SinoPac Securities Corporation
Financial Statements for the
Years Ended December 31, 2004 and 2003 and
Independent Auditors’ Report
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and the Stockholders
SinoPac Securities Corporation
We have audited the accompanying balance sheets of SinoPac Securities Corporation (the “Corporation”) as of
December 31, 2004 and 2003, and the related statements of income, changes in stockholders’ equity and cash
flows for the years then ended. These financial statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Rules Governing the 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 misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the Corporation as of December 31, 2004 and 2003 and the results of its operations and cash flows
for the years then ended, in conformity with Criteria Governing the Preparation of Financial Reports by
Securities Firms, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants,
related regulations and accounting principles generally accepted in the Republic of China.
According to the Criteria Governing the Preparation of Financial Reports by Securities Firms, we have also
audited the consolidated financial statements of the Corporation as of December 31, 2004 and 2003, and for the
years then ended, on which we have issued an unqualified opinion thereon.
January 18, 2005
Notice to Readers
The accompanying 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
financial statements are those generally accepted and applied in the Republic of China.
For the convenience of readers, the auditors’ report and the accompanying financial statements have been
translated into English from the original Chinese version prepared and used in the Republic of China. 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 financial statements shall prevail.
-1-
SINOPAC SECURITIES CORPORATION
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In Thousands of New Taiwan Dollars, Except Par Value)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 2, 3, and 26)
Short-term investments, net (Notes 2 and 4)
Operating securities - dealing (Notes 2 and 5)
Operating securities - underwriting (Notes 2 and 5)
Operating securities - hedging (Notes 2 and 5)
Operating securities - hedged (Notes 2 and 5)
Operating securities - custodian account (Notes 2 and 5)
Bonds purchased under resale agreements (Notes 2 and 6)
Premiums paid for long options - non-hedging (Notes 2 and 29)
Margin loans receivable (Note 2)
Loan from refinanced margin (Note 2)
Refinancing deposits receivable (Note 2)
Margin deposits - futures and options (Notes 2, 26 and 30)
Derivative financial assets - OTC (Notes 2 and 29)
Notes and accounts receivable, net of allowance for doubtful accounts of $372 in 2004 and
$25,739 in 2003 (Notes 2, 5 and 26)
Other receivables (Notes 2, 18 and 26)
Pledged time deposits - current (Notes 26 and 27)
Deferred loss for warrant (Note 2)
Other current assets (Note 26)
Total current assets
$
2004
Amount
%
1,106,925
2,530,425
9,833,650
2,134,213
233,570
82,770
205,177
1,636,879
9
14,243,048
29
13,715
331,623
93,395
2
5
21
5
1
4
30
1
-
56,557
440,224
3,370,900
14,458
36,327,567
2003
Amount
%
1,224,687
2,940,148
10,539,268
2,305,393
2,695,377
123,604
108,577
693,200
31
15,826,453
23,848
269,295
89,616
2
6
21
5
5
1
31
1
-
1
7
-
187,197
579,990
3,666,400
50,809
129,299
1
7
-
77
41,453,192
80
$
LONG-TERM INVESTMENTS (Notes 2 and 7)
Long-term equity investments
Equity method
Cost method
Long-term investments in bonds
Other long-term investments
4,702,833
696,277
50,322
8,300
10
2
-
4,136,952
557,028
-
8
1
-
Total long-term investments
5,457,732
12
4,693,980
9
PROPERTIES (Notes 2, 8, 26 and 27)
Cost
Land
Buildings
Equipment
Leasehold improvements
Less - accumulated depreciation
Advance payments on equipment
Properties, net
OTHER ASSETS
Refundable deposits (Notes 9, 26 and 28)
Prepaid pension fund - noncurrent (Notes 2 and 24)
Deferred charges (Note 2)
Pledged time deposits - noncurrent (Note 27)
Properties leased to others (Notes 2, 10 and 27)
Overdue receivables, net of allowance for doubtful accounts of $68,527 in 2004 and $330,567 in
2003 (Note 2)
Total other assets
SECURITIES BROKERAGE ACCOUNTS, NET (Notes 2, 20 and 26)
TOTAL
1,413,817
722,797
1,238,474
538,080
3,913,168
(1,375,763 )
2,537,405
56,346
3
1
3
1
8
(3 )
5
-
1,484,258
753,728
1,173,952
529,944
3,941,882
(1,239,219 )
2,702,663
20,096
3
2
2
1
8
(2 )
6
-
2,593,751
5
2,722,759
6
1,903,891
223,147
135,334
75,000
448,240
4
1
1
1,982,988
199,362
153,740
353,556
4
1
-
-
192
-
2,785,612
6
2,689,838
5
94,064
-
88,106
-
$ 47,258,726
100
$ 51,647,875
100
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term bank loans (Notes 11, 26 and 27)
Commercial paper issued (Notes 12 and 27)
Bonds sold under repurchase agreements (Notes 2, 13 and 26)
Warrant liabilities (Notes 2, 14 and 29)
Repurchase of warrants issued (Notes 2, 15 and 29)
Premiums received from short options - futures (Notes 2 and 29)
Deposits on short sales (Note 2)
Short sale proceeds payable (Note 2)
Derivative financial liabilities - OTC (Notes 2 and 29)
Notes and accounts payable
Other payables (Notes 2, 18, 26 and 28)
Deferred income tax liabilities - current (Notes 2 and 18)
Other current liabilities (Note 26)
Total current liabilities
LONG-TERM LIABILITIES
Bonds payable (Note 16)
Long-term loans (Note 17)
Total long-term liabilities
OTHER LIABILITIES
Reserve for default accounts (Note 2)
Reserve for trading loss (Note 2)
Deferred income tax liabilities - noncurrent (Notes 2 and 18)
Reserve for bad debt (Note 2)
Guarantee deposits-in
Total other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY (Notes 2, 7, 21 and 22)
Capital stock - $10 par value
Authorized - 1,900,000 thousand shares
Issued - 1,526,902 thousand shares
Capital surplus
Additional paid-in capital
Treasury stock transactions
Share in capital surplus of investee
Capital surplus from business combination
Total capital surplus
Retained earnings
Legal reserve
Special reserve
Unappropriated earnings
Total retained earnings
Other components of stockholders’ equity
Cumulative translation adjustments
Net loss not recognized as pension costs
Total other items of stockholders’ equity
Total stockholders’ equity
TOTAL
The accompanying notes are an integral part of the financial statements.
-2-
$
2004
Amount
%
2003
Amount
%
2,900,000
4,707,805
7,409,198
656,500
(565,883 )
322
1,978,472
2,531,424
305,549
578,110
1,874,515
126,426
345,417
6 $
10
16
2
(1 )
4
5
1
1
4
1
7,108,000
3,878,689
9,146,129
747,250
(264,857 )
4,248
1,106,590
1,474,771
332,300
76,895
1,607,877
78,856
941,533
14
8
18
1
(1 )
2
3
1
3
2
22,847,855
49
26,238,281
51
2,000,000
-
4
-
2,000,000
-
4
-
2,000,000
4
2,000,000
4
200,000
288
94,620
154,293
3,062
1
-
200,000
102,824
125,703
208,161
2,053
1
-
452,263
1
638,741
1
25,300,118
54
28,877,022
56
15,269,020
32
15,269,020
30
584,747
31,358
961
1,725,359
2,342,425
1
4
5
584,747
31,358
961
1,725,359
2,342,425
1
3
4
1,196,764
2,393,529
919,345
4,509,638
2
5
2
9
980,555
1,961,110
2,160,086
5,101,751
2
4
4
10
(159,426 )
(3,049 )
(162,475 )
-
57,877
(220 )
57,657
-
21,958,608
46
22,770,853
44
$ 47,258,726
100
$ 51,647,875
100
SINOPAC SECURITIES CORPORATION
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2004
Amount
REVENUES (Note 2)
Commissions and fees (Note 26):
Brokerage
Underwriting
Gain on sales of securities (Note 2):
Dealing
Underwriting
Hedging
Structured notes
Stock affairs agent fees (Note 26)
Interest income (Note 2)
Dividend income
Gain from short covering (Note 2)
Gain on warrants issued (Notes 2 and 14)
Commissions and fees - futures (Note 26)
Gain from futures transactions (Notes 2 and 29)
Gain from option transactions (Notes 2 and 29)
Gain from derivative financial instruments transactions - OTC
(Notes 2 and 29)
Reversal of trading loss reserve (Note 2)
Other operating income
Investment income (Notes 2 and 7)
Other nonoperating revenue and income (Note 26)
Total revenues
COSTS, EXPENSES AND LOSSES
Commissions and fees:
Brokerage
Dealing
Refinancing
Expenses for security underwriting
Loss on sale of securities (Note 2)
Dealing
Hedging
Structured notes
Interest expense (Notes 2 and 26)
Provision for decline in market value of operating securities
(Note 2)
Expense for the issuance of warrants
Loss from futures transactions (Notes 2 and 29)
Exchange clearing expenses - futures (Note 26)
Loss from option transactions (Notes 2 and 29)
%
2003
Amount
%
$ 2,585,866
100,702
40
1
$ 2,252,134
178,859
32
3
229,993
277
122,005
1,270,442
105,067
2,454
1,207,047
199,115
172,219
3
2
20
2
19
3
3
980,090
593,931
36,069
115,378
1,216,097
159,037
432,909
139,391
87,716
-
14
9
1
2
18
2
6
2
1
-
1,593
102,536
31,634
193,159
160,069
2
3
2
8,076
14,562
430,652
284,738
6
4
6,484,178
100
6,929,639
100
178,139
13,048
1,067
15,537
3
-
149,430
8,971
1,047
15,854
2
-
73,020
721,854
163,067
1
11
3
40
207,477
3
225,587
5,413
188,800
4,092
-
4
3
-
56,665
7,940
4,796
112,898
1
2
(Continued)
-3-
2004
Amount
Operating expenses (Notes 25, 26 and 28)
Nonoperating expenses and losses (Notes 25, 26 and 28)
49
2
$ 3,512,008
145,558
51
2
4,901,860
76
4,222,684
61
1,582,318
24
2,706,955
39
662,973
10
544,861
8
919,345
14
$ 2,162,094
31
INCOME BEFORE INCOME TAX
INCOME TAX EXPENSE (Notes 2 and 18)
$
Income
Before
Income
Tax
BASIC EARNINGS PER SHARE (Note 19)
$
1.04
The accompanying notes are an integral part of the financial statements.
-4-
%
$ 3,192,704
119,532
Total costs, expenses and losses
NET INCOME
2003
Amount
%
Net
Income
$
0.60
Income
Before
Income
Tax
$
1.81
Net
Income
$
1.44
(Concluded)
SINOPAC SECURITIES CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In Thousands of New Taiwan Dollars, Except Par Value)
Capital Stock $10 Par Value
Authorized
Issued
Shares (in
Shares (in
Thousands)
Amount
Thousands)
Amount
BALANCE, JANUARY 1, 2003
Appropriation of prior year’s earnings
Legal reserve
Special reserve
Cash dividends
Bonus to employees
Remuneration to directors and supervisors
Subtotal
Adjustment in long-term equity investments under equity
method
Translation adjustments on long-term equity investments
Reissuance of treasury stock to employees - (33,330)
thousand shares
Net income in 2003
BALANCE, DECEMBER 31, 2003
Appropriation of prior year’s earnings
Legal reserve
Special reserve
Cash dividends
Bonus to employees
Remuneration to directors and supervisors
Subtotal
Adjustment in long-term equity investments under equity
method
Translation adjustments on long-term equity investments
Net income in 2004
BALANCE, DECEMBER 31, 2004
Other Items of Stockholders’ Equity
Cumulative Net Loss not
Translation Recognized
Retained Earnings (Notes 2, 21 and 22)
Adjustments as Pension Treasury
Legal
Special
Unappropriated (Notes 2
Costs
Stock
Reserve
Reserve
Earnings
and 7)
(Note 2)
(Note 22)
Capital
Surplus
(Notes 2, 21
and 22)
1,900,000
$ 19,000,000
1,526,902
$ 15,269,020
$ 2,321,997
1,900,000
19,000,000
1,526,902
15,269,020
-
-
-
-
-
1,900,000
829,716
$ 1,659,432
2,321,997
150,839
980,555
301,678
1,961,110
(150,839 )
(301,678 )
(968,056 )
(34,941 )
(32,000 )
-
-
733
-
-
-
(2,008 )
-
-
-
19,695
-
-
-
2,162,094
-
19,000,000
1,526,902
15,269,020
2,342,425
980,555
1,961,110
2,160,086
57,877
1,900,000
19,000,000
1,526,902
15,269,020
2,342,425
216,209
1,196,764
432,419
2,393,529
(216,209 )
(432,419 )
(1,462,772 )
(18,379 )
(30,307 )
-
57,877
-
-
-
-
-
-
-
919,345
1,900,000
$ 19,000,000
1,526,902
$ 15,269,020
$ 2,342,425
$ 1,196,764
$ 2,393,529
The accompanying notes are an integral part of the financial statements.
-5-
$
$ 1,487,514
$
919,345
$
103,280
103,280
(45,403 )
$
$
-
Total
Stockholders’
Equity
$ (348,649 ) $ 21,322,310
-
(348,649 )
(220 )
-
-
-
(968,056 )
(34,941 )
(32,000 )
20,287,313
(1,495 )
(45,403 )
348,649
-
368,344
2,162,094
(220 )
-
22,770,853
(220 )
-
(1,462,772 )
(18,379 )
(30,307 )
21,259,395
(217,303 )
-
(2,829 )
-
-
(2,829 )
(217,303 )
919,345
(159,426 )
$ (3,049 )
$
-
$ 21,958,608
SINOPAC SECURITIES CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In Thousands of New Taiwan Dollars)
2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization
Provision for bad debts
Other expenses and losses
Provision for decline in market values of operating securities
Gain on warrants issued
Investment income recognized under equity method
Cash dividends received from equity-accounted investees
Loss on sale of properties
Loss on abandonment of properties
Deferred income tax
Provision (reversal) of reserves for trading losses
Increase in prepaid pension fund
Net changes in operating assets and liabilities
Short-term investments for trading purposes
Operating securities - dealing
Operating securities - underwriting
Operating securities - hedging
Operating securities - hedged
Operating securities - custodian account
Bonds purchased under resale agreements
Margin loans receivable
Loan from refinanced margin
Refinancing deposits receivable
Margin deposits - futures and options
Derivative financial assets - OTC
Notes and accounts receivable
Other receivables
Other current assets
Overdue receivables
Bonds sold under repurchase agreements
Warrant liabilities
Repurchase of warrants issued
Deposits on short sales
Short sale proceeds payable
Derivative financial liabilities - OTC
Notes and accounts payable
Other payables
Other current liabilities
Securities brokerage accounts, net
Net cash provided by (used in) operating activities
$
919,345
2003
$ 2,162,094
274,181
49
225,587
(1,207,047 )
(193,159 )
73,170
663
3,993
16,487
(102,536 )
(23,785 )
305,445
45,781
41,296
56,665
(432,909 )
(430,652 )
8,721
255,245
83,641
(35,618 )
409,723
705,618
(119,006 )
2,527,291
41,603
(98,254 )
(943,679 )
1,583,405
(29 )
10,133
(66,232 )
(3,779 )
155,640
139,766
114,841
(78,676 )
(1,736,931 )
1,632,823
(766,743 )
871,882
1,056,653
(26,751 )
501,215
266,638
(596,116 )
(5,958 )
1,892,016
5,333,529
(1,281,993 )
(2,609,221 )
(125,412 )
(108,577 )
828,924
(3,736,974 )
20,108
2,274
(136,766 )
(68,155 )
(39,754 )
112,122
(101,770 )
880
(5,396,140 )
1,864,212
(1,036,324 )
(355,269 )
(363,874 )
287,617
(508,717 )
401,358
887,415
(179,592 )
5,562,025
(2,358,374 )
(Continued)
-6-
2004
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in pledged time deposits
Additions to properties
Proceeds from disposal of properties
Increase in long-term equity investments
Decrease (increase) in refundable deposits
Increase in deferred charges
$
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) short-term bank loans
Proceeds from commercial paper issued
Increase in guarantee deposits-in
Proceeds from reissuance of treasury stock to employees
Increase in bonds payable
Cash dividends paid
Remuneration paid to directors and supervisors
Bonus paid to employees
Net cash provided by (used in) financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
2003
220,500 $ (333,000 )
(207,381 )
(271,461 )
1,480
1,825
(863,895 ) (1,462,293 )
79,097
(590,467 )
(20,255 )
(18,332 )
(790,454 )
(2,673,728 )
(4,208,000 )
829,116
1,009
(1,462,772 )
(30,307 )
(18,379 )
3,100,000
1,260,710
368,344
1,000,000
(968,056 )
(32,000 )
(34,941 )
(4,889,333 )
4,694,057
(338,045 )
(117,762 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
1,224,687
1,562,732
CASH AND CASH EQUIVALENTS, END OF YEAR
$ 1,106,925
$ 1,224,687
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year
Interest
Income tax
$
$
$
$
The accompanying notes are an integral part of the financial statements.
-7-
274,435
38,501
330,798
78,472
(Concluded)
SINOPAC SECURITIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)
1. ORGANIZATION AND OPERATIONS
SinoPac Securities Corporation (the “Corporation”) was established on October 11, 1988 and started
operations on November 8, 1988. It engages in transactions involving marketable securities such as: (a)
underwriting, dealing (securities and futures) and brokerage; (b) financing customers’ acquisition and
short-sales; (c) trading foreign securities on behalf of customers; (d) assistance activities in futures trading;
(e) bills financing business and other business as approved by relevant authorities. Its shares have been
listed on the GreTai Securities Market (the over-the-counter securities exchange of the Republic of China,
or “ROC OTC”) since December 1994. Effective May 9, 2002, the Corporation’s shares ceased to be
traded over the ROC OTC because of the incorporation of the Corporation into SinoPac Holdings through a
share swap.
The Corporation had 1,980 and 1,963 employees as of December 31, 2004 and 2003, respectively.
The parent company is SinoPac Holdings, which owned 100% of the Corporation’s common stock as of
December 31, 2004 and 2003.
As of December 31, 2004, the Corporation had 48 branches supporting its head office.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity with the Criteria Governing the
Preparation of Financial Reports by Securities Firms, Criteria Governing the Preparation of Financial
Reports by Futures Commission Merchants, related regulations and accounting principles generally
accepted in the Republic of China (“ROC”). In preparing financial statements in conformity with these
criteria, regulations and principles, the Corporation is required to make certain estimates and assumptions
that could affect the amounts of allowance for doubtful accounts, depreciation of properties and properties
leased to others, pension, and unsettled lawsuit losses. Actual results could differ from these estimates.
For the convenience of readers, the accompanying 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 and difference in the interpretation of the
two versions, the Chinese-language financial statements shall prevail.
The significant accounting policies of the Corporation are summarized as follows:
Current/Noncurrent Assets and Liabilities
Assets, which include unrestricted cash and cash equivalents, to be converted into cash or consumed within
one year are classified as current. Liabilities to be liquidated or settled within one year are classified as
current. All others are classified as noncurrent.
Cash Equivalents
Cash equivalents consist of short-term notes with maturities of three months or less. They are stated at
cost. Cost of short-term notes sold is determined by the specific identification method.
-8-
Short-term Investments
Short-term investments are investments in open-end mutual funds stated at cost. The investments in
open-end mutual funds are carried at the lower of aggregate cost or market value. The market values is
based on the net asset value of the funds on the balance sheet date. The cost of the funds sold is
determined by the weighted-average method. Interests earned on short-term notes are charged to
nonoperating income (included in financial income).
Operating Securities
Stocks - except for Emerging Stocks - held by the Corporation’s Dealing and Underwriting departments are
stated at the lower of aggregate cost or market value. Emerging Stocks are stated at cost. The aggregate
market value of the stocks, except that of Emerging Stocks, is based on the closing price on the balance
sheet date. The cost of stocks sold is determined by the moving-average method.
Bonds are stated at the lower of aggregate cost or market value. The market value is based on the
reference price on the balance sheet date published by the ROC OTC exchange. The cost of bonds sold is
determined by the moving-average method.
Allowance for loss is provided for the total cost of the securities in excess of their market value. Any
recovery of the market values of the securities to the extent of their original carrying values is recognized as
income. The allowance is adjusted when the market value subsequently recovers.
The Corporation is the participating dealer in the exchange traded fund (ETF) market. When the
Corporation exchanges the component stocks for an ETF (or vice versa), it recognizes the disposal gains or
losses of the exchanged-out assets at fair market value and takes the market value as book value of the
exchanged-in assets.
Bonds Purchased Under Resale Agreements and Bonds Sold Under Repurchase Agreements
Bonds purchased under resale agreements and bonds sold under repurchase agreements are accounted for as
assets and liabilities, respectively, and the related interest income and expense are accounted for on the basis
of the contracted spread.
Warrant Liabilities and Operating Securities - Hedging
The amount received for the issuance of warrants is presented as “warrant liabilities.” The amount paid for
the repurchase of warrants issued is presented as “repurchase of warrants issued,” a contra-account of
“warrants liabilities.” Warrants liabilities and warrants repurchased are marked to market. The gain/loss,
presented as “gain/loss on warrants issued,” is recognized for the difference between the carrying values and
the market values of both the warrant liabilities and warrants repurchased. However, the loss on
revaluation of warrant liabilities is deferred to the extent of the unrealized gain on the related hedged
securities, while the loss on revaluation of warrants liabilities in excess of the unrealized gain on hedged
securities is charged to current income. The cost of repurchase of warrants issued is calculated using the
moving-average method, with the related gain or loss accounted for as “gain/loss on warrants issued.”
Securities held as hedges for warrants issued are stated at purchase cost. Securities held before, and then
transferred to hedge position (presented as operating securities - hedging) are stated at the lower of cost,
which is the book value of the transferred securities, or market value. These securities are stated at the
lower of cost or market value based on individual warrants issued. The loss on decline in market value of
such securities is charged to current income.
-9-
Margin Loans and Stock Loans
Margin loans pertain to the provision of funds to customers for them to buy securities. Margin loans
receivable represents the amount given to customers. The securities bought by customers are used to
secure these loans and are recorded through memo entries as “collateral securities.” The collateral
securities are returned when the loans are repaid.
The refinancing of margin loans with securities finance companies is recorded as “refinancing borrowings,”
which are collateralized by securities bought by customers.
The collateral securities are disposed of by the Corporation when their market values fall below a
pre-agreed level and the customer fails maintain this level. If the proceeds from the disposal of collateral
security cannot cover the balance of the loan and the customer cannot timely settle the deficiency, the
balance of the margin loan is reclassified under “overdue receivables.” If a collateral security cannot be
sold in the open market, the balance of the loan is reclassified under “other receivables” or “overdue
receivables.”
Stock loans represent securities lent to customers for short sales. The deposits received from customers on
securities lent out are credited to “deposits on short sales.” The securities sold short are recorded through
memo entries as “stock loans.” The proceeds from sales of securities lent to customers less any dealer’s
commission, financing charges and securities exchange tax are recorded under “short sales proceeds
payable.” When the customers return the stock certificates to the Corporation, the Corporation gives back
to customers the deposits received and the proceeds from sales of securities.
The margin deposited by securities firms to securities finance companies are recorded as “loan from
refinanced margin.” The refinancing securities delivered to the Corporation are recorded through memo
entries as “refinancing stock loans.” A portion of the proceeds from the short-sale of securities borrowed
from securities finance companies is retained by the securities finance companies as collateral and recorded
as “refinancing deposits receivable.”
Allowance for Bad Debts and Reserve for Bad Debts
Allowance for bad debts is provided on the basis of a review of the collectibility of notes and accounts
receivables, other receivables and overdue receivables. After providing this allowance, the Corporation
sets aside an additional amount as bad-debt reserve to save 3% on the value-added tax before July 1, 2003.
Under a ruling of the Securities and Futures Bureau, Financial Supervisory Commission, Executive Yuan,
R.O.C., this reserve may be used only to write off the nonperforming receivables.
Long-term Equity Investments
Investments in stock of companies in which the Corporation holds 20% or more of the investees’ common
shares or exercises significant influence on their operating and financial policy decisions are accounted for
by the equity method. The investments are stated at cost on the acquisition date and subsequently adjusted
for its proportionate share in the net income or net loss and in the net changes in the capital surplus accounts
of the investees, net losses not recognized as pension costs and other stockholder’s equity items. The
equity in net income or net loss is recognized as investment income or loss. Cash dividends received are
accounted for as reduction in the carrying value of the investments. The investment cost in excess of the
Corporation’s proportionate equity in the net assets of the investees when the equity method is first applied
or when the investment is first acquired, is amortized over five years.
Investment in stock of companies in which the Corporation holds less than 20% of the investees’ common
shares and has no significant influence on their operating and financial policy decisions are accounted for by
the cost method. The carrying amount is reduced to reflect an other than temporary decline in value, with
the related provisions for losses charged to income and the reduced carrying value becoming the new book
value.
- 10 -
For both equity-method and cost-method investments, stock dividends received are not recognized as
investment income, just increased shares. The cost per share is then recalculated on the basis of new
number of shares.
When the Corporation process of the stock swap, it takes the book value of exchanged-out investment as
cost of the exchanged-in investment if both investments are accounted for by the equity method.
Cost of investments sold is determined by the weighted-average method.
Consolidated financial statements will be prepared if the total assets or total operating revenues of the
Corporation’s direct or indirect subsidiaries are more than 10% of those of the Corporation. If the total
assets or operating revenues of each subsidiary are equal to or less than 10% of those of the Corporation but
the total assets or operating revenues of these subsidiaries are collectively more than 30% of those of the
Corporation, the consolidated financial statements should be prepared for those subsidiaries whose total
assets or operating revenues are more than 3%.
Long-term Investments in Bonds
Long-term investments in bonds are stated at face value and adjusted for amortization of premiums or
discounts. Premiums and discounts are amortized over bond’s spare years and charged to interest income.
Bonds held as operating securities and then transferred to long-term investments are stated at the lower of
cost, which is the book value of the transferred bonds, or market value.
Properties
Properties are stated at cost less accumulated depreciation.
capitalized. Repairs and maintenance are charged to expense.
Major renewals and betterments are
Depreciation is calculated by the straight-line method. Related expense is equal to cost less the salvage
value of one year divided by the initially estimated life of an asset.
The initial estimate of the service lives of properties is as follows: buildings, 40 to 60 years; equipment, 3
to 15 years, and leasehold improvements, 5 years. If a property that reaches its full residual value is still in
use, it is depreciated over its newly estimated service life.
Upon sale or other disposal of properties, the related cost and accumulated depreciation are removed from
the accounts, and any gain or loss is credited or charged to nonoperating income or expense.
Pension and Severance Benefits
The Corporation recognizes pension and severance benefits based on actuarial calculations.
Properties Leased to Others
These properties are depreciated using the straight-line method over service lives of 50 to 55 years.
Deferred Charges
Deferred charges, which include amounts paid for acquiring operating rights and computer software as well
as network construction and decoration or renovations, are capitalized and amortized over five years.
- 11 -
Securities Brokerage Accounts
These accounts pertain to open brokerage transactions. Under the Criteria Governing the Preparation of
Financial Reports by Securities Firms, the following unsettled brokerage transactions are recorded as: (a)
debit accounts (such as cash in bank - settlement, accounts receivable - customers’ purchases, net exchange
clearing receivable, margin transaction, and accounts receivable - settlement) and (b) credit accounts (such
as accounts payable - customers’ sales, net exchange clearing payable, margin transaction, and accounts
payable - settlement). These transactions are presented in the financial statements at net amounts.
Securities Lending and Borrowing
The proceeds from the sale of bonds borrowed by the Corporation for trading purposes are accounted for as
“borrowed securities payable.” They are carried at the higher of aggregate cost or market value. When
the market value of borrowed securities is higher than carrying value, the Corporation recognized losses and
adjusts the value of borrowed securities payable. When bonds are returned, the difference between the
covering cost and the carrying value are accounted for as gain/loss from short covering.
Income Tax
The Corporation uses the inter-period income tax allocation method. Deferred tax assets are recognized
for the tax effects of deductible temporary differences, unused operating loss carried forwards and unused
tax credits, and deferred tax liabilities are recognized for the tax effects of taxable temporary differences.
Valuation allowance is provided for deferred tax assets that are not certain to be realized. Deferred tax
assets and liabilities are classified as current or noncurrent on the basis of the classification of the related
assets or liabilities for financial reporting. A deferred tax asset or liability that can not be related to an
asset or liability for financial reporting is classified according to the expected realization date of the
temporary difference.
Adjustments of prior year’s tax are added to or deducted from the current year’s income tax expense.
Income taxes (10%) on undistributed earnings are recorded as expense when stockholders resolve to retain
the earnings.
From its 2003 tax filing, the Corporation used the linked-tax system, i.e., the Corporation, its parent
company (SinoPac Holdings) and subsidiaries of SinoPac Holdings “linked” their taxes in filing their return.
The use of this system is based on a directive issued by the Accounting Research and Development
Foundation (ARDF) of the ROC. The net tax effect should be allocated on a reasonable, systematic and
consistent method to and among the Companies using the linked tax system, and the allocated tax should be
accounted for as receivable or payable in the financial statements.
Reserve for Default Accounts
As required by the Rules Governing Securities Firms, for securities traded for customers’ accounts, the
Corporation should allocate monthly 0.0028% of the transaction price of the traded securities as a reserve
for default accounts. When the accumulated reserve for default accounts reaches $200,000, allocation will
be suspended. This reserve should be used only for covering the losses caused by breach of contracts for
trading on customers’ accounts or for other purposes approved by the Securities and Futures Bureau.
Reserve for Trading Losses
An amount equal to 10% of the net gain from the sale of securities and futures is recognized monthly as
reserve for trading losses under the Rules Governing Securities Firms and Rules Governing Future
Commission Merchants. This reserve is recognized until its accumulated balance reaches (a) $200,000 for
the trading department and (b) the minimum paid-in capital of futures department. This reserve can be
used only to offset actual loss from securities and futures dealings.
- 12 -
Foreign-currency Transactions
Foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when
the transactions occur. Gains or losses resulting from the application of prevailing foreign exchange rates
when cash in foreign currency is converted into New Taiwan dollars or when foreign-currency receivables
or payables are settled, are credited or charged to income in the year of conversion or settlement. At
year-end, the balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates,
and the resulting differences are recorded as follows:
a. Equity-method long-term stock investments - as cumulative translation adjustments under stockholders’
equity.
b. Other assets and liabilities - as credited or charged to current income.
Interest Rate Swap
Interest rate swap contracts are recognized through memo entries on the contract starting date. The fair
value of the contracts is presented as derivative financial assets and liabilities - OTC and is written off on
the settlement date. On balance sheet date, outstanding contracts are marked to market and the change in
fair value is recognized as gain or loss.
Futures
Initial margin on futures contracts and margin deposits maintained to reflect the fluctuation of market price
of futures contracts are recognized as margin deposits - futures. Gains or losses from daily marking to
market of the carrying amounts of the futures contracts, from taking opposite trade positions, and from
settlement of futures contracts are recognized as realized or unrealized gains or losses from futures
transactions - non-hedging or realized or unrealized gains or losses from futures transactions - hedging,
depending on the transaction purpose.
Options
Premiums received from short options or paid for long options for trading purposes are recognized as
liabilities and assets, respectively. The margin deposited for short options is recognized as margin deposits
- options. Gains or losses arising from daily marking to market of the carrying amounts of the options,
from taking opposite trade positions, and from settlement of options are recognized as realized or unrealized
gains or losses from options transactions - non-hedging.
Asset Swap Transactions - Convertible Bonds
Convertible bond swap transactions have three types: Fixed income, short call options and combination of
both types.
In a fixed income transaction, instruments used are a convertible bond sold outright plus an interest rate
swap contract and a long call option on the convertible bond. The notional amount of the swap contract is
recognized through a memo entry. The accounting treatment for a convertible bond sold outright is the
same as that for operating securities. The fair value of the interest rate swap contract and the premium
paid for a long call option are both recognized as derivative financial assets (liabilities) - OTC and are
marked to market. Gains or losses from changes in fair value are recognized in the current period as gains
or losses from derivative financial instruments transactions - OTC.
For short call options, the notional amount is recognized through a memo entry on the transaction date, and
the premium received is recognized as derivative financial liabilities - OTC. On the balance sheet date,
outstanding option contracts are marked to market, and the resulting gains or losses are recognized in the
current period as gains or losses from derivative financial instruments transactions - OTC.
- 13 -
Structured Note Transactions and Operating Securities-Hedged and Custodian Account
There are two types of structured note transactions:
equity-linked note transactions.
Principal-guaranteed note transactions and
For the principal-guaranteed note transactions, the Corporation receives the contract price from the
investors. The Corporation guarantees that the investors will get a fixed income from their investment and
gives the investors the right to share in the profits on the underlying assets. The contract price is
recognized as follows: (a) principal-guaranteed note liabilities - fixed income instruments, for which the
Corporation amortizes the principal and recognizes the implied-interest expenses using the straight-line
method and presents the interest expense as losses from principal-guaranteed note transactions, and (b)
principal-guaranteed note liabilities - options, for which the related price is marked to market, and gains
(losses) from valuation are presented as gains (losses) from valuation - principal-guaranteed notes.
However, the valuation loss on principal-guaranteed note liabilities - options is deferred to the extent of the
unrealized gain on hedged securities, while the valuation loss on principal-guaranteed note liabilities options in excess of the unrealized gain on hedged securities is charged to current income.
For the equity-linked note transactions, the Corporation receives the contract price from the investors. The
Corporation simultaneously invests the investors’ funds in fixed-income instruments and in long put options
on underlying assets. The contract price received is recognized as follows: (a) equity-linked note
liabilities - fixed income instruments, for which the Corporation amortizes the principal and recognizes the
implied interest expenses using the straight-line method and presents the interest expense as loss from
equity-linked note transactions, and (b) equity-linked note liabilities - premiums, which will be written off
when the options are exercised or at maturity. The options acquired from the investors are recognized as
equity-linked note assets - options and marked to market. Gains (losses) from valuation are presented as
gains (losses) from valuation - equity-linked notes. However, the valuation loss on equity-linked note
assets - options is deferred to the extent of the unrealized gain on hedged securities, while the valuation loss
on equity-linked note assets - options in excess of the unrealized gain on hedged securities is charged to
current income.
All assets (liabilities) of the structured note transactions are presented as derivative financial assets
(liabilities) - OTC and all gains (losses) are presented as gains (losses) from derivative financial instruments
transactions - OTC.
The fixed income instruments invested in by the Corporation under the contract are stated at cost, presented
as operating securities - custodian account, and carried at the lower of aggregate cost or market value. The
Corporation recognizes interest income from the instruments over an accrual basis over the contracted term.
The securities invested in by the Corporation for hedging purposes are stated at purchase cost, presented as
operating securities - hedged, and revaluated at the lower of cost or market value based on the related
contract. The loss on decline in market value of these securities is charged to income. The cost of
securities sold is determined by the moving-average method.
Revenue Recognition
Revenue from rendering services - brokerage and underwriting commissions and fees, stock affairs agent
fees, future commissions and fees, etc. - is recognized according to the stage of completion as of the balance
sheet date.
Interest income is accrued on a time basis by referring to the principal outstanding and the effective interest
rate.
Dividend income from equity securities is recognized on ex-dividend dates or on the dates when the
stockholders declare dividends.
- 14 -
3. CASH AND CASH EQUIVALENTS
Cash
Petty cash and cash on hand
$
Demand deposits
Checking accounts
Time deposits
Cash equivalents - commercial paper, due in January 2005, discount rates at
1.05% to 1.10% for 2004; due in January to March 2004, discount rates at
0.90% to 0.95% for 2003
2004
1,435
98,118
30,763
30,000
2003
$
1,415
943,066
15,480
30,000
946,609
234,726
$ 1,106,925
$ 1,224,687
4. SHORT-TERM INVESTMENTS
2003
2004
Open-end mutual funds
$ 2,530,425
Short-term notes - due in March to May 2004, discount rates at 0.90%-0.95%
-
$ 2,816,687
123,461
$ 2,530,425
$ 2,940,148
The net asset values of the open-end mutual funds on the last transaction days in December 2004 and 2003
were $2,550,229 thousand and $2,858,193 thousand, respectively.
5. OPERATING SECURITIES
2004
2003
Dealing department
Bonds
Issued by the government (interest rates at 1.00% to 7.75% in 2004;
interest rates at 1.00% to 7.75% in 2003)
Issued by corporations (interest rates at 1.20% to 5.60% in 2004;
interest rates at 1.20% to 6.60% in 2003)
Issued by banks (interest rates at 1.49% in 2004; interest rates at
1.325% to 6.040% in 2003)
Collateralized loans obligation (interest rates at 1.575% to 2.175%
in 2004)
Subtotal
Listed stocks and convertible bonds
Stocks and convertible bonds traded over the counter
Emerging stocks
Taiwan Innovative Growing Entrepreneurs
Exchange - traded funds
$
$
3,563,702
$
3,808,848
1,290,281
2,493,198
300,000
900,000
604,383
5,758,366
995,492
2,653,722
426,070
-
7,202,046
1,452,370
1,543,606
292,850
48,119
277
9,833,650
$ 10,539,268
(Continued)
- 15 -
2004
2003
Underwriting department
Listed stocks
Stocks and convertible bonds traded over the counter
Taiwan depositary receipts of public corporations
Stocks and convertible bonds other than listed and traded over the counter
$
616,412
1,807,882
106
2,424,400
290,187
$
388,237
1,603,420
263,736
50,000
2,305,393
-
$
2,134,213
$
2,305,393
$
235,730
2,160
$
2,763,021
67,644
$
233,570
$
2,695,377
$
83,808
1,038
$
125,412
1,808
$
82,770
$
123,604
$
122,988
83,843
206,831
1,654
$
108,577
108,577
-
$
205,177
$
108,577
Less allowance for decline in market value
Securities held for hedging purposes
Stocks held for warrants
Less allowance for decline in market value
Securities held for hedged purposes
Structured notes linked position
Less allowance for decline in market value
Securities in custodian account
Time deposits - due in January to March 2005, interest rates at
1.000% to 1.175%; due in January to October 2004, interest rates at
1.00% to 1.40% in 2003
Corporate bonds - interest rates at 3.40% in 2004
Less allowance for decline in market value
The aggregate market values of the securities based on the closing prices and reference prices as the end of
2004 and 2003 were as follows:
2004
Dealing department - bonds
Dealing department - listed and over-the-counter stocks and convertible
bonds
Dealing department - Taiwan Innovative Growing Entrepreneurs
Dealing department - exchange - traded funds
Underwriting department - listed and over-the-counter stocks and
convertible bonds
Underwriting department - Taiwan depositary receipts of public
corporations
Securities held for hedging purposes
Securities held for hedged purposes - structured notes linked position
Securities in custodian account - bonds
- 16 -
$
5,781,036
2003
$
7,288,443
3,657,998
-
3,014,164
46,079
276
2,134,126
2,080,324
238,727
84,965
82,189
223,362
2,810,637
123,798
-
The unsecured corporate bonds issued by Chien Shing Stainless Steel Co., Ltd. were not redeemed when
they matured on September 19, 2002. The Corporation received a promissory note of $50,000 thousand as
repayment. As of December 31, 2004, receivables has been collected.
6. BONDS PURCHASED UNDER RESALE AGREEMENTS
2004
Government bonds (interest rates at 1.000% to 1.312% in 2004; interest
rates at 0.855% to 1.015% in 2003)
Bank bonds (interest rates at 1.062% in 2003)
Convertible bonds (interest rates at 3.50% to 4.00% in 2004; interest rates
at 3.00% to 3.50% in 2003)
$
2003
1,495,779
-
$
361,700
100,000
141,100
$
1,636,879
231,500
$
693,200
The bonds outstanding as of December 31, 2004 will be resold for $1,639,350 thousand by September 2,
2005 under resale agreements.
7. LONG-TERM INVESTMENTS
2004
Carrying
Value
Investees
Long-term equity investments
Equity method
SinoPac Securities (Cayman) Holdings Limited
SinoPac Futures Corporation
SinoPac Capital Management Corporation
SinoPac Asset Management Corp. (B.V.I.)
Cumulative translation adjustments
Cost method
Stocks other than listed and traded over
the counter
Fu-Ding Venture Capital Corp.
Hua VI Venture Capital Corp.
Honpang Venture Capital Corp.
China Power Venture Capital Co., Ltd.
Shengtung Venture Capital Corporation
Communicator II Venture Holding Ltd.
IP Fund Two Co.
Top Taiwan III Venture Capital Co., Ltd.
Parawin Venture Capital Corp.
Global Securities Finance Co., Ltd.
Chiachen Chiayi Venture Capital Corporation
$ 3,417,776
1,263,467
181,016
4,862,259
(159,426 )
4,702,833
100,000
90,000
80,000
70,000
65,000
55,000
50,000
50,000
50,000
23,562
20,000
% of
Shareholdings
2003
Carrying
Value
% of
Shareholdings
100.00
98.21
100.00
-
$ 1,940,154
1,221,469
191,818
725,634
4,079,075
57,877
4,136,952
100.00
98.21
100.00
100.00
8.13
8.70
10.00
7.00
10.00
9.82
9.92
5.00
5.00
0.35
10.00
90,000
80,000
70,000
65,000
55,000
50,000
50,000
23,562
20,000
8.70
10.00
7.00
10.00
9.82
5.00
5.00
0.35
10.00
(Continued)
- 17 -
2004
Carrying
Value
Investees
Fu-Ban Securities Finance Co., Ltd.
$
Taiwan Securities Central Depository Co., Ltd.
Taiwan Future Exchange Co., Ltd.
Long-term investments in bonds
Government bonds - A89112
Other long-term investments
Advance payments on long-term investments
18,286
12,858
11,571
696,277
2003
% of
Shareholdings
0.47
0.64
0.56
% of
Shareholdings
Carrying
Value
$
29,037
12,858
11,571
557,028
50,322
-
8,300
-
$ 5,457,732
$ 4,693,980
0.47
0.64
0.56
SinoPac Securities (Cayman) Holdings Limited raised its capital of US$20,000 thousand (NT$666,024
thousand) and US$26,000 thousand (NT$904,035 thousand) in 2004 and 2003, respectively. The
Corporation subscribed for all of this investee’s shares. Besides, the Corporation in order to adjust the
foreign investment framework, it increased investments in SinoPac Securities (Cayman) Holdings Limited
by transfer - out the investments of SinoPac Assets Management Corp. (B.V.I.) amounted to US$19,653
thousand (NT$762,770 thousand). Then, the capital of SinoPac Securities (Cayman) Holdings Limited
was increased to US$87,753 thousand as of December 31, 2004. SinoPac Securities (Cayman) Holdings
Limited was incorporated to coordinate and control the Corporation’s foreign investments.
In August 2003, the Corporation acquired from other stockholders 2,887 thousand shares of SinoPac
Futures Corporation at $12.00 dollar per share, for a total of $34,644 thousand. As a result, the
Corporation’s ownership interest in SinoPac Futures Corporation rose from 88.37% to 95.59%. In
September 2003, SinoPac Futures Corporation raised its capital by issuing 60,000 thousand shares at $12.00
dollar per share. Thus, the capital of SinoPac Futures Corporation increased to $1,000,000 thousand.
The Corporation subscribed for 59,980 thousand shares, amounting to $719,757 thousand, resulting in a rise
in its equity in SinoPac Futures Corporation to 98.21%.
SinoPac Capital Management Corporation deducted capital $34,000 thousand to offset accumulative deficit
on December 20, 2004. Then, the capital of SinoPac Capital Management Corporation was decreased to
$176,000 thousand. The Corporation owned 100% of its common stock as of December 31, 2004.
As of December 31, 2004 and 2003, the carrying values of long-term investments accounted for by the
equity method and related investment income (loss) were calculated on the basis of audited financial
statements for the same period.
The Corporation’s direct or indirect investees, except SinoPac Capital Management Corporation since its
total assets or operating revenues are less than 10% of those of the Corporation, were included in
consolidated financial statements.
Long-term investments in bonds were deposited in the Central Bank of China (Taiwan) because the
Corporation engages in bills financing.
- 18 -
8. PROPERTIES
The details of accumulated depreciation are as follows:
2004
Buildings
Equipment
Leasehold improvements
$
80,398
878,148
417,217
$ 1,375,763
2003
$
69,143
784,209
385,867
$ 1,239,219
9. REFUNDABLE DEPOSITS
2004
Operation bond
Guarantee deposits on issuance of warrants and structured notes
Settlement/clearing fund
Rental deposits (Notes 26 and 28)
Deposit for unsettled lawsuit (Note 28)
Deposits for OTC transactions
Others
$
890,000
528,000
355,434
64,179
37,588
28,690
$ 1,903,891
2003
$
875,000
610,000
344,962
63,492
33,986
26,000
29,548
$ 1,982,988
Under the Rules Governing Securities Firms and Rules Governing Futures Commission Merchants, the
Corporation deposited cash, government bonds or financial bonds in government-designated banks as legal
deposits (operating bond). The deposits are made upon completion of corporate registration or upon
setting up a branch office.
Guarantee deposits on issuance of warrants and structured notes represents cash deposited by the
Corporation because it engages in warrant and structured note transactions.
The settlement/clearing fund represents cash placed by the Corporation with stock exchange since it
engages in securities trading (both for the account of its customers and for its own account). The deposit is
required under Rules Governing Securities Firms.
10. PROPERTIES LEASED TO OTHERS
2004
Land
Building, net of accumulated depreciation of $36,860 in 2004 and $30,172
in 2003
$
$
162,819
$
- 19 -
285,421
2003
448,240
214,980
138,576
$
353,556
The Corporation’s leasing contracts are as follows:
Lessees
Contract Period
SinoPac Futures Corporation
2003.01.162006.01.15
SinoPac Capital Management
Corporation
Taiwan Development & Trust
Building
2003.01.122006.01.11
2002.05.012006.04.30
SinoPac Managed Future Co.
2004.02.162005.08.15
2004.08.012007.07.31
AsiaTec Health Technology Co.
Rental Deposits and Monthly Rents
Monthly rent of $335 thousand (from January 16,
2003 to February 28, 2003) and $398 thousand
(from March 1, 2003 to January 15, 2006)
Monthly rent of $225 thousand
Monthly rent of $651 thousand (from May 1, 2002 to
April 30, 2003) and $623 thousand (from May 1,
2003 to April 30, 2006), and rental deposits of
$1,953 thousand
Monthly rent of $64 thousand
Monthly rent of $336 thousand, and rental deposit of
$1,009 thousand
11. SHORT-TERM BANK LOANS
The balances of the loans as of December 31, 2004 and 2003 were due from January 3 to April 8, 2005 and
from January 2 to March 23, 2004, respectively, with annual interests ranging from 1.22% to 1.42% and
from 1.18% to 1.40%, respectively.
12. COMMERCIAL PAPER ISSUED
These instruments were issued by financial institutions. The amounts outstanding as of December 31,
2004 and 2003 were due between January 4 and March 10, 2005 (discount rates from 0.70% to 1.16%) and
between January 2 and February 11, 2004 (discount rates from 0.59% to 1.10%), respectively.
13. BONDS SOLD UNDER REPURCHASE AGREEMENTS
2004
Bonds
Issued by the government (interest rates at 0.750% to 1.175% in 2004 and
0.75% to 1.15% in 2003)
$ 5,457,154
Issued by corporations (interest rates at 1.175% to 1.700% in 2004 and
0.825% to 1.800% in 2003)
1,307,143
Issued by banks (interest rates at 1.70% in 2004 and 0.825% to 1.150% in
2003)
300,000
Collateralized loan obligation (1.175% interest rate in 2004)
344,901
Convertible bonds (0.900% to 0.975% interest rates in 2003)
$ 7,409,198
2003
$ 4,501,683
2,524,151
1,067,495
1,052,800
$ 9,146,129
The bonds outstanding as of December 31, 2004 will be repurchased for $7,420,769 thousand by September
20, 2005.
- 20 -
14. WARRANT LIABILITIES
2004
Listed Date
SinoPac Securities 46
SinoPac Securities 47
SinoPac Securities 48
SinoPac Securities 49
SinoPac Securities 50
SinoPac Securities 51
SinoPac Securities 52
SinoPac Securities 53
SinoPac Securities 54
SinoPac Securities 55
SinoPac Securities 56
SinoPac Securities 57
SinoPac Securities 58
SinoPac Securities 59
SinoPac Securities 60
SinoPac Securities 61
April 26, 2004
April 26, 2004
April 29, 2004
April 30, 2004
April 30, 2004
May 5, 2004
May 13, 2004
July 5, 2004
July 8, 2004
July 8, 2004
July 14, 2004
November 26, 2004
November 26, 2004
November 30, 2004
November 30, 2004
December 2, 2004
SinoPac Securities 62
SinoPac Securities 63
SinoPac Securities 64
SinoPac Securities 65
SinoPac Securities 66
December 2, 2004
December 3, 2004
December 3, 2004
December 6, 2004
December 6, 2004
SinoPac Securities 67
December 7, 2004
SinoPac Securities 68
December 8, 2004
SinoPac Securities 69
December 8, 2004
Less: Gain on change
in market value of
warrant liabilities as
of December 31, 2004
Units
Issued
Underlying Securities
Hua Nan Financial Holdings Co., Ltd.
Walsin Lihwa Corporation
Mega Financial Holding Co., Ltd.
TECO Electric & Machinery Co., Ltd.
United Microelectronics Corp.
Inventec Corporation
RITEK Corporation
CMC Magnetics Corporation
Chang Hwa Commercial Bank, Ltd.
United Microelectronics Corp.
Compal Electronics, Inc.
United Microelectronics Corp.
Mega Financial Holding Co., Ltd.
Mitac International Corp.
Hua Nan Financial Holdings Co., Ltd.
Advanced Semiconductor Engineering,
Inc.
Far Eastern International Bank
Walsin Lihwa Corporation
Waterland Financial Holdings
Yang Ming Marine Transport Corp.
E.Sun Financial Holding Company,
Ltd.
The Farmers Bank of China
Taiwan Cement Corp.
Uni-President Enterprises Corp.
Price at
Issuance
(in New
Taiwan
Dollars)
20,000,000 $ 2.820
20,000,000
1.980
20,000,000
2.130
20,000,000
1.684
20,000,000
2.675
20,000,000
2.426
20,000,000
2.425
20,000,000
2.377
20,000,000
2.625
20,000,000
2.725
20,000,000
3.963
30,000,000
2.030
30,000,000
2.180
30,000,000
2.082
30,000,000
2.875
30,000,000
3.520
Amount
$
Strike
Price
(in New Leverage
Taiwan
at
Dollars) Issuance
56,400
39,600
42,600
33,680
53,500
48,520
48,500
47,540
52,500
54,500
79,260
60,900
65,400
62,460
86,250
105,600
$ 38.22
26.85
31.65
20.47
44.43
30.63
29.79
24.38
28.65
32.94
45.80
31.65
34.20
24.60
41.85
39.00
10.74
9.04
10.70
8.49
12.00
9.40
8.58
7.28
7.28
8.73
8.86
10.39
10.46
7.88
9.70
7.39
30,000,000
30,000,000
30,000,000
30,000,000
30,000,000
2.180
2.032
1.438
3.274
2.480
65,400
60,960
43,140
98,220
74,400
30.75
25.80
19.05
43.50
36.00
9.40
8.46
8.83
8.86
9.68
30,000,000
30,000,000
30,000,000
1.290
2.182
1.786
38,700
65,460
53,580
(780,570 )
17.25
28.50
24.00
8.91
8.71
8.96
Market value
$ 656,500
2003
Listed (Traded)
Date
SinoPac Securities - 07
SinoPac Securities - 08
SinoPac Securities - 09
SinoPac Securities - 10
SinoPac Securities - 11
SinoPac Securities - 12
SinoPac Securities - 13
SinoPac Securities - 14
June 10, 2003
June 16, 2003
July 15, 2003
July 15, 2003
July 16, 2003
July 21, 2003
July 21, 2003
August 4, 2003
SinoPac Securities - 15
September 12, 2003
SinoPac Securities - 16
September 12, 2003
SinoPac Securities - 17
SinoPac Securities - 18
SinoPac Securities - 19
SinoPac Securities - 20
SinoPac Securities - 21
SinoPac Securities - 22
SinoPac Securities - 23
SinoPac Securities - 24
SinoPac Securities - 25
SinoPac Securities - 26
SinoPac Securities - 27
SinoPac Securities - 28
September 17, 2003
September 17, 2003
September 18, 2003
September 18, 2003
September 23, 2003
September 30, 2003
September 30, 2003
October 3, 2003
October 13, 2003
October 13, 2003
October 21, 2003
October 22, 2003
Underlying Securities
Inventec Corporation
Lite-On Technology Corp.
United Microelectronics Corp.
Hua Nan Financial Holdings Co., Ltd.
Far Eastern Textile Ltd.
Mitac International Corp.
Delta Electronics, Inc.
Siliconware Precision Industries Co.,
Ltd.
E.Sun Financial Holding Company,
Ltd.
TECO Electronic & Machinery Co.,
Ltd.
Hua Nan Financial Holdings Co., Ltd.
Chang Hwa Commercial Bank Ltd.
Evergreen Marine Corp.
United Microelectronics Corp.
Acer Incorporated
Compal Electronics, Inc.
Micro-Star International Co., Ltd.
Nan Ya Plastics Corporation
Far Eastern Textile Ltd.
Taiwan Cement Corp.
Yulon Motor Co., Ltd.
D-Link Corporation
Units
Issued
Price at
Issuance
(in New
Taiwan
Dollars)
20,000,000 $ 2.720
20,000,000
5.500
20,000,000
2.320
20,000,000
2.570
20,000,000
1.380
20,000,000
1.630
20,000,000
4.540
20,000,000
2.570
Amount
$
Strike
Price
(in New Leverage
Taiwan
at
Dollars) Issuance
54,400
110,000
46,400
51,400
27,600
32,600
90,800
51,400
$ 22.82
39.85
29.98
31.18
18.77
21.00
67.65
36.00
7.50
6.70
10.00
9.00
9.90
8.60
9.90
9.30
20,000,000
1.580
31,600
27.00
11.40
20,000,000
1.230
24,600
17.55
9.50
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
20,000,000
1.680
1.480
2.520
2.470
4.640
4.100
6.620
2.270
1.382
1.185
3.560
3.460
33,600
29,600
50,400
49,400
92,800
82,000
132,400
45,400
27,640
23,700
71,200
69,200
35.70
23.75
35.40
44.40
76.50
78.00
94.50
60.30
21.52
18.37
61.20
51.00
14.20
11.20
9.40
11.98
10.99
12.68
9.52
17.70
10.38
10.34
11.46
9.83
(Continued)
- 21 -
2003
Listed (Traded)
Date
SinoPac Securities - 29
SinoPac Securities - 30
SinoPac Securities - 31
SinoPac Securities - 32
SinoPac Securities - 33
SinoPac Securities - 34
SinoPac Securities - 35
SinoPac Securities - 36
SinoPac Securities - P1
Less: Gain on change
in market value of
warrant liabilities as
of December 31, 2003
Units
Issued
Underlying Securities
October 22, 2003
October 23, 2003
October 27, 2003
October 27, 2003
Pou Chen Corporation
Amtran Technology Co., Ltd.
Chi Mei Optoelectronics Corporation
Siliconware Precision Industries Co.,
Ltd.
November 3, 2003 Systex Corporation
November 14, 2003 Sampo Corporation
November 28, 2003 Chang Hwa Commercial Bank Ltd.
December 22, 2003 Uni-President Enterprises Corp.
July 23, 2003
Coretronic Corporation
Price at
Issuance
(in New
Taiwan
Dollars)
20,000,000 $ 2.765
20,000,000
3.360
20,000,000
4.740
20,000,000
2.865
20,000,000
20,000,000
20,000,000
20,000,000
5,000,000
1.580
1.580
1.333
0.938
4.690
Market value
Strike
Price
(in New Leverage
Taiwan
at
Dollars) Issuance
Amount
$
55,300
67,200
94,800
57,300
$ 54.15
49.20
66.15
43.65
13.06
9.76
9.30
10.16
27.60
24.00
24.15
21.00
30.21
11.65
10.13
12.08
14.93
5.90
31,600
31,600
26,660
18,760
23,450
(887,560 )
$ 747,250
The warrants are American-type warrants which expire within seven to nine months after their respective
listed dates. The Corporation can exercise a warrant either by issuing the underlying securities or paying
in cash.
The market values of warrant liabilities were calculated using their closing prices on December 31, 2004
and 2003.
Gains on warrants issued of 2004 and 2003 were $1,207,047 thousand and $432,909 thousand, respectively.
Related details are as follows:
2004
Gain on change in market value of warrants liabilities
Gain from exercise of warrants before maturity
Loss on change in market value of warrants repurchased - realized
Loss on change in market value of warrants repurchased - unrealized
2003
$
1,671,154 $
1,610
(346,961 )
(118,756 )
$
1,207,047
1,036,616
27,270
(577,143 )
(53,834 )
$
432,909
15. REPURCHASE OF WARRANTS ISSUED
2004
Units
Repurchased
SinoPac Securities - 07
SinoPac Securities - 08
SinoPac Securities - 09
SinoPac Securities - 10
SinoPac Securities - 11
SinoPac Securities - 12
SinoPac Securities - 13
SinoPac Securities - 14
SinoPac Securities - 15
- $
-
2003
Units
Repurchased
Amount
-
Amount
189,000 $
1,073,000
921,000
462,000
184,000
210,000
431,000
5,941,000
3,753,000
389
4,459
2,886
593
420
186
257
19,352
3,169
(Continued)
- 22 -
2004
Units
Repurchased Amount
SinoPac Securities - 16
SinoPac Securities - 17
SinoPac Securities - 18
SinoPac Securities - 19
SinoPac Securities - 20
SinoPac Securities - 21
SinoPac Securities - 22
SinoPac Securities - 23
SinoPac Securities - 24
SinoPac Securities - 25
SinoPac Securities - 26
SinoPac Securities - 27
SinoPac Securities - 28
SinoPac Securities - 29
SinoPac Securities - 30
SinoPac Securities - 31
SinoPac Securities - 32
SinoPac Securities - 33
SinoPac Securities - 34
SinoPac Securities - 35
SinoPac Securities - 36
SinoPac Securities - 46
SinoPac Securities - 47
SinoPac Securities - 48
SinoPac Securities - 49
SinoPac Securities - 50
SinoPac Securities - 51
SinoPac Securities - 52
SinoPac Securities - 53
SinoPac Securities - 54
SinoPac Securities - 55
SinoPac Securities - 56
SinoPac Securities - 57
SinoPac Securities - 58
SinoPac Securities - 59
SinoPac Securities - 60
SinoPac Securities - 61
SinoPac Securities - 62
SinoPac Securities - 63
SinoPac Securities - 64
SinoPac Securities - 65
SinoPac Securities - 66
SinoPac Securities - 67
SinoPac Securities - 68
SinoPac Securities - 69
SinoPac Securities - P1
Adjustment: Loss on change in market value of
warrants repurchased
- $
630,000
455,000
338,000
3,101,000
19,000
1,022,000
187,000
86,000
134,000
180,000
1,353,000
23,254,000
25,476,000
26,976,000
29,285,000
29,129,000
28,848,000
28,125,000
24,674,000
28,982,000
29,105,000
25,396,000
28,644,000
26,857,000
-
552
329
202
826
18
527
80
113
188
225
1,873
27,700
33,381
49,675
67,593
64,298
59,924
52,461
31,195
89,118
70,234
31,788
63,302
39,037
(118,756 )
Market value
$ 565,883
- 23 -
2003
Units
Repurchased Amount
222,000 $
1,508,000
180,000
13,072,000
218,000
11,851,000
9,387,000
12,987,000
11,640,000
5,948,000
1,796,000
15,644,000
14,119,000
12,744,000
4,644,000
4,763,000
15,829,000
4,047,000
5,198,000
12,662,000
19,474,000
1,192,000
167
1,171
201
28,601
210
15,063
6,697
20,220
20,389
8,962
3,461
26,315
51,190
15,924
2,902
5,552
35,075
3,585
5,102
12,151
17,650
6,392
(53,834 )
$ 264,857
The market values of warrants repurchased were calculated using their closing price as of December 31,
2004 and 2003.
16. BONDS PAYABLE
2004
Issuance of three-year unsecured bonds (September 12, 2003 to
September 25, 2006) with annual simple interest rate of 1.5% payable
annually. Bonds are repayable in full at face value on maturity date.
$ 2,000,000
2003
$ 2,000,000
17. LONG-TERM LOANS
The Corporation entered into Notes Issuance Facility (NIF) transaction with Chiao Tung Bank, Chung
Hsing Bills Finance Corporation and The International Commercial Bank of China in December 2003 and
February 2004. The credit line was $1,500,000 thousand. The NIF contract took effect on the contract
date. The contract period was two years. The contract required the maintenance of certain financial
indicators during the term of the agreement.
The Corporation had not used the line of credit as of December 31, 2004.
18. INCOME TAX
Under the Ruling of Ministry of Finance No. 910458039 dated February 12, 2003, a financial holding
company (FHC) and its domestic subsidiaries in which the FHC holds 90% interest for 12 months within a
tax year, may choose to adopt the linked-tax system for income tax filings. The Corporation adopted the
linked-tax system for income tax filings with its parent company - SinoPac Holdings and subsidiaries of
SinoPac Holdings since 2003. Thus, these companies jointly filed the tax returns and the returns on
undistributed retained earnings, with SinoPac Holdings as the taxpayer.
For the adoption by the Corporation, SinoPac Holdings and subsidiaries of SinoPac Holdings (collectively,
the “Group”) of the linked-tax system is to reduce the Group’s income tax liabilities and maximize the
Group’s synergy.
a. The reconciliation between income tax expense on income before income tax at statutory rate of 25%
and income tax payable is as follows:
Income tax expense on income before income tax at statutory rate
of 25%
$
Adjustment item:
Income tax expense on permanent differences at statutory rate of 25%
Premium from issuance of warrants
Gain on warrants issued
Tax-exempt securities transaction loss (gain)
Provision for decline in value of marketable securities
Tax-exempt income of operating headquarters
Equity in net income of domestic investee companies
Cash dividend
Provision (reversal of reserves) for trading loss
Costs and expenses related to operating headquarters
2003
2004
395,580
473,936
(418,191 )
221,653
86,086
(58,865 )
(26,799 )
(26,267 )
(25,634 )
19,056
$
676,739
289,669
(265,971 )
(280,007 )
27,625
(16,962 )
(39,759 )
20,910
(Continued)
- 24 -
2004
Costs and expenses related to tax-exempt securities transactions
Realized investment loss of domestic investee companies
Tax-exempt futures transaction loss
Separate tax on interest on short-term negotiable instruments
Others
Income tax after adjustment for permanent difference
Deferred income tax
Current year’s income tax expense
Provisional payment of tax and withholding tax
Income tax (10%) on undistributed retained earnings
Income tax payable for prior years
Others
$
Income tax payable
$ 1,392,454
2003
14,812 $
(7,004 )
4,145
(1,951 )
59
650,616
(16,487 )
634,129
(25,621 )
783,946
$
26,059
6,296
(903 )
58
443,754
(255,245 )
188,509
(53,137 )
3,576
598,791
702
738,441
The income tax payables as of December 31, 2004 and 2003 were presented in the balance sheets as
liabilities of $1,399,766 thousand and $766,716 thousand (included in other payables), respectively, and
income tax refund receivables of $7,312 thousand and $28,275 thousand (included in other receivables),
respectively.
b. The composition of income tax expense is as follow:
2004
Current year’s income tax expense
Timing difference:
Premium from issuance of warrants
Reversal of allowance for bad debts
Equity in net income (loss) of foreign investees
Unrealized gain (loss) from valuation of derivative financial
instruments transactions
Pension expense due to difference in calculation for accounting and
tax purposes
Reversal (deferred) of unrealized losses
Amortization of employees’ benefits
Deferred of unrealized exchange loss
Income tax after adjusted timing differences
Prior years’ adjustment
Income tax (10%) on undistributed retained earnings
Others
$
Income tax expense
$
- 25 -
634,129
2003
$
(43,126 )
79,973
(37,374 )
137,969
26,158
91,648
9,856
(261 )
8,905
(10,262 )
1,088
443,754
96,829
3,576
702
5,946
750
657
(195 )
650,616
12,357
662,973
188,509
$
544,861
c. Deferred income tax assets (liabilities):
2004
Current
Premium from insurance of warrants
Allowance for bad debts
Unrealized losses
Unrealized loss (gain) from valuation of derivative financial
instruments transactions
Employee benefits expense in excess of limit
Unrealized exchange loss
Deferred income tax liabilities, net
Noncurrent
Cumulative equity in net income of foreign investees
Pension expense due to difference in calculation for accounting and
tax purposes
Reserve for default accounts
Employee benefits expense in excess of limit
Deferred income tax liabilities, net
$
2003
(149,068 ) $
19,083
12,614
(9,595 )
345
195
(192,194 )
99,056
13,364
261
657
-
$
(126,426 ) $
(78,856 )
$
(91,168 ) $
(128,542 )
(47,606 )
50,000
445
(53,552 )
50,000
100
$
(94,620 ) $
(125,703 )
The deferred income taxes were calculated using 25% as the tax rate.
d. As of December 31, 2004 and 2003, the Corporation’s payable to SinoPac Holdings under linked-tax
system were $629,137 thousand and 13,449 thousand, respectively. As of December 31, 2003, the
Corporation’s payable to Bank SinoPac was $175,060 thousand.
e. The information on the Integrated Income Tax System is as follows:
2004
Balance of stockholders’ imputed tax credit account
$
24,263
2003
$
29,638
The estimated and actual creditable tax ratio of the Corporation for 2004 and 2003 were 2.64% and
4.34%, respectively.
The unappropriated earnings of the Corporation as of December 31, 2004 and 2003 did not include any
earnings generated before December 31, 1997.
The amount of the income tax credit to be distributed to domestic stockholders is calculated on the basis
of the balance of the Imputation Credit Account (ICA) on the date of the earnings distribution. The
ratio of the ICA balance to undistributed earnings on the actual date of the distribution of the dividend
in 2005 may differ from the estimated ratio since additional taxes paid by the Corporation after
December 31, 2004 will increase the ICA balance.
f.
The income tax returns of the Corporation through 2000 have been examined by the tax authorities.
The tax authorities disallowed as deduction against the Corporation’s income tax obligations from 1994
to 2000, items such as operating expenses and interest expenses allocated to the dealing department and
assessment of warrants. The Corporation filed an appeal for reconsideration of the assessments. The
Corporation, however, accrued all amounts assessed by the tax authorities as additional income tax
expense and income tax payable.
- 26 -
The income tax returns of SinoPac Securities through 2002 had been examined by the tax authorities.
But the tax authorities disallowed as deduction against SinoPac Securities’s income tax obligations for
2002 on assessment of warrants. The Corporation filed an appeal for reconsideration of the
assessments. The Corporation, however, accrued all amounts assessed by the tax authorities as
additional income tax expense and income tax payable.
The Corporation negotiated with the tax authorities the tax withheld from bond interest income for the
years 1994-2000. After this negotiation, the Corporation agreed to receive a tax refund at 60% of tax
withheld from the bond interest income, and the Corporation deducted income tax payable of $33,990
thousand for the years ended December 31, 2004.
19. EARNINGS PER SHARE
The numerator and denominator used in calculating earnings per share (EPS) were as follows:
2004
Net income
Basic EPS
Net income for common
stockholders
Amounts (Numerator)
Income
Before
Income
Net
Income
Tax
$ 1,582,318
$
919,345
$ 1,582,318
$
919,345
$ 2,706,955
$ 2,162,094
$ 2,706,955
$ 2,162,094
EPS
Income
Shares
Before
(Denominator) Income
Net
(In Thousand)
Tax
Income
1,526,902
$
1.04
$
0.60
1,496,350
$
1.81
$
1.44
2003
Net income
Basic EPS
Net income for common
stockholders
20. SECURITIES BROKERAGE ACCOUNTS, NET
2004
Debit account
Cash in bank - settlement
Accounts receivable - customers’ purchases
Accounts receivable - settlement
Exchange clearing receivable
Margin transaction
$
Credit account
Accounts payable - customers’ sales
Accounts payable - settlement
Exchange clearing payable
Margin transaction
8,834
4,380,927
1,663,478
521,410
42,163
6,616,812
2003
$
4,608,456
1,914,292
6,522,748
Securities brokerage accounts, net
$
- 27 -
94,064
15,805
3,388,467
1,730,003
5,134,275
3,026,079
1,714,270
303,154
2,666
5,046,169
$
88,106
21. STOCKHOLDERS’ EQUITY
The Corporation plans to expand and diversify its operations overseas. Thus, it plans to distribute
dividends in the form of stock at 70% and cash at 30%. The Corporation lower the cash dividend ratio if
cash is needed in its operations.
The Articles of Incorporation of the Corporation provide that the following must be appropriated from the
annual net income less any prior years’ deficits;
a. 10% as legal reserve
b. 20% as special reserve
The remainder from the above appropriations may be distributed according to the resolutions of the board of
directors and the stockholders passed in their meetings. However, at least 1% of the appropriation should
be employees’ bonus.
These appropriations and the allocation of the remaining net income, as well as other appropriations of
earnings, should be resolved by the stockholders in the following year and given effect to in the financial
statements of that year.
Under Article No. 15 of the ROC Financial Holding Company Act, the Corporation’s board of directors (on
behalf of the stockholders) approved the appropriation and distribution of the 2003 and 2002 earnings on
April 22, 2004 and April 3, 2003, respectively, as follows:
Earning Appropriation
and Distribution
2003
2002
Legal reserve
Special reserve
Cash dividends to stockholders
Cash bonus to stockholders
Cash bonus to employees
Remuneration to directors and supervisors
$
216,209
432,419
916,141
546,631
18,379
30,307
$ 2,160,086
$
Dividends Per Share
(in Dollars)
2003
2002
150,839
301,678
610,761
357,295
34,941
32,000
$ 0.600
0.358
-
$ 0.400
0.234
-
$ 1,487,514
$ 0.958
$ 0.634
Had the bonus to employees and remuneration to directors and supervisors been expensed in 2003 instead of
being accounted for as earnings distributions, the pro forma Basic EPS of net income of 2003 would have
decreased from $1.44 to $1.41.
The earnings appropriation and distribution of 2004 have not been approved by the board of directors and its
stockholders as of the independent auditors’ report date. Please access the Market Information System on
the website of the Taiwan Stock Exchange for the information on bonus to employees and remuneration to
directors and supervisors.
Under the Company Law, legal reserve must be appropriated until the reserve equals the Corporation’s
paid-in capital. The reserve may be used to offset a deficit; also, when the reserve has reached 50% of the
Corporation’s paid-in capital, up to 50% of the reserve may be distributed as stock dividend.
Under the Rules Governing Securities Firms, a special reserve must be provided every year at 20% of net
income until the reserve equals Corporation’s paid-in capital. The reserve may be used to offset a deficit;
also, when the reserve has reached 50% of the Corporation’s paid-in capital, up to 50% of the reserve may
be distributed as stock dividend.
- 28 -
Under the Company Law, capital surplus may only be used to offset a deficit. However, the components
of capital surplus (from the issue of stock in excess of par value, business combination and treasury stock
reissuance, etc.) and donated assets received may be capitalized.
Stockholders are entitled to tax credits upon distribution of earnings generated from January 1, 1998. The
tax credit is calculated on the basis of the ratio of the balance of the imputation credit account on the
dividend distribution date to the prior year’s unappropriated earnings.
22. TREASURY STOCK (COMMON STOCK)
Cause
Changes in Treasury Stock (Thousand Shares)
Beginning
Ending
Balance
Acquisition
Disposal
Balance
2004: None
2003
Stock shares reissued to employees
-
33,330
-
33,330
The Securities and Exchange Law limits the number of shares of stock that the Corporation issued and then
reacquired to within 10% of the total shares issued. It also limits the total reacquisition cost of those shares
to within the sum of the balances of the retained earnings, additional paid-in capital in excess of par value
and realized capital surplus. In addition, the Corporation (as holder of the treasury stocks) may not use the
treasury stocks as security for any obligation. Further, the Corporation cannot exercise stockholder’s
rights on the treasury shares. These restrictions apply until the Corporation reissues the treasury shares.
The 33,330 thousand treasury shares as of December 31, 2003 had been reacquired before the incorporation
of SinoPac Holdings. Those shares were exchanged for 33,660 thousand shares of SinoPac Holdings.
In November 2003, the Corporation reissued 33,660 thousand shares of SinoPac Holdings at $10.976 per
share to its employees. The proceeds of reissuance, net of securities transaction tax, were $368,344
thousand. The reissuance resulted in the recognition of capital surplus of $19,695 thousand.
23. CUSTOMERS’ COLLATERAL SECURITIES AND STOCK LOANS
Shares in
Thousands
Collateral securities
Stock loans
Refinancing stock loans
1,161,218
110,066
578
2004
Market
Value
$ 23,016,754
2,633,690
19,630
Shares in
Thousands
1,209,266
57,414
590
2003
Market
Value
$ 26,136,002
1,554,594
23,839
The aggregate market values were based on the closing prices on the last transaction days in December 31,
2004 and 2003.
- 29 -
24. PENSION AND SEVERANCE BENEFITS
The Corporation has pension and severance plans for all its regular employees. The following employees
are entitled to receive retirement benefits: (a) those who have served either 25 years or have served over
15 years and are 55 years old; and (b) those hired on or before May 19, 1997 and with more than 20 service
years. In addition, employees hired on or before March 15, 1996 and have served at least five years are
eligible to receive severance benefits. The pension and severance benefits are based on the average six
months’ basic salary or wage before retirement or termination.
The Corporation makes monthly contributions of amounts equal to 6% of basic salaries and wages (net of
bonuses and benefits) to a pension fund. The fund is administered by the employee’s pension plan
committee and deposited in a bank in the committee’s name. An employee’s pension plan supervisors
committee administers the fund.
a. Pension cost
2004
Service costs
Interest costs
Expected return on plan assets
Amortization
$
Pension cost
$
2003
44,741 $ 38,079
13,827
10,543
(16,455 )
(15,765 )
11,117
276
53,230
$
33,133
b. Reconciliation of pension fund contribution and prepaid pension fund is as follows:
2004
2003
Vested benefit obligation
Non-vested benefit obligation
Accumulated benefit obligation
Effects of changes in employees’ future salary levels
Projected benefit obligation
Fair value of plan assets
Pension fund contribution
Unrecognized net transitional assets
Unamortization balance of pension loss
$ (334,220 ) $ (288,736 )
(114,129 )
(79,961 )
(448,349 ) (368,697 )
(36,587 )
(28,875 )
(484,936 ) (397,572 )
520,097
441,026
35,161
43,454
(1,275 )
(1,487 )
189,261
157,395
Prepaid pension fund
$ 223,147
2004
c. Vested benefits
$ 367,419
$ 199,362
2003
$ 288,736
d. Actuarial assumptions of pension obligation are as follows:
2004
Discount rate
Incremental rate of employees’ future salaries level
Expected rate of return on plan assets
- 30 -
3.0%
1.5%
3.0%
2003
3.5%
1.5%
3.5%
e. Summary of changes in the pension fund are as follows:
2004
2003
Balance, beginning of years
Contributions
Interest income
Contributions from related party
Payments
$
441,026 $
77,015
9,999
(7,943 )
424,338
68,751
10,520
1,359
(63,942 )
Balance, end of years
$
520,097
441,026
$
25. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES
2004
Personnel expenses
Salaries
Insurance
Pension
Others
Depreciation expenses (including depreciation expenses on properties
leased to others)
Amortization expenses
2003
$ 1,651,543
95,651
53,230
48,388
1,848,812
$ 1,863,824
102,406
33,133
47,177
2,046,540
213,922
60,259
223,021
82,424
$ 2,122,993
$ 2,351,985
26. RELATED-PARTY TRANSACTIONS
a. The Corporation has had significant transactions with the following related parties:
Related Party
Relationship to the Corporation
SinoPac Holdings
National Holding Co.
Bank SinoPac
SinoPac Asset Management Corporation
SinoPac Call Center Co., Ltd.
National Electric Appliance Co., Ltd.
Parent company
Director and supervisor of SinoPac Holdings
Wholly owned subsidiary of SinoPac Holdings
Wholly owned subsidiary of SinoPac Holdings
Wholly owned subsidiary of SinoPac Holdings
Its director is the vice chairman of the Corporation’s board of
directors (the “BOD”)
Hong Yue Finance Corp.
Its director is the vice chairman of the Corporation’s BOD
Hong Yue Investment Co.
Supervisor of SinoPac Holdings
SinoPac Futures Corporation
Subsidiary
SinoPac Capital Management Corporation Subsidiary
SinoPac Securities (Europe) Ltd.
Indirect subsidiary
SinoPac Securities (USA) Ltd.
Indirect subsidiary
SinoPac Managed Future Co.
Indirect subsidiary
National Investment Trust Company
Its director is a relative of the BOD chairman of SinoPac
Limited (NITC)
Holdings before the third quarter of 2003
- 31 -
b. In addition to the information disclosed in other notes, significant transactions and account balances
with the foregoing parties are summarized as follows:
1) Bonds sold under repurchase agreements
Interest
Expense
for the
Year Ended
December 31
As of December 31
Face
Amount
Cost
2004
SinoPac Holdings
National Electric Appliance Co., Ltd.
Hong Yue Finance Corp.
SinoPac Managed Future Co.
$
442,500
51,400
15,000
6,000
$
490,917
56,003
16,205
6,508
$
1,621
80
7
118
$
514,900
$
569,633
$
1,826
$
28,000
-
$
28,006
-
$
19
639
104
7,476
$
28,000
$
28,006
$
8,238
2003
National Electric Appliance Co., Ltd.
SinoPac Holdings
Hong Yue Finance Corp.
Others
2004
Amount
As of December 31
%
2003
Amount
%
944,763
76
2) Bank deposits (including cash in bank - settlement)
Bank SinoPac
$
92,301
8
$
$ 1,160,000
34
$ 1,130,000
31
$
27,267
435
15
-
-
-
27,702
15
3) Pledged time deposits - current
Bank SinoPac
4) Notes and accounts receivable
SinoPac Futures Corporation - commissions and fees $
SinoPac Holdings - stock affairs agent fees
Bank SinoPac - commissions from recommend
credit loans
17,343
430
31
1
101
-
$
17,874
32
$
In the first quarter of 2004, the Corporation sold convertible bonds to Bank SinoPac at cost for
$247,900 thousand. Receivables had been collected as of March 31, 2004.
- 32 -
2004
Amount
%
2003
Amount
%
$
331,623
100
$
269,295
100
$
454
-
$
1,199
-
$
2,907
49
20
-
$
2,943
8
2
-
$
2,956
20
$
2,951
2
$
500,000
17
$
600,000
8
$
322
20
-
$
2,429
36
-
$
342
-
$
2,465
-
5) Margin deposits - futures and options
SinoPac Futures Corporation
6) Other receivables
Bank SinoPac - interests and others
7) Other current assets
National Electric Appliance Co., Ltd. - prepaid rent
Others
8) Short-term bank loans
Bank SinoPac
9) Other payables
SinoPac Futures Corporation - leasehold
improvements payables and futures exchange and
clearing payables
Bank SinoPac - interests
In 2003, the Corporation bought equipment from SinoPac Holdings for $701 thousand.
Corporation had paid as the end of 2003.
2004
Amount
2003
Amount
%
The
%
10) Other current liabilities
SinoPac Securities (USA) Ltd. - temporary receipt
of brokerage fees
SinoPac Securities (Europe) Ltd. - temporary receipt
of brokerage fees
Others
$
$
5,260
1
2,361
446
1
-
8,067
2
$
$
485
-
20,133
19
2
-
20,637
2
(Continued)
- 33 -
2004
Amount
For the years
2003
Amount
%
%
11) Commissions and fees - brokerage
Bank SinoPac
National Holding Co.
Hong Yue Investment Co.
Mutual funds managed by NITC
Others
$
3,951
1,866
1,487
4,893
-
$
381
607
805
20,070
7,480
1
-
$
12,197
-
$
29,343
1
$
680
145
1
-
$
2,385
938
1
1
$
825
1
$
3,323
2
$
6,785
-
6
-
$
5,645
572
5
-
$
6,785
6
$
6,217
5
$
199,115
100
$
139,391
100
12) Commissions and fees - underwriting
Bank SinoPac
Others
13) Stock affairs agent fees
SinoPac Holdings
Others
14) Commissions and fees - futures
SinoPac Futures Corporation
The Corporation entered into a contract with SinoPac Futures Corporation to assist the latter in
futures trading. The Corporation receives commission based on the trading volume.
2004
Amount
15) Exchange and clearing expenses - futures
$
4,092
$
8,691
9,649
(8,007 )
$
10,333
2003
Amount
%
100
%
$
4,796
100
5 $
6
(5 )
9,522
9,338
1,554
6
6
1
20,414
13
16) Rental expense (included in operating expenses)
Hong Yue Investment Co.
National Electric Appliance Co., Ltd.
Bank SinoPac
- 34 -
6
$
The Corporation has lease contracts with National Electric Appliance Co., Ltd., Hong Yue
Investment Co., and Bank SinoPac. The terms are as follows:
Lessor
Term
National Electric Appliance Co., Ltd. a. Po Ai Road Building
May 2002-May 2007; annual rent of $7,623 thousand for
the first year, subject to a yearly adjustment based on
the consumer price index
To expand leased area, additional contract terms:
March 2003-March 2006; annual rent of $1,373
thousand for the first year, subject to a yearly
adjustment based on the consumer price index
b. Wu Tsang Street Building
September 2004-September 2005; annual rent of $840
thousand
Hong Yue Investment Co.
July 2003-July 2008; annual rent of $8,252 thousand for the
first year, subject to a yearly adjustment based on the
consumer price index; lease deposit of $2,708 thousand
Bank SinoPac
July 1999-July 2006; monthly rent of $130 thousand
SinoPac Bank runs its business within some of the Corporation’s operating places; thus, the
Corporation shares in paying rental, water and electricity bills with SinoPac Bank, and the amount
of receipts is presented as a deduction from rental expense.
2004
Amount
2003
Amount
%
%
17) Consulting and legal fees (included in operating
expenses)
SinoPac Call Center Co., Ltd.
SinoPac Capital Management Corporation
SinoPac Asset Management Corporation
$
15,706
10,000
200
31
20
-
$
13,632
7,000
2,200
27
14
5
$
25,906
51
$
22,832
46
The Corporation entered into a contract with SinoPac Call Center Co., Ltd. for outsourcing
customer call service. The contract took effect in 2004, and consulting fees are paid as actual
services are provided. The Corporation entered into a contract with SinoPac Capital Management
Corporation for consultation services. The contract took effect in 2004 and the total fee is $10,000
thousand, payable quarterly. The Corporation entered into a contract with SinoPac Asset
Management Corporation for consultation services. This contract had ended, and the total fee
from February 2003 to January 2004 is $2,400 thousand, payable quarterly.
- 35 -
2004
Amount
18) Other nonoperating revenue and income
Rental - SinoPac Futures Corporation
- SinoPac Capital Management Corporation
- Bank SinoPac
- SinoPac Managed Future Co.
Interest - Bank SinoPac
- SinoPac Futures Corporation
- Hong Yue Investment Co.
2003
Amount
%
%
$
4,773
2,700
2,085
671
10
5
4
1
$
4,679
2,700
16,269
-
8
4
27
-
$
10,229
20
$
23,648
39
$
21,878
348
27
33
-
$
1,560
415
38
2
-
$
22,253
33
$
2,013
2
$
481
-
$
381
-
19) Nonoperating expenses and losses
Interest - Bank SinoPac
All transactions with related parties were carried at arm’s length.
27. PLEDGED OR MORTGAGED ASSETS
As of December 31, 2004 and 2003, the following assets were pledged to financial institutions (a) as
guarantee for commercial paper issued and short-term bank loans, long-term loans and a bank overdraft line
obtained and (b) for meeting the requirements by the tax authorities for appeals for tax reassement.
2004
Time deposits - current
Time deposits - noncurrent
Properties, net
Properties leased to others, net
2003
$ 3,370,900
75,000
1,686,196
370,453
$ 3,666,400
1,718,368
353,556
$ 5,502,549
$ 5,738,324
Time deposits of $1,160,000 thousand, a portion of properties with carrying values of $1,094,266 thousand
and a portion of properties leased to others with carrying values of $89,646 thousand as of December 31,
2004 were pledged to Bank SinoPac.
Time deposits of $1,130,000 thousand, a portion of properties with carrying values of $1,123,881 thousand
and a portion of properties leased to others with carrying values of $70,423 thousand as of December 31,
2003 were pledged to Bank SinoPac.
- 36 -
28. CONTINGENCIES AND COMMITMENTS
a. On behalf of the investors of Cheng-Yi Food Co. (CYF) with respect to its initial public offering (IPO),
the Securities and Futures Institute (SFI) filed a civil case against CYF and the major and
sub-underwriters (the Corporation was a sub-underwriter in the IPO) of CYF. The damages claimed
by SFI amounted to $71,018 thousand plus 5% interest. The Corporation’s legal counsel believes that
the Corporation cannot be held liable for damages incurred by the investors since its role as
sub-underwriter to the CYF IPO is limited only to the distribution of CYF shares and it did not advise
CYF on matters related to the IPO.
b. Mr. Chang sued the Corporation and its two former employees, Mr. Lin and Mr. Huang, for
embezzlement. Mr. Chang claimed from the Corporation damages of $32,215 thousand plus 5%
interest. After the trial at the high court of second instance on June 30, 2004, the high court
determined that the Corporation should assume the related liability of $28,828 thousand plus 5%
interest and pay compensation. After the trial at the supreme court on November 8, 2004, the supreme
court determined that the case be returned to the high court to rejudge. In the opinion of the
Corporation’s management and legal counsel, clarification should be made that the damage claimed by
Mr. Chang was not connected to the Corporation’s brokerage affairs because Mr. Chang had authorized
Mr. Lin to deal with money remittance for stock payment for a long time. In addition, the Corporation
claimed that Mr. Chang also committed an unpremeditated crime. Nevertheless, on the basis of the
conservative principle, the Corporation estimated a loss of $29,000 thousand, recorded as other payables
in the financial statements.
c. A plaintiff, Mr. Chen, sued Mr. Chen, a former employee of the Corporation’s Yuan Lin branch, for
fraud. Plaintiff Mr. Chen also sued the Corporation as a codefendant and demanded that the
Corporation pay damages of $12,999 thousand plus 5% interest. After the trial at the district court of
second instance on December 31, 2003, the district court concluded that the Corporation should assume
the related compensation of $7,799 thousand plus 5% interest. In the opinion of the Corporation’s
management, since plaintiff Mr. Chen was not the Corporation’s client and the defendant Mr. Chen did
not have brokerage transactions with the plaintiff, the Corporation could claim miscarriage of justice
and thus filed an appeal with the supreme court. Nevertheless, on the basis of the conservative
principle, the Corporation estimated a loss of $8,500 thousand, recorded as other payables in the
financial statements.
d. The one-to-seven-year operating lease agreements on the lease of the head office and branch premises
are renewable within six months before expiry. The deposits for these leases amounted to $64,179
(Note 9) and are shown under refundable deposits. Deposits will be refunded without interest when
the leases expire. Rents for the next five years are as follows:
Rent
Payable
Period
2005
2006
2007
2008
2009
$ 162,918
123,678
85,775
33,072
12,414
Payment Frequency
Monthly or quarterly
Monthly or quarterly
Monthly or quarterly
Monthly or quarterly
Monthly or quarterly
The rental expenses after 2009 will be around $3,817 thousand.
The lease expenses for the period ended December 31, 2004 and 2003 were $165,262 thousand and
$162,961 thousand, respectively.
- 37 -
29. FINANCIAL INSTRUMENTS
a. Warrants
1) The objective of issuing warrants and strategies to achieve this objective:
The Corporation issues warrants for trading purposes.
The Corporation holds underlying securities to hedge risks from the exercise of warrants and risks
from changes in warrant positions held. The Corporation’s hedging strategy is to minimize the
market value risks. The changes in market values of the underlying securities are highly correlated
to those of the warrants, and the Corporation evaluates and adjusts the positions held periodically
(see Notes 2, 5, 14 and 15).
2) Credit risk
The Corporation is not exposed to credit risk because premium is received upon the issuance of
warrants.
3) Market risk
Market risk on issued warrants comes mainly from changes in market prices of underlying
securities. The Corporation manages the market risk by adopting a dynamic hedging strategy to
adjust the positions of warrants and underlying securities.
4) Liquidity risk, risk to cash flows and the uncertainty as to the amount and timing of future cash
requirement
The premium of the warrants issued by the Corporation is collected in advance, and the Corporation
establishes a hedging position with its own capital when the warrants are issued. The liquidity risk
of the underlying securities held for hedging is low because the authorities have set the market price
and share distribution of the securities, and the probability that the securities cannot be sold for a
reasonable price is quite low. The Corporation has to manage any cash demand arising from
adjustment of hedge position for any changes due to adverse fluctuation of market prices of the
underlying securities. However, the market liquidity is high, so the risk to cash flows is low.
Warrants will expire between January 2005 to September 2005.
outflows arising from the hedging, no additional cash is needed.
Except for the cash inflows and
5) Leverage of the instrument. Please refer to Note 14.
b. Interest rate swap
1) The objective of engaging in interest rate swap (IRS) contracts and strategies to achieve this
objective:
The Corporation entered into IRS contracts with counter-parties to profit from short-term
fluctuations in interest rates.
2) The information on the outstanding IRS contracts is as follows:
December 31, 2004
Nominal
Fair
Credit
Value
Risk
Amount
For trading purposes
$ 1,700,000 $ (10,311 ) $
- 38 -
4,354
December 31, 2003
Nominal
Fair
Credit
Amount
Value
Risk
$ 2,600,000 $ (28,548 ) $ 11,221
The Corporation established high standards for screening the counter-parties and has rated their
credits under strict criteria. It has also set upper limits for total value of credits granted to control
credit risks. Thus, it does not expect significant exposure to credit risks. Fair value is the present
value of future interest income and expense discounted at the yield rate.
The fair values of outstanding IRS contracts as the end of 2004 and 2003 were recognized as
derivative financial assets - OTC at $9,725 thousand and $21,022 thousand, respectively, and
derivative financial liabilities - OTC at $20,036 thousand and $49,570 thousand, respectively.
3) Market risk
The Corporation uses value-at-risks (VAR), based on statistical analysis of market data and foreign
industrial standards, in evaluating market risks of the IRS contracts. As of December 31, 2004 and
2003, the VARs were $581 thousand and $1,183 thousand, respectively.
4) Cash flows and demands
Net interest, equal to the notional amount of the interest rate swap contracts multiplied by the
difference in the interest rate bases received or paid upon each settlement date, is not material.
The notional amounts are not exchanged on the final settlement date. Thus, the cash demand is not
significant.
5) For the years ended December 31, 2004, gains of $4,356 thousand from IRS valuation were
recognized (presented as gain from derivative financial instruments transactions - OTC). For the
years ended December 31, 2003, losses of $6,396 thousand from IRS valuation were recognized
(presented as gain from derivative financial instruments transactions - OTC).
c. Futures and options
1) The objective of using futures and options and related strategies to achieve the objective:
The Corporation uses futures and options contracts for trading purposes, to increase its investment
instrument, to aggressively develop various services and enhance working capital efficiency.
2) Carrying value, fair value and credit risk
Item
Futures
Options
Transaction Type
Banking and Insurance Sector
Index Futures
TAIFEX Futures
Electronic Sector Index Futures
TAIFEX Options - put
TAIFEX Options - call and put
Stock Options (BAO) - call
Stock Options (BDO) - call
- 39 -
December 31, 2004
Carrying
Opening
Value/
Positions
Premium
Paid
Long/
Short Volume (Received)
Long
44
Long
Short
Long
Short
Short
Short
15
10
20
120
10
10
$
45,515
18,523
9,113
28
(378 )
(30 )
(30 )
Fair
Value
$
46,024
18,564
9,236
9
(274 )
(43 )
(5 )
Item
Futures
Options
Transaction Type
TAIEX Futures
Electronic Sector Index Futures
Mini-TAIEX Futures
Banking and Insurance Sector
Index Futures
TAIEX Options - put
TAIEX Options - call and put
December 31, 2003
Carrying
Opening
Value/
Premium
Positions
Long/
Paid
Short Volume (Received)
Long
Long
Long
Short
59
20
2
22
Long
Short
16
3,085
$
69,687
19,510
583
19,168
101
(5,199 )
Fair
Value
$
69,655
19,800
590
19,281
31
(4,248 )
The market value by contract as of balance sheet dates was based on the closing price published by
the Taiwan Futures Exchange (TAIFEX). The Corporation expects no exposure to credit risks
since the counter-party is TAIFEX.
As of December 31, 2004 and 2003, the fair values of premiums from option transactions were
recognized at $9 thousand and $31 thousand, respectively, paid for long options - non-hedging and
at $322 thousand and $4,248 thousand, respectively, received from short options - futures.
3) Market risk
Market risk is the fluctuation in market prices of stock index futures and options. The Corporation
has appropriate risk control management and has set up stop-loss points to monitor price
fluctuations and holding positions. When the balance of the trading margin account is lower than
the maintenance margin, the Corporation will recognize a loss by either settling the deal or putting
in more deposits to the initial margin.
4) Liquidity risk, risk of cash flows and the uncertainty as to the amounts and timing of future cash
required
The Corporation has paid in advance initial margin for stock index futures contracts and premiums
for long options as well as margin for short options. More margin will be paid since the balance of
the trading margin account is lower than the maintenance margin. However, future cash demand is
supported by sufficient working capital. Thus, the risk of cash flows is insignificant.
5) Gain (loss) from stock index futures and options transactions
Gains or losses for the years ended December 31, 2004 and 2003 are summarized as follows:
For the Year Ended
December 31, 2004
Gains
(Losses)
Gains
from Futures from Option
Transactions Transactions
Non-hedging and realized
Non-hedging and unrealized
- 40 -
$
(189,227 ) $
427
172,122
97
$
(188,800 ) $
172,219
For the Year Ended
December 31, 2003
Gains
Gains
(Losses)
from Futures from Option
Transactions Transactions
Non-hedging and realized
Non-hedging and unrealized
$
87,564
152
$
(113,779 )
881
$
87,716
$
(112,898 )
d. Asset swap transactions - convertible bonds
1) The objective of convertible bonds swap transactions and strategies to achieve this objective:
The Corporation sold convertible bonds, which were acquired from dealing or underwriting
transactions, to counter-parties. The selling price received was taken as a nominal amount.
During the contract term, the Corporation took the pre-agreed interest rate in exchange for the
coupon rate and the interest compensation on the convertible bonds with counter-parties. It also
acquired the right to purchase the convertible bonds from the counter-parties anytime before the
expiration date of the contract.
Convertible bond swap transactions have three types: Fixed income, short call options and
combination of both types. The Corporation engaged in this transaction to diversify its financial
instruments, to lower the capital pressure from underwriting convertible bonds, to reinforce its
capability in underwriting convertible bonds, reduce risks, and to enliven the second market for
convertible bonds.
2) Information on outstanding convertible bond swap transactions is as follows:
Nominal
Amount
a) Fixed income transactions
Interest rate swap
Long call option on convertible bonds
$ 576,000
-
b) Short call option on convertible bonds
511,000
Nominal
Amount
a) Fixed income transactions
Interest rate swap
Long call option on convertible bonds
$ 305,000
-
b) Short call option on convertible bonds
232,000
December 31, 2004
Premiums
Paid
Fair
(Received)
Value
$
29,180
Credit
Risk
$ (11,157 ) $
1,332
76,056
127,199
(25,111 )
(61,657 )
-
December 31, 2003
Premiums
Paid
Fair
(Received)
Value
$
10,309
(10,273 )
$
383
59,914
(56,893 )
Credit
Risk
$
6,256
131,127
-
The fair value is computed using the model approved by the ROC OTC. The parameters used in
the model (convertible bond market prices, underlying stock prices, interest rates, etc.) are public
market information, thus, a risk-free arbitrage opportunity does not exist.
- 41 -
The Corporation established high standards for screening the counter-parties of fixed income
transactions and rated their credits under strict criteria. The Corporation has set upper limits for
total value of credits granted to control credit risks. Thus, it does not expect significant exposure
to credit risks.
The premium from short call option transactions is collected in advance, and the Corporation
expects no exposure to credit risks.
The fair values of fixed income convertible bonds swap transactions as of December 31, 2004 and
2003 were recognized as derivative financial assets - OTC at $2,448 thousand and $7,974 thousand,
respectively, and derivative financial liabilities - OTC at $13,605 thousand and $7,591 thousand,
respectively.
3) Market risk
The Corporation uses value-at-risks (VAR), based on statistical analysis of market data (including
interest rate, convertible bond market prices and theoretical value of options) and foreign industrial
standards in evaluating market risks of convertible bond swap transactions. As of December 31,
2004 and 2003, the VARs were $2,110 thousand and $907 thousand, respectively.
4) Liquidity risk, risk of cash flows and the uncertainty as to the amounts and timing of future cash
required
The underlying convertible bonds, acquired from dealing and underwriting transactions, were sold
to counter-parties and the Corporation received related payments. In addition, the Corporation
took the pre-agreed interest rate in exchange for the coupon rate and the interest compensation of
convertible bonds from counter-parties. Further, the Corporation acquired the right to repurchase
convertible bonds from counter-parties. Thus, there are no significant liquidity risks and the cash
demand is insignificant.
5) Gain (loss) from convertible bonds swap transactions
For the years ended December 31, 2004 and 2003, marking to market of convertible bond swap
transactions resulted in loss of $8,388 thousand and gains of $15,496 thousand (presented as gains
from derivative financial instruments transactions - OTC), respectively.
e. Structured note transactions
1) The objective of structured note transactions and strategies to achieve this objective:
There are two types of structured note transactions authorized by the ROC OTC market:
Principal-guaranteed note transactions and equity-linked note transactions. The Corporation signs
the contract with the counter parties, receives all (principal-guaranteed note transaction) or part
(equity-linked note transactions) of the contract price and settles the contract with cash on the
expiration date according to the return on the underlying assets. In substance, the transactions
include buy or sale of fixed-income instruments and rewards-linked options on the underlying
assets.
The Corporation started structured note transactions in July 2003 to diversify its financial
instruments, to increase profits, to enhance its hedging methods, and to raise profitability.
- 42 -
2) Information on outstanding structured notes transactions is as follows:
December 31, 2004
Premiums
Nominal
Paid
Amount (Received) Fair Value
a) Principal-guaranteed note transactions
Fixed-income instruments
Short call option on underlying assets
$
86,600
-
$
- $ (84,363 )
(2,237 )
(1,721 )
b) Equity-linked note transactions
Fixed-income instruments
Long put option on linked underlying assets
a) Principal-guaranteed note transactions
Fixed-income instruments
Short call option on underlying assets
124,200
-
347
(123,820 )
5,166
December 31, 2003
Premiums
Nominal
Paid
Amount (Received) Fair Value
$ 122,700
-
$
- $ (119,523 )
(3,215 )
(4,022 )
b) Equity-linked note transactions
Fixed-income instruments
Long put option on linked underlying assets
94,400
-
587
(94,114 )
706
The fair value is computed using the model approved by the ROC OTC. The parameters used in
the model (including underlying asset market prices and interest rates, etc.) are based on public
information available in the market; thus, a risk-free arbitrage opportunity does not exist.
The Corporation has strict criteria on the types of fixed income assets to be used and controls the
investment amounts. In addition, the premium from short option transactions is collected in
advance. Thus, the Corporation expects no exposure to credit risks.
3) Market risk
The market risk of structured note transactions is mainly from adverse fluctuations of the
underlying assets market price. Thus, option hedging models are used to hedge market risk. As
of December 31, 2004, the market risk is $8,058 thousand.
4) Liquidity risk, risk of cash flows and the uncertainty as to the amount and timing of future cash
required
The fixed income instruments purchased by the Corporation with the contract price received from
the structured note transactions are stored in a custodian bank. To enable investors to execute the
contract before maturity, the Corporation takes the liquidity risk of the fixed income instruments
into consideration when selecting the target instruments. If the liquidity risk of the fixed income
instruments is minor, there is no material risk of cash flows and no uncertainty on the amount and
timing of future cash demand.
- 43 -
5) For the years ended December 31, 2004 and 2003, gains (losses) from structured note transactions
were as follows: Losses of $3,132 thousand and $434 thousand from principal-guaranteed note
transactions, gains of $1,323 thousand and losses of $807 thousand from principal-guaranteed note
valuation; gains of $2,734 thousand and $98 thousand from equity-linked note transactions, and
gains of $4,700 thousand and $119 thousand from equity-linked notes valuation (presented as gain
from derivative financial instruments transactions - OTC).
f.
Fair values of financial instruments
Non-derivative Financial
Instruments
Carrying
Value
2004
December 31
Fair Value
Carrying
Value
2003
Fair Value
Assets
Financial assets with carrying value
equal to fair value
Short-term investments
Operating securities
Dealing
Underwriting
Hedging
Hedged
Custodian account
Long-term investments
Refundable deposits
$ 21,267,588
2,530,425
$ 21,267,588
2,550,229
$ 22,442,795
2,940,148
$ 22,442,795
2,981,654
9,833,650
2,134,213
233,570
82,770
205,177
5,457,732
1,903,891
9,865,104
2,134,213
238,727
84,965
205,177
5,458,754
1,903,891
10,539,268
2,305,393
2,695,377
123,604
108,577
4,693,980
1,982,988
10,641,812
2,353,686
2,810,637
123,798
108,577
4,693,980
1,982,988
20,579,758
2,000,000
3,062
20,579,758
2,000,000
3,062
23,632,235
2,000,000
2,053
23,632,235
2,000,000
2,053
Liabilities
Financial liabilities with carrying
value equal to fair value
Bonds payable
Guarantee deposits-in
The bases for fair values are as follows:
1) Short-term financial instruments - carrying value. Since the terms of these instruments are very
close to their maturity dates, the use of their carrying values as fair values is reasonable. This
evaluation applies to cash and cash equivalents, bonds purchased/sold under resell/repurchase
agreements, margin loans receivable, loan from refinancing margin, refinancing deposits receivable,
margin deposits - futures and options, notes and accounts receivable, other receivable (except for
income tax refund receivable), pledged time deposits, short-term bank loans, commercial papers
issued, deposits on short sales, short sales proceeds payable, notes and accounts payable and other
payables (except for income tax payable).
2) Investments in open-end mutual funds - based on the fund’s net assets values on the last trading day
in December 2004 and 2003. Investment in short-term notes and operating securities - time
deposits - since the terms of the instruments are very close to their maturity dates, use of their
carrying values as fair values; operating stocks except Emerging stocks - based on the closing price
of the last trading day in December 2004 and 2003; Emerging stocks - based on carrying value;
operating bonds - based on the reference prices published by R.O.C. OTC Securities Exchange on
the last trading day in December 2004 and 2003. Please refer to Notes 2, 4 and 5.
3) Long-term equity investments with no readily available market value - carrying value (if there is no
impairment in value). Long-term investment in bonds is based on the reference prices published
by R.O.C. OTC Securities Exchange.
- 44 -
4) Refundable deposits and guarantee deposits-in - carrying values.
5) Bonds payable - since the bonds bear fixed rate, the fair value of the bonds is derived by
discounting the expected cash flows. The discount rate used is the rate of bonds that have similar
characteristics as the bonds issued by the Corporation.
30. SPECIFIC RISK FROM FUTURES DEALING
The Corporation pays margin deposits on the starting dates of futures contracts. It also pays the margin
deposits for short options contracts. The margin account of the Corporation is reevaluated daily on the
basis of the market prices of the outstanding futures and options contracts. The Corporation is required to
put in additional margin deposits when the margin account falls below an agreed level (the “maintenance
margin”). Otherwise, the counter-party closes out the position by selling the contract.
There were 69 futures contracts and 160 option contracts outstanding as of December 31, 2004. 103
futures contracts and 3,101 option contracts outstanding as of December 31, 2003. Margin deposits paid
amounted to $331,623 thousand and $269,295 thousand as the end of 2004 and 2003, respectively.
31. SEGMENT INFORMATION
The Corporation mainly engages in underwriting, dealing and brokering of marketable securities, financing
the acquisition, short-sales by customers and futures dealing. It is considered a single-industry business.
32. ADDITIONAL DISCLOSURES
Following are the additional disclosures required by the Securities and Futures Bureau for the Corporation
and its investees:
a. Financing provided:
None
b. Endorsement/guarantee provided: Table 1 (attached)
c. Acquisition of individual real estates at costs of at least NT$100 million or 20% of the paid-in capital:
None
d. Disposal of individual real estates at prices of at least NT$100 million or 20% of the paid-in capital:
None
e. Total discount of commissions and fees to related parties amounting to at least NT$5 million:
f.
None
Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital:
None
g. Names, locations, and related information of investees on which the Corporation exercises significant
influence: Table 2 (attached)
h. Derivative financial instruments transactions:
Please see Note 29
- 45 -
33. DISCLOSURES REQUIRED BY MINISTRY OF FINANCE, RULING OF NO. 0920004507 DATED
OCTOBER 31, 2003
The Corporation’s investees which registered in the Cayman Islands and the British Virgin Islands include
SinoPac Securities (Cayman) Holdings Limited, SinoPac Asset Management Corp. (B.V.I.), SPS Asia Ltd.,
SinoPac Asia Limited and SPS Asset Management Limited. Information on these investees’ operating
activities are as follows:
a. Balance sheets: Table 3 to 7 (attached)
b. Statements of income: Table 8 to 12 (attached)
c. Securities held: Except that SPS Asia Ltd. held no securities at the end of 2004, for others please see
Table 13 to 16 (attached).
d. Derivative financial instruments transactions and the source of capital: Except that SinoPac Securities
(Cayman) Holdings Limited and SPS Asia Ltd. did not invest in derivative financial instruments, for
others please see Table 17 (attached).
e. Revenues from assets management business, service contents and litigation:
1) Except that SPS Asset Management Limited had the revenues from fund’s assets management
business of HK$12,134,997 and HK$11,159,096, for others did not have the revenues related to
assets management business.
2) Litigation:
None
- 46 -
TABLE 1
SINOPAC SECURITIES CORPORATION AND INVESTEES
ENDORSEMENT/GUARANTEE PROVIDED TO OTHER PARTIES
YEAR ENDED DECEMBER 31, 2004
(In Thousands of New Taiwan Dollars, Unless Otherwise Specified)
Counter-party
No.
0
Note 1:
Endorsement/Guarantee
Provider
Name
SinoPac Securities Corporation SinoPac Securities
(the “Corporation”)
(Asia) Ltd.
Nature of the Relationship
100% indirect subsidiary of
the Corporation
Limits on Each
Counter-party’s
Maximum
Ending Balance
Endorsement/
Balance for the Period
Guarantee
Amounts
$8,783,443
(Note 1)
$1,585,500
(US$50,000 thousand)
None
Value of Collaterals
Property, Plant or
Equipment
None
Under the Corporation’s rules, each counter-party’s endorsement and guarantee amounts and the total gross amounts are limited to 40% of the Corporation’s net worth.
- 47 -
Ratio of Accumulated
Maximum
Amount of Collateral to Net
Collateral/Guarantee
Equity of the Latest Financial
Amounts Allowable
Statement
None
$8,783,443
(Note 1)
TABLE 2
SINOPAC SECURITIES CORPORATION AND INVESTEES
NAMES, LOCATIONS, AND RELATED INFORMATION ON INVESTEES ON WHICH THE CORPORATION EXERCISES SIGNIFICANT INFLUENCE
YEAR ENDED DECEMBER 31, 2004
(In Thousands New Taiwan Dollars, Unless Otherwise Specified)
Original Investment Amount
Investee Company
SinoPac Futures Corporation
Location
Main Businesses and Products
8Fl., No. 2, Chung Ching S. Rd., Sec. 1, Taipei, Taiwan
Brokerage and dealing of futures contracts
Dec. 31, 2003
Dec. 31, 2004
$
1,107,881
Balance as of December 31, 2004
$
Percentage of
Ownership
Shares
Carrying Value
1,107,881
98,214,750
98.21
$
1,263,467
3,066,055
1,637,261
87,752,581
100.00
3,258,350
112,028
146,028
17,600,000
100.00
181,016
16,000
thousand
16,000,000
100.00
-
20,000,000
100.00
SinoPac Securities (Cayman) Holdings Limited P.O. Box 513 GT, Strathvale House, North Church Street, George Town,
Grand Cayman, Cayman Islands, British West Indies
Investment holding company
SinoPac Capital Management Corporation
19Fl., No. 2, Chung Ching S. Rd., Sec. 1, Taipei, Taiwan
Investment consulting
SinoPac Asset Management Corp. (B.V.I.)
Ellen L. Skelton Building, Fishers Lane, Road Town, Tortola, British
Virgin Islands
Securities brokerage, investment consulting, fund
management and other securities business
SinoPac Managed Future Co.
18Fl., No. 2, Chung Ching S. Rd., Sec. 1, Taipei, Taiwan
Futures management
SinoPac Securities (Europe) Ltd.
5th Floor Habib House, 42 Moorgate, London EC2R 6EL
European-business agent
US$
1,514
thousand
US$
1,514
thousand
1,000,000
100.00
US$
1,077
thousand
SinoPac Securities (Asia) Ltd.
23Fl., Two International Finance Centre, No. 8, Finance Street, H.K.
Hong Kong stock brokerage
US$
54,972
thousand
US$
38,582
thousand
45,021
100.00
US$
69,072
thousand
SinoPac Futures (Asia) Ltd.
23Fl., Two International Finance Centre, No. 8, Finance Street, H.K.
Futures and options brokerage
US$
1,205
thousand
US$
1,205
thousand
10,000,000
100.00
US$
2,357
thousand
SinoPac Capital (Asia) Ltd.
23Fl., Two International Finance Centre, No. 8, Finance Street, H.K.
Issuance of derivative products
US$
3,862
thousand
US$
3,862
thousand
30,000,000
100.00
US$
4,797
thousand
SPS Asia Ltd. (formerly NSC Asia Ltd.)
Akara Bldg., 24 De Castro Street, Wickhams Cayl, Road Town,
British Virgin Islands
Derivatives instruments business
US$
744
thousand
US$
744
thousand
1,000
100.00
US$
41
thousand
SinoPac Asset Management (Asia) Ltd.
(formerly NITC Asset Management (Asia)
Ltd.)
46Fl., Cosco Tower, 183 Queen’s Road, Central, Hong Kong
Asset management and investment consulting
US$
4,367
thousand
US$
158
thousand
10,000,000
100.00
US$
3,507
thousand
SinoPac Securities (U.S.A.) Ltd.
400 Montgomery St. Suite 800, San Francisco, CA 94104, U.S.A.
American-business agent
US$
1,848
thousand
US$
1,848
thousand
2,000
100.00
US$
SinoPac Securities (H.K.) Limited
23Fl., Two International Finance Centre, No. 8, Finance Street, H.K.
Securities brokerage, investment consulting, fund
management and other securities business
US$
256
thousand
US$
3,205
thousand
2,000,000
100.00
SinoPac Asia Limited
Ellen L. Skelton Building, Fishers Lane, Road Town, Tortola, British
Virgin Islands
Securities brokerage, investment advisory and
consulting
US$
6,000
thousand
US$
6,000
thousand
6,000,000
SPS Asset Management Limited
Akara Bldg., 24 De Castro Street, Wickhams Cayl, Road Town,
British Virgin Islands
Asset management and investment consulting
HK$
39
thousand
HK$
39
thousand
SinoPac Securities (Asia) Nominees Ltd.
23Fl., Two International Finance Centre, No. 8, Finance Street, H.K.
Hong Kong stock trust business
HK$
2
HK$
SinoPac (Asia) Nominees Ltd.
23Fl., Two International Finance Centre, No. 8, Finance Street, H.K.
Nominee trust account for overseas stockholdings
HK$
2
HK$
Tortola,
Tortola,
US$
16,000
thousand
US$
200,000
Note 1:
SinoPac Securities (Cayman) Holdings Limited and SinoPac Asset Management Corp. (B.V.I.) own 94.89% and 5.11%, respectively, of SinoPac Securities (Asia) Ltd.
Note 2:
As of December 31, 2004, SinoPac Asset Management Corp. (B.V.I.) and SinoPac Securities (H.K.) Limited were undergoing a dissolution process.
- 48 -
US$
22,914
thousand
Equity in Net
Income (Net
Loss) of the
Investees
Net Income
(Loss) of the
Investee
$
US$
122,851
$
Note
117,997 Subsidiary
40,255
40,255 Subsidiary
(10,641 )
(10,802 ) Subsidiary
1,368
thousand
45,709 Indirect subsidiary (Note 2)
(5,278 )
Indirect subsidiary
US$
(326
thousand )
Indirect subsidiary
US$
1,158
thousand
Indirect subsidiary (Note 1)
194,722
-
Indirect subsidiary
494
thousand
Indirect subsidiary
-
Indirect subsidiary
US$
909
thousand
Indirect subsidiary
612
thousand
US$
(244
thousand )
Indirect subsidiary
US$
184
thousand
US$
130
thousand
Indirect subsidiary (Note 2)
100.00
US$
12,675
thousand
US$
1,212
thousand
Indirect subsidiary
5,000
100.00
HK$
1,482
thousand
HK$
8,379
thousand
Indirect subsidiary
2
2
100.00
HK$
2
-
Indirect subsidiary
2
2
100.00
HK$
2
-
Indirect subsidiary
US$
TABLE 3
SINOPAC SECURITIES (CAYMAN) HOLDINGS LIMITED
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In U.S. Dollars)
2003
Amount
%
848,835
3,900
1
-
2
852,735
1
100,847,010
98
57,520,082
99
$ 102,798,103
100
$
58,372,817
100
2,530
40,903
-
$
1,471
-
-
43,433
-
1,471
-
87,752,581
4,214,027
10,413,734
374,328
85
4
10
1
48,100,000
952,874
8,952,443
366,029
82
2
15
1
102,754,670
100
58,371,346
100
$ 102,798,103
100
58,372,817
100
ASSETS
CURRENT ASSETS
Cash
Prepaid expenses
$
Total current assets
LONG-TERM EQUITY INVESTMENTS
TOTAL
2004
Amount
%
1,951,093
-
2
-
1,951,093
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accrued expenses
Other current liabilities
$
Total current liabilities
STOCKHOLDERS’ EQUITY
Capital stock
Capital surplus
Retained earnings
Cumulative translation adjustments
Total stockholders’ equity
TOTAL
- 49 -
$
TABLE 4
SINOPAC ASSET MANAGEMENT CORP. (B.V.I.)
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In U.S. Dollars)
ASSETS
CURRENT ASSETS
Cash
Bonds purchased under resale agreements
Other receivables
$
Total current assets
LONG-TERM EQUITY INVESTMENTS
PROPERTIES
Computer equipment
Less - accumulated depreciation
%
2003
Amount
%
6,488,170
-
28
-
306,029
6,112,829
2,403
2
28
-
6,488,170
28
6,421,261
30
16,387,985
72
15,324,373
70
$
143,164
(103,396 )
1
(1 )
143,164
(79,536 )
-
39,768
-
63,628
-
$
22,915,923
100
$
21,809,262
100
$
2,189
-
$
2,046
-
Properties, net
TOTAL
2004
Amount
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accrued expenses
STOCKHOLDERS’ EQUITY
Capital stock
Retained earnings
Cumulative translation adjustments
Total stockholders’ equity
TOTAL
$
- 50 -
16,000,000
6,916,647
(2,913 )
70
30
-
16,000,000
5,805,708
1,508
73
27
-
22,913,734
100
21,807,216
100
22,915,923
100
21,809,262
100
$
TABLE 5
SPS ASIA LTD.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In H.K. Dollars)
ASSETS
2004
Amount
%
2003
Amount
%
CURRENT ASSETS
Other receivables
$
319,044
100
$
626,222
100
TOTAL
$
319,044
100
$
626,222
100
$
-
-
$
307,178
49
7,734
311,310
2
98
7,734
311,310
1
50
319,044
100
319,044
51
319,044
100
626,222
100
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accrued expenses
STOCKHOLDERS’ EQUITY
Capital stock
Retained earnings
Total stockholders’ equity
TOTAL
$
- 51 -
$
TABLE 6
SINOPAC ASIA LIMITED
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In U.S. Dollars)
2003
Amount
%
22,183,379
1,208,167
92,592,162
200,000
12,301
802,827
2,000,000
-
18
1
78
1
2
-
99
118,998,836
100
39,340
-
-
-
881,250
1
-
-
$
68,403,134
100
$ 118,998,836
100
$
16,710,000
38,794,237
223,729
125
24
57
-
Total liabilities
55,728,091
STOCKHOLDERS’ EQUITY
Capital stock
Retained earnings
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Short-term investments, net
Operating securities - dealing
Margin deposits - futures and options
Derivative financial assets
Other receivables
Other financial assets
Pledged time deposits
Other current assets
$
Total current assets
PROPERTIES
Advance payments on equipment
OTHER ASSTS
Deferred charges
TOTAL
2004
Amount
%
6,168,332
57,478,817
2,596,060
175,551
1,000,000
63,784
9
84
4
2
-
67,482,544
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term bank loans
Bonds sold under repurchase agreements
Derivative financial liabilities
Other payables
Other current liabilities
Total stockholders’ equity
TOTAL
$
- 52 -
$
100,000
106,826,168
204,761
404,982
-
90
-
81
107,535,911
90
6,000,000
6,675,043
9
10
6,000,000
5,462,925
5
5
12,675,043
19
11,462,925
10
68,403,134
100
$ 118,998,836
100
TABLE 7
SPS ASSET MANAGEMENT LIMITED
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In H.K. Dollars)
2003
Amount
%
13,720,249
173,576,229
851,411
1,265,307
52,260,000
29,989
6
72
22
-
100
241,703,185
100
775
-
775
-
$ 346,716,931
100
$ 241,703,960
100
$ 226,549,014
3,122,138
5,463,274
1,091,588
108,822,000
186,552
65
1
2
1
31
-
345,234,566
ASSETS
CURRENT ASSETS
Cash
Operating securities - dealing
Accounts receivable
Other receivables
Other financial assets
Other current assets
$
Total current assets
LONG-TERM EQUITY INVESTMENTS
TOTAL
2004
Amount
%
7,466,665
321,645,704
1,985,287
45,861
15,546,000
26,639
2
93
1
4
-
346,716,156
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Bonds sold under repurchase agreements
Derivative financial liabilities
Accounts payable
Other payables
Other financial liabilities
Other current liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
Capital stock
Retained earnings
Total stockholders’ equity
TOTAL
- 53 -
$
15,600,000
7,436,000
3,762,696
1,530,109
208,260,000
-
6
3
2
1
86
-
100
236,588,805
98
38,750
1,443,615
-
38,750
5,076,405
2
1,482,365
-
5,115,155
2
$ 346,716,931
100
$ 241,703,960
100
TABLE 8
SINOPAC SECURITIES (CAYMAN) HOLDINGS LIMITED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In U.S. Dollars)
2004
Amount
%
1,215,623
7,491
99
1
Total revenues
1,223,114
EXPENSES
Operating expenses
REVENUES
Investment income
Nonoperating revenue and income
NET INCOME
$
$
- 54 -
2003
Amount
%
6,786,655
17,162
100
-
100
6,803,817
100
18,591
2
8,173
-
1,204,523
98
6,795,644
100
$
$
TABLE 9
SINOPAC ASSET MANAGEMENT CORP. (B.V.I.)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In U.S. Dollars)
REVENUES
Investment income
Interest income
Gain from option transactions
Nonoperating revenue and income
$
Total revenues
COSTS AND EXPENSES
Loss from futures transactions
Operating expenses
Nonoperating expenses and losses
Total costs and expenses
NET INCOME
$
- 55 -
2004
Amount
%
2003
Amount
%
1,324,802
75,183
1,812
95
5
-
3,693,458
55,959
220,950
7,222
93
1
6
-
1,401,797
100
3,977,589
100
34,002
88
2
-
78,650
40,930
41
2
1
-
34,090
2
119,621
3
1,367,707
98
3,857,968
97
$
$
TABLE 10
SPS ASIA LTD.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2003
(In H.K. Dollars)
Amount
REVENUES
Commissions and fees - brokerage
Gain on sales of securities
Nonoperating revenue and income
$
%
261,326
231,916
16,552
51
46
3
Total revenues
509,794
100
EXPENSES
Operating expenses
387,373
76
122,421
24
NET INCOME
$
Note: The operations of SPS Asia Ltd. was suspended in 2004, so there was no revenues and
expenses in 2004.
- 56 -
TABLE 11
SINOPAC ASIA LIMITED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In U.S. Dollars)
REVENUES
Commissions and fees - brokerage
Gain on sales of securities - dealing
Interest income
Gain from option transactions
Nonoperating revenue and income
$
Total revenues
COSTS AND EXPENSES
Interest expenses
Loss from futures transactions
Exchange clearing expenses - futures
Loss from derivative financial instruments
transactions
Operating expenses
Nonoperating expenses and losses
Total costs and expenses
NET INCOME
$
- 57 -
2004
Amount
%
258,572
1,991,027
1,491,833
340,886
6
49
37
8
4,082,318
2003
Amount
%
4,641,174
2,034,256
505,500
332,308
62
27
7
4
100
7,513,238
100
1,507,595
908,879
47,094
37
22
1
2,345,840
316,614
9,035
31
4
-
26,634
344,739
35,259
1
8
1
137,459
1,381,770
334
2
19
-
2,870,200
70
4,191,052
56
1,212,118
30
3,322,186
44
$
$
TABLE 12
SPS ASSET MANAGEMENT LIMITED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
(In H.K. Dollars)
REVENUES
Commissions and fees - brokerage
Gain on sales of securities - dealing
Interest income
Gain from derivative financial instruments
transactions
Other operating income
Nonoperating revenue and income
$
Total revenues
COSTS AND EXPENSES
Commissions and fees - brokerage
Interest expenses
Other operating costs
Operating expenses
Total costs and expenses
NET INCOME
$
- 58 -
2004
Amount
%
2003
Amount
%
2,265,612
3,447,778
960,581
10
15
4
1,943,454
40,242
1,057,632
13
7
4,459,472
12,141,237
54,909
19
52
-
676,000
11,159,096
5,619
5
75
-
23,329,589
100
14,882,043
100
1,718,483
6,289,059
6,163,327
779,509
7
27
27
3
1,281,871
696,366
7,587,534
544,992
8
5
51
4
14,950,378
64
10,110,763
68
8,379,211
36
4,771,280
32
$
$
TABLE 13
SINOPAC SECURITIES (CAYMAN) HOLDINGS LIMITED
SECURITIES HELD
DECEMBER 31, 2004
(In U.S. Dollars)
Securities Type and Name
Stock
SinoPac Asset Management Corp. (B.V.I.)
SinoPac Securities (Europe) Ltd.
SinoPac Securities (Asia) Ltd.
SinoPac Futures (Asia) Ltd.
SinoPac Capital (Asia) Ltd.
SPS Asia Ltd.
SinoPac Asset Management (Asia) Ltd.
SinoPac Securities (U.S.A.) Ltd.
Relationship with the Company
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
subsidiary
Subsidiary
Note 1:
Net worth was calculated using investee’s audited financial statements for the same period.
Note 2:
SinoPac Asset Management Corp. (B.V.I.) was undergoing a dissolution process.
Financial Statement Account
Long-term equity investments
Long-term equity investments
Long-term equity investments
Long-term equity investments
Long-term equity investments
Long-term equity investments
Long-term equity investments
Long-term equity investments
- 59 -
Shares
16,000,000
1,000,000
42,721
10,000,000
30,000,000
1,000
10,000,000
2,000
December 31, 2004
Percentage of
Carrying Value
Ownership (%)
$
22,913,734
1,076,514
65,543,287
2,356,697
4,796,920
41,050
3,506,557
612,251
100.00
100.00
94.89
100.00
100.00
100.00
100.00
100.00
Net Worth
$
22,913,734
1,076,514
65,543,287
2,356,697
4,796,920
41,050
1,509,181
542,729
Note
Note 2
TABLE 14
SINOPAC ASSET MANAGEMENT CORP. (B.V.I.)
SECURITIES HELD
DECEMBER 31, 2004
(In U.S. Dollars)
Securities Type and Name
Stock
SinoPac Securities Asia Limited
SinoPac Securities (H.K.) Limited
SinoPac Asia Limited
Relationship with the Company
Investee under equity method
Subsidiary
Subsidiary
Note 1:
SinoPac Securities (H.K.) Limited was undergoing a dissolution process.
Note 2:
Net worth was calculated using investees’ audited financial statements for the same period.
Financial Statement Account
Long-term equity investments
Long-term equity investments
Long-term equity investments
- 60 -
Shares
2,300
2,000,000
6,000,000
December 31, 2004
Percentage of
Carrying Value
Ownership (%)
$
3,528,679
184,263
12,675,043
5.11
100.00
100.00
Net Worth
$
3,528,679
184,263
12,675,043
Note
Note 2
Note 1
Note 2
TABLE 15
SINOPAC ASIA LIMITED
SECURITIES HELD
DECEMBER 31, 2004
(In U.S. Dollars)
Securities Type and Name
Relationship with the Company
Financial Statement Account
Units/Par Value
December 31, 2004
Carrying Value
Market Value
Overseas convertible bonds
Amtran Techno.Co., Ltd. (CV)
Sinbon Electronics Co., Ltd.
Hon Hai Precision (REGS) (CV)
Chi Mei Optoelec. Corp.
Cathay Fin.Hold.Co., Ltd. CV
Pou Chen Corp. CV
Intl. Semiconductor Tech. (CV.)
Wistron Corp. CVR Inc. CV
Quanta Display Inc. CV (CONF)
Taiwan Cement Corp.
Federal Corporation (CV)
Formosa Plastic 611
Formosa Plastic 310
Nanya
Intl. Bank of Taipei
None
None
None
None
None
None
None
None
None
None
None
None
None
None
None
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
2,100,000
3,300,000
500,000
4,000,000
1,250,000
1,500,000
1,000,000
500,000
6,000,000
750,000
200,000
5,500,000
5,750,000
5,250,000
2,500,000
$ 2,128,875
3,345,688
544,375
4,456,526
1,574,902
1,559,659
944,062
505,208
6,107,500
783,750
204,000
5,733,250
6,018,333
5,489,438
2,543,075
$ 2,176,650
3,733,125
557,812
4,720,000
1,593,750
1,496,250
875,000
477,500
6,232,794
796,562
194,240
6,222,150
6,504,975
5,939,325
2,600,000
Corporate bonds
Walt Disney Co.
Household Fin. Corp. L29
Lehman Bros. Hold. Inc.
Bank Of America Corp.
Sony Capital Corp. (144A)
Hewlett-Pack Co.
J.P. Morgan & Co.
Goldman Sachs Group Inc.
Goldman Sachs Group Inc. (AV35)
JHF - 16H2728
Citi Group Inc.
Mcdonald’s Corp.
None
None
None
None
None
None
None
None
None
None
None
None
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
2,000,000
1,000,000
1,000,000
500,000
1,000,000
1,000,000
1,000,000
1,000,000
4,000,000
640,000
1,000,000
1,000,000
2,133,000
1,071,500
1,119,900
486,150
966,800
998,900
1,037,500
1,012,700
4,030,000
688,000
1,014,200
924,437
2,008,174
1,017,894
1,106,132
511,640
1,019,914
1,042,424
1,037,910
1,010,353
4,034,464
669,440
1,032,100
1,499,958
Stocks
Formosa Petrochemical Corp.
None
Operating securities - dealing
35,273
57,089
63,961
Note: Market value was calculated by the closing price on the last trading day in December 2004.
- 61 -
Note
TABLE 16
SPS ASSET MANAGEMENT LIMITED
SECURITIES HELD
DECEMBER 31, 2004
(In H.K. Dollars)
Securities Type and Name
Relationship with the Company
Financial Statement Account
Units/Par Value
December 31, 2004
Carrying Value
Market Value
Note
Beneficiary certificate
NAM Short-term Fixed Income Fund
NAM PRSF - Asteroids Fund
Barits Bond Fund
None
None
None
Operating securities - dealing
Operating securities - dealing
Operating securities - dealing
531,831
2,170,003
1,735
$ 54,630,146
173,734,539
5,019
$ 54,630,146
173,734,539
5,019
Note 1
Note 1
Note 1
Overseas convertible bonds
POU. Chen Corp. CVT
None
Operating securities - dealing
US$12,000,000
93,276,000
93,276,000
Note 2
Stocks
NAM Multi-Series Fund
None
Long-term equity investments
100
775
775
Note 2
Note 1:
Market value was calculated by the net worth on the last transaction day in December 2004.
Note 2:
Market value was calculated by the carrying value of investment.
- 62 -
TABLE 17
DERIVATIVE FINANCIAL INSTRUMENTS TRANSACTIONS AND
THE SOURCE OF CAPITAL
YEAR ENDED DECEMBER 31, 2004 AND 2003
SinoPac Asset Management Corp. (B.V.I.)
1. Stock index futures and options
a. The objective of using stock index futures and options and related strategies to achieve the
objective:
SinoPac Asset Management Corp. (B.V.I.) uses stock index futures and option contracts
for trading purposes to increase the investment instruments, aggressively develop various
services and heighten working capital efficiency.
b. Carrying value, fair value and credit risks
There were no outstanding stock index futures and option contracts as of December 31,
2004 and 2003.
c. Gain (loss) from stock index futures and option transactions
There were no stock index futures and option transactions in 2004.
year ended December 31, 2003 are summarized as follows:
Gains or losses for the
In U.S. Dollars
Losses from Gains from
Futures
Option
Transactions Transactions
Non-hedging and realized
$
(78,650 ) $
220,950
SinoPac Asia Limited
1. Stock index futures and options
a. The objective of using stock index futures and options and related strategies to achieve the
objective:
SinoPac Asia Limited uses stock index futures and option contracts for trading purposes to
increase the investment instruments, aggressively develop various services and heighten
working capital efficiency.
b. Carrying value, fair value and credit risks
There were no outstanding stock index futures and option contracts as of December 31,
2004 and 2003.
- 63 -
c. Gain (loss) from stock index futures and option transactions
Gains or losses for the years ended December 31, 2004 and 2003 are summarized as
follows:
In U.S. Dollars
2004
Losses from Gains from
Futures
Option
Transactions Transactions
Non-hedging and realized
$
(908,879 ) $
-
2003
Losses from Gains from
Futures
Option
Transactions Transactions
Non-hedging and realized
$
(316,614 ) $
505,500
2. Asset swap transactions - convertible bonds
a. The objective of convertible bonds swap transactions and strategies to achieve this
objective:
SinoPac Asia Limited bought convertible bonds from counter-parties. The purchase price
was taken as a nominal amount. During the contract term, SinoPac Asia Limited took the
coupon rate and the interest compensation on the convertible bonds in exchange for the
pre-agreed interest rate with counter-parties. It also sold to counter parties the right to
buy convertible bonds anytime before the expiry of related contract.
b. There were no outstanding convertible bond swap contracts as of December 31, 2004.
Information on outstanding convertible bond swap transactions as of December 31, 2003 is
as follows:
In U.S. Dollars
December 31, 2003
Premiums
Fair
Received
Value
Nominal
Amount
Fixed - income transactions
Interest rate swap
Short call option on
convertible bonds
$ 1,000,000
-
$
(99,127 )
$
12,301
(204,761 )
Credit
Risk
$
-
The fair value is computed using the model approved by the ROC OTC. The parameters
used in the model (convertible bond market prices, underlying stock prices, interest rates,
etc.) are public market information, thus, a risk-free arbitrage opportunity does not exist.
The counter-parties of SinoPac Asia Limited are reputable banks. Thus, the possibility of
exposure to credit risks is minimal.
- 64 -
c. Market risk
SinoPac Asia Limited uses value-at-risks (VAR) based on statistical analysis of market
data (including interest rate, convertible bond market prices and theoretical value of
options) and foreign industrial standards in evaluating market risks of convertible bond
swap transactions. As of December 31, 2003, the VAR was US$2,400.
d. Liquidity risk, risk of cash flows and the uncertainty as to the amounts and timing of future
cash required
The underlying convertible bonds were acquired from counter-parties. SinoPac Asia
Limited took the coupon rate and the interest compensation of convertible bonds in
exchange for the pre-agreed interest rate from counter-parties. Further, the Corporation
sold to counter-parties the right to buy convertible bonds. Thus, there are no significant
liquidity risks and the cash demand is not significant.
e. Gain (loss) from convertible bonds swap transactions
For the years ended December 31, 2004 and 2003, gains from convertible bonds swap
transactions are US$819,560 and US$20,787, respectively (presented as losses from
derivative financial instruments transactions).
3. Stock index swap
a. The object of using the stock index swap and related strategies to achieve the objective:
SinoPac Asia Limited uses stock index swap to hedge the Corporation’s risks on derivative
transactions and warrants issued.
b. Carrying value, fair value and credit risk
There were no outstanding stock index swap contracts as of December 31, 2004 and 2003.
c. Gain (loss) from stock index swap
Losses from stock index swap transactions in 2004 and 2003 are US$846,194 and
US$158,246, respectively (presented as losses from derivative financial instruments
transactions).
SPS Asset Management Limited
1. Asset swap transactions - convertible bonds
a. The objective of convertible bonds swap transactions and strategies to achieve this
objective:
SPS Asset Management Limited separated convertible bonds, which were acquired from
dealing transactions, into corporate bonds and options, and sold these two to investors with
different needs. The proceeds from selling corporate bonds was presented as other
financial liabilities, and the premiums received from selling options was presented as
derivative financial liabilities. SPS Asset Management Limited engaged in this
transaction to lower capital pressure of holding convertible bonds and reduce risks.
- 65 -
b. Information on outstanding convertible bond swap transaction is as follows:
In H.K. Dollars
December 31, 2004
Premiums
Received
Fair Value
Nominal
Amount
Short call option
on convertible
bonds
$
93,276,000
$
$ 156,000,000
(3,122,138 ) $
December 31, 2003
Premiums
Received
Fair Value
Nominal
Amount
Short call option
on convertible
bonds
(4,210,310 ) $
$
(8,112,000 ) $
(7,436,000 ) $
Credit Risk
-
Credit Risk
-
2. Market risk
Since SPS Asset Management Limited hold the convertible bonds, the market risk are
insignificant as a whole.
3. Liquidity risk, risk of cash flows and the uncertainty as to the amounts and timing of future
cash required
Since SPS Asset Management Limited hold the convertible bonds, there are no significant
liquidity risk and the cash demand is insignificant.
4. Gain (loss) from convertible bonds swap transactions
For the years ended December 31, 2004 and 2003, gains of convertible bond swap transactions
are HK$4,459,472 and HK$676,000, respectively (presented as gains from derivative financial
instruments transactions).
SinoPac Asset Management Corp. (B.V.I.), SinoPac Asia Limited and SPS Asset Management
Limited use their own capital in engaging in the above derivative transactions.
- 66 -