D-Link 2004 Annual Report Download - page 49

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21
D-LINK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
D-Link applied to the Securities and Futures Commission (SFC) to issue 25,000 thousand units
of employee stock options on May 27, 2003. Each unit of employee stock options can purchase
one common share, and the total amount of common shares for employee stock options is 25,000
thousand shares. D-Link will issue new common shares to redeem the stock options. The
application was approved by the SFC on June 6, 2003, but the employee stock options had not
been issued as of December 31, 2004.
(b) Capital surplus
Pursuant to the ROC Company Law, with the exception of capital surplus originating from long-
term equity investments accounted for by the equity method, capital surplus can only be used to
offset a deficit and cannot be used to declare cash dividends. However, capital surplus derived
from additional paid-in capital and earnings from gifts received can be used to increase share
capital if there is no accumulated deficit. According to current SFC regulations, capitalization of
capital surplus cannot exceed a rate of ten percent and can be done only in years after the year in
which such capital increase is registered with the authorities.
(c) Distribution of earnings and dividend policy
After establishing the legal and special reserve, earnings may be distributed in the following
order in accordance with D-Link’ s articles of incorporation (revised on May 28, 2004): 2% as
remuneration to directors and supervisors and 5%~10% (originally 12.5%) as employee bonuses.
An additional reserve on certain earnings may also be retained. The remaining earnings may be
distributed as stockholders’ dividends.
According to the ROC Company Law, D-Link must retain 10% of its annual income as a legal
reserve until such retention equals the amount of authorized common stock. The retention is
accounted for by transfers to a legal reserve upon approval at a stockholders’ meeting. The legal
reserve can only be used to offset an accumulated deficit, and when it reaches an amount equal to
one-half of the paid-in share capital, one-half of legal reserve may be transferred to common
stock.
According to ROC SFC regulations, an ROC publicly listed company should retain a special
reserve equal to any deductions made to stockholders’ equity related to items such as foreign
currency translation adjustments before distribution of earnings which were generated after 1999.
If the aforementioned deduction of stockholders’ equity is reversed, the same amount could be
removed from special reserve and transferred to unappropriated earnings.
D-Link has adopted the remaining dividend policy based on the industry environment, business
growth, and long-term financial planning. D-Link considers the capital budget to determine the
distribution of stock dividends accompanied by cash dividends, which should be no less than
10% of total dividends.