TAIWAN SHIN KONG SECURITY CO., LTD. and its subsidiaries Consolidated Financial Statement and Auditors Report

Transcription

1 Stock No: 9925 TAIWAN SHIN KONG SECURITY CO., LTD. and its subsidiaries Consolidated Financial Statement and Auditors Report 2007 and 2006 Address: No. 126, Section 1, Chien Kuo North Road, Taipei, Taiwan, R.O.C Tel. No.: (02)

2 CONTENTS Item Page No. Notes To Financial Statements I. Cover page 1 II. Contents 2 III. Declaration of consolidated financial 3 statements with relarted party IV. Auditors report 4 V. Consolidated balance sheet 5 VI. Consolidated statement of income 6~7 VII. Consolidated statement of changes in 8 shareholders equity VIII. Consolidated statement of cash flow 9~11 IX. Notes to consolidated financial statement (I) History 12~18 I (II) Summary of significant accounting policies 18~24 II (III) Reasons and effects of changes in 24~26 III accounting principles (IV) Material transactions offset between parent company and subsidiaries 61, 92~111 XXXIII (V) Explanation of important accounting titles 25~52 IV~XXVII (VI) Transactionsrelated party 52~57 XXVIII (VII) Pledged assets 57 XXIX (VIII) Significant undertakings or contingent 57~60 XXX events (IX) Loss of material disaster (X) Supplementary disclosure 57~60 XXX (XI) Others (XII) Noted disclosures 1. Information related to material 60, 63~74 XXXI transactions 2. Information related to reinvested 61, 75~90 XXXI enterprises 3. Information about investment in 61, 91 XXXI mainland china 4. Business relationship between the 61, 92~111 XXXII parent company and subsidiaries and the material business transactions conducted (XIII) Financial information by department 62 XXXIV 2

3 DECLARATION The companies to be included into the affiliated companies consolidated financial statements we prepared for fiscal year 2007 (January 1 to December 31, 2007) in accordance with the Criteria for the Preparation of Consolidated Reports on Operation, Consolidated Financial Statements, and Report on Affiliates and Subsidiaries are as same as those to be included into the consolidated financial statement between parent companies and subsidiaries prepared in accordance with Statement of Financial Accounting Standard No. 7. The relevant information to be disclosed in the affiliated companies consolidated financial statement has already been disclosed in the consolidated financial statement between the parent company and subsidiaries and therefore no consolidated statements of the affiliated companies shall be necessary. Declared by: Company: Taiwan Shin Kong Security Responsible person: Lee FengYau March 6,

4 To: Taiwan Shin Kong Security Auditors report We have audited the accompanying consolidated balance sheet of Taiwan Shin Kong Security and subsidiaries as of December 31, 2007 and 2006 and the related statements of income, retained earnings and cash flows for the years then ended. We conducted our audits in accordance with generally accepted auditing standards in the Republic of China and Rules Governing Auditing and Certification of Financial Statements by Certified Public Accounts. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Shin Kong Security and subsidiaries as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with Guidelines Governing the Preparation of Financial Reports by securities, Business Accounting Law, Business Accounting Guidelines, Finance Accounting Standards, and generally accepted accounting principles. As stated in Note III, Taiwan Shin Kong Security and subsidiaries have adopted the principle under Finance Accounting Standards No. 34 on Financial Instruments: Recognition and Management and No. 36 on Financial Instruments: Presentation and Disclosure on January 1, 2006 and the related regulations. Deloitte & Touche CPA: Chen HuiMin SFCs written approval No: Taitsaicheng(6) No CPA:Y.H. Lin Financial Supervisory Commission, Executive Yuans written approval No.: Jinkwongcheng(6) No.: March 6,

5 Unit: NT$1,000 Taiwan Shin Kong Security and its subsidiaries Consolidated Balance Sheet December 31, 2007 and 2006 Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 Code Asset Amount % Amount % Code Liability and shareholders equity Amount % Amount % Current assets Current liability 1100 Cash and cash equivalents (Notes II & IV) $ 1,528, $ 1,650, Shortterm loan (Notes XIV & XXVIII) $ 545,000 6 $ 630, Financial assets at fair value through income statement (Notes II, III, V & XXVII) 2110 Shortterm securities payable (Note XV) 49, , , Notes payable (Note XXVIII) 89, , Financial instruments for sales current 2140 Accounts payable (Note XXVIII) 138, ,739 1 (Notes II, III, VI & XXVII) 1,775, ,202, Income tax payable (Notes II and XXIV) 139, , Notes receivable (Net) (Notes II, VII, & 2170 Expenses payable 513, ,477 5 XXVIII) 177, , Equipment accounts payable 15,612 11, Accounts receivable (Net) (Notes II, VIII, & 2228 Other payables 49, ,786 XXVIII) 421, , Advance receipts (Note XXVIII) 625, , Corporate bond payable due in one year (Note Other financial assetscurrent 16,387 7, XVI) 280, , Rent payable due in one year Inventory (Note II) 195, , (Note XVIII) 42,055 37, Longterm loan due in one year Prepayments (Note IIVIII) 44,440 46, (Note XVII) 2,000 2, Deferred income tax assets current (Note II 2298 Other current liability (Note XXVIII) 82, ,443 1 and IV) 54, ,591 21XX Total current liability 2,573, ,377, Other current assets 60, ,900 11XX Total current assets 4,455, ,855, Longterm liability 2411 Corporate bond payable (Note XVI) 280,000 3 Investment in financial assets under cost method 2420 Longterm loan (Note XVII) 28,000 21,362 (Notes II, III, IX, X, XI, XXVIII & XXIX) 2446 Rent payable (Note XVIII) 62, , ,525, ,517, XX Total longterm liability 90, , Longterm investment based on cost method 21,457 19, Real estate investment (net) 1,190, ,202, Other liability 1425 Pension liability accrual Prepaid longterm investment proceeds 5, (Notes II & XIX) 288, , XX Deposit received Total investment 2,738, ,744, (Notes XX and XXVIII) 317, , XX Total other liability 605, ,181 5 Fixed assets (Notes II, XII, & XXIX) Cost 2XXX Total liability 3,269, ,289, Land 776, , House and building 597, ,875 6 Shareholders Equity of parent company (Note II & XXI) 1531 Machinery & equipment 1,834, ,599, Capital stock 3,711, ,662, Transportation equipment 348, , Additional paidin capitalstock premium 146, , Office equipment 304, ,105 3 Retained earning 1681 Other equipment 191, , Legal reserve 702, , X1 4,052, ,745, Special reserve X9 Less: Cumulative depreciation ( 1,824,826 ) ( 19 ) ( 1,568,156 ) ( 15 ) 3350 Unappropriated earnings 1,678, ,468, Prepaid construction equipment amount 20,988 6,988 Other items 15XX Total fixed assets 2,248, ,184, Cumulative translation adjustment 1, Net loss unrecognized as pension cost ( 27,520 ) ( 905 ) Other assets (Notes II, VIII, XIII, XXIV, XXVIII, 3451 & XXIX) 3510 Longterm rental receivablerelated party 67, ,369 1 Unrealized (loss) profit of financial instruments 9, ,838 7 Treasury stock 3,156 thousand shares in 2007 and 3,125 thousand shares in 2006 ( 34,070 ) ( 1 ) ( 34,070 ) Total shareholders equity of parent company 6,189, ,531, Deferred income tax assetsnoncurrent 67, , Other assetsothers 154, , XX Total other assets 289, , Minority interest 274, , XXX Total shareholders equity 6,463, ,809, XXX Total assets $ 9,732, $ 10,099, Total liability and shareholders equity $ 9,732, $ 10,099, Notes to the consolidated financial statements constitute a part of these financial statements. (Please refer to the audit report of Deloitte & Touche dated March 6, 2008) Chairman: Lee FengYau Manager: Lin PoFong Company Accountant: Sung TingKai 5

6 Taiwan Shin Kong Security and its subsidiaries Consolidated Income Statement January 1 ~ December 31, 2007 and 2006 Unit: NT$1,000 (Except EPS which is in NT$) Code Amount % Amount % 4000 Total operating revenue (Net) (Notes XX & XXVIII) $5,847, $5,603, Operating cost (Notes XXIII, XXV and XXVIII) ( 3,521,080 ) ( 60 ) ( 3,210,452 ) ( 57 ) 5910 Gross income 2,326, ,392, Operating expenses (Notes XXV & XXVIII) 6200 General and administrative expenses ( 1,324,355 ) ( 23 ) ( 1,227,754 ) ( 22 ) 6900 Net operating profit 1,001, ,164, Nonoperating revenue 7110 Interest revenue 9,072 7, Dividend income 153, , Gain on disposal of fixed assets 228 1, Gain on disposal of investment 148, , Rent income (Notes XI & XXVIII) 27,569 11, Gain of financial assets in valuation net , Miscellaneous income (Note XXVIII) 54, , Total nonoperating revenue 393, ,030 6 Nonoperating expenses and loss 7510 Interest expenses ( 28,941 ) ( 25,286 ) 7522 Investment loss (Notes IX and X) ( 25,924 ) ( 164,632 ) ( 3 ) 7530 Loss on disposal of fixed assets ( 2,363 ) ( 2,004 ) (Continued) 6

7 (See previous page) Code Amount % Amount % 7560 Loss in exchange ( $ 135 ) ( $ 397 ) 7570 Loss of price decline of inventory and loss of idle inventory ( 952 ) 7880 Miscellaneous expenses ( 29,648 ) ( 1 ) ( 46,562 ) ( 1 ) 7500 Total nonoperating expenses and loss ( 87,963 ) ( 1 ) ( 238,881 ) ( 4 ) 7900 Net income before tax of the continuing department 1,306, ,286, Income tax expenses (Notes II and XXIV) ( 277,003 ) ( 5 ) ( 317,037 ) ( 6 ) 8900 Net Income of continuing department 1,029, , Cumulative effect of the change in accounting principle (net of income tax for an amount of $329 thousand) (Note III) Consolidated gross income $1,029, $ 969, Vested in: 9601 Shareholders of parent company $ 978, $ 918, Minority interest 51, ,598 1 $1,029, $ 969, Code Before tax After tax Before tax After tax EPS 9750 Basic EPS (Note XXVI) $ 3.54 $ 2.79 $ 3.49 $ 2.63 Notes to the consolidated financial statements constitute a part of these financial statements. (Please refer to the audit report of Deloitte & Touche dated March 6, 2008) Chairman: Lee FengYau Manager: Lin PoFong Company Accountant: Sung TingKai 7

8 Balance 1/1/2006 Cumulative effect of the application of FAS No. 34 for the first time Taiwan Shin Kong Security and its subsidiaries Consolidated Statement of Changes in Shareholders Equity January 1 ~ December 31, 2007 and 2006 Unit: NT$1,000 Retained earning Other items Unrealized profit (loss) of Cumulative Net loss Additional paidin Unappropriated financial translation unrecognized as Treasury stock Total shareholders Capital stock capital Legal reserve Special reserve earnings instruments adjustment pension cost cost Minority interest equity $ 3,579,810 $ 146,302 $ 528,977 $ 3,564 $ 1,213,158 ( $ 2,008 ) $ 623 ( $ 1,856 ) ( $ 34,070 ) $ 226,833 $ 5,661, , ,368 Distribution of earnigns 2005 Legal reserve 81,723 ( 81,723 ) Special reserve ( 3,564 ) 3,564 Capital increased by earning 71,596 ( 71,596 ) recapitalization Cash dividend ( 465,375 ) ( 465,375 ) Capital increased by employees bonus 11,086 ( 11,086 ) Remunerations to directors and supervisors ( 36,953 ) ( 36,953 ) Consolidated gross income in ,370 51, ,968 Unrealized profit (loss) of financial instruments for sales 479, ,478 Change of translation adjustment Net Loss of unrecognized pension cost Balance Dec. 31, ,662, , ,700 1,468, , ( 905 ) ( 34,070 ) 278,431 6,809,873 Acquired subsidiary in the midterm ( 55,538 ) ( 55,538 ) Distribution of earnings 2006 Legal reserve 91,837 ( 91,837 ) Special reserve 905 ( 905 ) Capital increased by earning 36,625 ( 36,625 ) recapitalization Cash dividend ( 585,999 ) ( 585,999 ) Capital increased by employees bonus 12,384 ( 12,384 ) Remunerations to directors and supervisors ( 41,281 ) ( 41,281 ) Net income 2007 Unrealized profit (loss) of financial instruments for sales 978,719 51,260 1,029,979 ( 668,287 ) ( 668,287 ) Change of translation adjustment 1,100 1,100 Net Loss of unrecognized pension cost ( 26,615 ) ( 26,615 ) Balance 12/31/2007 $ 3,711,501 $ 146,302 $ 702,537 $ 905 $ 1,678,047 $ 9,551 $ 1,826 ( $ 27,520 ) ( $ 34,070 ) $ 274,153 $ 6,463,232 Notes to the consolidated financial statements constitute a part of these financial statements. (Please refer to the audit report of Deloitte & Touche dated March 6, 2008) Chairman: Lee FengYau Manager: Lin PoFong Company Accountant: Sung TingKai 8

9 Taiwan Shin Kong Security and its subsidiaries Consolidated Statement of Cash Flow January 1 ~ December 31, 2007 and 2006 Unit: NT$1, Cash flow from operating activity Consolidated gross income $1,029,979 $ 969,968 Cumulative effect of the change in accounting principle ( 1,314 ) Loss of bad debt 7,770 11,662 Depreciation and amortization 315, ,219 Gain on disposal of investment ( 148,249 ) ( 128,588 ) Gain (net) of financial assets in valuation ( 297 ) ( 38,837 ) Investment loss of financial assets under Cost Method 151,163 Liquidation of capital decrease and loss of reinvestment 26,597 Investment (income) loss under Equity Method ( 673 ) 13,469 Loss on disposal of fixed assets (net) 2, Other losses (fixed assets theft loss) 48 Loss of price decline of inventory and loss of idle inventory 952 Inventory obsolences loss 10 Deferred income tax ( 3,568 ) ( 4,923 ) Net change in operating assets and liability Notes receivable ( 18,630 ) 13,269 Accounts receivable ( 21,734 ) ( 30,435 ) Inventory ( 33,319 ) ( 5,426 ) Prepayments 1,955 ( 2,138 ) Other current assets ( 40,917 ) 21,988 Notes payable 8,541 1,586 Accounts payable 3,729 ( 36,212 ) Income tax payable ( 30,995 ) ( 12,333 ) Expenses payable 12,697 59,401 Other payables ( 10,287 ) ( 12,415 ) Receipt in advance 121,910 32,396 Other current liabilities 6,110 29,628 Accrued pension liability ( 8,608 ) ( 4,064 ) Deferred pension cost 890 Net cash inflow from operating activity 1,220,890 1,307,336 (Continued) 9

10 (See previous page) Cash flow from investing activity Acquisition of financial assets for sales ( $1,262,781 ) ( $1,175,490 ) Proceeds from the disposal of financial assets for sales 1,151,309 1,176,229 Cash dividend distributed within one year from the disposal of financial assets for sales 200 Acquisition of financial assets with changes in fair values recognized as gains or losses ( 32,538 ) ( 23,738 ) Proceeds from the disposal of financial assets with changes in fair values recognized as gains or losses 33,191 38,024 Financial assets under Cost Method ( 100,000 ) Proceeds from the disposal of financial assets under Cost Method 28,963 4,100 Increase of longterm investment under Equity Method ( 5,343 ) Payment on shares refunded by capital decrease 35,632 9,505 Proceeds from the disposal of longterm investment under Equity Method 343 Procurement of fixed assets ( 353,132 ) ( 433,323 ) Gains on disposal of fixed assets 1,695 4,350 Increase in appropriated assets ( 20,019 ) ( 3,639 ) Increase in deferred expenses ( 16,335 ) ( 33,994 ) Decrease (increase) in refundable deposit 8,610 ( 2,468 ) Increase in other assets ( 5,430 ) ( 20 ) Net cash outflow from investing activity ( 530,292 ) ( 445,807 ) Cash flow from financing activity Shortterm loan increase (decrease) ( 85,000 ) 300,000 Shortterm security payable increase 49,852 Longterm loan solved ( 23,464 ) ( 352 ) Longterm loan taken 30,000 Decrease in corporate bonds payable ( 210,000 ) ( 210,000 ) Decrease in deposits received 43,710 16,311 Remuneration to directors/supervisors and employees bonus ( 36,953 ) Cash dividend ( 585,999 ) ( 465,375 ) Decrease in minority equity ( 39,097 ) ( 18,684 ) Net cash outflow from financing activity ( 819,998 ) ( 415,053 ) Effects of first consolidation of subsidiaries 7,317 (Continued) 10

11 (See previous page) Cash and cash equivalent increase (decrease) ( $ 122,083 ) $ 446,476 Balance of cash and cash equivalentsbeginning 1,650,453 1,203,977 Balance of cash and cash equivalentsend $1,528,370 $1,650,453 Supplementary disclosure of cash flow information Interest paid in the current period (exclusive of capitalized interest) $ 30,403 $ 26,641 Income tax paid $ 311,360 $ 338,454 Investing and financing activity not affecting cash flow, or having only partial cash income and expenses Procurement of fixed assets $ 474,151 $ 537,058 Plus: Accounts payable for procurement of fixed assetsbeginning 11,705 12,228 Less: Transferred to inventory ( 117,112 ) ( 104,258 ) Accounts payable for procurement of fixed assetsend ( 15,612 ) ( 11,705 ) Accounts paid for procurement of fixed assets in the current period $ 353,132 $ 433,323 Notes to the consolidated financial statements constitute a part of these financial statements. (Please refer to the audit report of Deloitte & Touche dated March 6, 2008) Chairman: Lee FengYau Manager: Lin PoFong Company Accountant: Sung TingKai 11

12 Taiwan Shin Kong Security and its subsidiaries Notes to Consolidated Financial Statement 2007 & 2006 (Expressed in Thousand New Taiwan Dollars unless specified otherwise) I. History, operations and policy of consolidation History and operations (I) Taiwan Shin Kong Security (referred to as TAIWAN SHIN KONG SECURITY CO., LTD. hereinafter) was incorporated in January 1980 in Taipei City and had twentyone subsidiaries and seventythree offices setup gradually thereafter. TAIWAN SHIN KONG SECURITY CO., LTD. is primarily engaged in the design, sale, lease, installation, maintenance, repairing and inspection of natural calamity, theft and fire resistant facilities, and the import/export related to the said products, as well as operation and investment of the relevant business. TAIWAN SHIN KONG SECURITY CO., LTD.s stocks have been traded on TSE since Dec As of December 31, 2007 and 2006, TAIWAN SHIN KONG SECURITY CO., LTD. had 1,859 employees and 1,805 employees on the payroll, respectively. (II) The subsidiary, Yi Kong Security Company Limited (hereinafter referred to as YKS), was incorporated in March It is primarily engaged in the design, installation and maintenance of natural calamity, theft and fire resistant facilities, and theft, fire and natural calamity resistant in offices, business places, factory buildings and warehouses. As of December 31, 2007 and 2006, Yi Kong Security Company Limited (hereinafter referred to as YKS) had 3,240 employees and 3,065 employees on the payroll, respectively. Its parent company is TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 69%. (III) The subsidiary, Taiwan Security (hereinafter referred to as TSC), was incorporated in October 1998 and started operating as of June It is primarily engaged in transportation and security maintenance of cash or other precious articles. As of December 31, 2007 and 2006, Taiwan Security had 861 employees and 810 employees on the payroll, respectively. Its parent company is TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 99.58%. 12

13 (IV) The subsidiary, ShinPo Investment Co., Ltd (hereinafter referred to as ShinPo Investment), was incorporated in June It is primarily engaged in the general investment. As of December 31, 2007 and 2006, ShinPo Investment had 1 employee on the payroll, respectively. Its parent company and ultimate parent company is YKS whose shareholdings are 23.61% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 76.37%, respectively. (V) The subsidiary, Yi Kong Building Management (hereinafter referred to as YKB), was incorporated in November 1998 and started operating as of July It is primarily engaged in the administrative service of apartment buildings. As of December 31, 2007 and 2006, Yi Kong Building Management had 0 employee on the payroll, respectively. Its parent company and ultimate parent company are YKS whose shareholdings in it are 3.90%, Shinkong Optical Networking whose shareholdings in it are 8%, etech Pro whose shareholdings in it are 8%, Shin Kong Aerotech International whose shareholdings in it are 10% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 70%, respectively. (VI) The subsidiary, etech Pro (hereinafter referred to as etech), was incorporated in September 1999 and started operating as of December It is primarily engaged in the management of parking lots, installation of computer equipment, wholesale of electronic materials, wholesale of office machines & equipment, wholesale and retail of information software. As of December 31, 2007 and 2006, etech Pro had 25 employees and 26 employees on the payroll, respectively. Its parent company and ultimate parent company are Yi Kong Building Management whose shareholdings in it are 49% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 49%, respectively. (VII) The subsidiary, Shin Kong Aerotech International (hereinafter referred to as SHA), was incorporated in July 2000 and started operating as of October 2000.It is primarily engaged in telecommunication engineering, installation of computer equipment, manufacture of aviators and spare parts thereof, automatic controlling equipment engineering, wholesale and retail of information software. As of December 31, 2007 and 2006, Shin Kong Aerotech International Co., Ltd. had 12 employees and 10 employees on the payroll, respectively. 13

14 Its parent company and ultimate parent company are etech whose shareholdings in it are 1.33% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 97.07%, respectively. (VIII) The subsidiary, Shin Soft (hereinafter referred to as SSC), was incorporated in November 2000 and started operating as of April 2001.It is primarily engaged in the management of parking lots, installation of computer equipment, wholesale of electronic materials, wholesale of office machines & equipment, wholesale and retail of information software. As of December 31, 2007 and 2006, Shin Soft had 43 employees and 34 employees on the payroll, respectively. Its parent company and ultimate parent company are ShinPo Investment whose shareholdings in it are 27.94%, etech whose shareholdings in it are 7% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 65%, respectively. (IX) The subsidiary, Shincluster Electronics (hereinafter referred to as Shincluster Electronics), was incorporated in April 2000 and started operating as of August It is primarily engaged in data processing and supply service of electronic information, retail and installation of fire protection safety equipment, retail of electronic materials, installation engineering of telecommunication equipment, service and retail of information software. As of December 31, 2007 and 2006, Shincluster Electronics had 30 employees and 20 employees on the payroll. Its parent company and ultimate parent company are etech whose shareholdings in it are 19%, ShinPo Investment whose shareholdings in it are 2%, and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 19%, respectively. (X) SHINPO INTERNATIONAL CO., LTD. the subsidiary, SHINPO INTERNATIONAL CO., LTD. (hereinafter referred to as SHINPO), was incorporated in Samoa in December It is primarily engaged in overseas holding business. As of December 31, 2007 and 2006, SHINPO INTERNATIONAL CO., LTD. had 0 employee on the payroll, respectively. Its parent company and also ultimate parent company is TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 100%. (XI) ThaiSK Security International The subsidiary, ThaiSK Security International (hereinafter referred to as ThaiSK), was incorporated on September 14, 2007 and engaged in security business. As of December 31, 2007, ThaiSK Security International had 14 employees on the payroll. Its parent company and also ultimate parent company are Shincluster Electronics whose shareholdings in it are 10% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 19%, respectively. 14

15 (XII) The subsidiary of subsidiary, Shinkong Optical Networking (hereinafter referred to as SON), was incorporated in January 2000 and started operating as of August It is primarily engaged in installation engineering of instruments and meters, fire protection safety equipment engineering, automatic controlling equipment engineering, installation engineering of telecommunication controlling RF facilities and installation of computer equipment. As of December 31, 2007 and 2006, Shinkong Optical Networking had 19 employees on the payroll, respectively. Its parent company and also ultimate parent company are ShinPo Investment whose shareholdings in it are 99.63% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XIII) The subsidiary of a subsidiary, Shin Kong Technology (hereinafter referred to as SKT), was incorporated in October 2007 and started operating as of November It is primarily engaged in installation engineering of computer equipment, telecommunications equipment wholesaling, telecommunications equipment retailing, telecommunications engineering, installation engineering of telecommunication controlling RF facilities, and telecommunications phone number process. As of December 31, 2007, Shin Kong Technology had 7 employees on the payroll. Its parent company and also ultimate parent company are ShinPo Investment Overseas Enterprise whose shareholdings in it are 80% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XIV) The subsidiary, CASK TechNetwork Inc. (hereinafter referred to as CASK), was incorporated in September 2001 and started operating as of May It is primarily engaged in installation engineering of computer equipment, information software wholesaling, information software retailing, international trade, information software service, data processing service, and electronic information supply service. As of December 31, 2007 and 2006, CASK TechNetwork Inc. had 9 employees on the payroll. Its parent company and also ultimate parent company are ShinPo Investment Overseas Enterprise and whose shareholdings in it are 67.02% and TAIWAN SHIN KONG SECURITY CO., LTD. whose shareholdings in it are 29.68%, respectively. (XV) The subsidiary of subsidiary, Shin Kong Overseas Enterprise (hereinafter referred to as SKOE), was incorporated in Samoa in December 2001.It is primarily engaged in overseas holding business. As of December 31, 2007 and 2006, Shin Kong Overseas Enterprise Co., Ltd. had 0 employee on the payroll. Its parent company and also ultimate parent company are ShinPo International whose shareholdings in it are 100% and TAIWAN SHIN KONG SECURITY CO., LTD.. 15

16 (XVI) SHINTOW OVERSEAS HOLDING CO., LTD.The subsidiary of subsidiary, ShinTow Overseas Holding (hereinafter referred to as ShinTow), was incorporated in Samoa in August It is primarily engaged in overseas holding business. As of December 31, 2007 and 2006, SHINTOW OVERSEAS HOLDING CO., LTD. had 0 employee on the payroll, respectively. Its parent company and also ultimate parent company are ShinPo Investment whose shareholdings in it are 100% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XVII) SHINPO INVESTMENT OVERSEAS ENTERPRISE CO., LTD. The subsidiary of subsidiary, SHINPO INVESTMENT OVERSEAS ENTERPRISE CO., LTD. (hereinafter referred to as SHINPO), was incorporated in Samoa in August 2004.It is primarily engaged in overseas holding business. As of December 31, 2007 and 2006, SHINTOW OVERSEAS HOLDING CO., LTD. had 0 employee on the payroll. Its parent company and ultimate parent company are ShinPo Investment Overseas whose shareholdings in it are 100% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XVIII) The subsidiary of subsidiary, Shincluster International Limited (hereinafter referred to as Shincluster), was incorporated in Samoa in October It is primarily engaged in overseas holding business. As of December 31, 2007 and 2006, Shincluster International Limited had 0 employee on the payroll. Its parent company and ultimate parent company are Shincluster Electronics whose shareholdings in it are 100% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XIX) The subsidiary of subsidiary, Tianjin Shincluster Technology limited (hereinafter referred to as TST), was incorporated in April It is primarily engaged in development, production and sale of security system products. As of December 31, 2007 and 2006, Tianjin Shincluster Technology limited had 6 employees on the payroll, respectively. Its parent company and ultimate parent company are Shincluster International whose shareholdings in it are 100% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XX) The subsidiary of subsidiary, Shanghai Shin Kong Security Prevention Technology (hereinafter referred to as STAIWAN SHIN KONG SECURITY CO., LTD.), was incorporated in March It is primarily engaged in design of public safety prevention technology engineering and construction thereof. As of December 31, 2007 and 2006, Shanghai Shin Kong Security Prevention Technology had 0 employee on the payroll, respectively. 16

17 Its parent company and ultimate parent company are Shincluster International whose shareholdings in it are 15%, ShinPo Investment Overseas whose shareholdings in it are 40% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XXI) The subsidiary of subsidiary, Shanghai Shin Kong Property Management Ltd. (hereinafter referred to as SSKP), was incorporated in July It is primarily engaged in the management of properties. As of December 31, 2007 and 2006, Shanghai Shin Kong Property Management Ltd. had 1,203 employee and 643 employees on the payroll, respectively. Its parent company and ultimate parent company are ShinPo Investment Overseas whose shareholdings in it are 55% and TAIWAN SHIN KONG SECURITY CO., LTD.. (XXII) The subsidiary of subsidiary, Beijing Yi Kong Property Management Ltd. (hereinafter referred to as BYKP), was incorporated in September It is primarily engaged in property management and consulting service. As of December 31, 2007, Beijing Yi Kong Property Management Ltd. had 70 employees on the payroll. Its parent company and ultimate parent company are ShinTow Overseas Holding whose shareholdings in it are 70% and TAIWAN SHIN KONG SECURITY CO., LTD.. Consolidation policy (I) The invested companies that were wholly owned of TAIWAN SHIN KONG SECURITY CO., LTD. on December 31, 2006 were included in the consolidated financial statements of 2007 and 2006 as follows: Dec. 31, 2007 Dec. 31, 2006 YKS YKS Taiwan Security Taiwan Security ShinPo Investment ShinPo Investment Yi Kong Building Management Yi Kong Building Management etech etech Shin Kong Aerotech Shin Kong Aerotech Shin Soft Shin Soft Shincluster Electronics Shincluster Electronics ShinPo International ShinPo International ThaiSK Security International Co., Ltd. (New) Shinkong Optical Shin Kong Technology (New) (Continued) Shinkong Optical 17

18 (See previous page) II. Dec. 31, 2007 Dec. 31, 2006 CASK TechNetwork Inc. Shin Kong Overseas Enterprise Shin Kong Overseas Enterprise Shin Soft overseas (liquidated in 2007) ShinTow Overseas Holdings ShinTow Overseas ShinTow Overseas ShinPo Investment Overseas Shincluster International Shincluster International Tianjin Shincluster Technology Tianjin Shincluster Technology Shanghai Shin Kong Security Shanghai Shin Kong Security Shanghai Shin Kong Property Shanghai Shin Kong Property Management Management Beijing Yi Kong Property Management Ltd. (New) (II) For the purpose of preparing the consolidated financial statements, the financial statements of ShinPo International Limited, Shin Kong Overseas Enterprise, SHINTOW OVERSEAS HOLDING CO., LTD., SHINPO INVESTMENT OVERSEAS ENTERPRISE CO., LTD., Shincluster International, Tianjin Shincluster Technology, Shanghai Shin Kong Security, Shanghai Shin Kong Property Management, Beijing Yi Kong Property Management Ltd., and ThaiSk Security International were not audited by CPAs while others were. The management believed that the reference to unaudited financial statements did not present a threat of significant impact. (III) The shareholdings of CASK TechNetwork Inc. were 67% in 2007 and with significant influence; therefore, it is valued in accordance with the Equity Method. (IV) All internal business transactions of the consolidated company were written off from the consolidated financial statements. Summary of significant accounting policies The consolidated financial statements were prepared in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Business Accounting Guidelines and generally accepted accounting principles. According to the said standards, regulations, and principles for the preparation of financial statements, TAIWAN SHIN KONG SECURITY CO., LTD. had the allowance for bad debt, allowance for inventory loss in valuation, depreciation of fixed assets, and pension appropriated in accordance with estimation made reasonably. The estimated amount of the said accounts could be different from the actual amount since it does involve judgment. Summary of significant accounting policies as follows: Standards in differentiating current and noncurrent assets and liabilities Current assets include cash and cash equivalent; also, assets that can be cashed in within one year from the Balance Sheet date. Fixed assets and assets other than current assets are classified as noncurrent assets. Current liabilities are to be 18

19 liquidated within one year from the Balance Sheet date. Liabilities other than current liabilities are noncurrent liabilities. Cash equivalents Cash equivalent is promissory notes, bank acceptances, and repurchase bonds due in three months; therefore, the book value is similar to fair value. Financial instruments with the change in fair value recognized as income/expense Financial instruments with the change in fair value recognized as income/expense include financial assets and liabilities for trade; also, financial assets and liabilities there are valued at the fair value originally and with the change in fair value recognized as income/expense. They are estimated on the basis of fair value in initial recognition, and valued on the basis of fair value continuously thereafter. Also, any change in the fair value is recognized as expense of the year. Cash dividends (including the proceeds received in the year of investment) of the investment are recognized as income of the year. The profit or loss of the financial instruments sold should be booked as income or expense on the disposition date. Derivatives that are not in compliance with the hedging accounting are classified into the category of financial assets and liabilities for trade. Derivatives with a positive fair value is booked as financial assets, on the other hand, derivatives with a negative fair value is booked as financial liabilities. Base of fair value: Listed/OTC company bases fair value on the closing price on the Balance Sheet date. Financial instruments without market price available for reference are valued by estimation. Financial assets for sales Financial assets available for sales are estimated on the basis of fair value in initial recognition plus the acquisition cost. Financial assets for sales are estimated on the basis of fair value continuously thereafter; also, any change in the value is recognized as adjustments to shareholders equity. Cumulative profit or loss of the financial assets for sales should be booked as income or expense on the disposition date. The transaction day accounting principle is adopted for the bookkeeping of equity investments acquisition or disposition. The bookkeeping and disposition of financial assets available for sales; also, the fair value of financial assets available for sales are similar to the financial instruments that are with the change of fair value booked in Income Statement. Cash dividend is recognized as income on the exdividend date; however, the cash dividend distributed according to the net income before investment is deducted from capital cost.stock dividends are not stated as the income investment, provided that the increase in shares is noted and cost per share is recalculated according to the total shares after the increase.the interest of the difference between the original amount and due amount of debt instrument is amortized and recognized as expenses in accordance with the Interest Method. 19

20 Should there be decrease in the amount of subsequent impairment, recognize it as impairment loss with supporting evidence. Recognize as adjustments to shareholders equity, the decrease in impairment of equity items. If the decrease of impairment loss is a consequence of the post event after recognizing impairment loss, it is to be reversed and expensed upon occurrence. Income recognition and accounts receivable, allowance for bad debt This will be realized or identified as realizable in the course of making profit, as relevant cost driver on revenue has been recognized. The sale of goods or provision of service will not be recognized as revenue until it complies with the relevant requirements. Sales income is valued in accordance with the fair value of the trade (net of commercial discount and volume discount) reached between the buyer and the company. If the accounts receivable of the sales revenue is to be collected in one year, the fair value and cash value is with insignificant difference, and frequent transactions are conducted, fair value will be then calculated without referring to interest rate. The allowance for bad debt shall be provided subject to the estimation of the likelihood of trades receivable. The Company has the collectibility of accounts receivables assessed in accordance with the aging analysis and collateral valuation. Inventory Inventory means the workinprogress amount invested in materials and construction of the project for installation of the security system for customers, which is stated based on the actual investment cost. Financial assets under Cost Method Equity investment that is with unknown fair value includes unlisted/otc stock and emerging stock and it is valued at the original cost. The accounting process of dividend is similar to the process of financial assets for sales. Impairment loss must be recognized with the support of objective evidence and the impairment loss cannot be reversed. Longterm investment under Equity Method For investees where the consolidated company holds more than 20% of the shares with voting rights, or the Company can exert a significant influence over such investees, the Equity Method shall be used for valuation. The difference between the investment cost and net equity calculated based on the percentage of equity or firstly under the Equity Method shall be amortized in 5 years.according to the amended Finance Accounting Standard on January 1, 2006, investment cost is to be analyzed and processed and with the difference of investment cost over identifiable net assets fair value recognized as goodwill. Goodwill will not be amortized but with impairment loss test conducted; moreover, impairment loss could have happened to goodwill upon the occurrence of specific events or environmental change; therefore, an impairment test is needed. If there is difference of identifiable assets fair value over investment cost, it is diminished proportionally to the fair value of noncurrent assets (except for the financial assets, disposable assets, deferred income tax assets, prepaid pension, or other pension payment that is under the Equity Method) and with the remaining difference booked 20

21 as extraordinary gain/loss. The unamortized balance of longterm investment under the Equity Method that was the difference of investment cost over net equity should be processed the same way as goodwill since January 1, 2006 without further amortization taken. The difference of investment cost and net equity construed as deferred credit is amortized continuously in accordance with the remaining useful years. The profits generated from the clockwise trade between the invested company under the Equity Method and the Company is written off proportionally to the shareholdings. If the invested company is wholly owned of the Company, the said profits are to be written off entirely. The profits generated from the counterclockwise trade between the invested company under the Equity Method and the Company is written off proportionally to the shareholdings. Where the new shares issued by the investee are not subscribed for subject to the shareholding percentage and the percentage of investment is changed therefore and the net equity invested increases or decreases, the additional paidin capital and longterm investment shall be adjusted subject to the increase or decrease. Where the said adjustment should be stated as the additional paidin capital and the balance of additional paidin capital generated by longterm investment is insufficient, the difference thereof shall be stated as the retained earnings. The income of shares held with investees shall be recognized based on the treasury stock method. The investment income recognized based on the shares held with the subsidiaries shall be based on the customary law.the parent companys stock shares held by the subsidiary are processed as Treasury stock. The dividend distributed to the companys subsidiary is credited to the investment gain account and with the Additional paidin capital Treasury stock adjusted accordingly. For the subsidiary of the Company that is valued with the Equity Method, if the longterm investment in and advances to the invested company is with a negative value due to the recognition of loss, unless the Company intends to support the said subsidiary continuously or the invested companys loss was a shortterm loss in its nature; also, there is evidence to show the resumption of profitable operation in a short run, the recognition of investment loss aims to have the investment value and advances zero out. Fixed assets Fixed assets are stated at cost less accumulated depreciation. The interest borne by the sums disbursed for the fixed assets during its purchase period was capitalized and included as the cost of the fixed assets. Major updates and improvements were treated as capital expenditures. Routine repair and maintenance expenditures were expensed during the year of incursion. 21

22 The consolidated companies fixed assets are depreciated in the following manners: (I) Spare security materials: the spare security materials which have not been installed and stated based on the cost of acquisition and valued based on the weighted average method. Upon installation and transfer to security equipment, the depreciation of such materials shall be commenced. (II) Security equipment: the machines installed for subscribers of the security system and included in machinery & equipment, which shall be depreciated based on the average method within their useful life. (III) Telecommunication equipment: leasehold of exclusive telephone lines, which are amortized within five years. (IV) Other fixed assets: depreciation thereof is provided based on the average method and the residual value will be reserved for one year; Depreciation should be accumulated for the fixed assets that remain in service at the end of their useful life in accordance with the residual value. In addition to the depreciation of the aforementioned assets, depreciation shall be made in accordance with the straight line method and the useful years as follows: 5~55 years for architecture and auxiliary equipment; 3~5 years for transportation equipment; and 3~5 years for manufacturing equipment. In selling or disposing of assets, the cost and accumulated depreciations, accumulated impairment, and unrealized appraisal valuation shall be written off from the book. And any related gains or loss are charged to nonoperating income or nonoperating loss accounts in the year. Accounting of leasing business For the lease that complies with the requirements for leasehold of assets state the cost of leased assets and implied interest as rental receivable. The implied interest is stated as unrealized interest income and transferred to lease interest income on a quarterly basis based on the interest method. Deferred expenses The renovation project, telephone installation project and software equipment project are amortized within five years. Asset Impairment If the book value of an asset (fixed assets, leased assets, deferred expense and longterm investment under the Equity Method) is with significant impairment loss resulted according to the relevant cash value, the impairment loss is to be recognized accordingly.where the collectable amount of the assets is recovered some day, the amount is then reversed against balances of accumulated impairment losses, provided that the book value upon reversal shall not exceed the book value of the assets less depreciation or amortization to be provisioned when no impairment losses of the assets are recognized. Pension fund Pension fund applicable to the rules for defined benefit payment will be recognized based on the amount stated by the actuaries. Pension Fund which shall be payable 22

23 pursuant to the defined rules for contribution of pension fund shall be recognized as expenses in the current year in the duration of employees service. When the defined rules for benefit of pension fund are reduced or paid off, the reduced or paid off income shall be stated as the net pension cost in the current period. There were no employees at full time status in companies contained in the consolidated statement, including Yi Kong International, TAIWAN SHIN KONG SECURITY CO., LTD. International, Shin Kong Overseas, Shin Tow Holdings, Shin Tow Overseas, and Shin Chun International Enterprise. Therefore, no contribution to pension fund was made on the basis of the actuary method. Shin Tow Investments, etech Pro, Shin Kong Aerotech International, Shin Soft, Shinkong Optical Networking, Shin Kong Technology, CASK TechNetwork Inc., Tianjin Shincluster Technology, Shanghai Shin Kong Security and Shanghai Shin Kong Property Management are at the initial stage of operation that no internal code governing employee retirement has yet been instituted. Therefore, no contribution to pension fund was made on the basis of the actuary method. Treasury stock cost When the Company refers to outstanding stock shares as Treasury Stocks, the cost is booked as Treasury Stock and debited to Shareholders Equity. The parent companys stock shares held by the subsidiaries are reclassified as Treasury Stock from longterm investment at the book value of Transfer investment in parent company account on subsidiarys financial statement. Income tax The Company computes income tax of single period and multiple periods; also, recognizes the deferred tax effect from temporary differences including accounting principle change and deductible temporary differences and outstanding investment credit. The possibility of realization for deferred income tax must be assessed and with allowance for valuation recognized. The tax effect of taxable temporary difference is recognized as deferred income tax liabilities. Deferred income tax asses or liabilities are classified into the category of current or noncurrent in accordance with the nature of the liabilities and assets. Irrelevant assets or liabilities are classified into the category of current or noncurrent in accordance with the expected turnover period. Tax credits on R&D and human resources training expense are accounted for as deductions for current year as income tax expenses. Adjustment of the prior years income tax is added to current income tax expense in the year the adjustment is made. The 10% additional income tax levied on unappropriated earnings calculated according to the income tax law is stated as the income tax expenses in the year of the resolution made by the shareholders meeting. Transaction in foreign currencies and translation of financial statement dominated in foreign currency: For the currency translation of the financial statements of overseas subsidiaries, all 23

24 assets and liabilities accounts are to be translated according to the spot exchange rate on the Balance Sheet date. In terms of Shareholders Equity, it is to be translated according to the historical exchange rate. Dividend is to be translated according to the exchange rate on the announcement date. Income Statement is to be translated according to the weighted average exchange rate. Exchange difference is booked in the Cumulative translation adjustment account and is debited or credited to Shareholders Equity. It is to be consolidated to Income Statement once the overseas subsidiary is sold or liquidated. The assets, liabilities, income and expense in foreign currency resulted from the transaction of nonderivatives are translated to New Taiwan Dollar for bookkeeping according to the spot exchange rate on the trade date. The exchange difference resulted from the transaction of assets and liabilities in foreign currency is booked in Income Statement. The assets and liabilities in foreign currency should be adjusted according to the spot exchange rate on the Balance Sheet Date and with the exchange difference booked in Income Statement. The nonmonetary assets and liabilities (for example, equity) in foreign currency that are valued at the fair value should be adjusted according to the spot exchange rate on the Balance Sheet date. The corresponding exchange difference that is with the fair value change recognized as adjustment to shareholders equity is credited/debited to shareholders equity. The corresponding exchange difference that is with the fair value change recognized as income/expense is booked in Income Statement. The nonmonetary assets and liabilities in foreign currency that are valued at the cost should be valued in accordance with the historical exchange rate on the trade day. III. For the longterm investment under the Equity Method in foreign currency, exchange difference is booked in the Cumulative translation adjustment account and is debited or credited to Shareholders Equity in accordance with the shareholders equity after the translation according to the invested companys financial statements in foreign currency. Reasons and effects of changes in accounting principles Financial Accounting Standards No. 34 on Financial Instruments: Recognition and Measurement and No. 36 on Financial Instruments: Disclosure and Presentation Effective on January 1, 2006, the Company has adopted the principles under Financial Accounting Standards No. 34 on Financial Instruments: Recognition and Measurement and No. 36 on Financial Instruments: Disclosure and Presentation in its accounting policies. While the aforementioned Standards were applied for the first time, the Company had financial assets and liabilities (including derivatives) classified adequately and with the original amount adjusted. The financial assets and liabilities that are valued at fair value and with the fair value change recognized as income/expense or the derivatives in a relationship of fair value hedging is booked in Cumulative effect of the change in accounting principle. The financial assets and liabilities that are for sales and valued at the fair value or the derivatives in a relationship between cash flow hedging and offshore operating institutes net investment hedging, it is debited/credited to shareholders equity. 24