Shih Wei Navigation Co., Ltd. and Subsidiaries · Shih Wei Navigation Co., Ltd. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and

Shih Wei Navigation Co., Ltd. and Subsidiaries

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

- 2 -

SHIH WEI NAVIGATION CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

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

2012 2011 2012 2011

ASSETS Amount % Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Amount % Amount %

CURRENT ASSETS CURRENT LIABILITIES

Cash (Note 4) $ 996,065 3 $ 1,981,114 8 Short-term bank loans (Notes 10 and 19) $ 295,555 1 $ 557,745 2

Financial assets at fair value through profit or loss - current Notes and accounts payable 168,561 1 131,185 1

(Notes 2 and 5) 156,929 1 89,650 - Income tax payable (Notes 2 and 15) 37,959 - 132,145 1

Held-to-maturity financial assets - current (Notes 2 and 6) - - 15,138 - Accrued expenses 138,775 - 123,593 1

Accounts receivable (Note 2) 29,360 - 20,022 - Financial liabilities at fair value through profit or loss -

Inventories (Note 2) 258,086 1 163,659 1 current (Notes 2 and 5) 30,440 - 159,020 1

Noncurrent assets classified as held for sale (Notes 2 and 8) 16,103 - 848,813 3 Receipts in advance (Note 8) 67,355 - 352,370 1

Restricted assets - current (Notes 10 and 19) - - 623,514 3 Current portion of convertible bonds payable (Notes 2, 5 and 11) 429,738 2 - -

Other current assets (Notes 15 and 18) 258,585 1 223,398 1 Current portion of long-term bank loans (Notes 12 and 19) 2,166,922 8 1,579,131 6

Other current liabilities (Notes 2 and 15) 257,529 1 50,821 -

Total current assets 1,715,128 6 3,965,308 16

Total current liabilities 3,592,834 13 3,086,010 13

INVESTMENTS

Financial assets carried at cost - noncurrent (Notes 2 and 7) 28,388 - 28,421 - LONG-TERM LIABILITIES

Financial liabilities at fair value through profit or loss -

PROPERTY AND EQUIPMENT (Notes 2, 9, 12, 19 and 20) noncurrent (Notes 2, 5 and 11) - - 26,730 -

Cost Convertible bonds payable (Notes 2, 5 and 11) - - 420,118 2

Land 579,422 2 79,937 1 Long-term bank loans (Notes 12 and 19) 17,689,532 61 12,874,898 52

Buildings 30,906 - 30,906 -

Transportation equipment 1,160 - 1,160 - Total long-term liabilities 17,689,532 61 13,321,746 54

Vessel equipment 30,158,043 104 21,559,860 88

Office equipment 2,602 - 2,522 - OTHER LIABILITIES

Leasehold improvements - - 5,675 - Accrued pension cost (Notes 2 and 13) 13,521 - 14,458 -

Total cost 30,772,133 106 21,680,060 89 Guarantee deposits received 288 - 297 -

Less: Accumulated depreciation 4,944,825 17 3,969,149 16 Deferred income tax liabilities - noncurrent (Notes 2 and 15) 79,596 - 129,577 1

25,827,308 89 17,710,911 73

Prepayments for equipment 324,478 1 2,058,910 8 Total other liabilities 93,405 - 144,332 1

Net property and equipment 26,151,786 90 19,769,821 81 Total liabilities 21,375,771 74 16,552,088 68

OTHER ASSETS STOCKHOLDERS' EQUITY

Refundable deposits - noncurrent 38,571 - 32,071 - Capital stock - par value NT$10.00, authorized - 500,000 thousand

Deferred charges (Note 2) 105,595 1 78,578 1 shares; issued and outstanding 366,350 thousand shares 3,663,500 13 3,663,500 15

Restricted assets - noncurrent (Notes 12 and 19) 921,455 3 556,856 2 Capital surplus

Additional paid-in capital from share issuance in excess of par 689,413 3 689,413 3

Total other assets 1,065,621 4 667,505 3 Convertible bonds converted at a price in excess of the common

stock's par value 371,904 1 371,904 2

Equity component of convertible bonds 42,864 - 42,864 -

Others 7,123 - 7,123 -

Total capital surplus 1,111,304 4 1,111,304 5

Retained earnings

Legal reserve 1,356,253 5 1,265,404 5

Special reserve 667,497 2 1,017,521 4

Unappropriated earnings 1,855,463 6 1,488,735 6

Total retained earnings 3,879,213 13 3,771,660 15

Other equity

Cumulative translation adjustments (1,061,045) (4) (659,789) (3)

Net loss not recognized as pension cost (7,820) - (7,708) -

Total other equity (1,068,865) (4) (667,497) (3)

Total stockholders' equity 7,585,152 26 7,878,967 32

TOTAL $ 28,960,923 100 $ 24,431,055 100 TOTAL $ 28,960,923 100 $ 24,431,055 100

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

- 3 -


CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011

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

2012 2011

Amount % Amount %

OPERATING REVENUES (Notes 2 and 18) $ 4,045,636 100 $ 4,061,861 100

OPERATING COSTS (Notes 16 and 18) 3,618,581 89 2,640,639 65

GROSS PROFIT 427,055 11 1,421,222 35

OPERATING EXPENSES (Notes 14, 16 and 18) 200,622 5 188,310 5

OPERATING INCOME 226,433 6 1,232,912 30

NONOPERATING INCOME AND GAINS

Interest income 15,979 - 24,368 1

Dividend income 198 - 12,846 -

Gain on disposal of property and equipment (Notes 2

and 8) 212,533 5 133,359 3

Gain on sale of investments, net (Notes 2, 5 and 7) 419 - 52,014 1

Exchange gains, net (Notes 2 and 5) 283,093 7 - -

Gain on valuation of financial assets, net (Notes 2

and 5) 9,749 - 16,406 1

Gain on valuation of financial liabilities, net (Notes 2

and 5) 62,059 2 - -

Miscellaneous income (Note 18) 200,930 5 91,251 2

Total nonoperating income and gains 784,960 19 330,244 8

NONOPERATING EXPENSES AND LOSSES

Interest expense (Notes 2, 9, 10, 11 and 12) 226,952 6 163,739 4

Loss on disposal of property and equipment (Notes 2

and 8) 27,365 1 - -

Exchange loss, net (Notes 2 and 5) - - 229,826 6

Loss on valuation of financial liabilities, net (Notes 2

and 5) - - 60,663 1

Miscellaneous expense 6,118 - 7,006 -

Total nonoperating expenses and losses 260,435 7 461,234 11

INCOME BEFORE INCOME TAX 750,958 18 1,101,922 27

INCOME TAX (Notes 2 and 15) 93,880 2 193,427 5

CONSOLIDATED NET INCOME $ 657,078 16 $ 908,495 22

ATTRIBUTABLE TO:

(Continued)

- 4 -


CONSOLIDATED STATEMENTS OF INCOME


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

2012 2011

Amount % Amount %

Stockholders of the parent $ 657,078 16 $ 908,495 22

Minority interest - - - -

$ 657,078 16 $ 908,495 22

2012 2011

Before

Income

Tax

After

Income

Tax

Before

Income

Tax

After

Income

Tax

EARNINGS PER SHARE (Note 17)

Basic $ 2.05 $ 1.79 $ 3.01 $ 2.48

Diluted $ 2.01 $ 1.76 $ 2.98 $ 2.47

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

- 5 -


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


(In Thousands of New Taiwan Dollars, Except Cash and Stock Dividends Per Share)

Capital Stock Issued and Other Equity (Notes 2, 13 and 14)

Outstanding (Note 14) Capital Surplus Retained Earnings (Note 14) Cumulative Net Loss Not Total

Shares (Notes 2, 11 Unappropriated Translation Recognized as Stockholders'

(Thousands) Amount and 14) Legal Reserve Special Reserve Earnings Adjustments Pension Cost Equity

BALANCE, JANUARY 1, 2011 366,350 $ 3,663,500 $ 1,111,304 $ 1,151,902 $ 70,431 $ 2,739,882 $ (1,011,559) $ (5,962) $ 7,719,498

Appropriation of the 2010 earnings

Legal reserve - - - 113,502 - (113,502) - - -

Special reserve - - - - 947,090 (947,090) - - -

Cash dividends - $3 per share - - - - - (1,099,050) - - (1,099,050)

Consolidated net income for the year ended December 31, 2011 - - - - - 908,495 - - 908,495

Translation adjustments on long-term equity method investments - - - - - - 351,770 - 351,770

Change in net loss not recognized as pension cost - - - - - - - (1,746) (1,746)

BALANCE, DECEMBER 31, 2011 366,350 3,663,500 1,111,304 1,265,404 1,017,521 1,488,735 (659,789) (7,708) 7,878,967

Appropriation of the 2011 earnings

Legal reserve - - - 90,849 - (90,849) - - -

Special reserve - - - - (350,024) 350,024 - - -

Cash dividends - $1.5 per share - - - - - (549,525) - - (549,525)

Consolidated net income for the year ended December 31, 2012 - - - - - 657,078 - - 657,078

Translation adjustments on long-term equity method investments - - - - - - (401,256) - (401,256)

Change in net loss not recognized as pension cost - - - - - - - (112) (112)

BALANCE, DECEMBER 31, 2012 366,350 $ 3,663,500 $ 1,111,304 $ 1,356,253 $ 667,497 $ 1,855,463 $ (1,061,045) $ (7,820) $ 7,585,152

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

- 6 -


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands of New Taiwan Dollars)

2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Consolidated net income $ 657,078 $ 908,495

Adjustments to reconcile consolidated net income to net cash provided

by operating activities

Depreciation 1,170,088 899,387

Amortization 89,920 61,737

Amortization of deferred charges classified as interest expense 3,750 2,250

Gain on disposal of property and equipment, net (185,168) (133,359)

Gain on sale of investments, net (419) (52,014)

Deferred income tax (53,980) (25,577)

Loss (gain) on valuation of financial assets, net (7,375) 2,261

Loss (gain) on valuation of financial liabilities, net (153,356) 62,498

Amortization of discounts on convertible bonds payable 9,620 9,405

Net changes in operating assets and liabilities

Financial assets at fair value through profit or loss (63,506) 42,318

Accounts receivable (10,341) 196

Inventories (102,691) (70,576)

Other current assets (107,342) (14,388)

Notes and accounts payable 39,177 62,934

Income tax payable (94,186) 106,995

Accrued expenses 18,513 10,628

Other current liabilities (23,548) 32,112

Accrued pension cost (1,049) (1,065)

Receipts in advance (26,845) (11,457)

Net cash provided by operating activities 1,158,340 1,892,780

CASH FLOWS FROM INVESTING ACTIVITIES

Increase in advance real estate receipts 573,405 57,947

Increase in deferred marketing expenses (29,199) -

Proceeds of the disposal of financial assets carried at cost - 70,607

Proceed of the disposal of held-to-maturity financial assets 14,787 -

Acquisition of investment accounted for by the equity method (99,956) -

Acquisition of property and equipment (7,956,960) (4,524,764)

Proceeds of the disposal of property and equipment, and deferred

charges 263,966 293,910

Decrease (increase) in refundable deposits (6,500) 400

Increase in deferred charges (123,675) (44,868)

Decrease in restricted assets 226,908 222,848

Net cash used in investing activities (7,137,224) (3,923,920)

CASH FLOWS FROM FINANCING ACTIVITIES

Decrease in short-term bank loans (247,503) (628,035)

Increase in long-term bank loans 5,822,584 3,183,181

(Continued)

- 7 -





2012 2011

Decrease in guarantee deposits received (4) (44,910)

Cash dividends (549,525) (1,099,050)

Net cash provided by financing activities 5,025,552 1,411,186

EFFECT OF EXCHANGE RATE CHANGES (31,717) 52,365

NET DECREASE IN CASH (985,049) (567,589)

CASH, BEGINNING OF YEAR 1,981,114 2,548,703

CASH, END OF YEAR $ 996,065 $ 1,981,114

SUPPLEMENTAL CASH FLOW INFORMATION

Interest paid (excluding capitalized interest) $ 209,315 $ 141,409

Income tax paid $ 242,046 $ 112,009

NONCASH INVESTING AND FINANCING ACTIVITIES

Current portion of long-term bank loans $ 2,166,922 $ 1,579,131

Property and equipment reclassified to noncurrent assets classified as

held for sale $ - $ 848,813

Decrease in advance real estate receipts (classified under other current

liabilities) $ 828,462 $ -

Decrease in noncurrent assets classified as held for sale $ 832,710 $ -

Decrease in deferred marketing expenses (classified under other

current assets) $ 74,550 $ -

INVESTING ACTIVITIES AFFECTING BOTH CASH AND

NONCASH ITEMS

Acquisition of fixed assets

Acquisition of property, plant and equipment $ 7,960,848 $ 4,524,764

Increase in payable for equipment purchased (classified under

accounts payable) (3,888) -

Cash paid $ 7,956,960 $ 4,524,764

(Continued)

- 8 -





The Corporation acquired 100% equity interest in the Gueishan Island Marine Biology Development Co., Ltd.

in December 2012. The fair values of the acquired assets and liabilities are summarized as follows:

Cash $ 44

Other current assets 827

Property and equipment 578,053

Accrued expenses (443)

Current portion of long-term bank loans (160,000)

Net assets 418,481

Percentage of ownership acquired 100%

418,481

Fair value of the net identifiable assets acquired in excess of the acquisition cost (78,481)

340,000

Payable on the equity investment (240,000)

Cash paid $ 100,000

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

- 9 -


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

1. ORGANIZATION AND OPERATIONS

Shih Wei Navigation Co., Ltd. (the “Corporation”) was incorporated in March 1985 under the Company

Act of the Republic of China. The Corporation mainly provides cargo shipping services, shipping agency,

and sells and leases ships.

The Corporation’s shares began to be traded on the Taiwan GreTai Securities Market in July 2001 and then

became listed on the Taiwan Stock Exchange in August 2003.

The Corporation and its subsidiaries’ investment relationships and percentages of ownership as of

December 31, 2012 were as follows.

Dong Lien Maritime S.A. Panama

(Dong Lien)

Fortunate Maritime S.A. Panama

(Fortunate)

Grand Ocean Navigation (Panama) S.A. Leader Pescadores S.A. Panama

Elegant Pescadores S.A. (Panama) Beacon Pescadores S.A. Panama

Blossom Pescadores S.A. (Panama) Well Pescadores S.A. Panama

Royal Pescadores S.A. (Panama) Glaring Pescadores S.A. Panama

Brave Pescadores S.A. Vigor Pescadores S.A. Panama

Brilliant Pescadores S.A. Trump Pescadores S.A. Panama

Shining Pescadores S.A. (Panama) Fourseas Pescadores S.A. Panama

Moon Bright Shipping Corporation Fair Pescadores S.A. Panama

Genius Pescadores S.A. (Panama) Huge Pescadores S.A. Panama

Gallant Pescadores S.A. Forever Pescadores S.A. Panama

Grand Pescadores S.A. (Panama) Eternity Pescadores S.A. Panama

Jackson Steamship S.A. Federal Pescadores S.A. Panama

Sunny Pescadores S.A. (Panama) Patriot Pescadores S.A. Panama

Excellent Pescadores S.A. (Panama) Wise Pescadores S.A. Panama

Bright Pescadores S.A. Panama Penghu Pescadores S.A. Panama

Honor Pescadores S.A. Panama Modest Pescadores S.A. Panama

Grand Overseas S.A. Panama Skyhigh Pescadores S.A. Panama

Superior Pescadores S.A. Panama Dancewood Pescadores S.A. Panama

Valor Pescadores S.A. Panama Danceflora Pescadores S.A. PanamaUnicorn Brilliant S.A. Panama Stamina Pescadores S.A. Panama Poseidon Pescadores S.A. Panama Spinnaker Pescadores S.A. Panama (一○一年四月成立)

Pharos Pescadores S.A. Panama Endurance Pescadores S.A. Panama (一○一年十一月成立)

100%

100%

龜山島海洋生物開發股份有限公司(龜山島公司)

100%100%

四維航業股份有限公司

Dong Lien, Fortunate and Dong Lion’s subsidiaries mainly provide cargo shipping services, serve as

shipping agents, and sell, lease and build ships and their spare parts. Gueishan Island mainly provides

resort hotels service.

As of December 31, 2012 and 2011, the Corporation and its subsidiaries had 1,083 and 873 employees,

respectively.

Shih Wei Navigation Co., Ltd.

Gueishan Island Marine Biology

Development Co., Ltd. (Gueishan Island)

(incorporated in April 2012)

(incorporated in November 2012)

- 10 -

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying 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.

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 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 consolidated financial statements shall prevail. However, the

accompanying consolidated 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) for their oversight purposes.

The significant accounting policies of the Corporation and its subsidiaries are summarized as follows:

Basis of Consolidation

The consolidated companies are the Corporation’s direct or indirect subsidiaries of which the Corporation

holds more than 50% of their respective common shares and all other direct or indirect investees over which

the Corporation has substantive control. All significant intercompany transactions or balances were

eliminated during the consolidation.

The Corporation acquired 100% of the stock of Gueishan Island Marine Biology Development Co., Ltd.

(“Gueishan Island”) in December 2012. Thus, Gueishan Island was included in the consolidated financial

statement as of and for the year ended December 31, 2012.

Foreign-currency Transactions

The subsidiaries’ financial statements expressed in foreign currencies have been translated into New

Taiwan dollars at the following exchange rates: Assets and liabilities - year-end spot rate; stockholders’

equity - historical exchange rate; and income statement accounts - current year’s average rate. Differences

resulting from the above translation are recorded as “cumulative translation adjustments” under the

stockholders’ equity.

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 that are carried at cost continue to be stated

at exchange rates at trade dates.

Accounting Estimates

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

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

deferred charges amortized; impairment of assets; income tax; pension cost; bonuses to employees,

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

- 11 -

Current and Noncurrent Assets and Liabilities

Current assets include cash and those 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 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 Instruments 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. The Corporation and its

subsidiaries recognize a financial asset or a financial liability on its balance sheet when the Corporation and

its subsidiaries become parties to the contractual provisions of the financial instrument. A financial asset

is derecognized when the Corporation and its subsidiaries lose control of their contractual rights over the

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

is discharged, canceled 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 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. 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 of financial assets and financial liabilities at the balance sheet date are determined as follows:

Publicly traded stocks - at closing prices; open-end mutual funds - at net asset values; financial assets and

financial liabilities without quoted prices in an active market - at values determined using valuation

techniques; and derivatives - at values calculated using bank-quoted prices.

Noncurrent Assets Classified as Held for Sale

Noncurrent assets that meet the held-for-sale criteria are measured at the lower of carrying amount and fair

value. If the carrying amount exceeds the asset's fair value less costs to sell, an impairment loss is

recognized.

Financial Assets Carried at Cost

Investments in equity instruments with no quoted prices in an active market and with fair values that cannot

be reliably measured, such as non-publicly traded stocks, are measured at their original cost. 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 the recalculation of cost per share. An impairment loss is recognized

when there is objective evidence that the asset is impaired. A reversal of this impairment loss is

disallowed.

- 12 -

Impairment of Assets

If the recoverable amount of an asset (mainly property and equipment and deferred charges) 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. If an impairment loss 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.

Inventories

Inventory is vessel fuel, which is stated at the lower of cost or net realizable value. Inventory write-downs

are made by item.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Borrowing costs directly

attributable to the acquisition or construction of property and equipment are capitalized as part of the cost of

those assets. Major additions, replacements and betterments are capitalized, while maintenance and

repairs are expensed currently.

Depreciation is provided on a straight-line basis over the estimated useful lives, as follows: buildings, 50

years; transportation equipment, 5 years; vessel equipment, 3 to 25 years; office equipment, 3 to 8 years;

leasehold improvements, lease terms. Property and equipment still in use beyond their original estimated

useful lives are further depreciated over their newly estimated useful lives.

The related cost and accumulated depreciation of property and equipment are derecognized from the

balance sheet upon its disposal. Any gain or loss on disposal of the asset is included in nonoperating gains

or losses in the period of disposal.

Deferred Charges

Deferred charges, mainly the costs of vessel overhaul, golf club memberships and syndicated loan fees, are

initially recorded at cost and amortized using the straight-line method over 2 to 3 years, over 20 years and

over loan terms, respectively.

Convertible Bonds

The Corporation first determines the carrying amount of the liability component by measuring the fair value

of a similar liability that does not have an associated equity component, then determines the carrying

amount of the equity component, representing the equity conversion option, by deducting the fair value of

the liability component from the fair value of the convertible bonds as a whole. The liability component

(excluding embedded derivatives) is measured at amortized cost using the effective interest method, while

the embedded non-equity derivatives are measured at fair value. Upon bond conversion, the Corporation

uses the aggregate carrying amount of the liability and equity components of the bonds at the time of

conversion as a basis to record the common shares issued.

Pension

Under the defined benefit pension plan, pension cost is recognized on the basis of actuarial calculations.

Unrecognized net transition obligation and the unrecognized net actuarial gain or loss are amortized using

the straight-line method over the average remaining service years of employees.

- 13 -

Under the defined benefit pension plan, the minimum amount of pension liability should be recognized in

the balance sheet. If the accrued pension liability already shown in the book is less than the minimum

amount, the difference should be recognized as additional pension liability. If the additional liability does

not exceed the sum of unrecognized prior service cost and unrecognized transitional net benefit obligation,

the deferred pension cost account should be charged. Deferred pension cost is classified as an intangible

asset. If the additional liability exceeds this sum, the excess should be charged to the net loss not yet

recognized as net pension cost account, which is classified as a reduction of stockholders’ equity.

Under the defined contribution plan, the required monthly contributions to employees’ individual pension

accounts are recognized as pension cost.

Income Tax

The Corporation 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. 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 income 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.

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

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

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

Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts

Revenue is recognized when the earnings process has been completed and the economic benefits associated

with the transaction have been realized or are realizable. The revenues from vessel leases are recognized

over the contract periods. Cargo revenues are recognized when the cargos are transported to the port of

discharge.

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

agreed between the Corporation and its subsidiaries and the customers for service rendered in the normal

course of business. 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.

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

receivable. The Corporation and its subsidiaries make this review by an aging analysis of the outstanding

receivables and assessing prior years’ collectability of receivables and economic situation.

Reclassifications

Certain accounts in the financial statements as of and for the year ended December 31, 2011 have been

reclassified to conform to the presentation of the financial statements as of and for the year ended

December 31, 2012.

- 14 -

3. ACCOUNTING CHANGE

Operating Segments

On January 1, 2011, the Corporation and its subsidiaries adopted the newly issued Statement of Financial

Accounting Standards (SFAS) No. 41 - “Operating Segments.” The statement requires that segment

information be disclosed on the basis of the information about the components of the Corporation 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 Corporation'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 Corporation and its

subsidiaries only changed the presentation of segment information.

4. CASH

December 31

2012 2011

Cash on hand $ 303 $ 142

Checking accounts and demand deposits 789,289 464,748

Time deposits 206,473 1,516,224

$ 996,065 $ 1,981,114

5. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

December 31

2012 2011

Financial assets held for trading - current

Mutual funds $ 150,662 $ 83,376

Domestic quoted stocks 4,875 5,212

Forward exchange contracts 1,392 1,062

$ 156,929 $ 89,650

Financial liabilities held for trading - current

Liability component of convertible bonds (Note 11) $ 28,980 $ -

Currency option contracts 1,460 1,171

Forward exchange contracts - 157,849

$ 30,440 $ 159,020

Financial liabilities held for trading - noncurrent

Liability component of convertible bonds (Note 11) $ - $ 26,730

The Corporation and its subsidiaries used forward exchange and currency option contracts in 2012 and

2011 for trading purposes. These contracts were classified as financial instruments held for trading and

were measured at fair value because the hedge accounting requirement does not apply to them.

- 15 -

Outstanding forward exchange contracts as of December 31, 2012 and 2011 were as follows:

Contract Amount

Currency Maturity Date (In Thousands)

December 31, 2012

Buy Yen/USD 2013.12.30 JPY516,300/USD6,000


Buy Yen/USD 2013.12.30 JPY42,740/USD500

December 31, 2011

Sell Yen/USD 2012.02.02 JPY150,000/USD1,899

Buy Yen/USD 2012.10.31 JPY2,003,320/USD23,200




Buy Yen/USD 2013.12.30 JPY42,740/USD500

Outstanding currency option contracts as of December 31, 2012 and 2011 were as follows:

Contract Amount

(In Thousands) Exercise Price Maturity Date

December 31, 2012

Sell USD put option USD 1,000 JPY81/USD1 2013.01.07

Sell USD call option USD 1,000 USD1.28/EUR1 2013.01.07

Sell USD put option USD 1,000 JPY80.8/USD1 2013.01.09

Sell USD call option USD 1,000 JPY86.25/USD1 2013.01.16

Sell JPY call option JPY 300,000 JPY83/USD1 2013.01.21

Sell USD call option USD 1,000 USD1.025/AUD1 2013.01.22



Sell JPY call option JPY 63,000 JPY80.5/USD1 2013.02.06

Sell JPY call option JPY 81,000 JPY81/USD1 2013.02.18

Sell USD put option USD 1,000 JPY81/USD1 2013.02.18

December 31, 2011

Sell USD call option USD 1,000 NTD30.6/USD1 2012.01.13

Sell USD put option USD 1,000 NTD30/USD1 2012.01.13

Sell USD call option USD 1,000 JPY79.5/USD1 2012.01.17


Sell USD call option USD 1,000 USD1.28/EUR1 2012.01.19

Sell USD put option USD 1,000 NTD29.95/USD1 2012.01.30





Net gains on financial assets held for trading were $10,168 thousand in 2012 and $17,568 thousand in 2011,

respectively. Net gains and net losses on financial liabilities held for trading were $66,352 thousand in

2012 and $61,683 thousand in 2011, respectively.

- 16 -

6. HELD-TO-MATURITY FINANCIAL ASSETS

December 31

2012 2011

Bond investments - Deutsche Bank Aktiengesellschaft $ - $ 15,138

The Corporation and its subsidiaries bought three-year corporate bonds issued by Deutsche Bank

Aktiengesellschaft, with face values of US$500 thousand on June 4, 2009 and a coupon interest rate of 3%.

Interest is calculated annually. The principal is fully repayable on the maturity date.

7. FINANCIAL ASSETS CARRIED AT COST

December 31

2012 2011

Domestic unlisted common stocks

Lustrous Technology Ltd. $ 10,888 $ 10,888

Overseas unlisted common stocks

K/S Danred I (investment cost: US$519 thousand) 16,721 16,721

Lando Co., Ltd. (investment cost: ￥3,000 thousand) 779 812

$ 28,388 $ 28,421

The above equity investments, which had no quoted prices in an active market and of which fair values

could not be reliably measured, were carried at cost.

8. NONCURRENT ASSETS CLASSIFIED AS HELD FOR SALE

December 31

2012 2011

Land and building in the Chang-an section in Taipei City $ 16,103 $ 848,813

The Corporation entered into a joint construction contract with Wang Tai Construction Co., Ltd. (“Wang

Tai”) on February 12, 2009. Under the contract, the Corporation provided land in the Chang-an section in

Taipei City and Wang Tai provided the construction fund. After the completion of the construction, the

Corporation and Wang Tai will own 61 percent and 39 percent of the entire land and building, respectively.

Based on the joint construction contract, the land, the buildings and the buildings under construction, the

financing fund, the proceeds of the sales of land and buildings, and the related interest income should be

entrusted to Mega International Commercial Bank Co., Ltd. As of September 30, 2011, the land was

classified as held for sale because the project was expected to be completed and sold within one year. In

January 2012, the real estate title to the project was transferred, and the Corporation acquired the buildings

ownership under the contract. The fair value of transferred-in assets, buildings, amounted to $320,304

thousand and the cost of transferred-out assets, land, amounted to $347,669 thousand. The loss of $27,365

thousand was recognized from the exchange of assets.

- 17 -

In 2009, the Corporation entered into presale contracts with third parties and related parties for the third and

higher floors of the buildings. The related land rights of the above joint construction project amounted to

$1,567,550 thousand, including related-party transactions amounting to $135,800 thousand with Lan

Jun-De, Lin Hui-Ling and Chen Huo-Tsai. Proceeds of the presales of the residential buildings (and

related land rights) were split between the Corporation and Wang Tai at a ratio of 55.65% to 44.35%, and

those from the presales of the parking spaces (and related land rights) were split at a ratio of 52.44% to

47.56%. As of December 31, 2011, the Corporation had collected $255,057 thousand of the proceeds of

the project, including those from related-party transactions amounting to $26,315 thousand, which was

classified as receipts in advance. In addition, the Corporation sold the first and second floors of the

buildings from this project to related parties, Liang Yu Investment Co. and Chi Huan Investment Co., for

$227,371 thousand. As of December 31, 2012, the real estate title to this project had been transferred to

the counter-parties and the Corporation collected total proceeds of $1,092,428 thousand. The gain of

$212,533 thousand on property disposal, including those from related-party transactions amounting to

$69,926 thousand, is the total proceeds of the projects of $1,092,428 thousand net of (a) the carrying

amounts of $805,345 thousand of the building and (b) marketing expenses and other expenses of $74,550

thousand.

9. PROPERTY AND EQUIPMENT

Accumulated depreciation consisted of:

December 31

2012 2011

Buildings $ 9,353 $ 8,267

Transportation equipment 1,080 886

Vessel equipment 4,932,676 3,953,829

Office equipment 1,716 1,309

Leasehold improvements - 4,858

$ 4,944,825 $ 3,969,149

Information on capitalized interest is as follows:

2012 2011

Capitalized interest $ 4,169 $ 14,163

Capitalization rates 0.92%-1.944% 0.86%-1.72%

10. SHORT-TERM BANK LOANS

December 31

2012 2011

Bank credit loans: Due in January 2013, 1.30% interest per annum

in 2012

$ 200,000 $ -

Bank credit loans: US$3,290 thousand, due in May 2013, 1.21%

interest per annum in 2012; due in May 2012, 1.50% interest per

annum in 2011

95,555 99,618

Secured bank loans: ￥993,000 thousand, due in January 2012,

0.87% interest per annum in 2012

- 387,814

Secured bank loans: US$2,322 thousand, due in February 2012,

1.42% interest per annum in 2012

- 70,313

- 18 -

$ 295,555 $ 557,745

U.S. certificates of deposit were used as collaterals for the above secured bank loans.

11. CONVERTIBLE BONDS PAYABLE

On January 14, 2010, the Corporation made a third issue of five-year unsecured convertible bonds, with a

face value of $450,000 thousand and a coupon rate of 0%. The effective interest rate was 2.27%. On the

third anniversary of issuance, the bondholders may require the Corporation to buy back their bonds at

103.03% of face value. The bondholders may request the Corporation to convert the bonds into the

Corporation’s common stock starting from one month after the issuance date to 10 days before the due date.

The conversion price at the issuance of the bonds was set at $46.2 which is required to be adjusted in

accordance with the bond agreement. The Corporation should redeem the remaining bonds at face value

upon maturity. During the period from one month after the issuance date to 40 days before the due date, if

the closing price of the Corporation’s common stock at the Taiwan Stock Exchange reaches 130% of the

conversion price for a period of 30 consecutive trading days, or the total amount of outstanding bonds is

less than 10% of the total issued amount, the Corporation may redeem the remaining bonds at a price

calculated using a predetermined formula.

The Corporation had adjusted the conversion price for the capital increase by cash in accordance with bond

conversion terms. As of December 31, 2012, the adjusted conversion price was $36.48.

As of December 31, 2012, bondholders did not exercise convertible rights and the Corporation did not

redeem any outstanding convertible bonds.

Convertible bond information based on Statement of Financial Accounting Standards No. 36 - “Financial

Instruments: Disclosure and Presentation” is as follows:

December 31

2012 2011

Face value of convertible bonds $ 450,000 $ 450,000

Liability component (1,800) (1,800)

Equity component (42,864) (42,864)

405,336 405,336

Transaction costs (3,500) (3,500)

Carrying amount of convertible bonds payable 401,836 401,836

Amortized bond discount 27,902 18,282

Convertible bonds payable 429,738 420,118

Less: Current portion of convertible bonds payable (429,738) -

$ - $ 420,118

- 19 -

12. LONG-TERM BANK LOANS

December 31

2012 2011

a. Eight-year secured bank loans: US$526,730 thousand and

￥1,650,942 thousand in 2012 and US$228,618 thousand and

￥8,149,857 thousand in 2011, with interest rate from 0.80% to

2.06% and from 0.86% to 2.01%, respectively; repayable in 32

quarterly installments between August 2011 and November 2020 $ 15,851,575 $ 10,104,315

b. Three-year secured bank loans: Interest rate from 1.25% to

1.44% in 2012 and from 1.25% to 1.45% in 2011, respectively;

the credit period revolved until August and October in 2014,

one-time repayment in every end of credit period 700,000 200,000

c. Eighteen-month credit bank loans: Interest rate of 1.538%;

one-time repayment in June 2014 600,000 -

d. Three-year credit bank loans: Interest rate from 1.30% to

1.35%; one-time repayment in March 2015 400,000 -

e. Ten-year secured bank loans: US$10,920 thousand in 2012 and

US$11,990 thousand in 2011, with interest rate of 1.06% and

1.12%, respectively; repayable in 40 quarterly installments until

December 2018 317,117 362,997

f. Three-year credit bank loans: Interest rate from 1.681% to

1.687%; repayable in monthly installments after 12 months from

the drawdown date until August 2015 300,000 -

g. Two-year credit bank loans: Interest rate from 1.04% to 1.08%

in 2012 and from 0.95% to 1.10% in 2011, respectively;

originally due in February 2013, with maturity extend to

February 2014, with one-time repayment 250,000 250,000

h. Three-year secured bank loans: US$8,000 thousand in 2012,

with interest rate from 0.82% to 0.84%; one-time repayment in

November 2015 232,320 -

i. Seven-year secured bank loans: US$7,583 thousand in 2012

and US$13,972 thousand in 2011, with interest rate from 1.095%

to 1.712% and from 1.51% to 1.71%, respectively; repayable in

28 quarterly installments until June 2018 220,220 423,006

j. Three-year secured bank loans: Interest rate of 1.72%;

repayable in 36 monthly installments until July 2015 187,198 -

k. Eighteen-month credit bank loans: US$6,410 thousand, with

interest rate from 1.355% to 1.498%; one-time repayment in

January 2014 186,154 -

l. Four-year secured bank loans: Interest rate of 2.805%;

one-time repayment in September 2013 160,000 -

m. Five-year secured bank loans: US$4,690 thousand in 2012 and

US$5,530 thousand in 2011, with interest rate of 1.012% and

1.20% respectively; repayable in 20 quarterly installments until

February 2015 136,198 262,243 167,421

n. Three-year secured bank loans: US$3,300 thousand, with

interest rate of 1.03%; one-time repayment in November 2014 95,832 -

o. Three-year secured bank loans: Interest rate of 1.5% in 2012

and from 1.20% to 1.50% in 2011; repayable in 36 monthly

installments until December 2014 80,408 115,000

p. Two-year credit bank loans: Interest rate from 1.30% to 1.40%;

one-time repayment in August 2013 80,000 80,000

(Continued)

- 20 -

December 31

2012 2011

q. Three-year credit bank loans: Interest rate of 1.50% in 2012

and from 1.20% to 1.50% in 2011, respectively; repayable in 36

monthly installments until December 2014 $ 59,432 $ 85,000

r. Syndicated bank loan: Interest rate from 1.606% to 1.633% in

2012 and 1.359% to 1.693% in 2011 - 1,080,000

s. Eighteen-month credit bank loans: Interest rates of 1.13% in

2012 and 2011; one-time repayment in June 2013; early

repayment was made in June 2012 - 600,000

t. Secured bank loans: US$10,663 thousand and ￥390,000

thousand, with interest from 1.00% to 1.51%; repayable in 32

quarterly installments from the date on which the final loan

drawdown is made - 475,124

u. Three-year credit bank loans: Interest rate of 1.50% in 2012

and from 1.35% to 1.50% in 2011, respectively; the credit period

originally due in December 2014, with one-time repayment;

early repayment was made in March 2012 - 300,000

v. Four-year and seven-month secured bank loans: Interest rate

from 1.50% to 1.72%; repayable in 19 quarterly installments and

repay $120,000 thousand in last time until August 2015; early

repayment was made in February 2012 - 211,166

Less: Current portion (2,166,922) (1,579,131)

$ 17,689,532 $ 12,874,898

(Concluded)

In July 2010, the Corporation entered into a syndicated secured facility agreement with Industrial Bank of

Taiwan and seven other banks for loan (r), as follows:

a. The credit line is $1.8 billion and the first loan drawdown should not be less than 60% of the credit line.

The first repayment is due on the 18th month from the first loan drawdown date. The credit line will

subsequently be decreased to zero over four periods semiannually. If the credit line drawdown

exceeds the available credit line on the date the credit line is decreased, the Corporation should repay

this excess immediately.

b. The credit period is three years from the first loan drawdown date.

c. Dong Lien Maritime S.A. Panama (“Dong Lien”) used its U.S. certificate of deposit as a collateral for a

syndicated loan. Under the syndicated loan agreement, the Corporation directly own 100% of Dong

Lien and Fortunate Maritime S.A. Panama (“Fortunate”). In addition, the Corporation should have the

power to participate in the operating policy decisions of Dong Lien and Fortunate. Further, Dong Lien

should directly own 100% of the 42 subsidiaries listed on the loan agreement.

d. The Corporation should maintain the following financial ratios under the syndicated loan agreement:

1) Current ratio - the ratio of current assets to current liabilities should not be less than 100%;

2) Financial liabilities ratio - the ratio of financial liabilities plus contingent liabilities to tangible net

assets should not exceed 200%;

3) Interest coverage ratio - the ratio of income before taxes, interest expense, depreciation and

amortization to interest expense should not be less than 400%; and

- 21 -

4) Tangible net assets (equities minus intangible assets) should not be less $6.5 billion.

The above ratios should be calculated on the basis of the audited semiannual and annual consolidated

financial statements accepted by the bank’s documentary agent. However, the Corporation failed to meet

the current ratio and the financial liability ratio specified in the syndicated loan agreement on June 30,

2012. As of June 30, 2011, the Corporation reclassified the syndicated loans over one year from the

balance sheet date of NT$1,080,000 thousand to current portion of long-term bank loans. In September

2011, two thirds of the banking syndicate agreed to waive the examination of the required ratios as shown

in the audited consolidated financial statements for the six months ended June 30, 2011. Early repayment

of the syndicated bank loan was made in June 2012.

New Taiwan dollar demand deposits and U.S. certificate of deposit were used as collaterals for the above

loan (b); U.S. certificate of deposit for loan (h) and (n); land for loan (l); land and building for loan (o); and

vessel equipment, for other secured bank loans.

13. PENSION PLANS

The pension plan adopted by the Corporation under the Labor Pension Act (LPA) is a defined contribution

plan. Under the LPA, the Corporation makes monthly contributions to employees’ individual pension

accounts at 6% of monthly salaries and wages. Related pension costs were $3,942 thousand in 2012 and

$3,503 thousand in 2011.

Based on the defined benefit plan adopted by the Corporation under the Labor Standards Law, pension

payments are calculated on the basis of the length of service and average basic pay of the six months before

retirement. The employee earns two base units each year for the first 15 years of service, and one base

unit for each additional year thereafter, but not more than 45 base units in total.

The Corporation contributes amounts equal to 4.3% of total monthly salaries and wages to a pension fund

administered by the pension fund monitoring committee. The pension fund is deposited in the Bank of

Taiwan in the committee’s name.

Other information on the defined benefit plan of the Corporation is as follows:

a. Changes in the pension funds:

2012 2011

Balance, beginning of year $ 12,153 $ 10,045

Contributions 2,152 1,980

Interest income 127 128

Balance, end of year $ 14,432 $ 12,153

b. Components of net periodic pension cost

2012 2011

Interest cost $ 602 $ 604

Projected return on plan assets (243) (226)

Amortization 743 537

Net periodic pension cost $ 1,102 $ 915

- 22 -

c. Reconciliation of funded status of the plan and accrued pension cost as of December 31, 2012 and 2011

December 31

2012 2011

Benefit obligation

Vested benefit obligation $ 16,417 $ 15,956

Non-vested benefit obligation 11,536 10,655

Accumulated benefit obligation 27,953 26,611

Additional benefit based on future salaries 3,497 3,482

Projected benefit obligation 31,450 30,093

Fair value of plan assets (14,432) (12,153)

Funded status 17,018 17,940

Unrecognized net loss (11,317) (11,190)

Additional liability 7,820 7,708

Accrued pension cost $ 13,521 $ 14,458

Vested benefit $ 16,417 $ 15,956

d. Actuarial assumptions as of December 31, 2012 and 2011

December 31

2012 2011

Discount rate used in determining present values 1.75% 2.00%

Future salary increase rate 2.00% 2.00%

Expected rate of return on plan assets 1.75% 2.00%

14. STOCKHOLDERS’ EQUITY

Under the Company Law, the capital surplus from shares issued in excess of par (additional paid-in capital

from issuance of common shares and conversion of bonds) may be used to offset a deficit; in addition,

when the Corporation has no deficit, such capital surplus may be distributed as cash dividends or

transferred to capital (limited to a certain percentage of the Corporation’s paid-in capital and once a year).

The capital surplus from employee stock options may not be used for any purpose.

According to the Corporation’s Articles of Incorporation, the legal reserve should be set aside at 10% of

annual income less any deficit. Under Company Law, after a special reserve is appropriated or reversed,

the remainder of income adding prior accumulated unappropriated retained earnings should be distributed at

not less than 2% of employees’ bonus and at not higher than 5% of remuneration to directors and

supervisors. And the above distributions should be approved by the board of directors at stockholders

meeting.

The Corporation’s dividend policy is based on the prudence principle, under which the Corporation

considers the long-term financing structure and operation. Thus, when earnings and funds become

sufficient for operating and expanding, then cash dividends or stock dividends will be distributed. The

most recent dividend policy provides for the distribution of stock dividends at up to 50% of earnings and

cash dividends of at least 50%.

- 23 -

For 2012 and 2011, earnings appropriations included the following: The bonuses to employees were

estimated at $12,000 thousand and $16,000 thousand, respectively, and the remunerations to directors and

supervisors were estimated both at $8,000 thousand, which were 2.83%, 2.79%, 1.89% and 1.39%,

respectively, of appropriations of earnings. Material differences between these estimates and the amounts

proposed by the Board of Directors in the following year are adjusted for also in the following year. If the

actual amounts subsequently resolved by the stockholders differ from the proposed amounts, the differences

are recorded in the year of stockholders’ resolution as a change in accounting estimate. If a share bonus is

resolved to be distributed to employees, the number of shares is determined by dividing the amount of the

share bonus by the closing price (after considering the effect of cash and stock dividends) of the shares of

the day immediately preceding the stockholders’ meeting.

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

balance of certain stockholders’ equity accounts (including net loss not recognized as pension cost and

cumulative translation adjustments) 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 Corporation’s paid-in capital. This reserve

may be used to offset a deficit. If the Corporation has no deficit and the legal reserve has exceeded 25%

of the Corporation’s paid-in capital, the excess may be transferred to capital or distributed in cash.

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

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

The appropriations from earnings for 2011 and 2010 were approved in the stockholders’ meetings on June

28, 2012 and June 24, 2011, respectively. The appropriations, including dividends per share, were as

follows:

Appropriation of Earnings

Dividends Per Share

(NT$)

For For For For

Year 2011 Year 2010 Year 2011 Year 2010

Legal reserve $ 90,849 $ 113,502 $ - $ -

(Reversal of appropriation) appropriation of

special reserve

(350,024) 947,090 - -

Cash dividends 549,525 1,099,050 1.50 3.00

$ 290,350 $ 2,159,642 $ 1.50 $ 3.00

The bonus to employees and the remuneration to directors and supervisors for 2011 and 2010 approved in

the stockholders’ meetings on June 28, 2012 and June 24, 2011, respectively, were as follows:

Years Ended December 31

2011 2010

Bonus to

Employees

Remuneration

to Directors

and

Supervisors

Bonus to

Employees

Remuneration

to Directors

and

Supervisors

Amounts approved in stockholders’

meetings $ 16,000 $ 8,000 $ 23,000 $ 10,000

Amounts recognized in respective

financial statements 16,000 8,000 23,000 10,000

$ - $ - $ - $ -

- 24 -

There were no differences between the approved amounts of the bonus to employees and the remuneration

to directors and supervisors in the stockholders’ meeting and the accrual amounts reflected in the financial

statements for the years ended December 31, 2011 and 2010.

The appropriation of the 2012 earnings was proposed by the board of directors on March 26, 2013. The

appropriations, including dividends per share, were as follows:

Appropriation

of Earnings

Dividends Per

Share

Legal reserve $ 65,708 $ -

Reversal of special reserve 401,368 -

Cash dividends 403,350 1.00

$ 870,426 $ 1.00

The board of directors also approved $12,000 cash bonus to employees and $8,000 thousand remuneration

to directors and supervisors. The resolved amounts of the bonus to employees and the remuneration to

directors and supervisors were equal to the accrual amounts reflected in the financial statements for the year

ended December 31, 2012.

The 2012 appropriations of earnings, bonus to employees and remuneration to directors and supervisors

will be resolved by the stockholders in their meeting scheduled for June 19, 2013.

For the Corporation to invest in its subsidiaries, the board of directors resolved on November 1, 2012 to

have a capital increase by cash, which was approved by the Securities and Futures Bureau on December 18,

2012. The board resolved to issue 37,000 thousand common shares at NT$19.5 per share, with a NT$10

par value and the record date of March 8, 2013.

Information on the bonus to employees, directors and supervisors is available on the Market Observation

Post System web site of the Taiwan Stock Exchange.

15. INCOME TAX

a. A reconciliation of income tax expense based on income before income tax at the statutory rate of 17%

and income tax expense was as follows:

2012 2011

Income tax expense at the statutory rate $ 127,663 $ 187,327

Tax effect of adjusting items:

Permanent differences (95,596) 6,102

Temporary differences 53,980 25,577

Additional tax at 10% of unappropriated earnings 61,814 -

Current income tax expense 147,861 219,006

Deferred income tax expense

Temporary differences (53,980) (25,577)

Adjustments for prior years’ tax (1) (2)

Income tax expense $ 93,880 $ 193,427

Income tax payables as of December 31, 2012 and 2011 were net of prepaid income taxes of $109,902

thousand and $86,861 thousand, respectively.

- 25 -

b. Deferred income tax assets (liabilities) were as follows:

December 31

2012 2011

Current (classified under other current assets (liabilities))

Unrealized exchange (gains) loss $ 909 $ (1,967)

Difference in amortized lives 410 -

$ 1,319 $ (1,967)

Noncurrent

Estimated cash dividend income - equity method $ (88,511) $ (139,383)

Cumulative translation adjustments 7,891 8,604

Accrued pension cost 1,024 1,202

Loss carryforwards 155 -

Less: Valuation allowance (155) -

Deferred income tax liabilities $ (79,596) $ (129,577)

c. Information on the integrated income tax is as follows:

December 31

2012 2011

Imputation credit account balance $ 366,733 $ 195,659

The creditable ratios for the distribution of the earnings of 2012 and 2011 were 21.81% (estimate) and

21.43% (actual), respectively.

The ratio for the imputation credits allocable to the Corporation’s stockholders is based on the balance

of the imputation credit amount (ICA) as of the date of dividend distribution. The expected creditable

ratio for the 2012 earnings, with the current income tax payable taken into consideration, may be

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

d. Income tax returns through 2010 and undistributed earnings returns through 2009 of the Corporation

and Gueishan Island have been assessed and cleared by the tax authorities.

e. Incomes of other subsidiaries incorporated in Panama are tax-exempt.

16. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES

2012

Operating

Cost of Sales Expenses Total

Personnel

Payroll $ 748,451 $ 85,647 $ 834,098

Insurance 3,816 6,568 10,384

Pension 914 4,130 5,044

Others 145,296 3,274 148,570

$ 898,477 $ 99,619 $ 998,096

Depreciation $ 1,167,497 $ 2,591 $ 1,170,088

Amortization $ 87,972 $ 1,948 $ 89,920

- 26 -

2011

Operating

Cost of Sales Expenses Total

Personnel

Payroll $ 619,440 $ 87,511 $ 706,951

Insurance 4,048 6,070 10,118

Pension 873 3,545 4,418

Others 120,526 3,127 123,653

$ 744,887 $ 100,253 $ 845,140

Depreciation $ 896,174 $ 3,213 $ 899,387

Amortization $ 60,049 $ 1,688 $ 61,737

17. EARNINGS PER SHARE

The numerators and denominators used in calculating basic earnings per share (EPS) were as follows:

EPS (NT$)

Amounts (Numerator) Shares Before After

Before After (Denominator) Income Income

Income Tax Income Tax (In Thousands) Tax Tax

Year ended December 31, 2012

Basic EPS

Income attributable to common

stockholders $ 750,958 $ 657,078 366,350 $ 2.05 $ 1.79

Effect of dilutive potential common

stock

Bonuses to employees - - 832

Convertible bonds 11,870 11,870 12,336

$ 762,828 $ 668,948 379,518 $ 2.01 $ 1.76

Year ended December 31, 2011

Basic EPS

Income attributable to common

stockholders $ 1,101,922 $ 908,495 366,350 $ 3.01 $ 2.48

Effect of dilutive potential common

stock

Bonuses to employees - - 925

Convertible bonds 27,450 27,450 11,646

$ 1,129,372 $ 935,945 378,921 $ 2.98 $ 2.47

The Accounting Research and Development Foundation (ARDF) issued Interpretation 2007-052, which

requires companies to recognize bonuses paid to employees, directors and supervisors as compensation

expenses beginning January 1, 2008. These bonuses were previously recorded as appropriations from

earnings. If the Corporation decides to settle the bonus to employees by cash or shares, the Corporation

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 stockholders resolve

the number of shares to be distributed to employees at their meeting in the following year.

- 27 -

18. RELATED-PARTY TRANSACTIONS

a. Related parties and their relationships with the Corporation

Related Parties

Relationship with the Corporation

and Subsidiaries

Coreocean Maritime S.A. Panama (“Coreocean”) Chairman is an immediate relative of the

Corporation’s chairman

Transformer Maritime S.A. Panama (“Transformer”) Chairman is an immediate relative of the


Efficiency Ship Management Corporation (“Efficiency”) Chairman is an immediate relative of the


Corebright Maritime S.A. Panama (“Corebright”) Chairman is an immediate relative of the


Corebest Maritime S.A. Panama (“Corebest”) Chairman is an immediate relative of the


Coreleader Maritime S.A. Panama (“Coreleader”) Chairman is an immediate relative of the


Corediamond Maritime S.A. Panama (“Corediamond”) Chairman is an immediate relative of the


Corepilot Maritime S.A. Panama (“Corepilot”) Chairman is an immediate relative of the


Corewinner Maritime S.A. Panama (“Corewinner”) Chairman is an immediate relative of the


Oceanlance Maritime S.A. Panama (“Oceanlance”) Related party in substance

Huo Da Investments Co., Ltd. (“Huo Da”) Chairman is an immediate relative of the


Huan Shin Investments Co., Ltd. (“Huan Shin”) Chairman is an immediate relative of the


Luo Pan Investments Co., Ltd. (“Luo Pan”) Chairman is an immediate relative of the


Chi Huan Investment Co. Chairman is an immediate relative of the


Liang Yu Investment Co. Chairman is the spouse of the Corporation’s

chairman

Lan Jun-De Chairman of the Corporation

Chen Huo-Tsai Supervisor of the Corporation

Lin Hui-Ling Senior manager of the Corporation

b. Significant related-party transactions (in addition to those disclosed in Note 8)

2012 2011

Amount % Amount %

Operating revenues

Management income

Coreocean $ 532 - $ 531 -

Transformer 532 - 531 -

Efficiency 532 - 531 -

Corediamond 532 - - -

Corepilot 532 - - -

(Continued)

- 28 -

2012 2011

Amount % Amount %

Corewinner $ 532 - $ - -

Corebright 487 - - -

Oceanlance 355 - - -

Corebest 175 - - -

Coreleader 87 - - -

Commission revenue

Efficiency 1,296 - 1,718 -

Transformer 659 - 1,428 -

Coreocean 643 - 1,279 -

Corepilot 610 - - -

$ 7,504 - $ 6,018 -

(Concluded)

The management income and commission revenue were obtained from providing related parties with

shipping services based on agreed terms.

2012 2011

Amount % Amount %

Ship rental expense (classified under operating

cost)

Oceanlance $ 85,762 2 $ - -

Rental revenue (classified under miscellaneous

income)

Luo Pan $ 24 - $ 24 -

Huo Da 24 - 24 -

Huan Shin 12 - 12 -

$ 60 - $ 60 -

The rental revenue was from leasing parts of the office.

2012 2011

Amount % Amount %

Prepaid rent (classified under other current

assets)

Oceanlance $ 8,422 3 $ - -

The rental revenue was from leasing parts of the office.

c. Compensation of directors, supervisors and management personnel:

2012 2011

Salaries $ 16,410 $ 14,752

Incentives 4,844 2,993

Special compensation 350 245

Bonus 3,672 4,869

$ 25,276 $ 22,859

- 29 -

19. MORTGAGED OR PLEDGED ASSETS

The following assets were mortgaged or pledged as collateral for bank guarantee and loans:

December 31

2012 2011

Restricted assets

Pledged time deposits (classified as restricted assets) $ 861,344 $ 1,120,351

Pledged demand deposits (classified as restricted assets) 60,111 60,019

Property and equipment

Land 579,422 79,937

Building, net 21,553 22,639

Vessel equipment, net 22,713,706 15,576,448

Prepayment for equipment - 943,143

$ 24,236,136 $ 17,802,537

20. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

With some shipbuilding companies, the subsidiaries entered into vessel construction contracts amounting to

￥5,100,000 thousand and US$41,500 thousand. As of December 31, 2012, ￥883,000 thousand and

US$1,250 thousand had been paid.

21. FINANCIAL INSTRUMENTS

a. Fair values of financial instruments

December 31

2012 2011

Carrying

Amount Fair Value

Carrying

Amount Fair Value

Nonderivative instruments

Assets

Financial assets at fair value

through profit or loss - current $ 155,537 $ 155,537 $ 88,588 $ 88,588

Held-to-maturity financial assets -

current - - 15,138 15,138

Financial assets carried at cost -

noncurrent 28,388 - 28,421 -

Refundable deposits 38,571 38,571 32,071 32,071

Restricted assets - noncurrent 921,455 921,455 556,856 556,856

Liabilities

Long-term bank loans (including

current portion) 19,856,454 19,856,454 14,454,029 14,454,029

Convertible bonds payable 429,738 429,738 420,118 420,118

Guarantee deposits received 288 288 297 297

(Continued)

- 30 -

December 31

2012 2011

Carrying

Amount Fair Value

Carrying

Amount Fair Value

Derivative instruments

Financial assets at fair value through

profit or loss - current

Forward exchange contracts $ 1,392 $ 1,392 $ 1,062 $ 1,062

Financial liabilities at fair value

through profit or loss - current

Liability component of convertible

bonds 28,980 28,980 - -

Currency options contracts 1,460 510 1,171 1,008

Forward exchange contracts - - 157,849 157,849

Financial liabilities at fair value

through profit or loss - noncurrent

Liability component of convertible

bonds - - 26,730 26,730

(Concluded)

b. Methods and assumptions used in determining fair values of financial instruments

1) The balance sheet carrying amounts of cash, accounts receivable, restricted assets - current,

short-term bank loans, notes and accounts payable, accrued expenses, and payable on the equity

investment (reclassified as other current liabilities) which were not included in the instruments

mentioned above, approximate fair value because of their short maturities.

2) For financial instruments at fair value through profit or loss and held-to-maturity financial assets

with an active market, the fair value is based on quoted market prices. For those financial

instruments without an active market, the fair value is estimated using valuation techniques

incorporating estimates and assumptions that are consistent with those generally used by other

market participants for instrument pricing.

3) For financial assets carried at cost, the fair values cannot be estimated because related stocks have

no active market and a reliable determination of their fair value entails an unreasonably high cost;

thus, their fair value is not presented.

4) For refundable deposits, restricted assets - noncurrent and guarantee deposits received, their future

receipt, settlement or payment terms are uncertain; thus, their fair value is their book value.

5) For long-term bank loans, their fair value is estimated using the present value of future cash flows

discounted at interest rates the Corporation and its subsidiaries may obtain for similar loans (e.g.,

similar maturities).

6) For convertible bonds payable, their fair value is estimated using the present value of future cash

flows.

c. As of December 31, 2012 and 2011, financial assets exposed to fair value interest rate risk amounted to

$0 thousand and $15,138 thousand, respectively; financial liabilities exposed to fair value interest rate

risk amounted to $1,279,738 thousand and $1,527,863 thousand, respectively; and financial liabilities

exposed to cash flow interest rate risk amounted to $19,302,009 thousand and $13,904,029 thousand,

respectively.

- 31 -

d. Financial risks

1) Market risk

Financial instruments at fair value through profit or loss are held by the Corporation and its

subsidiaries for trading in active markets. Hence, the Corporation and its subsidiaries are exposed

to market risks as a result of price fluctuations. The Corporation and its subsidiaries run a control

system to mitigate this risk, and management does not anticipate any material loss due to this risk.

The Corporation and its subsidiaries also hold foreign-currency assets, liabilities, forward exchange

contracts and currency option contracts. Hence, the Corporation and its subsidiaries are exposed

to market risks as a result of exchange rate fluctuations. The Corporation and its subsidiaries run a

control system and monitor the exchange rate fluctuations to reduce market risks.

2) Credit risk

The Corporation and its subsidiaries are exposed to credit risk on counter-parties’ default on

contracts. However, the amount of the Corporation and its subsidiaries’ maximum exposure to

credit risk on its financial instruments is equal to the book value. In addition, the Corporation and

its subsidiaries transact only with selected financial institutions and corporations with good credit

ratings. Thus, management does not anticipate any material losses on default on contracts.

3) Liquidity risk

The Corporation and its subsidiaries meet their cash flow demand in operation mainly through

financing, which includes using unused credit line and entering into new loan agreements with

financial institutions.

In addition, the Corporation and its subsidiaries’ financial instruments at fair value through profit or

loss is publicly traded in an active market and can readily be sold in the market at their approximate

fair values. However, their financial assets that are carried at cost are with significant liquidity

risks because these assets do not have quoted market prices in an active market.

4) Cash flow interest rate risk

The Corporation and its subsidiaries’ short-term and long-term loans are floating-rate loans.

Effective interest rates and future cash flows of the Corporation and its subsidiaries will fluctuate as

a result of changes in market interest rate.

The Corporation issued zero-coupon convertible bonds; thus, there is no cash flow interest rate risk

due to interest rate fluctuations.

22. OPERATING SEGMENT FINANCIAL INFORMATION

a. Segment information

On January 1, 2011, the Corporation and its subsidiaries adopted the newly issued Statement of

Financial Accounting Standards (SFAS) No. 41 - “Operating Segments.” SFAS No. 41 requires

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

Corporation and its subsidiaries' chief operating decision maker in order to allocate resources to the

segments and assess their performance. The Corporation and other subsidiaries are regarded as one

operating segment and mainly provides cargo shipping services and acts as a shipping agency.

However, Gueishan Island Marine Biology Development Co., Ltd. has not engaged in operating

activities. The information of the operating segment is the same as that presented in the accompanying

financial statements.

- 32 -

b. Geographical information

Sales to Other Than

Consolidated Entities Noncurrent Assets

Years Ended December 31 December 31

2012 2011 2012 2011

Europe $ 1,808,693 $ 2,197,382 $ - $ -

Asia 2,095,268 1,624,821 - -

Taiwan 128,802 230,304 1,127,900 632,345

United States 7,795 9,354 26,089,507 19,804,981

Oceania 5,078 - - -

$ 4,045,636 $ 4,061,861 $ 27,217,407 $ 20,437,326

Noncurrent assets were property and equipment and other assets.

c. Service information


2012 2011

Ship leasing $ 3,311,071 $ 3,717,602

Shipping transportation 726,770 334,904

Others 7,795 9,355

$ 4,045,636 $ 4,061,861

d. Major customers

The following customers accounted for at least 10% of consolidated revenue:


2012 2011

Amount

% to

Sale

Amount

% to

Sale

Company A $ 550,975 14 $ - -

Company B 535,014 13 - -

Company C 331,552 8 484,797 12

Company D 202,199 5 453,382 11

- 33 -

23. EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ASSETS AND

LIABILITIES

Significant financial assets and liabilities denominated in foreign currencies as of December 31, 2012 and

2011 are summarized as follows:

(In Thousands of Foreign Currencies and New Taiwan Dollars)

December 31

2012 2011

Foreign

Currencies

Exchange

Rate

New Taiwan

Dollars

Foreign

Currencies

Exchange

Rate

New Taiwan

Dollars

Financial assets

Monetary items

USD $ 55,943 29.04 $ $ 1,624,580 $ 91,907 30.275 $ $ 2,782,492

JPY 912,848 0.3364 307,082 370,895 0.3906 144,872

RMB 2,233 4.60 10,269 479 4.8070 2,301

EUR 248 39.16 9,718 569 39.18 22,284

Non-monetary items

USD 4,816 29.04 139,845 2,619 30.275 79,286

Financial liabilities

Monetary items

USD 579,081 29.04 16,816,518 282,198 30.275 8,543,543

JPY 1,668,941 0.3364 561,383 9,561,951 0.3906 3,734,898

Nonmonetary items

JPY - - - 404,421 0.3906 157,849

Documents

Shih Wei Navigation Co., Ltd. and Subsidiaries · Shih Wei Navigation Co., Ltd. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and