Advantech Co., Ltd. Financial Statements for the Three Months Ended March 31, 2008 and 2007 and Independent Accountants Review Report

Transcription

1 Advantech Co., Ltd. Financial Statements for the Three Months Ended March 31, 2008 and 2007 and Independent Accountants Review Report

2 INDEPENDENT ACCOUNTANTS REVIEW REPORT The Board of Directors and the Shareholders Advantech Co., Ltd. We have reviewed the accompanying balance sheets of Advantech Co., Ltd. as of March 31, 2008 and 2007, and the related statements of income and cash flows for the three months then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to issue a report on these financial statements based on our reviews. Except as stated in the following paragraph, we conducted our reviews in accordance with Statement of Auditing Standards No Review of Financial Statements, of the Republic of China. A review consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As stated in Note 8 to the financial statements, Advantech Co., Ltd. had investments accounted for by the equity method. As of March 31, 2008 and 2007, these investments had carrying values of NT$4,470,666 thousand and NT$4,033,117 thousand, respectively. As of March 31, 2008 and 2007, the negative carrying values of these investments, recorded as part of other liabilities, were NT$7,221 thousand and NT$5,005 thousand, respectively. The net investment gains of NT$285,935 thousand and NT$165,488 thousand in the three months ended March 31, 2008 and 2007, respectively, as well as additional disclosures in Note 20 required by the Securities and Futures Bureau for the Company and its investees were based on the inveestees unreviewed financial statements for the same reporting periods as those of the Company. Based on our reviews, except for any adjustments that might have been determined to be necessary had the investees financialstatements mentioned in the preceding paragraph been reviewed, we are not aware of any material modifications that should be made to the financial statements of Advantech Co., Ltd. as of and for the three months ended March 31, 2008 and 2007 for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China

3 As stated in Note 3 to the financial statements, Advantech Co., Ltd. adopted Interpretation No of the Accounting Research and Development Foundation of the Republic of China, which requires companies to recognize bonuses to employees and remuneration to directors and supervisors as compensation expenses starting on January 1, These bonuses and remunerations were previously recorded as appropriations from earnings. We have reviewed the consolidated financial statements of the Company and its subsidiaries as of and for the year ended March 31, 2008 and have issued an qualified accountants review report thereon (not presented herewith) with an explanatory paragraph. April 24, 2008 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the accountants report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language accountants report and financial statements shall prevail

4 ADVANTECH CO., LTD. BALANCE SHEETS MARCH 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value) (Reviewed, Not Audited) ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash (Note 4) $ 679,821 4 $ 1,632, Financial liabilities at fair value through profit or loss - Financial assets at fair value through profit or loss (Notes 2 current (Notes 2 and 5) 12, and 5) Accounts payable 542, ,637 4 Available-for-sale financial assets - current (Notes 2 and 6) 1,035, ,921, Payables to related parties (Note 16) 696, ,757 3 Notes receivable (Note 2) 35,726-40,906 - Income tax payable (Notes 2 and 13) 254, ,535 1 Accounts receivable, net of allowance for doubtful accounts Accrued expenses 337, ,229 1 of $14,027 thousand in 2008 and $10,392 thousand in 2007 Employee bonus payable (Note 11) 174, ,250 1 (Note 2) 516, ,935 3 Advance receipts and other current liabilities 82, ,139 - Receivables from related parties (Notes 2 and 16) 2,347, ,832, Other receivables 37,447-18,075 - Total current liabilities 2,100, ,685, Inventories, net (Notes 2 and 7) 1,160, ,136,606 7 Deferred income tax assets - current (Notes 2 and 13) 51,661-47,193 - OTHER LIABILITIES Prepayments and other current assets 29,465-22,616 - Accrued pension liabilities (Notes 2 and 10) 108, ,171 1 Deferred income tax liabilities - noncurrent (Notes 2 and 13) 274, ,775 1 Total current assets 5,894, ,033, Deferred credits (Note 2) 279, ,573 1 Others (Notes 2 and 8) 7,221-5,005 - LONG-TERM FUNDS AND INVESTMENTS Available-for-sale financial assets - noncurrent (Notes 2 Total other liabilities 669, ,524 3 and 6) 3,698, ,498, Investments accounted for by the equity method (Notes 2 Total liabilities 2,770, ,186, and 8) 4,470, ,033, SHAREHOLDERS EQUITY (Notes 2, 11 and 12) Total long-term funds and investments 8,169, ,531, Capital stock, NT$10.00 par value Authorized - 600,000 thousand shares PROPERTIES (Notes 2 and 9) Issued - 491,877 thousand shares in 2008 and 463,665 Cost thousand shares in ,918, ,636, Land 640, ,472 4 Capital surplus Buildings 844, ,911 5 Additional paid-in capital in excess of par 4,382, ,363, Machinery and equipment 369, ,277 2 From long-term equity investments 65,635-64,098 - Furniture and fixtures 103, ,331 - Total capital surplus 4,448, ,427, Other equipment 165, ,718 1 Retained earnings Total cost 2,124, ,037, Legal reserve 1,378, ,086,326 7 Less: Accumulated depreciation 505, ,097 2 Unappropriated earnings 4,155, ,841, ,618, ,626, Total retained earnings 5,533, ,927, Construction in progress and prepayment for equipment 452, ,180 - Others Cumulative translation adjustments 107, ,356 1 Property, plant and equipment, net 2,071, ,661, Unrealized valuation gains on financial instruments 563, ,163 - Total other equity 670, ,519 1 OTHER ASSETS Treasury stock - 24,500 thousand shares (2,057,597) (12) - - Refundable deposits 7,557-13,003 - Deferred expense, net (Note 2) 141, ,840 1 Total shareholders equity 13,514, ,191, Restricted assets - noncurrent (Note 17) - - 1,600 - Total other assets 148, ,443 1 TOTAL $ 16,284, $ 16,377, TOTAL $ 16,284, $ 16,377, The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche review report dated April 24, 2008) - 3 -

5 ADVANTECH CO., LTD. STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) Amount % Amount % OPERATING REVENUES (Notes 2 and 16) Sales $ 3,011, $ 2,333, Sales returns and allowances 17, ,631 1 Net sales 2,993, ,306, Other operating revenues 29, ,696 1 Total operating revenues 3,022, ,339, OPERATING COSTS (Notes 14 and 16) 2,149, ,660, GROSS PROFIT 873, , REALIZED (UNREALIZED) PROFITS ON INTERCOMPANY SALES (Note 2) (36,207 ) (1 ) 78,257 3 ADJUSTED GROSS PROFIT 837, , OPERATING EXPENSES (Note 14) Marketing 68, ,810 3 Administrative 120, ,952 4 Research and development 229, ,211 8 Total operating expenses 418, , OPERATING INCOME 419, , NONOPERATING INCOME AND GAINS Interest 3,863-7,545 - Equity in net gain of investees, net (Notes 2 and 8) 285, ,488 7 Gain on disposal of investments, net 4,776-23,737 1 Foreign exchange gain, net (Note 2) ,379 2 Gains on physical inventory - - 3,156 - Reversal of allowance for loss on inventories (Note 2) ,368 2 Royalty revenue (Note 16) 41, ,635 2 Valuation gain on financial assets, net (Notes 2 and 5) - - 6,857 - Other income (Note 16) 3,265-3,623 - Total nonoperating income and gains 339, , (Continued) - 4 -

6 ADVANTECH CO., LTD. STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) Amount % Amount % NONOPERATING EXPENSES AND LOSSES Foreign exchange loss, net (Note 2) $ 13,307 - $ - - Provision for losses on inventories (Note 2) 18, Loss on disposal of scrap inventories ,944 3 Valuation loss on financial assets, net (Notes 2 and 5) 10, Other expenses 2,127-1,348 - Total nonoperating expenses and losses 44, ,292 3 INCOME BEFORE INCOME TAX 713, , INCOME TAX (Notes 2 and 13) 82, ,153 3 NET INCOME $ 631, $ 586, Pretax After After Income Income Tax Pretax Tax EARNINGS PER SHARE (Note 15) Basic $ 1.50 $ 1.33 $ 1.36 $ 1.20 Diluted $ 1.50 $ 1.33 $ 1.35 $ 1.19 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche review report dated April 24, 2008) (Concluded) - 5 -

7 ADVANTECH CO., LTD. STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 631,077 $ 586,551 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,268 33,944 Provision for bad debts 4,158 - Provision (reversal of allowance) for losses on inventories 18,261 (42,368 ) Loss on disposal of scrap inventories - 55,944 Equity in net gain of investees, net (285,935 ) (165,488 ) Loss on disposal of properties, net 1, Gain on disposal of investments, net (4,776 ) (23,737 ) Accrued pension liabilities (734 ) 207 Deferred income taxes 14,501 50,851 Net changes in operating assets and liabilities Financial instruments at fair value through profit or loss 11,818 (1,300 ) Notes receivable 13,763 9,331 Accounts receivable 75, ,598 Receivables from related parties (82,487 ) 275,730 Inventories (64,236 ) 28,225 Other receivables 38,463 23,445 Prepayments and other current assets (3,493 ) (12,368 ) Accounts payable 70,809 98,032 Payables to related parties (278,076 ) 186,492 Income tax payable 66,052 27,652 Accrued expenses 51,091 34,662 Advance receipts and other current liabilities (9,172 ) 16,701 Deferred credits 36,207 (78,257 ) Net cash provided by operating activities 341,780 1,204,862 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of available-for-sale financial assets (2,011,486 ) (3,748,012 ) Proceeds of the sale of available-for-sale financial assets 1,951,622 2,913,850 Proceeds of the sale of long-term equity investments - 27,685 Proceeds of the disposal of properties Acquisition of properties (80,134 ) (51,829 ) Increase in deferred expenses (33,721 ) (13,873 ) Decrease (increase) in other assets 141 (410 ) Net cash used in investing activities (173,560 ) (872,564 ) (Continued) - 6 -

8 ADVANTECH CO., LTD. STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) CASH FLOWS FROM FINANCING ACTIVITIES Employee stock options $ 8,652 $ 1,206 Cash bonus to employees and remuneration to directors and supervisors (5,952 ) (12,521 ) Cash paid for acquisition of treasury stock (671,899 ) - Net cash used in financing activities (669,199 ) (11,315 ) NET INCREASE (DECREASE) IN CASH (500,979 ) 320,983 CASH, BEGINNING OF PERIOD 1,180,800 1,311,568 CASH, END OF PERIOD $ 679,821 $ 1,632,551 SUPPLEMENTARY CASH FLOW INFORMATION Income tax paid $ 267 $ 650 NONCASH INVESTING AND FINANCING ACTIVITIES Proceeds of the return of capital by investees $ 200,000 $ - Dividends receivable from equity-method investees $ 160,000 $ - Negative carrying value of investments recorded as part of other liabilities $ 7,221 $ 5,005 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche review report dated April 24, 2008) (Concluded) - 7 -

9 ADVANTECH CO., LTD. NOTES TO FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) (Reviewed, Not Audited) 1. ORGANIZATION AND OPERATIONS Advantech Co., Ltd. (the Company ) was established in September It manufactures and sells embedded computing boards, industrial automation products, applied computers and industrial computers. Its stock has been listed on the Taiwan Stock Exchange since December 13, As of March 31, 2008 and 2007, the Company had 1,268 and 1,247 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the Business Accounting Law, and Guidelines Governing Business Accounting, and accounting principles generally accepted in the ROC. Under these guidelines and principles, the Company is required to make certain estimates and assumptions that could affect the allowance for doubtful accounts, provision for loss on inventories, depreciation of properties and properties leased to others, pension cost, product warranty reserve, compensation expenses bonuses paid to employees, directors and supervisors and income tax. Actual results could differ from these estimates. For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. The Company s significant accounting policies are summarized as follows. Current and Noncurrent Assets and Liabilities Current assets include cash, those assets held primarily for trading purposes and to be realized, sold or consumed within one year from the balance sheet date. All other assets such as property, plant and equipment are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent. Financial Assets/Liabilities at Fair Value through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss ( FVTPL ) include financial asets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Company recognizes a financial asset or a financial liability on its balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Company has lost control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired. Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. At each balance sheet date subsequent to issue of initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the period in which they arise. On derecognition of a - 8 -

10 financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in profit or loss. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability. Fair values of financial assets and financial liabilities at the balance sheet date are determined as follows: Financial assets and financial liabilities without quoted prices in an active market - at values determined using valuation techniques. Available-for-sale Financial Assets Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. When subsequently measured at fair value, the changes in fair value are excluded from earnings and reported as a separate component of shareholders equity. The accumulated gains or losses are recognized as earnings when the financial asset is derecognized from the balance sheet. Purchase or sale of financial assets under customary transactions is recognized and derecognized using trading date accounting. Cash dividends are recognized as investment income upon ex-dividend day but are accounted for as reductions of the original cost of investment if these dividends are declared on the investees earnings before investment acquisition. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. After the receipt of stock dividends, the cost per share is recalculated on the basis of the new number of total shares. Fair values of financial assets and financial liabilities at the balance sheet date are determined as follows: Publicly traded stocks - at closing prices; open-end mutual funds - at net asset values. An impairment loss is recognized when there is objective evidence that the financial asset is impaired. Any subsequent decrease in impairment loss for an equity instrument classified as available-for-sale is recognized directly in equity. If the fair value of a debt instrument classified as available-for-sale subsequently increases as a result of an event which occurred after the impairment loss was recognized, the decrease in impairment loss is reversed to profit. Revenue Recognition, Accounts Receivable, and Allowance for Doubtful Accounts Sales are recognized when titles to products and material risks of ownerships are transferred to clients, primarily upon shipment, when the earnings process is mostly completed and profit is realized or is realizable. The Company does not recognize as sales those transactions involving the delivery of materials to subcontractors since ownership of materials is not transferred upon delivery of materials. Allowances and the related provision for sales returns are accounted for as a deduction from gross sales, and the related costs are deducted from cost of sales as they are incurred. Sales are measured at the fair value of the consideration received or receivable and represents amounts agreed between the Company and the customers for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest. An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts receivable. This review involves the aging analysis of the outstanding receivables and assessing relevant economic circumstances

11 Inventories Inventories consist of raw materials and supplies, work in process and finished goods. Inventories are stated at the lower of weighted-average cost or market. Market value refers to replacement value of raw materials and supplies and net realizable value of finished goods and work in process. Besides an assessment if technological changes would result in stock obsolescence, the inventories at the balance sheet date are also evaluated for estimated excess quantities and obsolescence on the basis of a demand forecast. Estimated losses on scrap and slow-moving items are recognized as an allowance for inventory obsolescence. Long-term Equity Investments Investments in shares of stock of companies in which the Company owns at least 20% of their outstanding common stock or exercises significant influence over their operating and financial policy decisions are accounted for by the equity method. Stock investments accounted for by the equity method are initially caried at cost and subsequently adjusted for the Company s proportionate share in the investees earnings or losses and changes in capital surplus. Investment income (or loss) is recognized whenever the investees recognize income (or loss). Cash dividends received are recognized as a reduction of the carrying value of the investments. If the equity in losses recognized exceeds the original investment acquisition costs plus any advance given to an equity-method investee, the excess losses should be recognized proportionately and is recorded as part of other liabilities. The difference between the cost of the investment and the Company s equity in the investee s net asets when an investment is acquired or when the equity method is first adopted is amortized over five years. Effective January 1, 2006, under the revised Statement of Financial Accounting Standards, investment premiums, representing goodwill, are no longer being amortized, but the Company needs to make asset impairment tests regularly. And if there are indications that the goodwill is probably impaired, the Company also needs to make an impairment test. If the net fair value of an asset exceed its investment cost. The difference will be credited to depend on the proportion of noncurent aset s (not include non-equity-method financial asset, dispose asset waiting for sale, differ tax asset and prepay pension cost or other pension pay) fair value. If the fair value of a noncurrent asset is not enough for crediting purposes, it will recognize as extraordinary gain. If the unamortized long-term investment by the equity method acquired before January 1, 2006 exceeds the Company s equity in the investee s equity in the investee s asets is a defered liability wil amortized depend on its remaining useful life. If an investee issues additional shares and the Company acquires these shares at a percentage different from its curent equity in the investee, the resulting increase in the Company s equity in its investee s net asets is credited to capital surplus. Any decrease in the Company s equity in the investee s net asets is debited to capital surplus. If capital surplus is not enough for debiting purposes, the difference is debited to unappropriated earnings. For equity-method investees over which the Company has controlling influence, if the equity in losses recognized exceeds the original investment acquisition costs, the Company recognizes its investee s total losses unless other investors commit to and have the ability to assume a portion of the losses. However, when the investees return to profitable operations, the profits should be recognized by the Company totally until its previously recognized losses are covered. All profits derived from sales of products by the Company to its subsidiaries are deferred but only profit in proportion to the Company s equity interest is defered for other equity-method investees that are not majority owned. Profit from the sales of products by equity-method investees to the Company is deferred in proportion to the Company s equity interests in the investees and credited against the investment. Profits from sales of products between equity-method investees are defered to the extent of the Company s equity interests in these investees. The deferred profits are included as part of other liabilities. All of these profits are realized through the subsequent sale of the related products to third parties

12 Stock dividends received are recorded only as an increase in the number of shares held but not recognized as investment income. Cost or carrying value per share is recomputed on the basis of total shares held after stock dividends are received. For all stock investments, costs of investments sold are determined using the weighted-average method. Properties Properties are stated at cost less accumulated depreciation. Major additions, renewals and betterments are capitalized, while maintenance and repairs are charged to current expense. Depreciation is computed using the straight-line method over service lives initially estimated as follows (plus one year to represent estimated salvage value): buildings and equipment, 45 to 60 years; machinery and equipment, 2 to 8 years; furniture and fixtures 2 to 5 years; and miscellaneous equipment, 2 to 5 years. Properties still being used by the Company beyond their initially estimated service lives are depreciated over their newly estimated service lives. Upon sale or other disposal of properties, the related cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss is credited or charged to nonoperating income or expenses in the year of disposal. Deferred Expenses Deferred expenses, consisting of computer software costs and royalties, are amortized over two or eight years using the straight-line method. Assets Impairment An impairment loss should be recognized if the carrying amount of properties, deferred expenses and investments accounted for by the equity method exceeds, as of the balance sheet date, their recoverable amount, and this impairment loss should be charged to current income. An impairment loss recognized in prior years could be reversed if there is a subsequent recovery in the estimates used to determine recoverable amount since the last impairment loss was recognized. However, an impairment loss is reversed only to the extent that it does not increase the asset carrying amount that would have been determined had no impairment loss on the asset been recognized in prior years. However, reversal of impairment loss on goodwill is prohibited. Pension Costs The Company has two types of pension plans: Defined benefit and defined contribution. Under the defined benefit pension plan, net periodic pension costs are recognized on the basis of actuarial calculations, and, under the defined contribution pension plan, on contribution basis throughout the employees service period. If the pension plans are revised, (a) the prior service costs of the defined benefit pension plan are amortized using the straight-line method over the average years from the revision date to conform to the date of benefit vesting, and (b) the prior service costs of the defined contribution pension plan are recognized as part of the net pension cost for the period. If the defined benefit pension plan is curtailed or settled, the resulting gains or losses should be recognized as part of the net pension cost for the period

13 Treasury stock Treasury stock is stated at cost and shown as a deduction in shareholders equity. Income Tax The Company uses inter-period allocation to account for income tax. Deferred tax assets are recognized for the tax effects of deductible temporary differences, investment tax credits, and deferred tax liabilities are recognized for the tax effects of taxable temporary differences. Valuation allowance is provided for deferred income tax assets that are not certain to be realized. Deferred income tax assets or liabilities are classified as current or noncurrent according to the nature of related assets or liabilities for financial reporting. But, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, it is classified as current or noncurrent depending on the expected realization date of the temporary difference. Investment tax credits for certain equipment or technology purchases, research expenditure, employee and trainings are recognized in the current year. Adjustments of prior years tax liabilities are added to or deducted from the curent year s tax expense. Income taxes (10%) on undistributed earnings generated since January 1, 1998 are recorded as expense in the year when the shareholders resolve to retain the earnings. Foreign-currency Transactions Foreign currency transactions (except derivative transactions) are recorded in New Taiwan dollars at the spot rates of exchange in effect when the transactions occur. At year-end, the balances of foreign-curency asets and liabilities ( Balances ) which caried at fair value are restated at the prevailing exchange rates, and the resulting differences are recorded as follows: Equity-method stock investments - as cumulative translation adjustments under shareholders equity; other assets and liabilities - as credits or charges to current income. At year-end, the balances of foreign-noncurrency assets and liabilities are restated at the prevailing exchange rates, the resulting differences are recognized as current earnings or a separate component of shareholders equity, and Balances caried at cost are restated at the history rates and recognized as the rate of the trading rate. Reclassifications Certain accounts in the financial statements as of and for the three months ended March 31, 2007 have been reclassified to be consistent with the presentation of the financial statements as of and for the three months ended March 31, ACCOUNTIING CHANGE In March 2007, the Accounting Research and Development Foundation of the Republic of China issued Interpretation No Accounting for Bonuses to Employees, Directors and Supervisors, which requires companies to recognize bonuses to employees and remunerations to directors and supervisors as compensation expenses beginning January 1, These bonuses were previously recorded as appropriations from earnings. This accounting change resulted in a decrease of $58,524 thousand in net income and a decrease in after income tax basic earnings per share of NT$0.12 for the three months ended March 31,

14 4. CASH March Cash on hand $ 1,493 $ 1,561 Checking and demand deposits 113, ,031 Time deposits: Interest %-3.63% in 2008 and 1.40%-5.15% in ,843 1,315,959 $ 679,821 $ 1,632, FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS The Company s trading-purpose assets were as follows: Financial assets resulting from trading March Forward contracts $ 413 $ 760 Financial liabilities resulting from trading Forward contracts $ 12,144 $ - The outstanding forward contracts as of March 31, 2008 and 2007 were as follows: March 31,2008 Currency Maturity Amount (Thousands) Sell USD/NTD From April to July 2008 USD40,600/NTD1,220,859 Sell EUR/USD From April to May 2008 EUR5,000/USD7,862 Sell YEN/USD April 2008 JPY49,510/USD500 March 31,2007 Sell YEN/USD From April to May 2007 YEN200,000/USD1,740 Sell EUR/USD From April to June 2007 EUR8,470/USD11,290 Sell USD/NTD April 2007 USD1,000/NTD33,037 The Company entered into forward contract transactions in the three months ended March 31, 2008 and 2007 to avoid risks on exchange rate fluctuations. The hedging strategy of the Company is to avoid the major portion of the market and liquidity risks. Net gains and loss arising from trading financial assets or liabilities for the three months ended March 31, 2008 and 2007 were net losses $10,981 thousand and net gains $6,857 thousand, respectively

15 6. AVAILABLE-FOR-SALE FINANCIAL ASSETS March Current Noncurrent Current Noncurrent Mutual funds $ 1,035,582 $ - $ 1,921,042 $ - Publicly traded stocks ASUSTEK Computer Inc. - 3,698,427-3,408,710 Firich Enterprise Co., Ltd ,088 $ 1,035,582 $ 3,698,427 $ 1,921,042 $ 3,498, INVENTORIES, NET March Finished goods $ 404,442 $ 379,700 Work in process 370, ,834 Materials and supplies 493, ,840 Inventories in transit 19,313 4,274 1,288,195 1,286,648 Allowance for losses (127,407 ) (150,042 ) $ 1,160,788 $ 1,136, LONG-TERM EQUITY INVESTMENTS Listed March % of % of Carrying Owner- Carrying Owner- Value ship Value ship Axiomtek Co., Ltd. $ 357, $ 421, Unlisted Advantech Automation Corp. (BVI) 1,449, ,323, Advantech Technology Co., Ltd. 917, , Advantech Investment Fund-A Co., Ltd. 417, , Advantech Europe Holding B.V. 397, , Advansus Corp. 281, , Advantech Technologies Co., Ltd. 154, , Advantech Japan Co., Ltd. 113, , Advantech Co. Singapore Pte, Ltd. 112, , Advantech Australia Pty Ltd. 110, , Advantech (Yan Shun) Holding Co., Ltd. 99, Advantech Co. Malaysia Sdn. Bhd. 40, , Advantech Hungary Ltd. 13, , (Continued)

16 March % of % of Carrying Owner- Carrying Owner- Value ship Value ship Advantech Investment & Management Service $ 5, $ 5, Advantech (H.K.) Technology Co., Ltd Viewsys Technology Co., Ltd , Advantech IBHA Technologies Inc , $ 4,470,666 $ 4,033,117 The calculation of the carrying values of the equity-method investments and the equity in their net income or net los was based on the investees unreviewed financial statements for the three months ended March 31, 2008 and The combined ownership of the Company and its subsidiaries in Advantech IBHA Technologies Inc. ( Advantech IBHA ) exceeded 20% of Advantech IBHA s outstanding common shares as of December 31, Thus, the investment in Advantech IBHA was accounted for by the equity method. However, Advantech IBHA was liquidated in May The Company intended to support the operations of Advantech (H.K.) Technology Co., Ltd. in the three months ended March 31, 2008 and Under the revised Statement of Financial Accounting Standards No. 5 - Long-term Investments in Equity Securities of the Republic of China, if the equity in losses recognized exceeds the original investment acquisition costs plus any advances given to the investee, the Company recognizes its investee s total losses unless other investors commit to assume, and can assume, a portion of the losses. As of March 31, 2008 and 2007, there were credit balances on this investment of $7,221 thousand and $5,005 thousand, respectively, included in other liability - others. The market value of the listed stock of the equity investment s market values, which was calculated on the basis of the closing price of March 31, 2008 and 2007 were $967,608 thousand and $1,310,804 thousand, respectively. The Company has included all of its direct and indirect subsidiaries in the consolidated financial statements as of and for the years ended March 31, PROPERTY, PLANT AND EQUIPMENT Statement of changes in property, plant and equipment and properties leased to others was as follows: Three Months Ended March 31, 2008 Beginning Re- Ending Balance Acquisition Disposal classification Balance Properties Cost Land $ 640,472 $ - $ - $ - $ 640,472 Buildings 844, ,911 Machinery and equipment 353,918 8, , ,286 Furniture and fixtures 103,173 1, ,802 Other equipment 161,675 9,749 5, ,972 2,104,149 $ 19,437 $ 6,305 $ 7,162 2,124, (Continued)

17 Three Months Ended March 31, 2008 Beginning Re- Ending Balance Acquisition Disposal classification Balance Accumulated depreciation Buildings 118,896 $ 4,132 $ - $ - $ 123,028 Machinery and equipment 217,569 11, ,716 Furniture and fixtures 60,220 4, ,425 Other equipment 87,050 6,321 3,831-89, ,735 $ 26,575 $ 4,601 $ - 505,709 1,620,414 1,618,734 Construction in progress and prepayments for equipment 398,794 $ 60,697 $ - $ (7,162 ) 452,329 $ 2,019,208 $ 2,071,063 Three Months Ended March 31, 2007 Beginning Re- Ending Balance Acquisition Disposal classification Balance Properties Cost Land $ 640,472 $ - $ - $ - $ 640,472 Buildings 844, ,911 Machinery and equipment 298,347 6,868 5,348 3, ,277 Furniture and fixtures 90,573 4, ,331 Other equipment 135,917 15,563-3, ,718 2,010,220 $ 26,487 $ 5,646 $ 6,648 2,037,709 Accumulated depreciation Buildings 102,367 $ 4,132 $ - $ - 106,499 Machinery and equipment 183,395 9,471 5, ,617 Furniture and fixtures 42,099 4, ,527 Other equipment 65,096 5, , ,957 $ 23,647 $ 5,507 $ - 411,097 1,617,263 1,626,612 Construction in progress and prepayments for equipment 16,387 $ 25,342 $ - $ (6,549 ) 35,180 $ 1,633,650 $ 1,661, PENSION PLAN The Labor Pension Act (the Act ) was enforced on July 1, The employees subject to the Labor Standards Law before July 1, 2005 were allowed to choose to continue to be subject to the Labor Standards Law or to be subject to the pension mechanism under this Act, with their service years accumulated until June 30, 2005 to be retained. Those hired on or after July 1, 2005 automatically become subject to the Act

18 Under the Act, the Company has a defined contribution pension plan. Since July 1, 2005, the Company has made monthly contributions to the employees individual pension accounts in the Bureau of Labor Insurance at 6% of employees salaries and wages. The pensioncost under the defined contribution loan was $11,680 thousand and $11,094 thousand for the three months ended March 31, 2008 and 2007, respectively. The Company has a defined benefit pension plan under the Labor Standards Law (the Law ). Under this pension plan, employees can accumulate two base points for every service year within the first 15 service years and one base point for every service year thereafter. Employees can accumulated up to 45 based points, and the benefits based on employee s average monthly salary for the six-month period prior to retirement. Under the Law, the Company accrues pension costs individually on the basis of actuarial calculations and make monthly contributions at 2% of salaries and wages to each company s pension fund, which is administered by each company s pension plan commitee and deposited in the respective commitees names in the Bank of Taiwan (the Central Trust of China merged with the Bank of Taiwan in July 2007, with the Bank of Taiwan as the survivor entity). The pension costs under the defined benefit pension plan were $1,489 thousand and $882 thousand for the three months ended March 31, 2008 and 2007, respectively. As of March 31, 2008 and 2007, the balance of the pension fund was $85,781 thousand and $76,000 thousand, respectively. 11.SHAREHOLDERS EQUITY Based on certain laws or regulations, capital surplus from long-term equity investments accounted for by the equity method cannot be used for any purpose. Other capital surplus may be used only to offset a deficit. Capital surplus from the issue of stock in excess of par value may be capitalized by issuing new shares to shareholders in proportion to their holdings, and capitalized amounts should be within certain limits. The Company s Articles of Incorporation provide that legal reserve should be set aside at 10% of annual net income less any cumulative losses. In addition, a special reserve should be appropriated as needed. The remainder of the income should be appropriated in the following order: a. 3% to 12% as bonus to employees. For stock bonuses, employees may include subsidiaries employees who meet certain criteria as determined by the Company s board of directors; b. 1% as remuneration to directors and supervisors. c. Dividends, as proposed by the board of directors. Any appropriations of earnings are recorded in the year of shareholders approval following the year of earnings generation. For the three months ended March 31, 2008, the bonus to employees and remunerations to directors and supervisors, representing 13% and 1%, respectively, of net income, were accrued on the basis of past experiences. Material differences between such estimated amounts and the amounts proposed by the Board of Directors in the following year are retroactively adjusted for in the current year. If the actual amounts subsequently resolved by the shareholders differ from the proposed amounts, the differences are recorded in the year of shareholders resolution as a change in accounting estimate. Based on a directive issued by the Securities and Futures Bureau, an amount equal to the net debit balance of certain shareholders equity accounts (including unrealized gain or loss on financial instruments and cumulative transaction adjustments) should be transferred from unappropriated earnings to a special reserve. Any special reserve appropriated may be reversed to the extent of the decrease in the net debit balance

19 Under the Company Law, legal reserve should be appropriated until the accumulated reserve equals the Company s paid-in capital. This reserve may be used only to offset a deficit. When the balance of the reserve reaches 50% of the Company s outstanding capital stock, up to 50% thereof may be transfered to capital. Under the Integrated Income Tax System, which took effect on January 1, 1998, noncorporate local shareholders are allowed a tax credit for the income tax paid by the Parent Company on earnings generated since An imputation credit account (ICA) is maintained by the Parent Company for such income tax and the tax credit allocated to each shareholder. The maximum credit available for allocation to each shareholder cannot exceed the ICA balance on the dividend distribution date. The Company operates in an industry related to computers, and its business related to network servers is new but with significant potential for growth. Thus, in formulating its dividend policy, the Company takes into account the overall business and industry conditions and trends, its objective of enhancing the shareholders long-term interest, and the sustainability of the Company s growth. The policy also requires that stock dividends be less than 75% of total dividends to retain internally generated cash within the Company to finance future capital expenditures and working capital requirements. The appropriations of earnings for 2007 and 2006 were proposed in the Board of Directors meeting and approved in the shareholders meeting held on March 21, 2007 and June 15, 2007, respectively. The appropriations and dividends per share were as follows: Dividends Per Appropriation of Earnings Share (Dollars) Legal reserve $ 294,988 $ 291,789 $ - $ - Cash dividends 1,869,508 1,854, Stock dividends 233, , Remuneration to directors and supervisors 26,549 26, Bonus to employees - stock 60,000 40, Bonus to employees - cash 205, , The appropriation of the earnings for 2006 was approved by the Financial Supervisory Commission, Executive Yuan, R.O.C., and the board of directors resolved that the date of distributing stock and cash dividends would be August 8, In addition, the Company completed obtained on August 28, 2007 its revised registration from the Ministry of Economic Affairs on the increase in issued shares. Information on the appropriation of bonus to employees and remuneration to directors and supervisors can be accessed online through the Market Observation Post System on the Web site of the Taiwan Stock Exchange. On April 1, 2003, the Securities and Futures Bureau approved the Company s stock option plan. There were 3,000 thousand units authorized to be issued, which may be converted to 3,000 thousand common shares. Employees may exercise a certain percentage of the option within two and four years of the grant date, and will expire six years from the grant date. The stock options were issued on August 14, 2003, and the exercise price was set at NT$28.84 as of March 31, As of March 31, 2008, there were 2,375 thousand units of stock options exercised, which were converted to 2,375 thousand common shares; thus, the unexercised stock options consisted of 265 thousand units. When the grant date of stock-based employee compensation plans is on or before January 1, 2004, the Company need not apply the accounting guideline Nos. 070, 071 and 072 for stock-based compensation issued by the Accounting Research and Development Foundation of the ROC

20 12. TREASURY STOCK (Shares in Thousands) Purpose of Treasury Stock Number of Shares, Beginning of Year Addition During the Year Reduction During the Year Number of Shares, End of Year Three months ended March 31, 2008 For transfer to employees 14, ,500 To maintain the Company s credibility and shareholders interest - 10,000-10,000 Under the Securities and Exchange Act, the Company shall neither pledge treasury stock nor exercise shareholders rights on these shares, such as rights to dividends and to vote. 13. INCOME TAX The Income Basic Tax Act (the IBT Act ), which took efect on January 1, 2006, requires that the basic income tax should be 10% of the sum of the taxable income as calculated in accordance with the Income Tax Law plus tax-exempt income under the Income Tax Law or other laws. The tax payable of the current year would be the higher of the basic income tax and income tax payable calculated in accordance with the Income Tax Law. The Company has considered the impact of the IBT Act in the determining of the curent year s income tax expense. a. Reconciliation of income tax expense based on income tax at statutory income tax rates to income tax expense, and current income tax payable were as follows: March Tax on pretax income at 25% statutory rate $ 178,421 $ 166,416 Deduct tax effects of: Permanent differences Tax-exempt income (51,866 ) (63,180 ) Other (6,649 ) (1,582 ) Temporary differences (3,987 ) (45,050 ) Investment tax credit (49,600 ) (28,302 ) Income tax currently payable $ 66,319 $ 28,302 b. Income tax expense consisted of the following: March Income tax currently payable $ 66,319 $ 28,302 Income tax expense - deferred 14,501 50,851 Withholding tax of dividends 1,826 - $ 82,646 $ 79,

21 c. The change of income tax payable prepaid income tax of balance sheet consisted of the following: March Balance, beginning of period $ 188,137 $ 137,883 Income tax currently payable 66,319 28,302 Payment (267 ) (650 ) Balance, end of period $ 254,189 $ 165,535 d. Net deferred income taxes as of March 31, 2008 and 2007 were as follows: March Current Deferred income tax assets Allowance for loss on inventories $ 31,852 $ 37,510 Unrealized product warranty reserve 10,212 9,091 Excess provisions for doubtful receivables 6,958 6,958 Investment tax credit - 52,653 Others 5,000-54, ,212 Valuation allowance - (52,653 ) 54,022 53,559 Deferred income tax liabilities Unrealized foreign exchange gain (2,361 ) (6,366 ) Deferred income tax assets, net $ 51,661 $ 47,193 Noncurrent Deferred income tax assets: Deferred income $ 53,743 $ 32,594 Accumulated equity in the net loss of investees 27, ,401 Pension cost 26,865 27, , ,783 Valuation allowance (27,107 ) (105,401 ) 80,608 60,382 Deferred income tax liabilities: Accumulated equity in the net gain of foreign investees (355,207 ) (250,157 ) Deferred income tax liabilities, net $ (274,599 ) $ (189,775 ) The income tax rate used to recognize deferred income tax was 25%. e. As of March 31, 2008, the Company s five years exemption on the income was as folows: Investment Plan Exemption Period The industry 500 MHz thin client production From 2006 to

22 f. Based on Article 70-1 of the Statute for Upgrading Industries, companies will be exempt from the profit-seeking enterprise tax on the following incomes if they use worldwide resources and set up an international operating network or if they establish operating headquarters within the territory of the Republic of China that is of a specific size and will bring about significant economic benefits: 1) Income from providing management services or R&D services to its affiliates abroad; 2) Royalty payment received from its affiliates abroad; and/or 3) Returns on investments and gains on asset disposal by overseas affiliates. g. The information on the Company s integrated income tax is as follows: March Balance of the imputation credit account (ICA) $ 269,712 $ 188,475 The balances of unappropriated retained earnings generated before 1997 $ 81,329 $ 81,329 The expected and actual creditable tax ratios for earnings were 8.94% and 8.18%, as of December 31, 2007 and 2006, respectively. The imputation credit allocated to the shareholders is based on its balance as of the date of dividend distribution. The expected creditable ratio may change when the actual allocation of the imputation credits is made. h. Income tax returns through 2004 had been examined and cleared by the tax authorities. However, the tax authorities made an assessment on the Company s 2003 return, but Company disagreed with this assessment. Thus, the Company requested for a reexamination of its return. As of April 24, 2008, the date of the accompanying accountants review report, the reexamination was in progress; nevertheless, the Company recognized the payable on this case. 14. PERSONNEL EXPENSES, DEPRECIATION AND AMORTIZATION Three Months Ended March Included in Included in Included in Included in Cost of Operating Cost of Operating Goods Sold Expenses Total Goods Sold Expenses Total Personnel expenses Payroll $ 58,044 $ 228,935 $ 286,979 $ 55,228 $ 166,132 $ 221,360 Insurance 4,851 11,155 16,006 4,527 12,145 16,672 Pension 3,887 9,282 13,169 2,953 9,023 11,976 Others 4,339 9,548 13,887 4,655 8,530 13,185 Depreciation 9,704 16,871 26,575 8,811 14,836 23,647 Amortization ,505 10, ,146 10,297 $ 81,013 $ 286,296 $ 367,309 $ 76,325 $ 220,812 $ 297,