting principles but are required by

the Securities and Futures Bureau (SFB, formerly the “Securities and Futures Commission” before July 1,

2004) for their oversight purposes.

The Parent Company and its subsidiaries’ significant accounting policies are summarized as follows:

Basis for Consolidation

The consolidated financial statements should include all of the Parent Company’s direct and indirect

investees in which the Parent Company has controlling interest or has voting rights of over 50%. Thus,

the consolidated entities in 2011 and 2010 included the Parent Company and all of its subsidiaries. All

significant intercompany accounts and transactions of the Parent and its subsidiaries have been eliminated

upon consolidation.

The consolidated financial statements for 2011 and 2010 of Philips & Lite-On Digital Solutions

Netherlands B.V., Philips & Lite-On Digital Solutions USA Inc., Lite-On Information Technology B.V.,

Lite-On Information Technology GmbH, and Philips & Lite-On Digital Solutions Germany GmbH were

audited by other auditors.

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Under certain guidelines, the financial statements for 2011 and 2010 of Philips & Lite-On Digital Solutions

Korea Ltd. and for 2011 of Lite-On American Inc. were unaudited. The Parent Company believes that,

had these investees’ financial statements been audited, any adjustments would have had no material effect

on the Parent Company’s financial statements.

The Parent Company had only a minority interest in Philips & Lite-On Digital Solutions Corporation as of

December 31, 2011 and 2010, but since it could exercise control over this investee’s board of directors, this

investee was included in the consolidation.

Foreign Currencies

The financial statements of foreign operations are translated into New Taiwan dollars at the following

exchange rates:

a. Assets and liabilities - at exchange rates prevailing on the balance sheet date;

b. Shareholders’ equity - at historical exchange rates;

c. Dividends - at the exchange rate prevailing on the dividend declaration date; and

d. Income and expenses - at average exchange rates for the year.

Exchange differences arising from the translation of the financial statements of foreign operations are

recognized as a separate component of shareholders’ equity. These exchange differences are recognized

in profit or loss in the year in which the foreign operations are disposed of.

Nonderivative foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in

effect when the transactions occur. Exchange differences arising from the settlement of foreign-currency

assets and liabilities are recognized in profit or loss.

At the balance sheet date, foreign-currency monetary assets and liabilities are revalued using prevailing

exchange rates, and the exchange differences are recognized in profit or loss.

At the balance sheet date, foreign-currency nonmonetary assets (such as equity instruments) and liabilities

that are measured at fair value are revalued using prevailing exchange rates, with the exchange differences

treated as follows:

a. Recognized in shareholders’ equity if the changes in fair value are recognized in shareholders’ equity;

b. Recognized in profit and loss if the changes in fair value is recognized in profit or loss.

Foreign-currency nonmonetary assets and liabilities that are carried at cost continue to be stated at exchange

rates at trade dates.

If the functional currency of an equity-method investee is a foreign currency, translation adjustments will

result from the translation of the investee’s financial statements into the reporting currency of the Group.

These adjustments are accumulated and reported as a separate component of shareholders’ equity.

Accounting Estimates

Under the above guidelines, law and principles, certain estimates and assumptions have been used for the

allowance for doubtful accounts; allowance for loss on inventories; depreciation of property, plant and

equipment; income tax; pension cost; loss on pending litigations; allowance for product warranties; bonuses

to employees, directors and supervisors; etc. Actual results may differ from these estimates.

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Current and Noncurrent Assets and Liabilities

Current assets include cash and those assets held primarily for trading purposes or to be realized, sold or

consumed within one year from the balance sheet date. All other assets such as property, plant and

equipment and intangible assets are classified as noncurrent. Current liabilities are obligations incurred

for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are

classified as noncurrent.

Financial Assets and Liabilities at Fair Value through Profit or Loss

Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss

(FVTPL) include financial assets or financial liabilities held for trading and those designated as at FVTPL

on initial recognition. The Parent Company recognizes a financial asset or a financial liability on its

balance sheet when it becomes a party to the contractual provisions of the financial instrument. A

financial asset is derecognized when the Parent Company has lost control of its contractual rights over the

financial asset. A financial liability is derecognized when the obligation specified in the relevant contract

is discharged, cancelled or expired.

Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable

to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit

or loss. At each balance sheet date subsequent to issue of initial recognition, financial assets or financial

liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or

loss in the year in which they arise. Cash dividends received subsequently (including those received in the

year of investment) are recognized as income for the year. On derecognition of a financial asset or a

financial liability, the difference between its carrying amount and the sum of the consideration received and

receivable or consideration paid and payable is recognized in profit or loss. All regular way purchases or

sales of financial assets are recognized and derecognized on a trade date basis.

A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a

financial liability held for trading. If the fair value of the derivative is positive, the derivative is

recognized as a financial asset; otherwise, the derivative is recognized as a financial liability.

Fair values at the balance sheet date of financial assets and financial liabilities with no quoted prices in an

active market are determined at values estimated using valuation techniques.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially measured at fair value plus transaction costs that are directly

attributable to the acquisition. At each balance sheet date subsequent to initial recognition,

available-for-sale financial assets are remeasured at fair value, with changes in fair value recognized in

equity until the financial assets are disposed of, at which time, the cumulative gain or loss previously

recognized in equity is included in profit or loss for the year. All regular way purchases or sales of

financial assets are recognized and derecognized on a trade date basis.

Fair values at the balance sheet date of financial asset, which consist of publicly traded stocks, are

determined at their closing prices. The recognition, derecognition and the fair value bases of

available-for-sale financial assets are similar to those of financial assets at FVTPL.

Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the

pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are not

recognized as investment income but are recorded as an increase in the number of shares. The total

number of shares subsequent to the increase is used for recalculation of cost per share.

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An impairment loss is recognized when there is objective evidence that the financial asset is impaired.

Any subsequent decrease in impairment loss on an equity instrument classified as available-for-sale is

recognized directly in equity. If the fair value of a debt instrument classified as available-for-sale

subsequently increases as a result of an event that occurred after the impairment loss was recognized, the

decrease in impairment loss is reversed to profit.

Impairment of Accounts Receivable

An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts

receivable. The Group makes this review by an aging analysis of the outstanding receivables, credit

review, assessment of the economic environment; etc.

As discussed in Note 3 to the financial statements, on January 1, 2011, the Group adopted the third-time

revised Statement of Financial Accounting Standards (SFAS) No. 34 - “Financial Instruments:

Recognition and Measurement.” One of the main revisions is that the impairment of receivables

originated by the Group should be covered by SFAS No. 34. Accounts receivable are assessed for

impairment at the end of each reporting period and considered to be impaired when there is objective

evidence that, as a result of one or more events that occurred after the initial recognition of the accounts

receivable, the estimated future cash flows of the asset have been affected. Objective evidence of

impairment could include:

a. Significant financial difficulty of the debtor;

b. Accounts receivable becoming overdue; or

c. It becoming probable that the debtor will enter into bankruptcy or undergo financial reorganization.

Accounts receivable that are assessed as not impaired individually are further assessed for impairment on a

collective basis. Objective evidence of impairment for a portfolio of accounts receivable could include the

Group’s past experience of collecting payments and an increase in the number of delayed payments, as well

as observable changes in national or local economic conditions that correlate with defaults on receivables.

The amount of the impairment loss recognized is the difference between the asset carrying amount and the

present value of estimated future cash flows, after taking into account the related collaterals and guarantees,

discounted at the receivable’s original effective interest rate.

The carrying amount of the accounts receivable is reduced through the use of an allowance account.

When accounts receivable are considered uncollectible, they are written off against the allowance account.

Recoveries of amounts previously written off are credited to the allowance account. Changes in the

carrying amount of the allowance account are recognized as bad debt in profit or loss.

Impairment of Assets

If the recoverable amount of an asset (mainly property, plant and equipment; intangible assets; deferred

charges; and investments accounted for by the equity method) is estimated to be less than its carrying

amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is

charged to earnings unless the asset is carried at a revalued amount, in which case the impairment loss is

first treated as a reduction of the unrealized revaluation increment, and any remaining loss is charged to

earnings.

If an impairment loss subsequently reverses, the carrying amount of the asset is increased accordingly, but

the increased carrying amount may not exceed the carrying amount that would have been determined had

no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is

recognized in earnings, unless the asset is carried at a revalued amount, in which case the reversal of the

impairment loss is first recognized as gains to the extent that an impairment loss on the same revalued asset

was previously charged to earnings. Any excess amount is treated as an increase in the unrealized

revaluation increment.

- 13 -

For the purpose of impairment testing, goodwill is allocated to each of the relevant cash-generating units

(CGUs) that are expected to benefit from the synergies of the acquisition. A CGU to which goodwill has

been allocated is tested for impairment annually or whenever there is an indication that the CGU may be

impaired. If the recoverable amount of the CGU becomes less than its carrying amount, the impairment is

allocated to first reduce the carrying amount of the goodwill allocated to the CGU and then to the other

assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. A reversal of an

impairment loss on goodwill is disallowed.

Inventories

Inventories consist of raw materials and supplies, semifinished goods, work in process, finished goods,

merchandise and goods in transit. Inventories are stated at the lower of cost or net realizable value.

Inventory write-downs are made by item, except where it may be appropriate to group similar or related

items. Net realizable value is the estimated selling price of inventories less all estimated costs of

completion and costs necessary to make the sale. Inventories are recorded at weighted-average cost.

Investments Accounted for by the Equity Method

Investments in which the Group holds 20 percent or more of the investees’ voting shares or exercises

significant influence over the investees’ operating and financial policy decisions are accounted for by the

equity method.

Stock investments accounted for by the equity method are initially carried at cost and subsequently adjusted

for the Group’s proportionate share in the investees’ earnings or losses and changes in capital surplus.

Cash dividends received are recognized as a reduction of the carrying value of the investments.

Investment income (or loss) is recognized whenever the investees recognize income (or loss).

The acquisition cost is allocated to the assets acquired and liabilities assumed on the basis of their fair

values at the date of acquisition, and the acquisition cost in excess of the fair value of the identifiable net

assets acquired is recognized as goodwill. Such goodwill is not amortized but instead is tested for

impairment annually or whenever there are indications that the investments are impaired. The Group’s

share of the fair value of the net identifiable assets acquired in excess of the cost of acquisition is used to

reduce the fair value of each of the noncurrent assets acquired (except for financial assets other than

investments accounted for by the equity method, noncurrent assets held for sale, deferred income tax assets,

prepaid pension or other postretirement benefit) in proportion to the respective fair values of the noncurrent

assets, with any excess recognized as an extraordinary gain.

Stock dividends received are recorded only as an increase in the number of shares held but are not

recognized as investment income. The cost or carrying value per share is recomputed on the basis of total

shares held after stock dividends are received.

For all stock investments, costs of investments sold are determined using the weighted-average method.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. Major additions and

improvements to property, plant and equipment are capitalized, while costs of repairs and maintenance are

expensed currently.

Depreciation is provided on a straight-line basis over estimated useful lives as follows: buildings - 5 to 55

years; machinery and equipment - 3 to 10 years; tooling equipment - 1 to 5 years; computer equipment - 3

to 5 years; transportation equipment - 5 years; furniture and fixtures - 3 to 5 years; and miscellaneous

equipment - 3 to 6 years. Property, plant and equipment still in use beyond their original estimated useful

lives are further depreciated over their newly estimated useful lives.

- 14 -

The related cost and accumulated depreciation of an item of property, plant and equipment are

derecognized from the balance sheet upon its disposal. Any gain or loss on disposal of the asset is

included in nonoperating income and gains or expenses and losses in the year of disposal.

Intangible Assets

Intangible assets consist of patents, land use rights and goodwill, which are recognized at cost. Patents are

depreciated using the straight-line method over 12 years. Goodwill is no longer amortized and is assessed

for impairment annually. Land use rights are amortized over 50 years.

Deferred Charges

Deferred charges, which primarily consist of computer software costs, costs of next-generation optical disk

technology, royalty fees, and office and factory refurbishment expenses, are amortized using the

straight-line method over three to eight years.

Product Warranty Reserve

Estimation of related cost is based on historical experience about product service and warranty period.

Pensions

Pension cost under a defined benefit plan is determined by actuarial valuations. Contributions made under

a defined contribution plan are recognized as pension cost during the year in which employees render

services.

Prior service costs resulting from the amendment of the defined benefit pension plan amendment should be

amortized using the straight-line method over the average service years from the amendment date until the

benefits become vested. When the benefits are vested right after plan amendment, the prior service costs

are immediately recognized as expenses.

Curtailment or settlement gains or losses on the defined benefit plan are recognized as part of the net

pension cost for the year.

Subsidiaries established mainly for investment holding purposes have either very few or no employees and

the countries where these subsidiaries are based have no pension laws. Thus, these subsidiaries have no

pension plans, do not contribute to pension funds and do not recognize pension costs. Other subsidiaries

contribute to pension funds in accordance with the laws or rules of their local governments and recognize

these contributions as expenses.

Income Tax

The Group applies the inter-year allocation method to its income tax, whereby deferred income tax assets

and liabilities are recognized for the tax effects of temporary differences, unused loss carryforward and

unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not

that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current

or noncurrent in accordance with the classification of the related asset or liability for financial reporting.

However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial

statements, it is classified as current or noncurrent on the basis of the expected length of time before it is

realized or settled.

Tax credits for research and development expenditures and personnel training expenditures can be deducted

from the current year’s tax provision.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

- 15 -

According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as

income tax in the year the shareholders approve the retention of earnings.

Stock-based Compensation

Employee stock options, which were granted between January 1, 2004 and December 31, 2007, are

accounted for under the interpretations issued by the Accounting Research and Development Foundation.

To valuate these plans, the Parent Company uses the intrinsic value method, under which compensation

cost is recognized on a straight-line basis over the vesting year.

Treasury Stock

Upon disposal of the treasury stock, the sales proceeds in excess of the cost are accounted for as capital

surplus - treasury stock. If the sales proceeds are less than the cost, the difference is accounted for as a

reduction of the remaining balance of capital surplus - treasury stock. If the remaining balance of capital

surplus - treasury stock is insufficient to cover the difference, the remainder is recorded as a reduction of

retained earnings.

If treasury stock is retired, the treasury stock account should be credited, and the capital surplus - premium

and the capital stock accounts should be debited proportionately at the share ratio of the retired stock. If

the carrying value of the retired stock exceeds the sum of both the par value of the retired stock and the

capital surplus - premium, the difference is accounted for as a reduction of capital surplus - treasury stock,

and any remaining difference is debited to retained earnings. If the sum of the par value and capital

surplus - premium exceeds the carrying value of the retired stock, the excess is accounted for as an increase

in capital surplus - treasury stock.

Revenue Recognition

Revenue from sales of goods is recognized when the Group has transferred to the buyer the significant risks

and rewards of ownership of the goods, because the earnings process has been completed and the economic

benefits associated with the transaction have been realized or are realizable.

Revenue is measured at the fair value of the consideration received or receivable and represents amounts

agreed between the Group and the customers for goods sold in the normal course of business, net of sales

discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as

the nominal value of the consideration to be received approximates its fair value and transactions are

frequent, fair value of the consideration is not determined by discounting all future receipts using an

imputed rate of interest.

3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES

Financial Instruments

On January 1, 2011, the Group adopted the newly revised Statement of Financial Accounting Standards

(SFAS) No. 34 - “Financial Instruments: Recognition and Measurement.” The main revisions include

(1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS

No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Group are now

covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at

amortized cost when a debtor has financial difficulties and the terms of obligations have been modified; and

(5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change

had no significant effect on the Group.

- 16 -

Operating Segments

On January 1, 2011, the Group adopted the newly issued SFAS No. 41 - “Operating Segments.” The

statement requires that segment information be disclosed on the basis of the information about the

components of the Group that management uses to make operating decisions. SFAS No. 41 requires the

identification of operating segments on the basis of internal reports that are regularly reviewed by the

Group’s chief operating decision maker in order to allocate resources to the segments and assess their

performance. This statement supersedes SFAS No. 20 - “Segment Reporting.” For this accounting

change, the Group restated the segment information as of and for the year ended December 31, 2010 to

conform to the disclosures as of and for the year ended December 31, 2011.

4. CASH

December 31

2011 2010

Cash on hand $ 682 $ 865

Checking accounts 966,989 840,722

Demand deposits 2,504,375 3,112,514

Time deposits 12,639,194 8,671,072

$ 16,111,240 $ 12,625,173

Time deposit interest rates were from 0.15% to 5.00% in 2011 and from 0.18% to 2.79% in 2010.

Overseas deposits of the Parent Company as of December 31, 2011 and 2010 were as follows:

December 31

2011 2010

Netherlands - Amsterdam (EUR441 thousand in 2011 and EUR176

thousand in 2010)

$ 17,265 $ 6,861

Netherlands - Amsterdam (US$402 thousand in 2011 and US$73

thousand in 2010)

12,183 2,114

USA - New York (US$122 thousand in 2011 and US$132 thousand

in 2010)

3,703 3,854

Singapore (US$13 thousand in 2011 and US$14 thousand in 2010) 408 394

USA - San Francisco (US$139 thousand in 2010) - 4,037

$ 33,559 $ 17,260

5. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS - CURRENT

Financial instruments classified as held for trading were as follows:

December 31

2011 2010

Financial assets held for trading

Forward exchange contracts $ 6,531 $ 57,880

Currency swap contracts - 259,655

$ 6,531 $ 317,535

(Continued)

- 17 -

December 31

2011 2010

Financial liabilities held for trading

Currency swap contracts $ 15,700 $ -

Forward exchange contracts - 5,961

$ 15,700 $ 5,961

(Concluded)

The Group entered into derivative contracts in 2011 and 2010 to manage exposures due to exchange rate

and interest rate fluctuations. The financial risk management objective of the Group was to minimize risks

due to changes in fair value or cash flows.

Outstanding forward exchange contracts as of December 31, 2011 and 2010 were as follows:

Currency

Maturity Date

Contract Amount

(In Thousands)

December 31, 2011

Currency swap contracts US$/NT$ 2012.01.05-2012.01.13 US$79,000/NT$2,382,530


Forward exchange contracts EUR/US$ 2012.01.11-2012.02.08 EUR15,200/US$19,844

December 31, 2010


Currency swap contracts US$/NT$ 2011.03.24 US$44,000/NT$1,339,600

Forward exchange contracts EUR/US$ 2011.01.03-2011.01.20 EUR14,000/US$18,493

Net gains on financial assets held for trading were NT$403,726 thousand in 2011 and NT$652,597

thousand in 2010. Net losses on financial liabilities held for trading were NT$396,522 thousand in 2011

and NT$254,933 thousand in 2010.

6. ACCOUNTS RECEIVABLE, NET

December 31

2011 2010

Accounts receivable $ 9,287,606 $ 10,033,981

Less: Allowance for doubtful accounts 28,816 30,718

Allowance for sales discounts 371,835 321,577

$ 8,886,955 $ 9,681,686

- 18 -

Movements of allowances for doubtful accounts were as follows:

Year Ended December 31

2011 2010

Balance, beginning of year $ 30,718 $ 30,735

Add: Allowance for doubtful accounts 2,150 20,946

Deduct: Amounts written off 4,052 20,963

Balance, end of year $ 28,816 $ 30,718

Philips & Lite-On Digital Solutions Corporation (PLDS TW) signed a factoring agreement with a bank.

Under this the agreement, PLDS TW will not shoulder the risk of non-collectibility of the accounts

receivable covered by the agreement.

Factored accounts receivable were as follows:

In Thousands of Dollars

Financial Institution Amount Collection Expense Rate Credit Line

2011

PLDS TW

Tai Shin International

Bank

US$ 17,539 US$ 17,097 US$ - 0.17-0.19 US$ 8,500

2010

PLDS TW

Tai Shin International

Bank

US$ 27,605 US$ 26,073 US$ - 0.17-0.19 US$ 13,500

Far Eastern International

Bank

US$ 1,895 US$ 1,895 US$ - 0.20 US$ 1,500

US$ 29,500 US$ 27,968 US$ - US$ 15,000

Note: The above credit line may be used on a revolving basis. No application for advance payment was

submitted by the PLDS TW in 2011 and 2010.

7. INVENTORIES, NET

December 31

2011 2010

Merchandise $ 4,236,813 $ 3,347,418

Finished goods 557,610 644,506

Semifinished goods 204,795 252,291

Work in process 189,073 40,780

Raw materials 2,134,348 1,861,383

Goods in transit 1,392,797 1,097,341

8,715,436 7,243,719

Unrealized intercompany profit (775,202) (690,294)

$ 7,940,234 $ 6,553,425

- 19 -

As of December 31, 2011 and 2010, the allowances for inventory devaluation were NT$534,244 thousand

and NT$453,779 thousand, respectively.

The cost of inventories recognized as cost of goods sold in 2011 included NT$80,465 thousand, which was

due to write-downs of inventories. The cost of inventories recognized as cost of goods sold in 2010

included NT$113,088 thousand, which was due to the reversal of write-downs of inventories.

The cost of inventories recognized as cost of goods sold included NT$8,420 thousand in 2011 and

NT$151,720 thousand in 2010, which were both due to losses on the scrap of inventories.

8. AVAILABLE-FOR-SALE FINANCIAL ASSETS - NONCURRENT

December 31

2011 2010

Domestic quoted stocks $ 111,404 $ 177,052

Overseas quoted stocks 5,818 6,541

$ 117,222 $ 183,593

9. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD

December 31

2011 2010

Carrying

Value

% of

Owner-ship

Carrying

Value

% of

Owner-ship

Lite-Space Technology Company

Limited

$ 26,208 27 $ - -

Investment loss recognized under the equity method was as follows:


2011 2010

Lite-Space Technology Company Limited $ 2,426 $ -

The investee’s financial statements as of and the year ended December 31, 2011 had not been audited.

Management believed that, had this investee’s financial statements been audited, no significant adjustments

would have been required for the consolidated financial statements.

- 20 -

10. PROPERTY, PLANT AND EQUIPMENT

December 31

2011 2010

Accumulated depreciation

Buildings $ 926,294 $ 710,841

Machinery and equipment 1,201,301 1,068,306

Tooling equipment 269,937 174,770

Computer equipment 156,478 129,025

Transportation equipment 8,853 8,129

Furniture and fixtures 73,038 66,743

Other equipment 268,862 276,968

$ 2,904,763 $ 2,434,782

The equipment of Automotive Playback Modules Hungary Electronical Mechanical Manufacturing and

Trading Limited Liability Company, a 100% subsidiary of Lite-On Information Technology B.V., became

impaired. Thus, the Group recognized an impairment loss of EUR2,288 thousand in 2009. This

equipment had been disposed as of December 31, 2010.

11. INTANGIBLE ASSETS

On April 10, 2006, the Parent Company and Qisda Corporation (“Qisda,” formerly BenQ Corporation)

signed a contract under which the Parent Company would obtain Qisda’s optical storage device subcontract

and manufacturing business and related authorization on product manufacturing, technology, patent use,

etc. for NT$1,226,855 thousand plus 13% equity in the Parent Company. This acquisition was in line with

the Parent Company’s long-term strategic partnership with Qisda to expand production scale and increase

market share.

Under decisions reached at the board of directors’ meeting on August 27, 2007 and the shareholders’

meeting on November 15, 2007, the Parent Company would instead make a payment wholly in cash and

would thus revise the agreement on the method for and schedule of payment to Qisda. The revised

agreement stipulated that the Parent Company should pay for the acquisitions in cash only.

The intangible assets acquired from Qisda consisted of patent use rights and goodwill amounting to

NT$2,695,878 thousand and NT$2,806,508 thousand, respectively. As of December 31, 2011 and 2010,

the amortization of patent use rights had amounted to NT$1,235,611 thousand and NT$1,010,954 thousand,

respectively.

Goodwill refers to three subsidiaries, one of which is Philips & Lite-On Digital Solutions Germany GmbH,

which became a 100% subsidiary of Philips & Lite-On Digital Solutions Corporation in March 2007.

After the acquisition cost was allocated to the assets acquired and liabilities assumed on the basis of their

fair values on the acquisition date, the acquisition cost in excess of the fair value of the identifiable net

assets acquired was recognized as goodwill amounting to NT$346,988 thousand. Goodwill also refers to

Philips & Lite-On Digital Solutions Germany GmbH and Philips & Lite-On Digital Solutions Korea Ltd.,

which amounted to NT$97,916 thousand (EUR2,388 thousand) and NT$8,629 thousand (KRW324,191

thousand), respectively.

- 21 -

From January 1, 2006, based on the revised Statement of Financial Accounting Standards 5 - “Long-term

Investments under the Equity Method,” goodwill should no longer be amortized but should be tested for

impairment at regular intervals every year. For this test, the recoverable amount should be evaluated by

the value in use of the tangible and intangible assets and the projected cash flows during the period of the

expected use of these tangible and intangible assets. Factors to be considered in assessing value in use are

past operating performance, future profit situation under normal operation, operating strategies, industrial

development of optical disks, market prospects, etc. Net cash input and the residual value of the assets

should be estimated, and the value in use of these assets should be discounted by the weighted average cost

of capital. The Parent Company had recognized an impairment loss of NT$453,533 thousand on Philips &

Lite-On Digital Solutions Corporation, Philips & Lite-On digital Solutions Germany GmbH and Philips &

Lite-On Digital Solutions Korea Ltd. as of December 31, 2011. The rest of intangible assets were not

estimated to be less than their carrying amount

12. PENSION PLAN

The pension plan under the Labor Pension Act (LPA) is a defined contribution plan. Under the LPA, the

Parent Company and Philips & Lite-On Digital Solutions Corporation make monthly contributions to

employees’ individual pension accounts at 6% of monthly salaries and wages. Related pension costs were

NT$43,489 thousand for 2011 and NT$39,835 thousand for 2010.

Based on the defined benefit plan under the Labor Standards Law (LSL), pension benefits are calculated on

the basis of the length of service and average monthly salaries and wages of the six months before

retirement. The Parent Company and Philips & Lite-On Digital Solutions Corporation contribute amounts

equal to 3% of total monthly salaries and wages to pension funds administered by their respective pension

fund monitoring committees. The pension funds are deposited in the Bank of Taiwan in the committees’

names.

Some subsidiaries, which are mainly holding companies, have either very few or even no staff. These

companies have no pension plans and thus do not contribute to pension funds and do not recognize pension

costs. Except for these subsidiaries, the remaining companies have defined contribution plans or both

defined benefit and defined contribution plans, and they contribute to pension funds and recognize pension

costs based on local government regulations. The pension costs recognized by these subsidiaries were

NT$7,998 thousand in 2011 and NT$13,418 thousand in 2010.

Other information on the defined benefit pension plan is as follows:

a. Components of net pension cost

Year Ended December 31, 2011

Parent

Company

Philips &

Lite-On Digital

Solutions

Corporation

Philips &

Lite-On Digital

Solutions

Germany

GmbH.

Service cost $ 1,374 $ - $ (697)

Interest cost 2,971 1,108 1,025

Projected return on plan assets (2,527) - -

Amortization 319 (412) -

Net pension cost $ 2,137 $ 696 $ 328

- 22 -


Parent

Company

Philips &

Lite-On Digital

Solutions

Corporation

Philips &

Lite-On Digital

Solutions

Germany

GmbH.

Service cost $ 1,389 $ - $ 2,227

Interest cost 2,637 1,147 714

Projected return on plan assets (2,951) - -

Amortization 185 (298) -

Net pension cost $ 1,260 $ 849 $ 2,941

b. Reconciliation of the funded status of the plan and accrued (prepaid) pension cost as of December 31,

2011 and 2010

December 31, 2011

Parent

Company

Philips &

Lite-On Digital

Solutions

Corporation

Philips &

Lite-On Digital

Solutions

Germany

GmbH.

Benefit obligation

Vested benefit obligation $ 10,690 $ - $ 9,740

Non-vested benefit obligation 79,784 24,114 9,700

Accumulated benefit obligation 90,474 24,114 19,440

Additional benefit based on future salaries 63,793 21,119 2,190

Projected benefit obligation 154,267 45,233 21,630

Fair value of plan assets (128,529) - -

Funded status 25,738 45,233 21,630

Unrecognized net transition obligation (1,526) - 10,991

Unamortized pension balance (30,885) 14,467 -

Accrued (prepaid) pension cost $ (6,673) $ 59,700 $ 32,621

December 31, 2010

Parent

Company

Philips &

Lite-On Digital

Solutions

Corporation

Philips &

Lite-On Digital

Solutions

Germany

GmbH.

Benefit obligation

Vested benefit obligation $ 7,307 $ - $ 12,960

Non-vested benefit obligation 61,803 23,127 17,981

Accumulated benefit obligation 69,110 23,127 30,941

Additional benefit based on future salaries 49,742 21,199 2,452

Projected benefit obligation 118,852 44,326 33,393

Fair value of plan assets (123,151) - (9,418)

Funded status (4,299) 44,326 23,975

Unrecognized net transition obligation (1,845) - -

Unamortized pension balance 3,925 14,678 -

Accrued (prepaid) pension cost $ (2,219) $ 59,004 $ 23,975

- 23 -

c. Actuarial assumptions

December 31

2011 2010

Parent

Company

Philips &

Lite-On

Digital

Solutions

Corporation

Philips &

Lite-On

Digital

Solutions

Germany

GmbH.

Parent

Company

Philips &

Lite-On

Digital

Solutions

Corporation

Philips &

Lite-On

Digital

Solutions

Germany

GmbH.

Discount rate 1.75% 1.75% 5.25% 2.50% 2.50% 4.50%

Rate of increase in

compensation 3.25% 3.25% 2.75% 3.25% 3.25% 2.75%

Expected long-term

rate of return on

plan assets 2.25% 2.25% - 2.00% 2.00% -

13. SHAREHOLDERS’ EQUITY

Common Stock

In Parent company’s annual meeting in 2011, the shareholders resolved to increase capital by transferring

NT$44,832 thousand from unappropriated earnings and NT$97,035 thousand from employees’ bonus to

common stock. The total common stock issued will be 7,681 thousand shares with a par value of $10 (in

NT dollars) and a total amount of $76,815 thousand. The government authorities approved this capital

increase on July 7, 2011, and the board of directors set August 13, 2011 as the date of distributing stock

dividends and cash dividends. The Parent Company had completed its revised registration to the Ministry

of Economic Affairs.

Employee Stock Option Plans

In December 2007, there were 22,685 option units granted to qualified employees of the Group. Each

option entitles the holder to subscribe for one thousand common shares of the Parent Company when the

options become exercisable. The options granted are valid for six years and exercisable at certain

percentages after the second, third and fourth anniversaries from the grant date. The options were granted

at an exercise price equal to the closing price of the Parent Company’s common shares listed on the Taiwan

Stock Exchange on the grant date. For cash dividend distribution, stock dividend distribution, and other

decreases in the Parent Company’s paid-in capital (except the cancellation of treasury stock), the exercise

price and the number of options are adjusted accordingly.

- 24 -

Other information on the employee stock option plans is as follows:


2011 2010

Number of

Options

Weighted-

average

Exercise Price

(NT$)

Number of

Options

Weighted-

average

Exercise Price

(NT$)

Balance, beginning of year 10,529 $ 21.5 17,119 $ 22.6

Options expired 170 - 481 -

Options exercised 1,729 21.5 4,500 22.6

Options exercised 968 19.8 1,609 21.5

Balance, end of year 7,662 19.8 10,529 21.5

Weighted-average fair value of

options granted (NT$)

$ 9.3002 $ 9.3002

The outstanding and exercisable options as of December 31, 2011 and 2010 were as follows:

December 31

2011 2010

Weighted-average

Remaining Life

(Years)

Weighted-average

Exercise Price

(NT$)

Weighted-average

Remaining Life

(Years)

Weighted-average

Exercise Price

(NT$)

2 $19.8 3 $21.5

Based on the intrinsic value method, no compensation cost was recognized for 2011 and 2010. Had the

Parent Company recognized compensation cost based on the fair value method using the binomial option

pricing model, the Parent Company’s assumptions and pro forma results for 2011 and 2010 would have

been as follows:

2011 2010

Assumptions (binomial option pricing model)

Risk-free interest rate 2.51% 2.51%

Expected life 2 years 3 years

Expected volatility 47.13% 47.13%

Expected dividend yield 7.09% 7.09%

Net income attributed to shareholders of the Parent Company

As reported (in thousands) $ 2,800,395 $ 2,944,905

Pro forma (in thousands) $ 2,789,600 $ 2,919,568

Basic after income tax earnings per share (NT$)

As reported $3.10 $3.28

Pro forma $3.09 $3.27

Diluted after income tax earnings per share (NT$)

As reported $3.07 $3.25

Pro forma $3.06 $3.24

- 25 -

Capital Surplus

Under the Company Law, capital surplus may be used to offset a deficit. The capital surplus from shares

issued in excess of par (additional paid-in capital from issuance of common shares and treasury stock

transactions) and donations may be capitalized within a certain percentage of the Parent Company’s paid-in

capital. Under the revised Company Law issued on January 4, 2012, the foregoing capital surplus may

also be distributed in cash. However, the capital surplus from long-term investments may not be used for

any purpose.

Appropriation of Earnings and Dividend Policy

The Parent Company is in a growing stage. Thus, in consideration of future business expansion, capital

requirements and tax obligations of the Parent Company and its shareholders, cash dividends, in principle,

should not be less than 10% of total dividends. The Parent Company’s Articles of Incorporation provide

that 10% of the annual net income (less deficit, if any) should be appropriated as legal reserve. A special

reserve should be provided in accordance with relevant regulations, and the appropriations of the remainder

should be resolved by the board of directors and then submitted in the shareholders’ meeting for approval.

These appropriations should include at least 10% as employees’ bonus, no more than 1.5% as remuneration

to directors and the remainder as dividends.

On the basis of past experience, the Parent Company estimated the bonus to employees and the

remuneration to directors of 2011 and 2010 at 15% and 1.5%, respectively, of the estimated appropriations

from earnings. If the actual amounts subsequently resolved by the shareholders differ from the proposed

amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting

estimate. If bonus shares are resolved to be distributed to employees, the number of shares is determined

by dividing the amount of bonus by the closing price (after considering the effect of cash and stock

dividends) of the shares of the day preceding the shareholders’ meeting.

All appropriations should be resolved by the shareholders in their annual meeting to be held in the

following year and given effect to in the financial statements of that year.

Based on a directive issued by the Securities and Futures Bureau, an amount equal to the net debit balance

of certain shareholders’ equity accounts (except treasury stock) should be transferred from unappropriated

earnings to a special reserve. Any special reserve appropriated may be reversed to the extent of the

decrease in the net debit balance.

Legal reserve should be appropriated until it has reached the Parent Company’s paid-in capital. This

reserve may be used to offset a deficit. Under the revised Company Law issued on January 4, 2012, when

the legal reserve has exceeded 25% of the Parent Company’s paid-in capital, the excess may be transferred

to capital or distributed in cash.

Except for non-ROC resident shareholders, all shareholders receiving the dividends are allowed a tax credit

equal to their proportionate share of the income tax paid by the Parent Company.

The appropriation and distribution of the Parent Company’s 2010 and 2009 earnings were approved by the

Parent Company’s shareholders on June 15, 2011 and June 17, 2010, respectively.

Appropriation of Earnings

Dividends Per

Share (NT$)

For For For For

Year 2010 Year 2009 Year 2010 Year 2009

Legal reserve $ 294,490 $ 177,933 $ - $ -

Special reserve 103,927 - - -

Cash dividends 2,107,104 1,295,101 2.35 1.46

Stock dividends 44,832 44,353 0.05 0.05

- 26 -

The bonus to employees of NT$485,176 thousand and the remuneration to directors of NT$40,159

thousand for 2010 were approved in the shareholders’ meeting on June 15, 2011. The bonus to employees

included a cash bonus of NT$388,141 thousand and a stock bonus of NT$97,035 thousand. The number

of shares of 3,198 thousand was determined by dividing the amount of share bonus by the closing price

(after considering the effect of cash and stock dividends) of the shares of the day immediately preceding the

shareholders’ meeting. There is no significant difference between the approved amounts of the bonus to

employees and the remuneration to directors and supervisors and the accrual amounts reflected in the

financial statements.

As of March 23, 2012, the auditors’ report date, the Corporation’s board of directors had not decided the

appropriation of the 2011 earnings. Information on the bonus to employees, directors and supervisors is

available on the Market Observation Post System website of the Taiwan Stock Exchange.

Unrealized Gain or Loss on Financial Instruments

For the years ended December 31, 2011 and 2010, the unrealized gain or loss on financial instruments was

as follows:

Available-for-sale

Financial Assets

Year ended December 31, 2011

Balance, beginning of year $ (12,352)

Recognized in shareholders’ equity (66,371)

Balance, end of year $ (78,723)


Balance, beginning of year $ 7,514

Recognized in shareholders’ equity (19,866)

Balance, end of year $ (12,352)

14. TREASURY STOCK

Unit: In Thousand Shares

Beginning Changes in Fiscal Year End of

Reason for Repurchase of Year Increase Decrease Year

2011

Reissuance to employees 7,200 - (7,200) -

2010

Reissuance to employees 7,200 - - 7,200

- 27 -

On August 26, 2008, the Parent Company’s board of directors resolved to buy 12,000 thousand shares of its

common stock from the open market. The buyback period was between August 27, 2008 and October 26,

2008, and the buyback price ranged from NT$15.8 to NT$34.65 per share. If, within the buyback period,

the share price in the market became lower than NT$15.8, the Parent Company was allowed to continue to

buy its common shares only if its board of directors approved such purchase. As of October 26, 2008, the

Parent Company had bought back 7,200 thousand common shares for NT$138,026 thousand, and these

shares were subsequently retired in November 2011.

15. INCOME TAX

a. A reconciliation of income tax expense based on income before income tax and income tax expense

was as follows:


2011 2010

Income tax expense at statutory rate $ 1,025,655 $ 914,673

Tax effect of adjusting items:

Permanent differences (79,372) (18,399)

Temporary differences (125,239) (170,566)

Investment tax credits used (21,862) -

Loss carryforwards used (1,300) 1,300

Additional 10% income tax on unappropriated earnings 39,455 26,194

Current income tax expense 837,337 753,202

Deferred income tax expense (benefit)

Temporary differences 9,512 233,279

Loss carryforwards 1,300 (1,300)

Investment tax credits 59,747 50,265

Adjustment in valuation allowance (56,889) (35,975)

Adjustments for prior years’ tax (66,420) (299,569)

$ 784,587 $ 699,902

Under Article 10 of the Statute for Industrial Innovation passed by the Legislative Yuan in April 2010,

a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its

income tax payable for the fiscal year in which these expenditures are incurred, but this deduction

should not exceed 30% of the income tax payable for that fiscal year. This incentive is effective from

January 1, 2010 till December 31, 2019.

In May 2010, the Legislative Yuan passed the amendment of Article 5 of the Income Tax Law, which

reduces a profit-seeking enterprise’s income tax rate from 20% to 17%, effective January 1, 2010.

- 28 -

b. Deferred income tax assets and liabilities consisted of:

December 31

2011 2010

Current

Deferred income tax assets

Warranty liabilities $ 119,215 $ 89,825

Unrealized allowance for loss on inventories 77,952 65,647

Unrealized sales returns and discounts 76,462 74,324

Unrealized foreign exchange loss 68,068 107,071

Investment tax credits 35,542 35,578

Gain on intercompany transactions 8,155 9,194

Loss carryforwards 3,847 5,000

Bad debts in excess of the limits 3,634 3,874

Amortization of patents 2,756 -

Unrealized loss on financial assets 1,558 -

Others 25,077 36,330

422,266 426,843

Less: Valuation allowance - 17,374

422,266 409,469

Deferred income tax liabilities

Unrealized gain on financial assets - (52,968)

Deferred income tax assets, net $ 422,266 $ 356,501

Noncurrent

Deferred income tax assets

Investment tax credits $ 74,060 $ 347,416

Amortization of patents 24,120 -

Impairment loss on financial assets carried at cost 12,750 12,750

Excess provisions for pension costs 10,149 10,031

Net loss of subsidiary 9,188 -

Impairment loss on available-for-sale financial assets 5,149 5,149

Others 1,252 -

136,668 375,346

Less: Valuation allowance 94,003 347,164

42,665 28,182

Deferred income tax liabilities

Unrealized amortization of goodwill (218,674) (178,915)

Accumulated equity in the net gain of foreign investees (74,019) (9,732)

Income from subsidiaries - (9,204)

Others (2,034) (2,958)

(294,727) (200,809)

Deferred income tax liabilities, net $ (252,062) $ (172,627)

- 29 -

c. As of December 31, 2011, investment tax credits were as follows:

Laws

Tax Credit Source

Total

Creditable

Amount

Remaining

Creditable

Amount

Expiry

Year

Philips & Lite-On Digital

Solutions Corp.

Statute for Upgrading

Industries

Research and development

expenditures

$ 156,078 $ 61,034 2012

Research and development

expenditures

48,568

48,568

2013

$ 204,646 $ 109,602

d. The Parent Company’s tax returns through 2009 had been assessed by the tax authorities. However,

the Parent Company disagreed with the tax authorities’ assessment on the 2006 to 2009 returns and

applied for a tax appeal. Nevertheless, the Parent Company has provided for the income tax assessed

by the tax authorities in observance of the conservatism guideline. In addition, Philips & Lite-On

Digital Solutions Corporation’s tax returns through 2009, except 2008, have been assessed by the tax

authorities.

e. Information on integrated income tax is as follows:

December 31

2011 2010

Balance of shareholders’ imputation credit account

Parent Company $ 656,796 $ 362,257

Philips & Lite-On Digital Solutions Corporation $ 31,805 $ 74,612

2011

(Estimate)

2010

(Actual)

Creditable ratio for the distribution of earnings

Parent Company 17.40% 13.76%

Philips & Lite-On Digital Solutions Corporation 20.48% 20.48%

For the distribution of earnings generated after January 1, 1998, the ratio for the imputation credits

allocable to the shareholders of the Parent Company and its domestic subsidiaries is based on the

balance of the ICA as of the date of dividend distribution. The expected creditable ratio for the 2011

earnings may be adjusted, depending on the ICA balance on the date of dividend distribution.

The unappropriated earnings as of December 31, 2011 and 2010 did not include earnings generated up

to December 31, 1997.

- 30 -

16. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSE


2011 2010

Operating Operating Operating Operating

Cost Expenses Total Cost Expenses Total

Personnel

Payroll $ 475,503 $ 3,342,791 $ 3,818,294 $ 1,657,808 $ 1,919,129 $ 3,576,937

Insurance 59,372 182,865 242,237 57,340 129,255 186,595

Pensions 6,121 48,527 54,648 9,998 48,305 58,303

Others 28,796 345,427 374,223 58,107 102,219 160,326

$ 569,792 $ 3,919,610 $ 4,489,402 $ 1,783,253 $ 2,198,908 $ 3,982,161

Depreciation $ 442,018 $ 219,787 $ 661,805 $ 369,227 $ 256,611 $ 625,838

Amortization 16,626 587,810 604,436 3,041 690,610 693,651

17. EARNINGS PER SHARE


2011 2010

Before After Before After

Income Tax Income Tax Income Tax Income Tax

Basic earnings per share (EPS)

(NT$)

$ 3.44 $ 3.10

$ 3.61

$ 3.28

Diluted EPS (NT$) $ 3.41 $ 3.07 $ 3.57 $ 3.25

The numerators and denominators used in calculating the Parent Company’s earnings basic and diluted EPS

were as follows:

Number of

Shares Earnings Per Share

Amount (Numerator) (Denominator) (Dollars)

Pretax After Tax (Thousand) Pretax After Tax


Basic EPS

Income for the year $ 3,108,717 $ 2,800,395 902,936

(Note 1)

$ 3.44 $ 3.10

Effect of dilutive potential common

shares

Employee stock option - - 3,800 (0.01) (0.01)

Bonus to employees - - 5,083 (0.02) (0.02)

Diluted EPS

Income for the year attributable to

common shareholders plus effect of

potential dilutive common shares

$ 3,108,717 $ 2,800,395 911,819 $ 3.41 $ 3.07


Basic EPS

Income for the year $ 3,240,511 $ 2,944,905 896,700

(Note 2)

$ 3.61 $ 3.28

Effect of dilutive potential common

shares

Employee stock option - - 5,860 (0.02) (0.02)

Bonus to employees - - 4,017 (0.02) (0.01)

Diluted EPS

Income for the year attributable to

common shareholders plus effect of

potential dilutive common shares

$ 3,240,511 $ 2,944,905 906,577 $ 3.57 $ 3.25

- 31 -

Note 1: 900,827 (thousand shares) - 7,200 (thousand shares) + 3,198 (thousand shares) × 200/365 + 4,483

(thousand shares) + 3,074 (thousand shares) = 902,936 (thousand shares)

Note 2: 887,539 (thousand shares) - 7,200 (thousand shares) + 6,416 (thousand shares) + 1,894 (thousand

shares) × 198/365 + 4,435 (thousand shares) + 4,483 (thousand shares) = 896,700 (thousand

shares)

The Parent Company should presume that the entire amount of the bonus will be settled in shares, and, if

the shares have a dilutive effect, the resulting potential shares should be included in the weighted average

number of shares outstanding used in the calculation of diluted EPS. The number of shares is estimated

by dividing the entire amount of the bonus by the closing price of the shares at the balance sheet date. The

dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the

shareholders resolve the number of shares to be distributed to employees at their meeting in the following

year.

The EPS has been retroactively adjusted for the issuance of stock dividends and employee stock bonuses.

Thus, in 2010, pretax and after-tax basic EPS decreased from NT$3.63 to NT$3.61 and from NT$3.30 to

NT$3.28, respectively. In addition, pretax and after-tax diluted EPS decreased from NT$3.59 to NT$3.57

and from NT$3.26 to NT$3.25, respectively.

18. FINANCIAL INSTRUMENTS

a. Fair values of financial instruments

December 31

2011 2010

Carrying Carrying

Amount Fair Value Amount Fair Value

Financial instruments

Assets

Financial assets at fair value through profit or

loss - current $ 6,531 $ 6,531 $ 317,535 $ 317,535

Available-for-sale financial assets - noncurrent 117,222 117,222 183,593 183,593

Liabilities

Financial liabilities at fair value through profit or

loss - current 15,700 15,700 5,961 5,961

Derivative financial instruments

Parent Company

Assets

Currency swap contracts - - 259,655 259,655

Forward exchange contracts 6,531 6,531 - -

Location

Domestic 2,122 2,122 3,510 3,510

Foreign (foreign corporations operating locally

are included) 4,409 4,409 256,145 256,145

(Continued)

- 32 -

December 31

2011 2010

Carrying Carrying

Amount Fair Value Amount Fair Value

Liabilities

Currency swap contracts $ 10,380 $ 10,380 $ - $ -

Forward exchange contracts - - 5,961 5,961

Location

Domestic 3,900 3,900 - -


are included) 6,480 6,480 5,961 5,961

Philips & Lite-On Digital Solutions Corporation

Assets

Currency swap contracts - - 57,880 57,880

Location


are included) - - 57,880 57,880

Liabilities

Currency swap contracts 5,320 5,320 - -

Location

Domestic 5,320 5,320 - -

(Concluded)

b. The methods and assumptions used for estimating the fair values of financial instruments were as

follows:

1) The foregoing financial instruments do not include short-term instruments such as cash, accounts

receivable and payable, other receivables and payables, and accrued expenses. The carrying

amounts of these short-term financial instruments approximate their fair values.

2) The fair values of refundable deposits and guarantee deposits received and restricted assets are

based on their carrying amounts because the amounts to be received in the future approximate their

carrying amounts.

3) Fair values of financial instruments designated as at FVTPL and available-for-sale are based on

their quoted prices in an active market. For those instruments with no quoted market prices, their

fair values are determined using valuation techniques incorporating estimates and assumptions

consistent with those generally used by other market participants to price financial instruments.

4) For derivatives with no quoted market prices, their fair values are determined using valuation

techniques incorporating estimates and assumptions consistent with those generally used by other

market participants to price financial instruments.

5) The Group used Reuters’s currency quotations to calculate the fair values of forward exchange

contracts, currency swap contracts, and cross-currency swap contracts.

6) Financial assets carried at cost are investments in unquoted shares, which have no quoted prices in

an active market and entail an unreasonably high cost to obtain verifiable fair values. Therefore,

no fair value is presented.

- 33 -

c. Fair values of financial assets and liabilities that were based on quoted market prices or were

determined using valuation techniques were as follows:

Quoted Market Prices Valuation Techniques

December 31 December 31

2011 2010 2011 2010

Assets

Financial assets at fair value through profit or

loss - current $ - $ - $ 6,531 $ 317,535

Available-for-sale financial assets - noncurrent 117,222 183,593 - -

Liabilities

Financial liabilities at fair value through profit or

loss - current - - 15,700 5,961

d. As of December 31, 2011 and 2010, financial assets exposed to cash flow interest rate risk amounted to

NT$2,972,585 thousand and NT$4,095,514 thousand, respectively, and financial assets exposed to fair

value interest rate risk amounted to NT$12,263,055 thousand and NT$7,789,901 thousand, respectively.

e. Financial risks

1) Market risk

The derivative financial instruments categorized as financial assets and liabilities at fair value

through profit or loss are mainly used to hedge exchange rate fluctuations of foreign

currency-denominated assets and liabilities. Thus, the gain or loss on derivatives will be offset by

the gain or loss on the exchange rate fluctuations of hedged assets and liabilities.

The Group’ s investments in listed securities and mutual funds are classified as available-for-sale

financial assets, which are measured at fair value. The fair value of these investments fluctuates as

market price and interest rate change.

2) Credit risk

Credit risk represents the potential loss that would be incurred by the Group if the counter-parties

breach financial instrument contracts. For risk management, financial instruments with positive

fair values at the balance sheet date are evaluated for credit risk. In addition, the counter-parties to

the financial instrument contracts are reputable financial institutions and business organizations.

Thus, management does not expect the Parent Company and its subsidiaries’ exposure to default by

those parties to be material.

3) Liquidity risk

The Group’s operating funds are deemed sufficient to meet the cash flow demand; thus, liquidity

risk is not considered significant.

Having long-term equity-method investments and financial assets carried at cost with no quoted

prices in an active market could, however, expose the Group to material liquidity risks. On the

other hand, the Group has available-for-sale financial assets that have quoted prices in an active

market and can be sold immediately at prices close to fair value. Financial instruments include the

Parent Company’s forward, currency swap and cross-currency swap contracts, details of which are

shown in Note 5. The contracted forward rates and interest are decided on the contract starting

dates. Thus, the cash flow risks on forward, currency swap and cross-currency swap contracts are

not material.

- 34 -

4) Cash flow interest rate risk

The Group has demand deposits with floating interest rates. As a result, the effective interest rate

on deposits will change as the market interest rate changes and thus result in the fluctuation of

future cash flows.

5) Risk control and hedging strategy

The Group has a risk management and control system to identify, evaluate and control all financial

risks such as market, credit, liquidity, and cash flow interest risks. Except for market risk, all risks

are offset through internal control or operating processes. Management’s goal is to minimize the

risks.

On market risk, the Group determines its optimum position by considering the long-term trend of

the external economic environment, internal operating conditions, and price fluctuations in the open

market.

19. RELATED-PARTY TRANSACTIONS

a. Related parties and relationships

Related Party Relationship with the Group

Lite-On Technology Corp. Ultimate Parent Company

Lite-On Integrated Services Inc. Equity-method investee of Lite-On Technology Corp.

Silport Travel Services Co., Ltd. (“Silport”) Silport’s chairman and the chairman of Lite-On

Technology Corp. are brothers.

Lite-On Electronics (DG) Co., Ltd. Equity-method investee of Lite-On Technology Corp.

Leotek Electronics Corp. Equity-method investee of Lite-On Technology Corp.

Lite-On (Guang Zhou) Infortech Ltd. Equity-method investee of Lite-On Technology Corp.

Lite-On Elec and Wire (GZ) Co., Ltd. Equity-method investee of Lite-On Technology Corp.

Lite-On Japan Ltd. Equity-method investee of Lite-On Technology Corp.

Lite-On Japan (H.K.) Ltd. (“LIT Japan - HK”) Equity-method investee of Lite-On Technology Corp.

Lite-On Overseas Trading Co., Ltd. (“Lite-On

Overseas”)

Equity-method investee of Lite-On Technology Corp.

Perlos (Guangzhou) Electronic Components

Co., Ltd. (“Perlos GZ”)

Equity-method investee of Lite-On Technology Corp.

b. Significant transactions with related parties

2011 2010

Amount % to

Total

Amount % to

Total

For the year

Sales

LIT Japan - HK $ 10,189 - $ 11,095 -

Lite-On Japan Ltd. 5,530 - 29,471 -

Lite-On Overseas 4,605 - - -

Lite-On Technology Corp. 1,462 - 654 -

Perlos GZ - - 15,701 -

$ 21,786 - $ 56,921 -

- 35 -

2011 2010

Amount % to

Total

Amount % to

Total

Purchases

Others $ 21 - $ 631 -

Operating expenses

Rent and management fees

Lite-On Technology Corp. $ 77,765 1 $ 66,257 1

Travel expenses

Silport 18,381 - 17,550 -

Stamp and phone fees

Lite-On Integrated Services Inc. 5,192 - 5,533 -

Promotional fees

Lite-On Japan Ltd. 802 - 791 -

$ 102,140 1 $ 90,131 1

Nonoperating income and gains

Miscellaneous income

Perlos GZ $ 17,565 1 $ 16,617 1

At year-end

Accounts receivable - related parties (included

in accounts receivable)

Lite-On Technology Corp. $ 558 - $ 620 -

Lite-On Electronics (DG) Co., Ltd. 417 - - -

Lite-On Japan Ltd. - - 9,619 -

Others - - 263 -

$ 975 - $ 10,502 -

Other receivables - related parties (included in

other accounts receivable)

Perlos GZ $ 8,027 2 $ 1,806 -

Leotek Electronics Corp. 1,470 1 - -

$ 9,497 3 $ 1,806 -

Accounts payable - related parties (included in

accounts payable)

Lite-On Electronics (DG) Co., Ltd. $ 2,998 - $ - -

Lite-On Technology Corp. 8 - 60 -

$ 3,006 - $ 60 -

- 36 -

2011 2010

Amount % to

Total

Amount % to

Total

Other payables - related parties (included in

other accounts payable)

Perlos GZ $ 156,509 11 $ - -

Lite-On Technology Corp. 29,456 2 6,956 1

Silport 2,004 - 2,900 -

Lite-On (Guang Zhou) Infortech Ltd. 788 - 903 -

Lite-On Integrated Services Inc. 703 - 887 -

Lite-On Elec and Wire (GZ) Co., Ltd. 273 - - -

Lite-On Japan Ltd. - - 64 -

$ 189,733 13 $ 11,710 1

Terms of sales to, purchases from, and settlement of receivables from and payables to related parties

were similar to those for third parties.

The Parent Company’s rent for the use of office space under an operating lease agreement (expiry on

December 31, 2013) with Lite-On Technology Corp. was NT$1,004 thousand per month, payable

monthly.

The rent of Philips & Lite-On Digital Solutions Corporation for the use of office space under an

operating lease agreement (expiry on December 31, 2013) with Lite-On Technology Corp. was

NT$1,545 thousand per month, payable monthly.

Compensation of directors and management personnel


2011 2010

Salaries $ 8,546 $ 8,507

Incentives 1,320 3,414

Special compensation 3,035 2,805

Bonus 61,631 78,621

$ 74,532 $ 93,347

20. MORTGAGED OR PLEDGED ASSETS

December 31

2011 2010

Restricted assets - noncurrent $ 92,071 $ 101,829

Restricted assets had been mortgaged or pledged by the Parent Company and its subsidiary, Philips &

Lite-On Digital Solutions Corporation, as collaterals for the meeting of customs duty requirements in

Europe.

- 37 -

21. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

a. Future minimum lease payments under operating lease agreements as of December 31, 2011 are

summarized as follows:

Site Expiry Monthly Rent

Parent Company

Taipei office - 12-14F and 23F 12/31/2013 $ 1,004

Hsinchu land 12/31/2023 658

Philips & Lite-On Digital Solutions Corporation

Taipei office - 12-13F and 16F 12/31/2013 1,545

b. The Parent Company entered into a joint technology development agreement with certain unrelated

parties. Under this agreement, the Parent Company should place funds quarterly, starting from the

first quarter of 2007, in a refundable deposit account as a guarantee of its authorization for its

counter-parties to develop technology. The 2009 year-end balance of this refundable deposit account

was NT$1,140,209 thousand. In 2010, the Parent Company terminated this agreement and collected

back all the deposits used as guarantee.

c. In October 2009, the U.S. Department of Justice (DOJ) confirmed its decision to investigate the optical

disk drive (ODD) industry for a violation of antitrust laws, and when informed by the DOJ of this

investigation, the Parent Company stated it would cooperate with the investigation. As of March 23,

2012, the date of the accompanying auditors’ report, the DOJ investigation was at the preliminary stage;

thus, the Parent Company could not estimate the possible results and impact of this case.

d. In October 2009, CMP Consulting Service, Inc. and KI, Inc. filed an antitrust group lawsuit against the

Parent Company and its subsidiaries - Philips & Lite-On Digital Solutions Corporation and Philips &

Lite-On Digital Solutions USA, Inc. - and some non-Group companies with related businesses with a

court in California. In addition, Aaron Wagner, The Stereo Shop, David Carney, Jr., Tina Corse,

Cynthia R. Rall and Richard R. Rall and Don Cheung filed an antitrust group lawsuit against the Parent

Company and its subsidiaries - Philips & Lite-On Digital Solutions Corporation and Philips & Lite-On

Digital Solutions USA, Inc. - and some non-Group companies with related businesses with various

courts in California in the second and third quarters of 2010. Furthermore, Aaron Deshaw filed an

antitrust lawsuit against the Parent Company and its subsidiaries - Philips & Lite-On Digital Solutions

Corporation and Philips & Lite-On Digital Solutions USA, Inc. - and some non-Group companies with

related businesses with a court in Oregon in the second quarter of 2010. The above antitrust lawsuits

have been consolidated for pretrial purposes in the United States District Court in the Northern District

of California. The Parent Company has appointed attorneys to deal with these lawsuits. As of March

23, 2012, the date of the accompanying auditors’ report, these cases were still in the preliminary stage,

and the Parent Company could not estimate the possible results and impact of these developments.

e. On April 7, 2010, petitioner Carlos Fogelman filed a motion with the Superior Court of Quebec in the

district of Montreal for authorization to institute class action proceedings against the Parent Company

and its subsidiaries, i.e., Philips & Lite-On Digital Solutions Corporation, Philips & Lite-On Digital

Solutions USA, Inc., and some non-Group ODD (optical disk drive) companies. On June 11, 2010,

the Fanshawe College of Applied Arts and Technology filed a statement of claim in Ontario against the

same defendants. On September 27, 2010, Neil Godfrey filed a statement of claim with the Superior

Court of British Columbia, also against the same defendants. All these complaints constituted an

antitrust group lawsuit. The Parent Company has appointed attorneys to deal with these lawsuits. As

of March 23, 2012, the date of the accompanying auditors’ report, these cases were still in the

- 38 -

preliminary stage, and the Parent Company could not estimate the possible results and impact of these

developments.

f. In April 2011, Orinda Intellectual Properties USA Holding Group, Inc. instituted class action

proceedings against the Parent Company, Lite-On Americans, Inc. and some non-Group companies

with related businesses before the United States District Court for the Northern District of California,

alleging infringement of patent. The Parent Company has assigned lawyers as its representative in

these lawsuits. As of March 23, 2012, the date of the accompanying auditors’ report, this case was

still in the preliminary stage, and the Parent Company could not estimate the outcome of the case or

amount of possible loss.

22. SIGNIFICANT FOREIGN-CURRENCY FINANCIAL ASSETS AND LIABILITIES

The significant foreign-currency financial assets and liabilities were as follows:

(In Thousands of New Taiwan Dollars and Foreign Currency, Except Exchange Rate)

December 31

2011 2010

Foreign

Currency

Exchange

Rate

New Taiwan

Dollars

Foreign

Currency

Exchange

Rate

New Taiwan

Dollars

Financial assets

Monetary items

USD $ 1,473,146 30.29 $ 44,621,592 $ 696,598 29.13 $ 20,291,900

EUR 74,168 39.11 2,900,710 53,047 38.92 2,064,589

HKD 1,594 3.90 6,217 5,256 3.75 19,710

CNY 586,512 4.81 2,821,123 666,004 4.44 2,957,058

JPY 357,848 0.39 139,561 940,445 0.36 338,560

KRW 470,129 0.03 14,104 405,047 0.03 12,151

HUF 49,679 0.13 6,458 - - -

CAD - - - 2,897 29.15 84,448

Nonmonetary item

USD 116,000 30.29 3,513,640 246,500 29.13 7,180,545

EUR 15,200 39.11 594,472 14,000 38.92 544,880

Financial liabilities

Monetary items

USD 1,671,798 30.29 50,638,761 385,442 29.13 11,227,925

EUR 209,808 39.11 8,205,591 4,338 38.92 168,835

HKD 755 3.90 2,945 126,913 3.75 475,924

CNY 295,712 4.81 1,422,375 238,909 4.44 1,060,756

CZK 54,596 1.52 82,986 32,907 1.62 53,309

JPY 137,752 0.39 53,723 - - -

23. SEGMENT INFORMATION

Segment information is provided to the Group’s chief operating decision maker for allocating resources to

the segments and assessing their performance. The information focuses on every type of products sold or

services provided. The reportable segment is optical storage drives. The Corporation also had other

operating segments that did not exceed the quantitative threshold.

The Corporation uses net profit as the measure of segment profit and the basis of performance assessment.

There was no material inconsistency between the accounting policies of the operating segment and the

accounting policies described in Note 2.

- 39 -

The Parent Company’s operating segment information is as follows:

a. Industry financial information


Optical Storage

Drives Others Elimination Total

Sales from external

customers $ 50,605,266 $ 10,674,974 $ - $ 61,280,240

Interest income - 231,445 - 231,445

Operating profit 2,336,941 490,517 - 2,827,458


Optical Storage

Drives Others Elimination Total

Sales from external

customers $ 46,038,892 $ 12,719,347 $ - $ 58,758,239

Interest income - 140,198 - 140,198

Operating profit 2,526,957 602,794 - 3,129,751

b. Geographic information

Sales Noncurrent Assets

Year Ended December 31 December 31

2011 2010 2011 2010

Taiwan $ 12,224,823 $ 12,305,615 $ 5,939,970 $ 6,374,031

Asia 30,902,312 29,385,352 4,781,325 4,566,454

United States 11,387,130 12,395,232 1,908 2,302

Europe 4,927,790 4,354,985 51,552 516,257

Others 1,838,185 317,055 - -

$ 61,280,240 $ 58,758,239 $ 10,774,755 $ 11,459,044

The geographic information is presented by billing regions. Noncurrent assets include property, plant

and equipment, intangible assets and other assets but exclude financial instruments and deferred tax

assets.

c. Production information

The Group engages mainly in manufacturing and selling optical storage and related components.

d. Major customers representing at least 10% of gross sales


2011 2010

Amount % Amount %

Customer A $ 21,054,673 34 $ 8,017,482 14

Customer B 13,654,867 22 13,600,768 23

Customer C 10,521,740 17 5,225,617 9

Customer D 5,942,862 10 3,540,765 6

Customer E 5,822,791 10 6,174,803 11

Lite-On IT Corp. and Subsidiaries · LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF...

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