Unizyx Holding Corporation and Subsidiaries Consolidated ... Q4 Unizyx... · Unizyx Holding Corporation and Subsidiaries Consolidated Financial Statements December 31, 2015 and 2014

Unizyx Holding Corporation and Subsidiaries

Consolidated Financial Statements

December 31, 2015 and 2014 (With Independent Auditors’ Report Thereon)


Consolidated Balance Sheets December 31, 2015 and 2014

(in thousands of New Taiwan Dollars)

See accompanying notes to consolidated financial statements.

December 31, 2015 December 31, 2014

Assets Amount ％ Amount ％

Current assets:

Cash and cash equivalents (note 6(1)) $ 3,185,776 19 3,213,678 19

Financial assets measured at fair value through profit or

loss – current (note 6(2)) 5,260 - 24,717 -

Notes and accounts receivable, net (note 6(4)) 5,135,130 31 5,215,875 30

Accounts receivable – related parties, net (note 7) 479,070 3 551,772 3

Inventories (note 6(5)) 4,461,102 27 4,883,990 29

Other financial assets – current (note 6(4)) 42,934 - 79,648 -

Other current assets (note 7) 417,438 3 321,194 2

13,726,710 83 14,290,874 83

Non-current assets:

Financial assets carried at cost – non-current (note 6(3)) 30,373 - 143,840 1

Investments accounted for using equity method (note 6(6)) 114,775 1 33,131 -

Property, plant and equipment, net (notes 6(8) and 8) 2,184,696 13 2,152,164 13

Intangible assets (note 6(9)) 83,229 - 54,822 -

Deferred income tax assets (note 6(15)) 300,584 2 237,866 2

Refundable deposits 32,390 - 45,879 -

Net defined benefit asset (note 6(14)) 66,740 - 72,434 1

Other financial assets – non-current (note 8) 57,189 - 65,737 -

Long-term rent prepayments (note 6(13)) 9,419 - 9,860 -

Other non-current assets 84,338 1 65,220 -

2,963,733 17 2,880,953 17

Total assets $ 16,690,443 100 17,171,827 100


Liabilities and Stockholders’ Equity Amount ％ Amount ％

Current liabilities:

Short-term borrowings (note 6(10)) $ 1,987,216 12 1,054,822 6

Short-term notes and bills payable (note 6(11)) 50,000 - 150,000 1

Financial liabilities measured at fair value through profit

or loss – current (note 6(2)) 2,101 - 552 -

Notes and accounts payable 3,697,297 22 3,750,805 22

Payroll and bonus payable 503,609 3 545,775 3

Royalty payable 348,999 2 377,599 2

Other payables-related parties (note 7) 7,772 - 10,573 -

Income tax payable 119,633 1 75,557 -

Provision for warranty obligations – current (note 6(12)) 156,060 1 130,635 1

Advance receipts 105,914 1 122,013 1

Accrued expenses and other current liabilities 773,710 4 771,741 5

7,752,311 46 6,990,072 41

Non-current liabilities:

Deferred income tax liabilities (note 6(15)) 175,990 1 149,769 1

Net defined benefit liabilities (note 6 (14)) 3,824 - 23,445 -

Guarantee deposits received 2,863 - 3,371 -

182,677 1 176,585 1

Total liabilities 7,934,988 47 7,166,657 42

Stockholders’ equity (note 6(16)):

Equity attributable to parent company stockholders

Common stock 4,611,773 28 4,887,613 28

Capital surplus 3,805,480 23 3,894,726 23

Retained earnings 511,076 3 1,217,993 7

Other equity 10,381 - 99,982 1

Treasury stock (220,033) (1) (155,680) (1)

8,718,677 53 9,944,634 58

Non-controlling interests 36,778 - 60,536 -

Total equity 8,755,455 53 10,005,170 58

Total liabilities and equity $ 16,690,443 100 17,171,827 100



Consolidated Statements of Comprehensive Income

Years ended December 31, 2015 and 2014

(in thousands of New Taiwan Dollars, except for earnings per common share)

2015 2014 Amount ％ Amount ％

Operating revenues (notes 6(19) and 7) $ 21,390,243 100 21,260,772 100Cost of goods sold 16,719,013 78 15,964,315 75

Gross profit 4,671,230 22 5,296,457 25Operating expenses (notes 6(7) and 7):

Selling 1,848,839 9 2,017,226 9General and administrative 1,072,931 5 823,541 4Research and development 1,980,613 9 1,869,947 9

Total operating expenses 4,902,383 23 4,710,714 22Operating income (loss) (231,153) (1) 585,743 3

Non-operating income and gains (expenses and losses): Other income (note 6(20)) 67,570 - 70,291 -Gain (loss) on disposal of investment, net (note 6(3)) 15,309 - (6,153) -Foreign exchange gain or loss, net (319,450) (1) (240,957) (1)Interest expense (30,205) - (16,806) -Share of profit or loss of associates accounted for using

equity method, net (note 6(6)) 8,330 - (70,943) -Other gains and losses (note 6(20)) (2,728) - 65,868 -

(261,174) (1) (198,700) (1)Income (loss) before income taxes (492,327) (2) 387,043 2

Income tax expenses (note 6(15)) 153,678 1 208,786 1Net income (loss) (646,005) (3) 178,257 1Other comprehensive income (loss)

Items that will not be reclassified subsequently to profit or loss Remeasurements of defined benefit plans (8,874) - 706 -

Items that may be reclassified subsequently to profit or loss Exchange differences on translation of foreign financial

statements (110,750) - 49,250 -Income tax expense related to components of other

comprehensive income or loss (note 6(15)) 18,352 - (7,901) - (92,398) - 41,349 - (101,272) - 42,055 -

Total comprehensive income for the year $ (747,277) (3) 220,312 1Net income (loss) attributable to:

Shareholders of the parent $ (625,044) (3) 174,379 1Non-controlling interests (20,961) - 3,878 - $ (646,005) (3) 178,257 1

Total comprehensive income attributable to: Shareholders of the parent $ (723,519) (3) 213,660 1Non-controlling interests (23,758) - 6,652 - $ (747,277) (3) 220,312 1

Earnings per share (New Taiwan Dollars) (note 6(18)) Basic earnings per share $ (1.35) 0.37Diluted earnings per share $ 0.37



Consolidated Statements of Changes in Equity



Equity Attributable to Shareholders of the Parent

Retained Earnings Subtotal of

equity

Common stock

Capital surplus

Legal reserve

Unappropriated retained earnings Total

Cumulative translation adjustment

Treasury stock

attributable to the

shareholders of the parent

Non- controlling

interests Total equity

Balance at January 1, 2014 $ 4,913,203 3,911,572 199,700 989,206 1,188,906 61,407 (202,074) 9,873,014 53,884 9,926,898 Net income for 2014 - - - 174,379 174,379 - - 174,379 3,878 178,257 Other comprehensive income for 2014 - - - 706 706 38,575 - 39,281 2,774 42,055 Total comprehensive income for 2014 - - - 175,085 175,085 38,575 - 213,660 6,652 220,312 Appropriations and distribution of retained earnings: Legal reserve - - 34,415 (34,415) - - - - - - Cash dividends - - - (145,998) (145,998) - - (145,998) - (145,998) Treasury stock retired (25,590) (20,804) - - - - 46,394 - - -

Cash dividend received by subsidiaries from parent company

-

2,817 - - - - -

2,817 -

2,817

Stock option compensation cost - 1,141 - - - - - 1,141 - 1,141

Balance at December 31, 2014 4,887,613 3,894,726 234,115 983,878 1,217,993 99,982 (155,680) 9,944,634 60,536 10,005,170 Net loss for 2015 - - - (625,044) (625,044) - - (625,044) (20,961) (646,005) Other comprehensive income (loss) for 2015 - - - (8,874) (8,874) (89,601) - (98,475) (2,797) (101,272) Total comprehensive income (loss) for 2015 - - - (633,918) (633,918) (89,601) - (723,519) (23,758) (747,277) Appropriations and distribution of retained earnings: Legal reserve - - 17,438 (17,438) - - - - - - Cash dividends - - - (72,999) (72,999) - - (72,999) - (72,999) Treasury stock retired (275,840) (90,701) - - - - 366,541 - - - Purchase of treasury stock - - - - - - (430,894) (430,894) - (430,894) Cash dividend received by subsidiaries from parent

company - 1,455 - - - - - 1,455 - 1,455

Balance at December 31, 2015 $ 4,611,773 3,805,480 251,553 259,523 511,076 10,381 (220,033) 8,718,677 36,778 8,755,455



Consolidated Statements of Cash Flows



2015 2014 Cash flows from operating activities: Income (loss) before income tax $ (492,327) 387,043 Adjustments: Depreciation 255,740 229,585 Amortization 56,492 54,258 Provisions of allowance for doubtful accounts 9,299 118,861 Financial assets and liabilities at fair value through profit or loss (4,425) (29,250) Interest expense 30,205 16,806 Interest income (17,448) (18,739) Stock option compensation cost - 1,141 Shares of profit or loss of associates accounted for using equity

method (8,330) 70,943

Losses on disposal of property, plant and equipment 1,562 258 Losses (gains) on disposal of investment (15,309) 6,153 Impairment loss of financial assets 31,604 3,053 Provisions for inventory obsolescence 324,601 168,610 Contribution of the assets and liabilities to subsidiaries 94,839 - Subtotal of gains or losses on non-cash activities 758,830 621,679 Net changes in operating assets and liabilities: Financial asset or financial liability at fair

value through profit or loss

25,431 (9,452) Notes and accounts receivable (including related parties) 144,460 (1,214,106) Inventories 53,349 (1,405,118) Other financial assets and other current assets (56,828) 44,694 Total changes in operating assets 166,412 (2,583,982) Notes and accounts payable (51,987) 724,818 Other payables-related parties (625) 10,573 Advance receipts and other current liabilities (38,850) 363,797 Net defined benefit asset and liabilities (20,969) (5,079) Total changes in operating liabilities (112,431) 1,094,109 Total changes in operating assets and liabilities 53,981 (1,489,873) Total adjustments 812,811 (868,194) Cash inflow (outflow) generated from operations 320,484 (481,151) Interest received 13,155 22,786 Interest paid (29,696) (16,939) Income taxes paid (113,856) (92,465) Net cash provided by (used in) operating activities 190,087 (567,769)

(Continued)



Consolidated Statements of Cash Flows (Continued)



2015 2014 Cash flows from investing activities: Proceeds from disposal of available-for-sale financial assets - 40,821 Acquisition of financial assets carried at cost - (44,995) Proceeds from disposal of financial assets carried at cost 37,947 - Return of capital from financial assets carried at cost 29,522 5,478 Acquisition of investments accounted for using equity-method (43,958) (25,000) Acquisition of property, plant and equipment (331,252) (357,921) Proceeds from disposal of property, plant and equipment 1,947 16

Decrease (increase) in refundable deposits 12,394 (9,054)Acquisition of intangible assets (50,888) - Decrease (increase) in other financial assets – non-current (17,501) 289,509

Increase in other non-current assets (57,594) (30,874) Net cash outflow to losing control over subsidiaries (37,705) - Cash used in investing activities (457,088) (132,020)Cash flows from financing activities: Increase in short-term borrowings 932,394 283,465 Increase (decrease) in short-term notes and bills payable (100,000) 150,000 Decrease in guarantee deposits received (508) (16) Payments of cash dividends (71,544) (143,181) Purchase of treasury stock (430,894) - Net cash provided by financing activities 329,448 290,268 Effect of exchange rate changes on cash and cash equivalents (90,349) 9,114 Net decrease in cash and cash equivalents (27,902) (400,407)Cash and cash equivalents at beginning of period 3,213,678 3,614,085 Cash and cash equivalents at end of period $ 3,185,776 3,213,678

(Continued)


Notes to Consolidated Financial Statements

December 31, 2015 and 2014 (amounts expressed in thousands of New Taiwan Dollars,

except for per share information and unless otherwise noted)

1. Organization and principal activities Unizyx Holding Corporation (“Unizyx”) was incorporated on August 16, 2010. Unizyx was set up through a share swap with ZyXEL Communications Corp. (“ZyXEL”). The shares of Unizyx have been authorized by the Securities and Futures Bureau (SFB) and are traded on the Taiwan Stock Exchange (TSE). The address of its registered office and principal place of business is 3F, No. 363, Sec. 2, Gongdao 5th Rd., Hsinchu City, Taiwan. Unizyx’s main activity is investment. As approved by the Unizyx’s board of directors’ meeting on October 15, 2010, MitraStar Technology Corp. (“MitraStar”), an OEM/ODM Business Unit of ZyXEL, was spun off from ZyXEL and became a 100%-held subsidiary of Unizyx on January 1, 2011. ZyXEL and MitraStar will focus and optimize their operations in different areas of the communication product value chain, with one focusing on ZyXEL brand communication product marketing and sales, and the other concentrating on communication technology development and product manufacturing. The focused and optimized operation of each subsidiary is expected to increase the overall efficiency of the ZyXEL group. ZyXEL spun off net operating assets amounting to $3,530,734 to MitraStar and exchanged one share of MitraStar’s common stock valued at $10 New Taiwan Dollars (TWD) per share for each share of ZyXEL’s stock valued at $10.51 TWD per share. Unizyx acquired 336,081 thousand shares of MitraStar’s new issued common stock, and ZyXEL and MitraStar became 100%-held subsidiaries of Unizyx. ZyXEL was incorporated on August 16, 1989, at the Hsinchu Science-based Industrial Park. The shares of ZyXEL were traded on the TSE beginning on August 12, 1999. ZyXEL’s main activities include the research, development, production and sale of high-speed multi-mode modems and application-specific chipsets (ASICs), secure telephones, network modems, digital video coders and decoders, wide area networks (WANs), local area networks (LANs), and integrated service digital network (ISDN) equipment. In addition, it provides related consulting and design services and imports and exports related products. The stock of ZyXEL stopped being publicly traded on September 2, 2010, as approved by the SFB. MitraStar was incorporated on November 12, 2010, at the Hsinchu Science-based Industrial Park. MitraStar’s main activities include wired communication equipment and apparatus manufacturing, electronic parts and components manufacturing, restrained telecom radio frequency equipment and materials manufacturing, computer and computing peripheral equipment manufacturing, data storage media manufacturing and duplicating, wholesaling of computer software, restrained telecom radio frequency equipment and materials importing, software design services, digital information supply services, etc. The consolidated financial statements as of December 31, 2015 and 2014, include Unizyx and its subsidiaries (hereinafter refer to as the “Company.”)

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2. Approval date and procedures of consolidated financial statements The consolidated financial statements were authorized for issuance by the board of directors on March 17, 2016.

3. New Standards and Interpretations (1) The 2013 version of the International Financial Reporting Standards (“IFRS”) endorsed by the

Financial Supervisory Commission, R.O.C. (“FSC”) but not yet in effect. The Company adopted the 2013 version of IFRS (excluding IFRS 9 Financial Instruments) endorsed by the FSC beginning in 2015. The new standards, amendments and interpretations announced by the International Accounting Standards Board (“IASB”) are as follows:

New, Revised or Amended Standards and Interpretations Effective date per IASB

Amendments to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First - time Adopters

July 1, 2010

Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopter

July 1, 2011

Amendments to IFRS 1 Government Loans January 1, 2013

Amendments to IFRS 7 Disclosures - Transfers of Financial Assets July 1, 2011

Amendments to IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities

January 1, 2013

IFRS 10 Consolidated Financial Statements January 1, 2013 (Adopted by the subsidiaries on January 1, 2014)

IFRS 11 Joint Arrangements January 1, 2013

IFRS 12 Disclosure of Interests in Other Entities January 1, 2013

IFRS 13 Fair Value Measurement January 1, 2013

Amendments to IAS 1 Presentation of Items of Other Comprehensive Income

July 1, 2012

Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets

January 1, 2012

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Amendments to IAS 19 Employee Benefits January 1, 2013

Amendments to IAS 27 Separate Financial Statements January 1, 2013

Amendments to IAS 32 Offsetting of Financial Assets and Financial Liabilities

January 1, 2014

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

January 1, 2013

Based on the Company's assessment, except for the following standards, the 2013 version of IFRS will not have significant influence upon adoption: A. IFRS 10 “Consolidated Financial Statements”

IAS 27 “Consolidated and Separate Financial Statements” was superseded by IFRS10 to establish principles for the presentation and preparation of the consolidated financial statements. In addition, IASB renamed IAS 27 as “Separate Financial Statements”, repealed SIC 12 “Consolidation – Special Purpose Entities”, and redefined the principle of control. The Company can have control over the investees when it meets the three control elements at the same time. The Company evaluated that the adoption of the above standard and believed that the equity method of accounting still should be used. As a result, there were no change from the amounts recognized in assets, liabilities and comprehensive income.

B. IFRS 12 “Disclosure of Interests in Other Entities”

IFRS 12 requires a broader disclosure of an entity's interests in subsidiaries, joint arrangements, associates and unconsolidated entities. The objective of IFRS 12 is to specify the disclosure information provided. The Company has increased its disclosures on subsidiaries and associates in accordance with the standard (note 6 (6)).

C. IFRS 13 “Fair Value Measurement”

The standard provides a revised definition of fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. The Company increased its levels of disclosure on fair value measurement (note 6 (22)) in accordance with IFRS 13, as well as adapting new standards from 2015. However, disclosures in comparison is not required according to IFRS 13. Therefore, there is no significant impact on the Company’s financial position and the results of its operations after the evaluation.

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D. IAS 1 “Presentation of Financial Statements

The other comprehensive income section is required to present line items which are classified by their nature, and are grouped by those items that will or will not be reclassified to profit and loss in subsequent periods. Allocation of income tax to two groups of items of other comprehensive is also required. The Company has changed the presentation of the statements of comprehensive income in accordance with the standard; the previous corresponding period is also disclosed.

E. IAS 19 “Employee Benefits”

The amendments to IAS 19 require the Company to calculate a “net interest” amount by applying the discount rate to the net defined benefit liability or asset to replace the interest cost and expected return on plan assets used in the current IAS 19. In addition, the amendments eliminate the accounting treatment of either the corridor approach or the immediate recognition of actuarial gains and losses to profit or loss when they occur. However, they require all remeasurement of defined benefit plans (including actuarial gains and losses) to be recognized immediately through other comprehensive income. The past service cost, on the other hand, will be expensed immediately when it is incurred and no longer be amortized over the average period before vesting on a straight-line basis. In addition, instead of only recognizing the liability and expense when the demonstrable benefit commitment is made, the amendments require the Company to recognize the liability and expense for termination benefit on (1) the date when the Company can no longer withdraw the offer of the benefit; or (2) the date when the Company recognizes related restructuring expense, whichever date is earlier. Moreover, the amendments also require a broader disclosure for the defined benefit plans. There is no significant impact on the Company’s financial position and the results of the operations after the evaluation. The Company discloses the defined benefit plan as the standard requires.

(2) Impact of new standards and interpretations announced by the IASB not yet endorsed by the FSC The new standards, interpretations and amendments issued by the IASB at the end of the reporting period of the prior fiscal year, but not yet endorsed by the FSC until the reporting date of the financial statement for the calendar year 2015 are summarized as below:


IFRS 9 Financial Instruments January 1, 2018

Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

Effective date to be determined by IASB

Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception

January 1, 2016

Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations

January 1, 2016

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IFRS 14 Regulatory Deferral Accounts January 1, 2016

IFRS 15 Revenue from Contracts with Customers January 1, 2018

IFRS 16 Lease January 1, 2019

Amendments to IAS 1 Disclosure Initiative January 1, 2016

Amendments to IAS 7 Disclosure Initiative January 1, 2017

Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealized Losses

January 1, 2017

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization

January 1, 2016

Amendments to IAS 16 and IAS 41 Bearer Plants January 1, 2016

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions July 1, 2014

Amendments to IAS 27 Equity Method in Separate Financial Statements

January 1, 2016

Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets

January 1, 2014

Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting

January 1, 2014

Annual Improvements to IFRSs 2010-2012 and 2011-2013 Cycle July 1, 2014

Annual Improvements to IFRSs 2012-2014 Cycle January 1, 2016

IFRIC 21 Levies January 1, 2014

The Company is assessing the impact on the financial condition and performance of the above standards and interpretations. The Company will disclose the related results when the assessment is finalized.

4. Summary of significant accounting policies

The significant accounting policies presented in the consolidated financial statements are summarized as follows. Except for note 3, the significant accounting policies have been applied consistently to all the periods presented in the consolidated financial statements. The Company’s consolidated financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language financial statements, the Chinese version shall prevail.

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(1) Statement of compliance

The accompanying consolidated financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers in the Republic of China (hereinafter referred to as the Regulations), International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations endorsed by the FSC (hereinafter referred to as “IFRS endorsed by the FSC”).

(2) Basis of preparation

A. Basis of measurement

The consolidated financial statements have been prepared on a historical cost basis except for the following material items in the consolidated statement of financial position: (a) Financial instruments designated as at fair value through profit or loss are measured at fair

value (including derivative financial instruments); (b) The net defined benefit liability (asset) is recognized as the fair value of the plan assets, less,

the present value of the defined benefit obligation and the effect of the asset ceiling (note 4 (17)).

B. Functional and presentation currency

The functional currency of each entity is determined based on the primary economic environment in which the entity operates. TWD is Unizyx’s functional currency, which is also the Company’s presentation currency. All financial information presented in TWD has been rounded to the nearest thousand.

(3) Basis of consolidation

A. Principle of preparation of the consolidated financial statements

The consolidated financial statements comprise Unizyx and its subsidiaries. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. Intra-company balances and transactions, and any unrealized income and expenses arising from intra-company transactions are eliminated in preparing the consolidated financial statements. Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

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If the Company loses control over its subsidiary, the Company shall derecognize the assets (including any goodwill) and liabilities of the former subsidiary from the consolidated statements of its financial position, and recognize any investment retained in the former subsidiary at its fair value when control is lost. The gain or loss associated with the loss of control is the difference between: (a) The sum of the fair value of the consideration received and investment retained in the former subsidiary at its fair value when control is lost, and (b) the sum of the assets (including any goodwill) and liabilities of the former subsidiary and the carrying value of the non-controlling interests when control is lost. The Company shall account for all amounts previously recognized in other comprehensive income in relation to that subsidiary on the same basis as would be required if the Company had directly disposed of its related assets and liabilities.

B. List of subsidiaries in the consolidated financial statements

The consolidated entities were as follows:

Percentage of

Ownership (%)

Name of Business December December Investor Name of Subsidiary Nature 31, 2015 31, 2014

Unizyx ZyXEL Development, manufacturing and sales of communications and networking products

100% 100%

Unizyx MitraStar Development, manufacturing and sales of communications and networking products

100% 100%

ZyXEL ZyChamp Investment Co., Ltd.

Investment activities 100% 100%

ZyXEL ZyXEL Communications Inc.

Machining, assembly, development and sales of network products

100% 100%

ZyXEL ZyXEL Communications A/S (ZyXEL Denmark)

Sales and marketing 100% 100%

ZyXEL ZyXEL Singapore Private Limited


ZyXEL VICTOR BLUE LIMITED. (Victor)


ZyXEL ZyTPE Communications Corporation


ZyXEL Sphairon GmbH (a ZyXEL Company)

Development of communications and network products

100% 100%

ZyXEL ZyXEL Iletisim Teknolojileri A.S.


ZyXEL ZyXEL Communications Do Brasil Ltda.

Sales and marketing 100% -

ZyXEL ZyXEL Korea Co., Ltd. Sales and marketing 65% 65%

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Percentage of

Ownership (%)

Name of Business December December Investor Name of Subsidiary Nature 31, 2015 31, 2014

ZyXEL ZyFLEX Technologies Inc. Development, research, manufacturing, and sales of communications and network products

- 100%

MitraStar Bluebell Overseas Ltd. (Bluebell)


MitraStar Wuxi Genezys Technology Ltd.

Development of communications, network products and consulting service

100% 100%

MitraStar Shanghai Monetics Telecommunications Corp.

Sales of communications, network products and consulting service

100% 100%

Bluebell Wuxi MitraStar Technology Co., Ltd.

Manufacture and sales of communications and network products

100% 100%

Victor ZyXEL Malaysia SDN BHD


Victor ZyXEL Communications (Shanghai) Corp.

Sales of communications, network products and consulting service

100% 100%

Victor ZyXEL Technology India Pvt Ltd.


Victor ZyXEL Middle East FZE Sales and marketing 100% 100% Victor Tianjin Huagin

Communications Equipment Co., Ltd.

Manufacture and sale of communications and network products

95% 95%

Victor ZyXEL Thailand Co., Ltd. Sales and marketing 51% 51% ZyXEL Denmark

ZyXEL Deutschland GmbH Sales and marketing 100% 100%

ZyXEL Denmark

ZyXEL Communications UK Ltd.


ZyXEL Denmark

ZyXEL Communications Czech s.r.o.


ZyXEL Denmark

ZyXEL Communications B.V.


ZyXEL Denmark

ZyXEL Communications Iberia S.L


ZyXEL Denmark

ZyXEL Communications Italy S.r.l

Sales and marketing 100% -

C. Subsidiaries not included in the consolidated financial statements: None.

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D. Change in subsidiaries included in the consolidated financial statements:

For the purpose of expanding the European market, ZyXEL Communications Iberia S.L turned belong ZyXEL Denmark branch company to 100% owned sub-subsidiary, ZyXEL Communications Iberia S.L, in January 2014, and it was included in the consolidated financial statements since its inception. Due to the adjustment of its group investment structure, ZyXEL acquired 100% share of ZyXEL Iletisim Teknolojileri A.S. from its subsidiary Victor, by book value in November 2014. ZyXEL Costa Rica, S.A. and ZyXEL Pakistan (Pvt.) Ltd. had completed the liquidation in April and December of 2014. The Company has discontinued recognizing these companies’ share on its consolidated financial statements on the date these companies completed the liquidation. For the purpose of expanding the South American market, ZyXEL set up a new 100% owned sub-subsidiary, ZyXEL Communications Do Brasil Ltda., in January 2015. It was included in its consolidated financial statements since its inception. For the purpose of expanding the European market, ZyXEL set up a new 100% indirectly owned subsidiary, ZyXEL Communications Italy s.r.l, in May 2015. It was included in its consolidated financial statements since its inception. For the purpose of operations for the long-term support of ZyXEL Foundation, ZyXEL contributes 100% shares of ZyFLEX Technologies Inc. to ZyXEL Foundation in November 2015. ZyXEL discontinued recognizing the shares of ZyFLEX Technology Inc. in its consolidated financial statement on the date of contribution.

(4) Foreign currencies

A. Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Company entities at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the end of the reporting periods (hereinafter referred as “the reporting date”) are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year adjusted for the effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of translation.

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(Continued)

Foreign currency differences of available-for-sale financial assets are recognized in other comprehensive income, while other differences are recognized in profit or loss.

B. Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to the Company’s functional and presentation currency at the exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to the Company’s functional and presentation currency at the average rate. Foreign currency differences are recognized in other comprehensive income, and presented in the exchange differences on translation in equity. When a foreign operation is disposed of such that control or significant influence is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Company disposes of any part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Company disposes of only part of investment in an associate or joint venture that includes a foreign operation while retaining significant influence, the relevant proportion of the cumulative amount is reclassified to profit or loss.

(5) Classification of current and non-current assets and liabilities

The Company classifies an asset as current when any one of the following requirements is met. Assets that are not classified as current are non-current assets. A. It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; B. It holds the asset primarily for the purpose of trading; C. It expects to realize the asset within twelve months after the reporting period; or D. The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used

to settle a liability for at least twelve months after the reporting period. The Company classifies a liability as current when any one of the following requirements is met. Liabilities that are not classified as current are non-current liabilities. A. It expects to settle the liability in its normal operating cycle; B. It holds the liability primarily for the purpose of trading;

C. The liability is due to be settled within twelve months after the reporting period; or

11



(Continued)

D. It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

(6) Cash and cash equivalents

Cash and cash equivalents comprise cash, cash in bank, and short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Time deposits with maturities of less than three months are used for short-term cash commitments instead of investment and are subject to an insignificant risk of changes in their fair value, and are classified as cash and cash equivalents.

(7) Financial instruments

Financial assets and financial liabilities are initially recognized when the Company becomes a party to the contractual provisions of the instruments. A. Financial assets

The Company classifies financial assets into the following categories: financial assets measured at fair value through profit or loss, receivables and financial assets curried at cost.

(a) Financial assets measured at fair value through profit or loss

Financial assets are classified as held for trading if they are acquired principally for the purpose of selling in the short term. Financial assets in this category are measured at fair value at initial recognition. Attributable transaction costs are recognized in profit or loss. Financial assets at fair value through profit or loss are measured at fair value and changes therein, which take into account any dividend and interest income, are recognized in profit or loss, and are included in a statement of comprehensive income account. A regular way purchase or sale of financial assets shall be recognized and derecognized, as applicable, using trade-date accounting.

(b) Receivables

Receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Receivables comprise notes and accounts receivable and other receivables. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, receivables are measured at amortized cost using the effective interest method, less any impairment losses. Interest on short-term accounts receivable is not calculated because it does not have significant influence. When purchasing or disposing of financial assets, trade-date accounting is be used.

12



(Continued)

(c) Financial assets carried at cost Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured, are carried at their cost, less, any impairment losses.

(d) Impairment of financial assets

A financial asset is impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event has an impact on the estimated future cash flows of the financial asset that can be estimated reliably. All individually significant receivables are assessed for specific impairment. Receivables that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Company uses historical trends of the probability of default, the timing of recoveries, and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than those suggested by historical trends.

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. An impairment loss in respect of a financial asset measured at cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss is not reversible in subsequent periods. An impairment loss in respect of a financial asset is deducted from the carrying amount except for accounts receivable, for which an impairment loss is reflected in an allowance account against the receivables. When it is determined a receivable is uncollectible, it is written off from the allowance account. Any subsequent recovery of a receivable written off is recorded in the allowance account. Changes in the amount of the allowance account are recognized in profit or loss. Impairment losses on available-for-sale financial assets are recognized by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss.

If, in a subsequent period, the amount of the impairment loss on a financial asset measured at amortized cost decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the decrease in impairment loss is reversed through profit or loss to the extent that the carrying value of the asset does not exceed its amortized cost before impairment was recognized at the reversal date.

13



(Continued)

Impairment losses and recoveries are recognized in profit or loss, and they are included in non-operating income and expenses.

(e) Derecognition of financial assets

The Company derecognizes financial assets when the contractual rights of the cash inflow from the asset are terminated, or when the Company transfers substantially all the risks and rewards of ownership of the financial assets.

B. Financial liabilities and equity instruments

(a) Classification of debt or equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements. Equity instruments refer to surplus equities of the assets after the deduction of all the debts for any contracts. Equity instruments issued are recognized as the amount of consideration received less the direct cost of issuing.

(b) Financial liabilities measured at fair value through profit or loss

A financial liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the near term. Financial liabilities in this category are measured at fair value at initial recognition. Financial liabilities at fair value through profit or loss are measured at fair value.

(c) Other financial liabilities

Financial liabilities which comprise short-term borrowings, short-term notes and bills payable, accounts payable, and other payables are measured at fair value, plus any directly attributable transaction cost at the time of initial recognition. Subsequent to initial recognition, they are measured at amortized cost calculated using the effective interest method.

(d) Derecognition of financial liabilities The Company derecognizes a financial liability when its contractual obligation has been discharged or cancelled, or has expired. The difference between the carrying amount of a financial liability removed and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in non-operating income and expenses.

14



(Continued)

(e) Offsetting of financial assets and liabilities The Company presents financial assets and liabilities on a net basis when the Company has the legally enforceable right to offset and intends to settle such financial assets and liabilities on a net basis or to realize the assets and settle the liabilities simultaneously.

C. Derivative financial instruments

The Company holds derivative financial instruments to hedge its foreign currency exposures. Derivatives are recognized initially at fair value, and attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss. When the fair value of a derivative instrument is positive, it is classified as a financial asset, and when the fair value is negative, it is classified as a financial liability. Embedded derivatives are separated from the host contract and accounted for separately when the economic characteristics and risk of the host contract and the embedded derivatives are not closely related, and the host contract is measured as at fair value through profit or loss.

(8) Inventories

Inventories are measured at the lower of cost and net realizable value. The costs of inventories include expenditure incurred in acquiring the inventories, production or conversion costs, and other costs (weighted-average method). In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

(9) Investment in associates

Associates are those entities in which the Company has significant influence, but not controlled, over the financial and operating policies. Investments in associates are accounted for using the equity method and are recognized initially at cost. The cost of the investment includes transaction costs. The carrying amount of the investment in associates includes goodwill arising from the acquisition less any accumulated impairment losses. The consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income of equity-accounted investees, after adjustments to align their accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases. The difference in the changes in equity, which are not related to income and other comprehensive income, and those not affecting the ownership of shares of the affiliated company, are recognized as adjustment credit to capital surplus by ownership of shares.

15



(Continued)

Unrealized profits resulting from transactions between the Company and an associate are eliminated to the extent of the Company’s interest in the associate. Unrealized losses on transactions with an associate are eliminated in the same way, except to the extent that the underlying asset is impaired. When the Company’s share of losses exceeds its profit in associates, the carrying amount of that investment, including any long-term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Company has a present legal or constructive obligation or has made payments on behalf of the investee.

(10) Property, plant and equipment A. Recognition and measurement

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost of self-constructed assets includes expenditure that is directly attributed to the acquisition of the asset, any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, and any borrowing cost that is eligible for capitalization. The cost of software is capitalized as part of the equipment if the purchase of the software is necessary for the equipment to be capable of operating. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately, unless the useful life and depreciation method of a significant part of an item of property, plant and equipment are the same as the useful life and depreciation method of another significant part of that same item. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset, and is recognized in non-operating income and expenses.

B. Subsequent cost

Subsequent expenditure is capitalized only when it is probable that the future economic benefits associated with the expenditure will flow to the Company and the amount can be reliably measured. The carrying amount of those parts that are replaced is derecognized. Maintenance and repairs are recognized in profit or loss as incurred.

C. Depreciation

The depreciable amount of an asset is determined after deducting its residual amount, and it shall be allocated on a systematic basis over the asset’s useful life. A significant part of an item of property, plant and equipment which has a different useful life from the remainder of the item is depreciated separately. The depreciation charge for each period shall be recognized in profit or loss.

16



(Continued)

If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise, the asset is depreciated over the shorter of the lease term and its useful life.

The estimated useful lives, for the current and comparative years, of significant items of property, plant and equipment are as follows: (a) Buildings: 20 to 40 years. (b) Building improvements: 5 to 10 years. (c) Machinery, and research and development equipment: 3 to 10 years. (d) Office equipment and others: 3 to 10 years. (e) Buildings and building improvements constitute mainly buildings and their related facilities,

air-condition systems etc. Each such part depreciates based on its useful life of 20 to 40 years and 5 to 10 years, respectively.

Depreciation methods, useful lives, and residual values are reviewed at each reporting date. If expectations differ from the previous estimates, the change is accounted for as a change in an accounting estimate.

(11) Leases

A. Lessor

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease.

B. Lessee Other leases are operating leases and the related assets are not recognized in the Company’s statement of financial position. Payments made under an operating lease (excluding insurance and maintenance expenses) are recognized in profit or loss on a straight-line basis over the term of the lease.

C. Long-term prepayment for rentals The charges for land use rights are recorded at acquisition cost. Based on the shorter of the contract period or estimated benefit duration, the cost of land use rights is amortized using the straight-line method over a term of 25 or 50 years.

17



(Continued)

(12) Intangible assets

A. Research & development During the research phase, activities are carried out to obtain and understand new scientific or technical knowledge. Expenditures during this phase are recognized in profit or loss as incurred. Expenditures arising from the development phase shall be recognized as an intangible asset if all the conditions described below can be demonstrated; otherwise, they will be recognized in profit or loss as incurred. (a) The technical feasibility of completing the intangible asset so that it will be available for use

or sale. (b) The intention to complete the intangible asset and use or sell it. (c) The ability to use or sell the intangible asset. (d) How the intangible asset will generate probable future economic benefits. (e) The availability of adequate technical, financial and other resources to complete the

development and to use or sell the intangible asset. (f) The ability to measure reliably the expenditure attributable to the intangible asset during its

development. B. Other intangible assets

Other intangible assets that are acquired by the Company are measured at cost less accumulated amortization and any accumulated impairment losses.

C. Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

D. Amortization The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives (5 years for intangible assets) from the date that they are available for use. The residual value, amortization period, and amortization method for an intangible asset with a finite useful life shall be reviewed at least annually at each fiscal year-end. Any change shall be accounted for as changes in accounting estimates.

18



(Continued)

(13) Impairment – non-financial assets Except for inventories, deferred income tax assets, and a defined benefit asset, the Company assesses whether impairment has occurred in non-financial assets on every reporting date, and estimates the recoverable amount. If it is not possible to determine the recoverable amount for the individual asset, then the Company will have to determine the recoverable amount for the asset’s cash-generating unit (CGU). The recoverable amount for an individual asset or a cash-generating unit is the higher of its fair value less costs to sell and value in use. If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss. An impairment loss shall be recognized immediately in profit or loss. The Company re-assesses at each reporting date whether there is any indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset. An impairment loss recognized in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset shall be increased to its recoverable amount as a reversal of a previously recognized impairment loss.

(14) Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as interest cost. A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

(15) Treasury stock Repurchased shares are recognized under treasury shares (a contra-equity account) based on their repurchase price (including all directly accountable costs), net of tax. Gains on disposal of treasury shares should be recognized under capital reserve – treasury share transactions; Losses on disposal of treasury shares should be offset against existing capital reserves arising from similar types of treasury shares. If there are insufficient capital reserves to be offset against, then such losses should be accounted for under retained earnings. The carrying amount of treasury shares should be calculated using the weighted average of different types of repurchase.

19



(Continued)

In the retirement of treasury shares, capital reserve – share premiums and share capital should be debited proportionately. Gains on cancellation of treasury shares should be recognized under existing capital surplus arising from similar types of treasury shares; Losses on cancellation of treasury shares should be offset against existing capital surplus arising from similar types of treasury shares. If there are insufficient capital surplus to be offset against, then such losses should be accounted for under retained earnings.

(16) Revenue recognition

A. Goods sold

Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts, and volume rebates. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. The timing of the transfers of risks and rewards varies depending on the individual terms of the sales agreement. For export sales that are usually FOB shipping point, transfer occurs upon loading the goods onto the relevant carrier at the port. Generally for such products, the customer has no right of return. For domestic sales, transfer occurs upon receipt by the customer.

B. Services

The Company provides design service to customers. Revenue from service rendered is recognized in profit in proportion to the stage of completion of the transaction at the reporting date.

C. Rent income

Income from subletting real estate is recognized as non-operating income and expense. D. Government grants

Income from government grants for research and development is recognized as non-operating income and expenses based on actual costs incurred as a percentage of the expected total costs.

20



(Continued)

(17) Employee benefits A. Defined contribution plans

Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.

B. Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of the defined benefit pension plans is calculated separately for each plan by estimating the amount of the future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any fair value of any plan asset is deducted. The discount rate is the yield at the reporting date (market yields of government bonds) on bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Company, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Company. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities. When the benefits of a plan are improved, the expense of the increased benefits relating to past service by employees is recognized immediately in profit or loss. Remeasurements of the net defined benefit liability (asset), which comprise (1) actuarial gains and losses, (2) the return on plan assets (excluding interest) and (3) the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. Remeasurements of the net defined benefit liabilities (asset) are recognized in other comprehensive income. The Company also reclassified the amount recognized in other comprehensive income to retained earnings. The Company recognizes gains or losses on the curtailment or settlement of the defined benefit plan when the curtailment or settlement occurs. The gain or loss on curtailment comprises any resulting change in the fair value of the plan assets and in the present value of the defined benefit obligation.

21



(Continued)

C. Short-term employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

Under short-term cash bonus or profit-sharing plans, a liability is recognized for the amount expected to be paid if the Company has either a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

(18) Share-based payment

The grant-date fair value of share-based payment awards granted to employees is recognized as employee expenses, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards whose related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.

(19) Income taxes Income tax expenses include both current taxes and deferred taxes. Except for expenses related to business combinations or recognized directly in equity or other comprehensive income, all current and deferred taxes shall be recognized in profit or loss. Current taxes include tax payables and tax deduction receivables on taxable gains (losses) for the year calculated using the statutory tax rate on the reporting date or the actual legislative tax rate, as well as tax adjustments related to prior years. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and liabilities may be offset against each other if the following criteria are met:

A. The entity has the legal right to settle tax assets and liabilities on a net basis; and B. The taxing of deferred tax assets and liabilities fulfill one of the below scenarios:

(a) levied by the same taxing authority; or (b) levied by different taxing authorities, but where each such authority intends to settle tax

assets and liabilities (where such amounts are significant) on a net basis every year of the period of expected asset realization or debt liquidation, or where the timing of asset realization and debt liquidation is matched.

22



(Continued)

A deferred tax asset should be recognized for the carry forward of unused tax losses, unused tax credits, and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the unused tax losses, unused tax credits, and deductible temporary differences can be utilized. Such unused tax losses, unused tax credits, and deductible temporary differences shall also be re-evaluated every year on the financial reporting date, and adjusted based on the probability that future taxable profit will be available against which the unused tax losses, unused tax credits, and deductible temporary differences can be utilized. In accordance with the Business Mergers and Acquisitions Act, Article 40, the Company has adopted its parent company, Unizyx, as the taxpayer to file a combined corporate income tax return and the 10% surtax on undistributed earnings from 2011. Unizyx and the Company’s domestic subsidiaries firstly calculated their respective income tax provision according to IAS 12 Income Taxes and reconciled the difference between the separate income tax returns and the combined final business income return. The differences were allocated to all combined entities on a reasonable, systematic and consistent basis and consequently to current year’s income tax expense and deferred income tax expenses. According to the ROC Income Tax Act, Unizyx’s and its ROC subsidiaries’ earnings are subject to an additional 10 % corporate income surtax if not distributed. This surtax is charged to income tax expense in the following year when the shareholders decide not to distribute the earnings.

(20) Business combination

Business combination is measured as an aggregation of the consideration transferred (which generally is measured at fair value at the acquisition date) and the amount of any non-controlling interest in the acquiree, net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed (generally at fair value). If the residual balance is negative, the Company shall re-assess whether it has correctly identified all of the assets acquired and liabilities assumed, and recognize a gain on the bargain purchase thereafter. If the business combination is achieved in stages, the Company shall measure any non-controlling equity interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. In a business combination is achieved in stages, the Company shall re-measure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. In prior reporting periods, the Company may have recognized changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the Company had disposed directly of the previously held equity interest. If the disposal of the equity interest required a reclassification to profit or loss, such an amount shall be reclassified to profit or loss.

23



(Continued)

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the Company shall retrospectively adjust the provisional amounts recognized at the acquisition date, or recognize additional assets or liabilities to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The measurement period shall not exceed one year from the acquisition date. All the transaction costs incurred for the business combination are recognized immediately as the Company’s expenses when incurred, except for the issuance of debt or equity instruments.

(21) Earnings per share

The Company discloses basic and diluted earnings per share attributable to ordinary equity holders of Unizyx. The calculation of basic earnings per share is based on the profit attributable to the ordinary shareholders of Unizyx divided by the weighted-average number of ordinary shares outstanding. The calculation of diluted earnings per share is based on the profit attributable to ordinary shareholders of Unizyx divided by the weighted-average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares, such as convertible preference shares, convertible notes, employee stock options, unvested restricted stock awards, and employee bonus.

(22) Operating segment information

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the Company). Operating results of the operating segment are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Each operating segment consists of standalone financial information.

5. Major sources of accounting assumptions, judgments and estimation uncertainty

The preparation of the consolidated financial statements based on the Regulations and the IFRSs endorsed by the FSC requires management to make judgments estimates and assumptions that affect the application of the accounting policies and reported amount of assets, liabilities, income and expense. Actual results may differ from these estimates. Management continues to monitor the accounting assumptions, estimates and judgments. Management recognizes any changes in accounting estimates during the period and the impact of those changes in accounting estimates in the next period.

24



(Continued)

Accounting policies and disclosures of the Group include the fair value measurement for financial or non-financial assets and liabilities. The Group determines the fair value using the independent data sources which reflect the current market condition and confirming the data available are independent, reliable, in consistent with other sources and represent the exercisable price. The Group also periodically assesses the evaluation model, performs retrospective tests, and updates inputs with any other necessary fair value adjustment for the evaluation model in order to ensure the reasonableness of the valuation. Information about critical judgments in applying accounting policies that have the most significant effect on amounts recognized in the consolidated financial statements is measurement of inventories (note 6(5)), as following: Inventories are stated at the lower of cost or net realizable value, and the Company use judgment and estimate to determine the net realizable value of inventory at the end of each reporting period. The net realizable value of the inventory is mainly determined based on assumptions of future demand within a specific time horizon. However, due to the fast change of industry, the above estimation could have significant change. The Company evaluates its assets and liabilities using the observable market inputs. The hierarchy of the fair value depends on the valuation techniques used, and the different levels have been defined as follows: Level 1: quoted prices (unadjusted) in active markets for identified assets or liabilities. Level 2: inputs (other than quoted prices) included within Level 1 that are observable for the assets or

liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: inputs for assets or liabilities that are not based on observable market data (unobservable inputs). When there is a transfer between levels of the fair value hierarchy, the Company recognizes the transfer at the reporting date. For the assumptions used in fair value measurement, please refer to note 6(22) of the financial instruments.

6. Description of the significant accounts

(1) Cash and cash equivalents

December 31,

2015 2014

Petty cash, demand deposits, and checking accounts $ 1,755,738 2,421,636 Cash equivalents - time deposits 1,295,038 792,042 Cash equivalents – repurchase agreement 135,000 - $ 3,185,776 3,213,678

25



(Continued)

The interest rate on the repurchase agreement is 0.38% on December 31, 2015, and the bonds matured on January 4, 2016. Refer to note 6(22) for the fair value sensitivity analysis and interest rate risk of the financial assets and liabilities of the Company.

(2) Financial assets

Details are as follows: A. Financial assets measured at fair value through profit or loss

December 31,

2015 2014

Financial assets held for trading: Beneficiary certificates – open-end fund $ 4,311 19,022

The loss on valuation at fair value of financial assets held for trading was $1,710 and $549 for the years ended December 31, 2015 and 2014, respectively. The gain on disposal of financial assets held for trading was $988 and $628 for the years ended December 31, 2015 and 2014, respectively.

B. Sensitivity analysis－equity market price risk

If the equity market price had changed, the impact on other comprehensive income would have been as follows (if calculated on the same basis for both years and assuming that all other variables remained the same):

2015 2014

Equity market price at

reporting date

Other comprehensive income (loss), net of

taxes

Net income

(loss)

Other comprehensive income (loss), net of

taxes

Net income

(loss)

Increase 10% $ - 431 - 1,902Decrease 10% $ - (431) - (1,902)

26



(Continued)

C. Financial instruments The Company used derivative instruments to hedge certain currency risk the Company is exposed to arising from its operating activities in 2015 and 2014. Because the Company does not qualify hedge accounting is not used. The forward exchange agreements not settled as of December 31, 2015 and 2014 were as follows:

December 31, 2015

Notional amount

(in thousands of EUR) Currency

Duration of contract Fair value

Sell forward foreign currency exchange contract

1,000 Sell EUR/Buy USD 2015.12.16~ 2016.06.20

$ 416


1,000 Sell EUR/Buy USD 2015.12.10~ 2016.06.14

314


300 Sell EUR/Buy USD 2015.12.17~ 2016.06.21

131


200 Sell EUR/Buy USD 2015.12.17~ 2016.06.21

88

Financial assets measured at fair value through profit or loss – current $ 949 Sell forward foreign currency

exchange contract 1,000 Sell EUR/Buy USD 2015.11.17~

2016.05.19 (643)


1,000 Sell EUR/ Buy USD 2015.11.16~ 2016.06.20

(360)


500 Sell EUR/Buy USD 2015.11.17~ 2016.05.19

(312)


500 Sell EUR/Buy USD 2015.11.17~ 2016.05.19

(308)


500 Sell EUR/Buy USD 2015.11.16~ 2016.06.20

(228)


500 Sell EUR/Buy USD 2015.11.16~ 2016.06.20

(225)


2,000 Sell EUR/Buy USD 2015.12.04~ 2016.06.08

(25)

Financial liabilities measured at fair value through profit or loss – current $ (2,101)

27



(Continued)

December 31, 2014

Notional amount

(in thousands

of JPY) Currency Duration of

contract Fair value


200,000 Sell JPY/Buy USD 2014.11.13~ 2015.05.18

$ 1,579


200,000 Sell JPY/Buy USD 2014.11.17~ 2015.06.19

1,542


200,000 Sell JPY/Buy USD 2014.12.17~ 2015.07.21

1,390


200,000 Sell JPY/Buy USD 2014.12.17~ 2015.07.21

1,160


200,000 Sell JPY/Buy USD 2014.12.31~ 2015.08.06

24

Financial assets measured at fair value through profit or loss – current $ 5,695 Sell forward foreign currency

exchange contract 200,000 Sell JPY/Buy USD 2014.12.30~

2015.08.06 $ (420)


100,000 Sell JPY/Buy USD 2014.12.31~ 2015.08.06

(132)

Financial liabilities measured at fair value through profit or loss – current $ (552)

For the years ended December 31, 2015 and 2014, for the sell forward foreign currency exchange contract transactions, unrealized valuation gain (loss) amounting to $(1,152) and $5,143, respectively. For the years ended December 31, 2015 and 2014, for the sell forward foreign currency exchange contract transactions, realized as valuation on gain amounting to $6,299 and $24,028, respectively.

(3) Financial assets carried at cost – non-current:

A. Financial assets carried at cost – non-current:

December 31,

2015 2014

Non-publicly traded stocks(domestic companies) $ 15,080 104,957 Non-publicly traded stocks(foreign companies) 15,293 38,883 $ 30,373 143,840

28



(Continued)

The equity investments held by the Company are measured at amortized cost at the reporting date since the range of reasonable fair value estimates is large and the probability for each estimate cannot be reasonably determined; therefore, the Company’s management determined that the fair value cannot be measured reliably. In February 2015, the Company increased its capital of $29,850 in ZQAM Communications, Inc., which made its ownership of shares raised from 17% to 33%; therefore, ZQAM Communications, Inc. had been categorized as an investment under equity method since February 2015. In April 2015, the Company disposed the shares of MTAB Holding (Cayman) Inc. The proceeds and gains on the investment amounted to $37,947 and $14,209, respectively. In April 2015, the Company increased its capital of $3,108 in Global Channel Resource Pte. Ltd.which made its ownership of shares raised from 19% to 20%; therefore, Global Channel Resource Pte. Ltd. had been categorized as an investment under equity method since April 2015. However, since Global Channel Resource Pte. Ltd. increased its capital in July 2015, the Company’s ownership of shares decreased from 20% to 17%; thereafter, the Company recognized it as a financial asset in cost measurement beginning August, 2015. Meanwhile, the Company recognized the investment loss of $2,960 as an investment accounted for using the equity method. Chien Pang Venture Corp. and Hong Pang Venture Corp. reduced their capital and commenced liquidation in March and July 2015, respectively. The Company recognized an impairment loss of $30,833 at book value, which was based on the predicted-post capital reduction. The date of both dissolution was on Oct. 1, 2015. The difference between actual and the predicted amount of the impairment was recognized as a gain on the disposal of $1,100. The Company received a $29,522 and $5,478 refund due to the capital reduction of Hong Pang Venture Corp. and Chien Pang Venture Corp in 2015 and 2014, respectively. In June 2015, the Company recognized an impairment loss of $148 due to the decrease in capital of its investee, L7 Networks Inc. The said investee has made a decision to close its operation in the future. The Company recognized an impairment loss on the ownership of Zowie Technology Corp. because this investee decreased its capital in third quarter of 2015 amounting to $623.

The Company recognized an impairment loss on the ownership of Handlink Technologies, Inc. because this investee decreased its capital in fourth quarter of 2014 amounting to $3,053.

29



(Continued)

The special shareholders’ meeting of Broad Web Corporation approved the merger on October 29, 2013, Broad Web Corporation was merged with Trend Micro Co., Ltd., and Trend Micro Co., Ltd. is the surviving company. And set November 30, 2013, as the acquisition date, the acquisition price was $34.2 TWD per share. According to the merger contract, Trend Micro Co., Ltd. offered $27.36 TWD per share (80% total of the acquisition price) to the shareholders of Broad Web Corporation. Therefore, the Company received $34,785 and recognized a gain on disposal of investment of $17,078. The rest value of the acquisition price was 6.84 TWD per share (20% of the acquisition price), which was deposited as a guarantee of Broad Web’s compliance with the assurances and obligations in the merger contract. If Broad Web Corporation breaches the contract within two years (starting from the acquisition date,) Trend Micro Co., Ltd. can offset the loss from the deposit. Trend Micro Co., Ltd. will pay 10% (less the loss from the contract plus interest) to the shareholders of Broad Web Corporation at the end of the first and second year after the acquisition date. The contingent fee of $8,698 depends on the performance of Broad Web Corporation. Therefore, The Company will not recognize this part of gain on disposal investment under the material uncertainty until the Company receives this amount. Broad Web Corporation breached the merger contract in 2015. Trend Micro Co., Ltd., therefore followed the contract, the rest value of the acquisition value is decreased by 0.6034 TWD per share that resulted in decreasing the deposit of $769. The Company received the refund deposit of $3,581 and $4,348 in 2015 and 2014, respectively, and was recorded as other revenue.

B. Information on foreign currency equity investment

The significant equity investment in foreign currency was as follows:


Foreign currency

(thousands)

Exchange

rate TWD

Foreign currency

(thousands)

Exchange

rate TWD

US dollar $ 600 32.83 15,293 $ 1,250 31.65 38,883

30



(Continued)

(4) Notes, accounts receivable and other receivables, net A. Notes, accounts receivable and other receivables, net

December 31,

2015 2014

Notes receivable $ 15,554 626 Letters of credit receivable 305,944 1,051,498 Accounts receivable 5,076,439 4,420,587 5,397,937 5,472,711 Less: Allowance for doubtful accounts (190,077) (181,090)

Allowance for sales discounts and returns (72,730) (75,746) $ 5,135,130 5,215,875 Other receivables (recorded as other financial assets – current) $ 38,029 79,036

The aging analysis of notes, accounts receivable, and other receivables as of the reporting date was as follows:


Gross

amount Impairment

loss Gross

amount Impairment

loss

Current $ 4,332,100 - 4,640,067 - Overdue 1~30 days 636,279 - 553,790 - Overdue 31~180 days 287,222 9,894 207,271 30,653Overdue 181~360 days 41,515 41,515 23,768 23,768Overdue more than 361 days 138,850 138,668 126,851 126,669 $ 5,435,966 190,077 5,551,747 181,090

The movement in the allowance for impairment with respect to trade receivables during the year was as follows:

Individually Assessed for Impairment

Collectively Assessed for Impairment Total

Balance at January 1,2015 $ 116,080 65,010 181,090Impairment loss recognized - 9,299 9,299Effect of movements in exchange rates - (312) (312)Balance at December 31,2015 $ 116,080 73,997 190,077

31



(Continued)

Individually Assessed for Impairment

Collectively Assessed for Impairment Total

Balance at January 1,2014 $ 28,975 32,327 61,302Impairment loss recognized (note) 87,105 31,756 118,861Effect of movements in exchange rates - 927 927Balance at December 31,2014 $ 116,080 65,010 181,090

Note: With the individual provision for impairment, the amount of $87,105 related to a receivable

from a customer who has significant uncertainty to pay due to the supplier’s chipsets quality problem. However, the supplier provided free use of other chipsets products at the amount of $64,645 as compensation, which was recognized as a deduction for the cost of goods sold.

As of the December 31, 2015 and 2014, due to the economic environment, the Company expected that several customers would be unable to pay the unpaid amounts. Based on past payment behavior and a broad analysis of customer credit ratings, the Company recognized a 100% allowance for doubtful accounts for the accounts receivable overdue more than 180 days with a lower possibility of receiving them. An allowance for doubtful accounts is used to record bad debt. If the Company believes the amount might not be received, the allowance of doubtful accounts will be written off along with the related financial assets.

B. Other financial assets－current

December 31,

2015 2014

Other receivables: Receivables for mold design service $ 15,732 35,238 Receivables for commission 11,036 21,218 Receivables for repair service 4 3,083 Other 11,257 19,497

38,029 79,036 Interest receivable 4,905 612 $ 42,934 79,648

C. Financial assets pledged as collateral

As of December 31, 2015 and 2014, there were no financial assets pledged.

32



(Continued)

(5) Inventories

December 31,

2015 2014

Raw materials $ 1,520,467 1,959,517 Work in process and semi-finished goods 301,242 236,862 Finished goods 2,639,393 2,687,611 $ 4,461,102 4,883,990

For the years ended December 31, 2015 and 2014, the Company recognized operating cost of $324,601 and $168,610, respectively, from the write-down of inventory costs to net realizable value. As of December 31, 2015 and 2014, the Company’s inventories were not pledged as collateral.

(6) Investment accounted for using equity method

There is no individually significant associate for the Company. The following table summarizes the amounts recognized by the Company as shares of its associates:

December 31,

2015 2014

Summarized information of the associates that are not individually material $ 114,775 33,131

2015 2014

Attributable to the Company $ 8,330 (70,943)

On the purpose of developing and designing cloud calculating, applications, database and server virtualization, the Company obtained 40% of shares of Ecoworks with an investment of $25,000 thousands in May 2014. Moreover, ZQAM Communications Inc. was turned into an investment under equity method, please refer to note 6(3). In addition, on the purpose of developing the business of Mail Server and Internet Security, the Company acquired 40% of shares of Share Tech Information Co., Ltd. with an investment of $11,000 in December 2015. As of December 31, 2015 and 2014, the Company’s investment accounted for using equity method were not pledged as collateral.

33



(Continued)

(7) Losing control over a subsidiary On November 1, 2015, the Company donated 100% shares of ZyFLEX Technologies Inc. to other related party and lost its control over ZyFLEX Technologies Inc. The carrying amount on the date of the donation was $94,839. The expense of the donation was included under the category of administrative expense of the consolidated statement of comprehensive income. On November 1, 2015, the carrying amounts of ZyFLEX Technologies Inc. were as follows:

Cash $ 37,705 Inventories 53,650 Other financial assets and other current assets 1,592 Property, plant and equipment, net 15,245 Refundable deposits 1,095 Other current assets 26,102 Accounts payable (1,521) Accrued expenses and other current liabilities (39,029) The carrying amount of previously subsidiary net assets $ 94,839

(8) Property, plant and equipment

The cost, depreciation, and impairment of the property, plant and equipment of the Company in 2015 and 2014 were as follows:

Land

Building and

improvement

Machinery and

equipment

Research and

development equipment

Office and other

equipment

Construction in progress

and inspection equipment Total

Cost:

Balance at January 1, 2015 $ 36,094 2,170,884 553,506 265,440 774,803 9,428 3,810,155

Additions - 23,957 125,169 44,053 130,182 7,891 331,252

Disposals - (479) (18,851) (12,471) (41,160) - (72,961)

Reclassification - (8,948) (22,486) - 31,434 - -

Effect of losing control of subsidiaries - - (51,787) (69,027) (17,065) - (137,879)

Effect of movements in exchange rates 1,340 (20,548) (10,838) (1,243) (13,355) (65) (44,709)

Balance at December 31, 2015 $ 37,434 2,164,866 574,713 266,752 864,839 17,254 3,885,858 Balance at January 1, 2014 $ 33,990 1,742,957 432,072 218,244 720,807 347,476 3,495,546

Additions - 396,856 133,175 65,714 100,352 (338,176) 357,921

Disposals - - (21,908) (20,642) (66,188) - (108,738)

Reclassification - 1,642 (1,651) - 600 - 591

Effect of movements in exchange rates 2,104 29,429 11,818 2,124 19,232 128 64,835

Balance at December 31, 2014 $ 36,094 2,170,884 553,506 265,440 774,803 9,428 3,810,155

34



(Continued)

Land

Building and

improvement

Machinery and

equipment

Research and

development equipment

Office and other

equipment

Construction in progress

and inspection equipment Total

Depreciation and impairment loss: Balance at January 1, 2015 $ - 697,058 220,362 140,302 600,269 - 1,657,991

Depreciation for the year - 69,289 68,952 29,026 88,473 - 255,740

Disposals - (337) (18,377) (12,280) (38,458) - (69,452)

Reclassification - (6,168) (19,612) - 25,780 - -

Effect of losing control of subsidiaries - - (51,233) (60,010) (11,391) - (122,634)

Effect of movements in exchange rates - (3,649) (4,718) (936) (11,180) - (20,483)

Balance at December 31, 2015 $ - 756,193 195,374 96,102 653,493 - 1,701,162 Balance at January 1, 2014 $ - 625,144 181,818 133,189 570,285 - 1,510,436

Depreciation for the year - 65,508 61,665 25,916 76,496 - 229,585

Disposals - - (21,937) (20,416) (66,111) - (108,464)

Reclassification - 588 (3,661) - 3,446 - 373

Effect of movements in exchange rates - 5,818 2,477 1,613 16,153 - 26,061

Balance at December 31, 2014 $ - 697,058 220,362 140,302 600,269 - 1,657,991Carrying amounts: Balance at December 31, 2015 $ 37,434 1,408,673 379,339 130,650 211,346 17,254 2,184,696 Balance at December 31, 2014 $ 36,094 1,473,826 333,144 125,138 174,534 9,428 2,152,164 Balance at January 1, 2014 $ 33,990 1,117,813 250,254 85,055 150,522 347,476 1,985,110

Property, plant and equipment were subject to a registered debenture to secure bank loans as of December 31, 2014. Please refer to note 8. Property, plant and equipment were not pledged as collateral as of December 31, 2015.

(9) Intangible assets

The costs and amortization of intangible assets of the Company were as follows:

Operating Rights

Costs: Balance at January 1, 2015 $ 73,354 Additions 50,888 Effect of movements in exchange rates (4,057) Balance at December 31, 2015 $ 120,185 Balance at January 1, 2014 $ 80,834 Effect of movements in exchange rates (7,480) Balance at December 31, 2014 $ 73,354

35



(Continued)

Operating Rights

Amortization and impairment loss: Balance at January 1, 2015 $ 18,532 Amortization for the year 19,336 Effect of movements in exchange rates (912) Balance at December 31, 2015 $ 36,956 Balance at January 1, 2014 $ 2,485 Amortization for the year 19,185 Reclassification 218 Effect of movements in exchange rates (3,356) Balance at December 31, 2014 $ 18,532 Carrying amounts: Balance at December 31, 2015 $ 83,229 Balance at December 31, 2014 $ 54,822 Balance at January 1, 2014 $ 78,349

As of December 31, 2015 and 2014, the Company’s intangible assets were not pledged as collateral.

(10) Short-term borrowings

The Company short-term borrowing details were as follows:

December 31,

2015 2014

Unsecured borrowings $ 1,987,216 956,137 Secured borrowings - 98,685 Total $ 1,987,216 1,054,822 Range of interest rates 1.05%~

3.50% 1.10%~ 2.85%

As of December 31, 2015 and 2014, the unsecured borrowings belonged to MitraStar, which were endorsed by Unizyx. As of December 31, 2014, the secured borrowings belonged to ZyXEL Iletisim Teknolojileri A.S., which had pledged a building as collateral. Please refer to note 8.

(11) Short-term notes and bills payable

December 31,

2015 2014

Commercial papers payable $ 50,000 150,000Range of interest rates 1.42% 1.42%

36



(Continued)

As of December 31, 2015 and 2014, the commercial-papers payable belonged to MitraStar were endorsed by Unizyx.

(12) Provision－current

Provisions for contingent service cost were as follows:

2015 2014

Balance at January 1 $ 130,635 208,222Provision (reversed) during the year 80,945 (36,822)Write-off for the year (52,353) (36,489)Effect of losing control of subsidiaries (4,257) - Effect of movements in exchanges rates 1,090 (4,276)Balance at December 31 $ 156,060 130,635

The Company’s provision for contingent service cost in 2015 and 2014 was for sales of network products. Provision for contingent service cost was estimated based on the historical warranty information for similar products or services. The Company expected that most of the cost would occur within 1 or 2 years after sales.

(13) Operating lease A. Lessee

The Company entered into 20 years renewable operating agreements for land and operating facilities with the Science-based Industrial Park Administration (SIPA) expiring on December 31, 2024, and December 31, 2032, with an annual rental subject to SIPA adjustments. In addition, certain subsidiaries leased their offices. Minimum payments in future years under current operating lease agreements are listed below:

December 31,

2015 2014

Less than 1 year $ 72,320 87,855 Between 1~ 5 years 122,581 147,956 More than 5 years 136,885 148,175 $ 331,786 383,986

Operating leases recognized in expenses were $96,943 and $100,422 for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015 and 2014, the Company rented a piece of land from the SIPA, and the banks had issued the guarantees of $18,704 and $18,611, respectively.

37



(Continued)

B. Long-term rentals prepayment

The Company leases land under operating leases. The leases typically run for a period of 25 or 50 years, and all rental amounts are paid in advance. For each of the years 2015 and 2014, rental expenses were $255 and $245, respectively. As of December 31, 2015 and 2014, unamortized long-term rental prepayments were $9,419 and $9,860, respectively.

(14) Employee benefits

A. Defined benefit plans

The Company’s reconciliation in the present value of the defined benefit obligations and fair value of plan assets were as follows:

December 31,

2015 2014

Present value of defined benefit obligations $ 220,310 230,301 Fair value of plan assets (283,226) (279,290) Net defined benefit assets $ (62,916) (48,989)

Details of recognized liabilities (assets) were as follows:

December 31,

2015 2014

Net defined benefit asset $ (66,740) (72,434) Net defined benefit liabilities 3,824 23,445 $ (62,916) (48,989)

The Company’s domestic subsidiaries make defined benefit plan contributions to the pension fund account at Bank of Taiwan that provides pensions for employees upon retirement. The plans (covered by the Labor Standards Law) entitle a retired employee to receive an annual payment based on years of service and average salary for the six months prior to retirement. (a) Composition of plan assets

The Company’s domestic subsidiaries allocates pension funds in accordance with the Regulations for Revenues, Expenditures, Safeguard and Utilization of the Labor Retirement Fund, and such funds are managed by the Bureau of Labor Fund, Ministry of Labor. Minimum earnings shall be no less than the earnings attainable from two-year time deposits with interest rates offered by local banks.

38



(Continued)

The Company’s Bank of Taiwan labor pension reserve account balance amounted to $283,226 at December 31, 2015. For information on the utilization of the labor pension fund assets including the asset allocation and yield of the fund, please refer to the website of the Bureau of Labor Fund.

(b) Movements in present value change of defined benefit obligation

The movements in present value of the defined benefit obligation of the Company were as follows:

2015 2014

Defined benefit obligation at January 1 $ 230,301 231,595 Current service cost 1,707 1,704 Current interest cost 4,444 4,623 Remeasurements of the net defined benefit liabilities

Return on plan assets (excluding current interest) 6,511 (9,382) Actuarial losses arising from changes in financial

assumptions 4,186 9,562 Curtailment gains (16,847) - Paid from pension (2,893) (7,801) Effect of losing control of subsidiaries (7,099) - Defined benefit obligation at December 31 $ 220,310 230,301

(c) Movements of defined benefit plan assets

The movements in present value of the defined benefit plan assets of the Company were as follows:

2015 2014

Fair value of plan assets at January 1 $ 279,290 274,799 Interest income 5,511 5,553 Remeasurements of the net defined benefit liabilities

Return on plan assets (excluding current interest) 1,823 886 Deficit in the plan 4,762 5,853 Paid from pension (2,893) (7,801) Effect of losing control of subsidiaries (5,267) - Fair value of plan assets at December 31 $ 283,226 279,290

(d) Effect of the asset ceiling

There were no effect on the asset ceiling for the years ended 2015 and 2014.

39



(Continued)

(e) Expenses recognized in profit or loss The expenses recognized in profit or losses for the Company were as follows:

2015 2014

Current service cost $ 1,707 1,704 Interest on obligation 4,444 4,623 Return on plan assets (5,511) (5,553) Curtailment gains (16,847) - Effect of losing control of subsidiaries 228 - $ (15,979) 774

(f) Actuarial gains and losses recognized in other comprehensive income

The Company’s actuarial gains and losses recognized in other comprehensive income were as follows:

2015 2014

Cumulative amount at January 1 $ 7,365 6,659 Recognized during the period (8,874) 706 Effect of losing control of subsidiaries 177 - Cumulative amount at December 31 $ (1,332) 7,365

(g) Actuarial assumptions

The following were the Company’s significant actuarial assumptions regarding the present value of the defined benefit obligation:

December 31,

2015 2014

Discount rate 1.875% 2.00% Future salary increase rate 3.00% 2.50%~

3.00% The Company is expecting a contribution of $4,589 to its defined benefit plans in the following year after the reporting date. The weighted – average duration the defined benefit obligation is 18.32 years.

40



(Continued)

(h) Sensitivity analysis When calculating the present value of the defined benefit obligation, the Company uses judgments and estimations to determine the actuarial assumptions, including the discount rate and future salary changes as of the financial statement date. Any changes in the actuarial assumptions may significantly impact the amount of the defined benefit obligation. If there is a change in the actuarial assumptions as of the December 31, 2015, the impact on the defined benefit obligation would be as follows:

Impact on the defined benefit asset

Impact on the defined benefit liabilities

Increase 0.25%

Decrease 0.25%

Increase 0.25%

Decrease 0.25%

Discount rate $ 2,502 (2,627) (5,769) 6,062 Future salary increase rate $ (2,559) 2,453 5,906 (5,653)

Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, assuming all other variables remain constant, would have affected the defined benefit obligation by the amounts shown above. The method used in the sensitivity analysis is consistent with the calculation of pension liabilities in the balance sheets. There were no changes in the method and assumptions used in calculating the sensitivity analysis for 2015 and 2014.

B. Defined contribution plans

The Company allocates 6% of each employee’s monthly wages to the labor pension personal account at the Bureau of Labor Insurance, Ministry of Labor (the Bureau of Labor Insurance) in accordance with the provisions of the Labor Pension Act. Under this defined contribution plan, the Company allocates a fixed amount to the Bureau of Labor Insurance without additional legal or constructive obligations thereafter. The Company’s pension costs under the defined contribution method were $84,129 and $79,692 for 2015 and 2014, respectively. Payment was made to the Bureau of Labor Insurance. The total pension costs of the Company’s overseas subsidiaries under the defined contribution method were $70,218 and $60,541 for 2015 and 2014, respectively.

41



(Continued)

(15) Income tax A. Income tax expense

The amount of income tax in the years 2015 and 2014 were as follows:

2015 2014

Current tax expense Current period $ 142,258 87,530 Adjustment for prior periods 29,565 19,106

10% surtax on unappropriated retained earnings - 17,390 171,823 124,026 Deferred tax expense Origination and reversal of temporary differences (18,145) 84,760 Income tax expense $ 153,678 208,786

The amount of income tax (benefit) recognized in other comprehensive income in the years 2015 and 2014 were as follows:

2015 2014

Foreign currency translation differences for foreign operations $ (18,352) 7,901

Reconciliation of income tax and profit (loss) before income tax for 2015 and 2014 were as follows:

2015 2014

Profit (loss) before income tax $ (492,327) 387,043 Income tax using the Unizyx’s domestic tax rate (83,696) 65,797 Effect of tax rates in foreign jurisdiction 42,921 16,448 Investment gain of foreign subsidiaries recognized using

equity method 45,209 69,427

Additional 10% income surtax on undistributed earnings - 17,390 Prior-year adjustments 29,565 19,106 Effect of unrecognized deferred tax assets 103,587 18,777 others 16,092 1,841 $ 153,678 208,786

42



(Continued)

B. Deferred tax assets and liabilities

(a) Unrecognized deferred tax assets

Deferred tax assets have not been recognized in respect of the following items:

December 31,

2015 2014

Loss carryforward 200,020 113,059 Loss on overseas investment accounted for using equity

method 4,298 47,256 $ 204,318 160,315 Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.

(b) Recognized deferred tax assets and liabilities

Changes in the amount of deferred tax assets and liabilities for 2015 and 2014 were as follows: Deferred tax assets:

January 1,

2014

Recognized in income statement

Recognized in other

comprehensive income

December 31, 2014


Recognized in other


December 31, 2015

Loss carryforward $ 22,676 (22,676) - - - - - Allowance for inventory

obsolescence 105,805 6,918 - 112,723 16,749 - 129,472

Provision for contingent service cost 26,254 (16,179) - 10,075 1,550 - 11,625

Foreign currency translation differences for foreign operations 5,876 - 4,420 10,296 - 12,381 22,677

Unrealized profit on inter-company sales 22,529 (1,638) - 20,891 (4,362) - 16,529

Loss on overseas investment accounted for using equity method 24,714 (24,714) - - 23,515 - 23,515

Temporary difference of subsidiary 32,876 4,359 - 37,235 2,018 - 39,253

Others 53,365 (6,719) - 46,646 10,867 - 57,513

$ 294,095 (60,649) 4,420 237,866 50,337 12,381 300,584

43



(Continued)

Deferred tax liabilities:

January 1,

2014


Recognized in other


December 31, 2014


Recognized in other


December 31, 2015

Gain on overseas investment accounted for using equity

method $ (60,909) (22,071) - (82,980) (29,414) - (112,394)

Prepaid pension cost (14,604) (581) - (15,185) (158) - (15,343)

Foreign currency translation differences for foreign operations (26,771) - (12,321) (39,092) - 5,971 (33,121)

Unrealized gain on exchange (10,107) 814 - (9,293) (4,548) - (13,841)

Others (946) (2,273) - (3,219) 1,928 - (1,291)

$ (113,337) (24,111) (12,321) (149,769) (32,192) 5,971 (175,990)

According to the R.O.C. Income Tax Act, the previous 10 years’ losses of the Company’s domestic subsidiaries as assessed by the tax authorities can offset the current year’s net income for income tax purposes.

As of December 31, 2015, the unused loss carryforwards and related expiration years of the Company’s domestic subsidiaries were as follows:

Year of loss Expiration year Unused loss

carryforward

2006 2016 $ 22,277 2007 2017 84,811 2011 2021 2,547 2012 2022 31,620 2013 2023 59,564 2014 2024 43,708 2015 2025 677,326 $ 921,853

In accordance with the tax law of each region where the subsidiaries of the Company are located, losses on foreign subsidiaries as assessed by the tax authorities can be carried forward to offset the future years’ taxable profits. As of December 31, 2015, the tax effects of the unused loss on carryforwards amounted to $43,305.

44



(Continued)

C. Examination and approval As of the December 31, 2015, the income tax returns of Unizyx, ZyXEL, and MitraStar had been examined by the tax authority through year 2013.

D. Information related to the unappropriated earnings and tax deduction ratio were as follows:

December 31,

2015 2014

Unappropriated earnings of 1998 and after $ 259,523 983,878 Balance of deductible tax account $ 230,017 226,453

2015

(estimated) 2014 (actual)

Tax deduction ratio for earnings distribution to ROC residents 16.45% 11.29% The information related to the unappropriated retained earnings and tax deduction ratio shown in the tables above is prepared in accordance with ruling letter No. 10204562810 issued by the Ministry of Finance, R.O.C., on October 17, 2013. Effective January 1, 2015, the tax deduction ratio for individual shareholders residing in the R.O.C. will be half of the original tax deduction ratio according to the revised Article 66~6 of the Income Tax Act.

(16) Capital and other equity

A. Common stock

On August 16, 2010, Unizyx was set up through ZyXEL share swap, and the total share capital was $5,170,483. As of December 31, 2015 and 2014, Unizyx’s authorized common stock amounted to $7,000,000, of which $520,000 was for use as employee stock options, convertible preferred stock, or convertible corporate bonds. The issued common stock amounted to $4,611,773 and $4,887,613, respectively, with par value of $10 TWD per share. Reconciliations of shares outstanding for 2015 and 2014 were as follows (in thousands of shares):

Common Stock

2015 2014

Balance at January 1 477,269 477,269 Purchase of treasury stock (33,571) - Balance at December 31 443,698 477,269

45



(Continued)

B. Capital surplus

The details were as follows:

December 31,

2015 2014

Additional paid-in capital $ 3,648,024 3,866,220 Treasury share transactions 131,205 2,255 Employee share options 26,251 26,251

$ 3,805,480 3,894,726

(a) When Unizyx was set up through ZyXEL’s share swap on August 16, 2010, the amount of

net assets in excess of the par value calculated by the share swap method was $4,089,976, recorded as additional paid-in capital.

(b) According to Article 30 of the Business Mergers and Acquisitions Act, the unappropriated

retained earnings of a company that has a share swap with other companies that are transferred as additional paid-in capital of the holding company are not affected by the restriction of Article 241(i) of the Company Act. According to Article 47 of the Financial Holding Company Act and Ruling No. 0910003413, if the additional paid-in capital due to the share swap is from previous unappropriated earnings of subsidiaries, it can be appropriated as cash dividends or capitalized in the current year; also the capitalization ratio is not restricted by Article 8 of the Securities and Exchange Act Enforcement Rules. Further, according to Ruling No. 0910016280, since this additional paid-in capital is not generated from the holding company’s operations, there is no remuneration of the board of directors and bonus to employees. As of December 31, 2015 and 2014, the additional paid-in capital generated from ZyXEL’s unappropriated earnings before the share swap was $1,139,082.

(c) In accordance with the ROC Company Act, realized capital reserves can only be reclassified

as share capital or distributed as cash dividends after offsetting losses. The aforementioned capital reserves include share premiums and donation gains. In accordance with the Securities Offering and Issuance Guidelines, the amount of capital reserves to be reclassified under share capital shall not exceed 10 % of the actual share capital amount.

C. Legal reserve

In accordance with the Company Act, 10 % of net income after tax should be set aside as legal reserve, until it is equal to authorized capital. If the Company experienced profit for the year, the distribution of the statutory earnings reserve, either by new shares or by cash, shall be decided at the shareholders’ meeting, and the distribution amount is limited to the portion of legal reserve which exceeds 25 % of the paid-in capital.

46



(Continued)

D. Special reserve In accordance with Ruling No. 1010012865 issued by the Financial Supervisory Commission on April 6, 2012, a portion of current-period earnings and undistributed prior-period earnings shall be reclassified as a special earnings reserve during earnings distribution. The amount to be reclassified should be equal to the current-period total net reduction of other shareholders’ equity. Similarly, a portion of undistributed prior-period earnings shall be reclassified as a special earnings reserve (and does not qualify for earnings distribution) to account for cumulative changes to other shareholders’ equity pertaining to prior periods. Any subsequent reversals pertaining to the net reduction of other shareholders’ equity shall qualify for additional distributions.

E. Distribution of earnings and dividend policy

Pursuant to regulations promulgated by the Financial Supervisory Commission, a special reserve equivalent to the total amount of items that are accounted for as deductions from stockholders’ equity shall be set aside from current earnings, and not distributed. The special reserve shall be made available for appropriation to the extent of reversal of deductions from stockholders’ equity in subsequent periods.

According to the articles of incorporation, in years of earnings, Unizyx has to offset any accumulated deficit, pay income tax, and appropriate 10% of the balance as a legal reserve before distribution of earnings. The balance of the earnings may be distributed in the following order: no more than 2% should be distributed as the remuneration of the board of directors and supervisors, and the remaining earnings together with prior years’ unappropriated earnings could be retained in accordance with a resolution of the shareholders and after retaining part of the earnings: (a) No less than 0.01% should be distributed as employee bonuses, and the bonuses could be

either cash or stock. However, Unizyx may issue stock to employees of subsidiaries for profit sharing.

(b) The rest of the earnings are shareholders’ dividends.

The dividend policy of Unizyx is based on Unizyx’s profit condition, future operating development, and assurance of stockholders’ equity. Considering the common stock, capital structure, operating status, and earnings, Unizyx may distribute dividends in the form proposed by the board of directors, including stock issuance based on retained earnings and/or cash dividends. The dividend distribution must be through a resolution passed by the board of directors that complies with Unizyx’s balanced and stable dividend policy. Unizyx is in the phase of stable growth of operations. Therefore, the appropriated earnings will preferably be distributed in the form of cash dividends, with distribution of stock dividends being the other alternative. Distribution of stock dividends should be no more than 50% of total dividends. However, the above employee bonuses distributed as stock, valued at market value, or cash may be no more than 50% of net income or 50% of available earnings. The employees entitled to stock bonuses include employees of subsidiaries, and any distribution must be in conformity with the vesting requirement approved by a meeting of the board of directors.

47



(Continued)

In accordance with the ROC Company Act as amended in May 2015, profit sharing to employee and remuneration to directors are no longer subject to earnings distribution appropriated from current-year distributable earnings. Unizyx will amend its articles of incorporation before the deadline specified by the authorities. For the year ended December 31, 2014, the Unizyx used net income after tax to estimate profit sharing to employees amounting to $20, bonus to directors amounting to $2,196, based on its dividend policy. For the stock bonuses, the distribution amount is determined by dividing the total approved bonus amount by the closing market price of the Unizyx stock one day prior to the approved date and considering the ex-dividend effect. However, if the amounts are modified by the stockholders’ meeting in the following year, the adjustment will be treated as a change in accounting estimate and will be reflected in the statement of income in the following year.

On June 15, 2015, the general meeting of shareholders of Unizyx approved the distribution of its retained earnings for the year 2014. Information about Unizyx’s directors’ and supervisors’ remuneration and employee bonuses which were distributed from unappropriated earnings of 2014 is as follows:

2014

Dividend per common share (TWD): Cash $ 0.15

Employee bonuses – cash 20Directors’ and supervisors’ remuneration 2,196 $ 2,216

The above earnings distribution, which was charged to expense, had no difference from the resolution of Unizyx’s board of directors.

The deficit compensation for 2015 had been approved in the meeting of the Unizyx’s board of directors held on March 17, 2016. The deficit compensation for 2015 are to be presented for approval in the shareholders’ meeting of Unizyx; the information will be available on the Market Observation Post System website.

F. Treasury stock

As of December 31, 2013, Unizyx’s shares held by Unizyx and ZyChamp amounted to 4,660 thousand shares, and 9,391 thousand shares, respectively, and original cost was $81,213 and $120,861, respectively.

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(Continued)

As approved by the board of directors on November 11, 2014, Unizyx set November 17, 2014, as the record date for capital reduction and wrote off 2,559 thousand shares of treasury stock, which originally cost of $46,394. This capital reduction was registered through legal procedures. As approved by the board of directors on March 17, August 11 and November 10, 2015, Unizyx set March 23, August 17 and November 16, 2015, respectively, as the record date for capital reduction and wrote off 2,101 thousand, 15,637 thousand, and 9,846 thousand shares, respectively of treasury stocks, which had the originally costs of $34,819, $213,767, $117,955, respectively. These capital reductions were registered through legal procedures. As approved by the board of directors on May 12, August 11, and November 10, Unizyx had plans on repurchasing 25,000 thousand, 25,000 thousand and 10,000 thousand shares, respectively, of treasury shares in accordance with the related regulations of stock exchange. As of December 31, 2015, Unizyx had repurchased 33,571 thousand of treasury shares amounting to $430,894, based on the board of directors' resolution. As of December 31, 2015 and 2014, Unizyx shares held by Unizyx and ZyChamp were 17,479 thousand shares and 11,492 thousand shares, respectively, the original costs were $220,033 and $155,680, respectively, and the market prices were $232,471 and $204,558 respectively.

G. Other equity

Foreign exchange differences arising from foreign operation

January 1, 2015 $ 99,982 Foreign exchange differences (net of tax) (89,601) Balance at December 31, 2015 $ 10,381 January 1, 2014 $ 61,407 Foreign exchange differences (net of tax) 38,575 Balance at December 31, 2014 $ 99,982

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(Continued)

(17) Share-based payment

A. Unizyx registered and issued 15,000,000 units of employee stock options in November 2010. Each unit can purchase one share of Unizyx. The duration of the plan is 5 years, and the plan was certified by the SFB. As of December 31, 2015, the information related to the employee stock option rights which had expired was as follows:

Type

Authorization date

Grant date

Issued units (in

thousands) Grant period

Exercise price per

share (NT$)

Adjusted exercise price per

share (NT$)

Employee stock options in 2010

Nov. 26, 2010 Dec. 9, 2010

15,000 Service periods

between 2 to 4 years

29 25.90

The estimated fair value of the options granted was $1.3~$2.0 (TWD) at the date of grant using the Black-Scholes option pricing model, with the following weighted-average assumptions:

Expected dividend yield 2.55% Expected volatility 14.19% Risk-free interest rate 0.45%~0.90% Expected life 1 to 3 years

Information related to employee stock options that Unizyx granted to its, ZyXEL’s and MitraStar’s employees were as follows:

2015 2014

Employee stock options

Options (in thousands)

Weighted- average exercise

price (TWD)

Options (in thousands)

Weighted- average exercise

price (TWD)

Outstanding at beginning of year 15,000 $ 25.90 15,000 $ 25.90 Granted - - - - Exercised - - - - Forfeited (15,000) 25.90 - - Outstanding at end of year - 15,000 25.90 Exercisable at end of year - 15,000

As of December 31, 2015 and 2014, the weighted-average remaining contractual lives of outstanding options were 0 year and 0.94 years, respectively.

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(Continued)

B. Compensation cost of employee stock options

The compensation cost arising from stock options granted to employees of the Company amounted were as follows:

2015 2014

From stock options granted to employees amounted $ - 1,141

(18) Earnings per share A. Basic earnings per share

2015 2014

Net income (loss) attributable to ordinary shareholders of Unizyx $ (625,044) 174,379

Weighted-average number of shares outstanding during the year (in thousands of shares) 463,508 477,269

Basic earnings per share (TWD) $ (1.35) 0.37 B. Diluted earnings per share

2014

Net income attributable to ordinary shareholders of Unizyx $ 174,379 Weighted-average number of shares outstanding during the

year (in thousands of shares) 477,269 Effect on employee stock bonus (in thousands of shares) 2 477,271 Diluted earnings per share (TWD) $ 0.37

The diluted earnings per share were not calculated due to the anti-dilutive effect of the net loss incurred for the year ended December 31, 2015.

(19) Operations revenues

Operations revenue of the Company for the years ended December 31, 2015 and 2014 were as follows:

2015 2014

Sale of goods $ 21,083,892 21,059,146 Services provided 306,351 201,626 $ 21,390,243 21,260,772

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(Continued)

(20) Non-operating income and expenses

A. Other income

Other income of the Company for the years ended December 31, 2015 and 2014 were as follows:

2015 2014

Grant revenues $ 27,025 43,394 Interest income 17,448 18,739 Compensate revenue 14,898 - Rental revenues 8,199 8,158 $ 67,570 70,291

B. Other gains and losses

Other gains and losses of the Company for the years ended December 31, 2015 and 2014 were as follows:

2015 2014

Loss on financial assets (liabilities) measured at fair value through profit or loss (note 6(2)) $ 4,425 29,250

Loss on disposal of property, plant and equipment (1,562) (258) Impairment loss of financial assets (note 6(3)) (31,604) (3,053) Other 26,013 39,929 $ (2,728) 65,868

(21) Remuneration to employees, directors and supervisor

Pursuant to the amendment of the ROC Company Act, the amendment of Unizyx’s articles of incorporation was approved by the board of directors but not yet approved in the annual stockholders’ meeting. In accordance with Unizyx’s articles of incorporation, Unizyx shall accrue its remuneration to employees and directors based on a certain percentage of the current-year’s profit (profit before income tax excluding remuneration to employees and directors) less, accumulated deficit as follows: 0.01% as employees’ remuneration and 2% as directors’ remuneration. The aforementioned employee bonuses will be distributed in cash or stock dividends to employees who meet certain requirements of Unizyx and its affiliates. Unizyx incurred an operating loss and did not estimate its remuneration to employees, director and supervisor for the year ended December 31, 2015.

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(Continued)

(22) Financial instruments A. Categories of financial instruments

Financial assets

December 31,

2015 2014

Cash and cash equivalents $ 3,185,776 3,213,678 Financial assets measured at fair value through profit or loss –

current 5,260 24,717 Notes and accounts receivable 5,135,130 5,215,875 Accounts receivable – related parties 479,070 551,772 Other financial assets – current 42,934 79,648 Financial assets carried at cost – non-current 30,373 143,840 Refundable deposits 32,390 45,879 Other financial assets – non-current 57,189 65,737

$ 8,968,122 9,341,146 Financial liabilities

December 31,

2015 2014

Short-term borrowings $ 1,987,216 1,054,822 Short-term notes and bills payable 50,000 150,000 Financial liabilities measured at fair value through profit or

loss– current 2,101 552 Notes and accounts payable 3,697,297 3,750,805 Royalty payable 348,999 377,599 Other payable-related parties 7,772 10,573 Guarantee deposits received 2,863 3,371 $ 6,096,248 5,347,722

B. Credit risk

(a) Credit risk exposures

As of December 31, 2015 and 2014, the Company’s maximum exposure to credit risk was mainly from the carrying amount of financial assets and amounted to $8,932,489 and $9,172,589, respectively.

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(Continued)

(b) Disclosures of the concentration of credit risk The Company’s potential credit risk is derived primarily from deposits with banks and accounts receivable etc. The Company maintains its cash in various creditworthy financial institutions. Credit risk exposure to each financial institution is controlled by the Company. As a result, the Company believes that there is no significant concentration of credit risk of cash and financial assets. The main customers of the Company are multinational companies or companies with good credit ratings. From time to time, the Company monitors customers’ credit condition, and hence has not encountered any significant loss due to credit risk.

Although there is a potential for concentration of credit risk, the Company continually assesses the collectability of accounts receivable and makes a corresponding allowance for doubtful accounts. The Company’s management does not foresee any significant credit risk loss for the Company. The Company sets an allowance for doubtful accounts to reflect the estimated loss on accounts receivable. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.

C. Liquidity risk

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements.

Book value

Cash flow of contract

Within 6

months 6-12

months 1-2 years 2-5 years Over 5 years

December 31, 2015

Non-derivative financial liabilities

Short-term borrowings $ 1,987,216 (1,996,028) (1,996,028) - - - -

Short-term notes and bills payable 50,000 (50,000) (50,000) - - - -

Notes and accounts payable 3,697,297 (3,697,297) (3,697,297) - - - -

Royalty payable 348,999 (348,999) (348,999) - - - -

Other payable－related parties 7,772 (7,772) (7,772) - - - -

Guarantee deposits received 2,863 (2,863) - - (2,863) - -

Derivative financial liabilities Forward exchange contract:

Outflows 2,101 (2,097) - (2,097) - - -

$ 6,096,248 (6,105,056) (6,100,096) (2,097) (2,863) - -

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(Continued)

Book value

Cash flow of contract

Within 6

months 6-12

months 1-2 years 2-5 years Over 5 years

December 31, 2014 Non-derivative financial liabilities

Short-term borrowings $ 1,054,822 (1,061,962) (1,061,962) - - - -

Short-term notes and bills payable 150,000 (150,000) (150,000) - - - -

Notes and accounts payable 3,750,805 (3,750,805) (3,750,805) - - - -

Royalty payable 377,599 (377,599) (377,599)

Other payable－related party 10,573 (10,573) (10,573) - - - -

Guarantee deposits received 3,371 (3,371) - - (3,371) - -

Derivative financial liabilities Forward exchange contract:

Outflows 552 (554) - (554) - - -

$ 5,347,722 (5,354,864) (5,350,939) (554) (3,371) - -

The Company does not expect that the cash flows included in the maturity analysis could occur significantly earlier or at significantly different amounts.

D. Currency risk

(a) Exposure to currency risk

The Company’s significant exposure to foreign currency risk was as follows:


Foreign currency

Exchange rate TWD

Foreign currency

Exchange rate TWD

Financial Assets Monetary items

USD 90,576 32.83 2,973,610 67,586 31.65 2,139,097EUR 4,179 35.88 149,943 40,349 38.47 1,552,226JPY 43 0.27 12 394,675 0.26 102,615

Financial Liabilities Monetary items

USD 93,597 32.83 3,072,790 102,990 31.65 3,259,634

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(Continued)

(b) Sensitivity analysis

The Company’s exposure to foreign currency risk arises from the translation of the foreign currency exchange gains and losses on cash and cash equivalents, trade and other receivables, short-term borrowings, and trade payables that are denominated in foreign currency. A 5% depreciation or appreciation of the TWD against the above foreign currency at December 31, 2015 and 2014, would have increased (decreased) the net income as follows. (This analysis is based on foreign currency exchange rate variances that the Company considered to be reasonably possible at the reporting date. The analysis assumes that all other variables remain constant.)

2015 2014

Depreciation $ 2,539 26,715 Appreciation (2,539) (26,715)

(c) Exchange gains and losses of functional currency

For the years ended December 31, 2015 and 2014, the foreign exchange losses (including realized and unrealized) were $319,450 and $240,957, respectively. It is impractical to disclose the foreign exchange losses by each significant foreign currency due to the variety of the functional currencies of the Company.

E. Interest rate analysis

The following sensitivity analysis is based on the risk exposure to interest rates on the derivative and non-derivative financial instruments on the reporting date. For variable rate instruments, the sensitivity analysis assumes the variable rate liabilities are outstanding for the whole year on the reporting date. The Company’s internal management reported the increases/decreases the interest rates and the exposure to changes in interest rates of 0.25% is considered by management to be a reasonable change of interest rate.

If the interest rate had increased or decreased by 0.25%, the Company’s net income before tax would have increased or decreased by $704 and $3,042 for the years ended December 31, 2015 and 2014, respectively, with all other variable factors remaining constant. This is mainly due to the Company’s cash and cash equivalents, short-term borrowings, and short-term notes and bills payable at variable rates.

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(Continued)

F. Fair value of financial instruments (a) Categories of financial instruments and fair value

The Company’s carrying amount and fair value of financial assets and liabilities (including information on the fair value hierarchy, but excluding financial instruments whose fair values approximate their carrying amounts and equity investments which cannot be estimated reliably in an active market) were as follows: December 31, 2015 Fair Value

Carrying amount Level 1 Level 2 Level 3 Total

Financial assets:

Cash and cash equivalents $ 3,185,776 - - - - Financial assets measured at fair

value through profit or loss－current 4,311 4,311 - - 4,311

Derivative financial assets (forward exchange) 949 - 949 - 949

Notes and accounts receivable, net 5,135,130 - - - - Accounts receivable－related parties,

net 479,070 - - - -

Other financial assets-current 42,934 - - - - Financial assets carried at cost－

non-current 30,373 - - - -

Refundable deposits 32,390 - - - - Other financial assets－non-current 57,189 - - - -

$ 8,968,122 4,311 949 - 5,260

Financial liabilities:

Short-term borrowings $ 1,987,216 - - - -

Short-term notes and bills payable 50,000 - - - - Derivative financial liabilities

(forward exchange) 2,101 - 2,101 - 2,101

Notes and accounts payable 3,697,297 - - - -

Royalty payable 348,999 - - - - Other payables－related parties 7,772 - - - -

Guarantee deposits received 2,863 - - - - $ 6,096,248 - 2,101 - 2,101

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(Continued)

December 31, 2014 Fair Value

Carrying amount Level 1 Level 2 Level 3 Total

Financial assets:

Cash and cash equivalents $ 3,213,678 - - - - Financial assets measured at fair

value through profit or loss－current 19,022 19,022 - - 19,022

Derivative financial assets (forward exchange) 5,695 - 5,695 - 5,695

Notes and accounts receivable, net 5,215,875 - - - - Accounts receivable－related parties,

net 551,772 - - - - Other financial assets－current 79,648 - - - - Financial assets carried at cost－

non-current 143,840 - - - -

Refundable deposits 45,879 - - - - Other financial assets－non-current 65,737 - - - -

$ 9,341,146 19,022 5,695 - 24,717

Financial liabilities:

Short-term borrowings $ 1,054,822 - - - -

Short-term notes and bills payable 150,000 - - - - Derivative financial liabilities

(forward exchange) 552 - 552 - 552

Notes and accounts payable 3,750,805 - - - -

Royalty payable 377,599 - - - - Other payables－related parties 10,573 - - - -

Guarantee deposits received 3,371 - - - - $ 5,347,722 - 552 - 552

(b) Valuation techniques for financial instruments not measured at fair value

The Company estimates its financial instruments not measured at fair value using the following methods and assumptions: Fair value measurement for financial liabilities measured at amortized cost shall be based on the latest quoted price and agreed-upon price if these prices are available in an active market. When market value is unavailable, the fair value of financial liabilities is evaluated based on the discounted cash flow of the financial liabilities.

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(Continued)

(c) Valuation techniques for financial instruments that are measured at fair value - derivative financial instruments – forward contracts are measured by using the current forward foreign exchange rates.

(23) Financial risk management

A. Overview

The Company is exposed to the following risks due to usage of financial instruments:

(a) Credit risk (b) Liquidity risk (c) Market risk

This note presents information about the Company’s exposure to each of the above risks and the Company’s objectives, policies, and processes for measuring and managing risk. For further information, please refer to the relevant notes.

B. Risk management framework The board of directors has overall responsibility for the establishment and oversight of the risk management framework. The board is responsible for developing and monitoring the Company’s risk management policies, and meets regularly for discussions. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Company’s board of directors oversees how management monitors compliance with the Company’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. The board of directors is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the board of directors.

C. Credit risk Please refer to note 6(22). As of December 31, 2015 and 2014, the Company had provided guarantees for its 100%-owned subsidiaries.

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(Continued)

D. Liquidity risk There is no liquidity risk of being unable to raise capital to settle contract obligations since the Company has sufficient capital and working capital to fulfill contract obligations. As there is no open market for the financial assets carried at cost, they are subject to liquidity risk.

E. Market risk

The Company’s purchases and sales are mainly denominated in foreign currency. As a result, current and future cash flows of foreign currency assets and liabilities are exposed to the risk of foreign currency exchange rate volatility. Therefore, the Company engaged in derivative financial instrument transactions as economic hedges against potential changes in assets or liabilities held in foreign currencies. Gains and losses arising from changes in exchange rates are offset by those of the hedged item. As a result, the market risk is low. Beneficiary certificates held by the Company are presented under financial assets measured at fair value. Such assets are measured at fair value, and the Company is exposed to market price volatility. (a) Currency risk

The Company is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currencies of the Company’s entities, primarily the TWD, but also including the US dollar (USD), Euro (Euro), and Chinese Yuan (CNY). The currencies used in these transactions are the TWD, Euro, USD and CNY. In respect of other monetary assets and liabilities denominated in foreign currencies, the Company ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.

(b) Interest rate risk

The Company holds variable-rate financial assets and liabilities. Please refer to note 6(22) for interest rate risk.

(24) Capital management The board’s policy is to maintain a strong capital base so as to maintain investor, creditor, and market confidence and to sustain future development of the business. Capital consists of share capital, capital surplus, retained earnings, and non-controlling interests of the Company. The board of directors monitors the return on capital as well as the level of dividends to ordinary stockholders.

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(Continued)

The Company’s debt-to-equity ratios at the reporting date were as follows:

December 31,

2015 2014

Total liabilities $ 7,934,988 7,166,657 Less: cash and cash equivalents (3,185,776) (3,213,678) Net debt 4,749,212 3,952,979 Total equity(adjusted capital) $ 8,755,455 10,005,170 Debt-to-adjusted-capital ratio 54.24% 39.51%

7. Related-party transactions

(1) Parent company and ultimate controlling party

Unizyx is the ultimate controlling party of the Company. (2) Transactions with key management personnel

Key management personnel compensation comprised:

2015 2014

Short-term employee benefits $ 19,618 25,324 Post-employment benefits 5,710 308 Share-based payments - 8

$ 25,328 25,640 For information of share based compensation, please refer to note 6(17).

(3) Significant related-party transactions (a) Sales of goods

The significant transactions with related parties were as follows:

Sales Accounts receivable December 31, 2015 2014 2015 2014 Associate $ 764,785 502,227 478,353 551,772Other related-party 111 - 717 - $ 764,896 502,227 479,070 551,227

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(Continued)

There is no significant difference between the sales price of the Company for associates and for third parties. The terms of payment are 60 to 180 days after delivery, and the credit terms for third parties are 60 to 90 days. Receivables from related parties were not secured with collateral and did not require provisions for bad debt expenses.

(b) Rendering of services expense

The expenditures on developing products related to information service, cloud platform and programing with affiliated company were as follows:

2015 2014

Associate $ 23,181 13,718 Other related-party 13,810 -

$ 36,991 13,718 Details of other account payable of the Company were as follows:

December 31,

2015 2014

Associate $ 7,772 10,573 As of December 31, 2015 and 2014, the prepaid-service fee amounted to $78,690 and $400, respectively, and were recognized as other current assets.

(c) Donation

The Company donated 100% shares of ZyFLEX Technology Inc., with the carrying amount of $94,839 and cash amounted to $30,325, to other related party in November 2015.

8. Pledged assets

The carrying values of pledged assets were as follows:

December 31, Pledged assets Purpose of pledge 2015 2014

Other financial assets –

noncurrent Contract fulfillment and warranty guarantee $ 57,189 65,737

Property, plant and equipment, net

Short-term borrowings

-

34,710

$ 57,189 100,447

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(Continued)

9. Significant contingent liabilities and unrecognized commitments

(1) Significant commitments

A. The amounts of notes pledged at the bank by ZyXEL and MitraStar for financing purposes were as follows:

December 31,

2015 2014

$ 4,022,150 3,746,300 B. The amounts of ZyXEL’s outstanding letters of credit to facilitate ZyXEL’s purchases were as

follows: (in thousands of USD)

December 31,

2015 2014

$ - 324 C. MitraStar signed a “4G LTE (Fourth Generation of Mobile Phone Mobile Communications

Standards Long Term Evolution)” contract with the Industrial Development Bureau of the Ministry of Economic Affairs that was valid from March 1, 2013 to August 31, 2015. The subsidy for the contract is $73,500. Furthermore, in order to obtain such grant fund, the guarantee amount provided by bank, and Mitrastar were as follows:

December 31,

2015 2014

Performance bond $ - 28,343 Mitrastar’s check $ - 73,500

All guarantees issued by the bank mentioned above were endorsed by Unizyx.

D. In order to bid on projects, ZyTPE Communications Corporation submitted a performance guarantee letter. The amounts were as follows:

December 31,

2015 2014

$ 16,221 31,066

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(Continued)

E. In order to bid on the projects of Bank of Taiwan, Chunghwa Telecom Co., Ltd., and others, ZyFLEX Communications Inc. requested a bank to submit a performance guarantee letter and a warranty guarantee letter to its counterparties, and provided the relative amounts of time deposits recorded as restricted deposits. The amounts were as follows:

December 31,

2015 2014

$ - 14,043

F. In order to obtain the bid of TTNET A.S., ZyXEL Iletisim Teknolojileri A.S. requested a bank to issue a guarantee letter. The amounts were as follows:

(in thousands USD)

December 31,

2015 2014

$ 3,218 3,091 G. In order to bid on the project of Investronica, MitraStar obtained a letter of performance guarantee

from the bank. The amounts were as follows: (in thousands EUR)

December 31,

2015 2014

$ 600 - H. In order to bid on the project of EGYPTAN, ZyXEL obtained a letter of performance guarantee

from the bank. The amounts were as follows: (in thousands EUR)

December 31,

2015 2014

$ 411 - I. The outstanding commitments of Wuxi MitraStar Technology Co., Ltd. for construction and the

purchase of property, plant and equipment were as follows:

December 31,

2015 2014

$ 16,359 16,676

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(Continued)

J. The Company signed technology licensing agreements with certain companies and was required

to pay licensing fees in proportion to sales revenue of the licensed products under the agreements. K. The Company signed agency service agreements with certain companies and was required to pay

commission fees in proportion to commissioned sales under the agreements.

(2) Contingencies liabilities A. In 2013, TQDelta, L.L.C. asserted that ZyXEL sold products that infringed certain patents of

TQDelta, L.L.C. and brought suit against ZyXEL and ZyXEL’s subsidiary ZyXEL Communications Inc., ZyXEL is defending the lawsuit with a lawyer. However, ZyXEL believes that the abovementioned event will not have a significant effect on current operations.

B. In 2014, Charles C. Freeny III, Bryan E. Freeny, and James P. Freeny asserted that ZyXEL sold

products that infringed certain patents of Charles C. Freeny III, Bryan E. Freeny, and James P. Freeny and brought suit against ZyXEL’s subsidiary, ZyXEL Communications Inc; ZyXEL reached a settlement with these companies in March 2015.

C. In 2013, Innovative Wireless Solution, L.L.C. asserted that ZyXEL sold products that infringed

certain patents of Innovative Wireless Solution, L.L.C. and brought suit against ZyXEL’s subsidiary, ZyXEL Communications Inc.; Innovative Wireless Solution L.L.C. withdrew the lawsuit in March 2015.

D. In 2008, Northpeak Wireless, L.L.C. (“Northpeak”) asserted that ZyXEL sold products that

infringed certain Northpeak patents and brought suit against ZyXEL subsidiary, ZyXEL Communications Inc.; Northpeak withdrew the lawsuit in December 2015.

E. In 2015, IO dapt, L.L.C. asserted that ZyXEL sold products that infringed certain IO dapt, L.L.C.

patents and brought suit against ZyXEL subsidiary, ZyXEL Communications Inc.; IO dapt, L.L.C. withdrew the lawsuit on December 15, 2015.

F. In 2015, Frequency systems, L.L.C. asserted that ZyXEL sold products that infringed certain

Frequency systems, L.L.C. patents and brought suit against ZyXEL subsidiary, ZyXEL Communications Inc.; ZyXEL reached a settlement with Frequency systems, L.L.C. in January 2016.

G. In 2015, Wetro Lan L.L.C asserted that ZyXEL sold products that infringed certain Wetro Lan

L.L.C patents and brought suit against ZyXEL subsidiary, ZyXEL Communications Inc.; ZyXEL reached a settlement with Wetro Lan L.L.C in February 2016.

10. Significant disaster: None. 11. Subsequent events: None.

65



(Continued)

12. Other information The following is a summary statement of current-period employee benefits, depreciation, and amortization expenses by function:

By function 2015 2014

By item

Classified as

cost of goods sold

Classified as

operatingexpenses

Total

Classified as

cost of goods sold

Classified as

operatingexpenses

Total

Employee benefits Salaries 315,838 2,501,785 2,817,623 357,946 2,399,054 2,757,000 Labor and health insurance 35,587 225,500 261,087 34,591 196,488 231,079 Pension 21,039 117,329 138,368 27,558 113,449 141,007 Others 16,793 105,994 122,787 39,305 95,541 134,846 Depreciation 131,058 124,682 255,740 113,040 116,545 229,585 Amortization 2,908 53,584 56,492 3,425 50,833 54,258

13. Segment financial information

(1) General information and industrial information

There are three segments that need to be reported: the brand business unit, the product business unit, and the investment unit. The brand business unit uses the brand name “ZyXEL” to provide telecommunications service providers, enterprise users, and home users complete broadband access solutions and to provide customers instant and local services. The product unit develops products for customers and logistics services that focus on the manufacturing of wired and wireless broadband communications network, the new generation of internet, multimedia, and digital home applications in areas such as intellectual life. The investment unit is for general investment business. Unizyx had allocated income tax expense (benefit) or non-recurring gains and losses to segments that need to be reported. In addition, all the gains and losses of the segments that need to be reported included significant non-cash items except depreciation and amortization. The reported amounts accorded with the reports used by the chief operating decision maker. The accounting principles of the operating units are not significantly different from the significant accounting policies in note 4. The Company’s operating segments’ profits and losses are measured based on net income and loss after tax, which also serves as the basis for assessing the segments’ performance.

66



(Continued)

(2) Segment information The Company’s operating segment information and reconciliation are as follows: 2015

Brand Products

Investment

Reconciliationand

elimination

Total Revenue External $ 12,942,062 8,448,181 - - 21,390,243 Inter-segment 15,480 6,068,893 (496,289) (5,588,084) - Total revenue $ 12,957,542 14,517,074 (496,289) (5,588,084) 21,390,243 Reportable segment

operating income (loss) $ 91,502 (245,762) (626,768) 549,875 (231,153) Non-operating income and

expenses (196,084) (57,584) 3,698 (11,204) (261,174) Income (loss) before income

taxes $ (104,582) (303,346) (623,070) 538,671 (492,327) Depreciation and

amortization $ 84,425 227,807 - - 312,232 Reportable segment assets $ 8,749,747 9,467,453 8,732,000 (10,373,532) 16,575,668 Investment accounted for

using equity method 114,775 Total assets $ 16,690,443

2014

Brand Products

Investment

Reconciliation and

elimination

Total Revenue External $ 14,827,696 6,433,076 - - 21,260,772 Inter-segment 743 7,465,661 289,729 (7,756,133) - Total revenue $ 14,828,439 13,898,737 289,729 (7,756,133) 21,260,772 Reportable segment

operating income (loss) $ 222,313 367,880 191,808 (196,258) 585,743 Non-operating income and

expenses (125,080) (73,491) 3,835 (3,964) (198,700) Income (loss) before income

tax $ 97,233 294,389 195,643 (200,222) 387,043 Depreciation and

amortization $ 85,203 198,640 - - 283,843 Reportable segment assets $ 9,633,225 9,057,536 9,986,385 (11,538,450) 17,138,696 Investment accounted for

using equity method 33,131 Total assets $ 17,171,827

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(3) Information by product and service Revenue from external customers:

2015 2014

Broadband products $ 18,581,731 18,059,602 Products for Central Office Equipment 2,502,161 2,999,544 Others 306,351 201,626 $ 21,390,243 21,260,772

(4) Geographic information

Sales to customers classified by location of customers is as follows, within which revenue is recognized based on the location of the customer and non-current assets are recognized based on the location of the asset. A. Revenue from external customers:

Area 2015 2014

United States $ 3,628,159 2,113,104 France 2,764,805 2,233,690 Germany 2,255,481 1,303,223 China 2,016,883 1,854,846 Spain 1,334,954 2,584,718 Taiwan 1,263,574 1,588,315 Iran 262,839 1,368,917 Other countries 7,863,548 8,213,959 $ 21,390,243 21,260,772

B. Non-current assets:

December 31,

Area 2015 2014

China $ 1,114,277 1,080,278

Taiwan 1,028,581 1,013,580

Other countries 218,824 188,208

$ 2,361,682 2,282,066

(5) Information on major customers: None.

Documents

Unizyx Holding Corporation and Subsidiaries Consolidated ... Q4 Unizyx... · Unizyx Holding Corporation and Subsidiaries Consolidated Financial Statements December 31, 2015 and 2014