Ruentex Industries Limited and Subsidiary

Transcription

1 Ruentex Industries Limited and Subsidiary Consolidated Financial Statements for the Years Ended December 31, 2004 and 2003 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders Ruentex Industries Limited and Subsidiary We have audited the accompanying consolidated balance sheets of Ruentex Industries Limited and subsidiary (collectively, the Company ) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended (all expressed in New Taiwan dollars). These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of some investees. Long-term investments in those investees were accounted for using the equity method based on the investees financial statements audited by other auditors. Our opinion, insofar as it relates to the amounts included for those investees and disclosures in Note 11, is based solely on the reports of the other auditors. As of December 31, 2004 and 2003, long-term investments in those investees amounted to $3,853,377 thousand and $4,052,823 thousand, which were 24.01% and 22.51% of consolidated total assets of the Company, respectively. For the years ended December 31, 2004 and 2003, investment loss on those investees totaled $117,337 thousand and $104,182 thousand, which was 71.69% and (13.34%) of continuing operations income (loss) before income tax. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ruentex Industries Limited and its consolidated subsidiary, Chin-An Investment Company at December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China

3 As described in Note 3 to the financial statements, effective December 31, 2004, the Company adopted Statement of Financial Accounting Standards No. 35, Accounting for Asset Impairment. March 22, 2005 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. Also, as stated in Note 2 to the financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English

4 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars) ASSETS Amount % Amount % CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) $ 38,271 - $ 132,011 1 Short-term investments, net (Notes 2 and 5) 321, ,863 2 Notes receivable, net (Notes 2 and 6) 47,652-67,877 - Notes receivable, related parties, net (Note 28) 1, Accounts receivable, net (Notes 2 and 7) 284, ,529 2 Accounts receivable, related parties, net (Note 28) 7,703-15,825 - Other receivables (Notes 2 and 8) 67, ,859 - Other receivable, related parties, net (Note 28) 385, ,387 1 Inventories (Notes 2 and 9) 1,300, ,667,992 9 Prepaid expenses 20,788-23,430 - Other prepayments (Notes 2 and 10) 86, ,647 1 Deferred income tax assets (Note 25) 48,911-42,902 - Restricted current assets (Note 29) 226, ,633 5 Other current assets (Note 2) 15,061-19,669 - Total current assets 2,852, ,794, LONG-TERM INVESTMENTS (Notes 2 and 11) 7,484, ,059, PROPERTY, PLANT AND EQUIPMENT, NET (Notes 2 and 12) 5,229, ,678, INTANGIBLE ASSETS - Deferred pension cost 82,992-42,126 - OTHER ASSETS Idle assets (Note 13) 2,068-2,490 - Guarantee deposits paid (Note 13) 27,436-28,323 - Deferred charges (Note 2) 43,733-49,113 - Long-term notes and accounts receivable (Note 13) 224, ,610 1 Deferred income tax (Note 25) 35,552-60,604 - Other assets - other (Notes 13 and 29) 66, ,231 1 Total other assets 399, ,371 2 LIABILITIES AND STOCKHOLDERS EQUITY Amount % Amount % CURRENT LIABILITIES Short-term borrowings (Notes 2 and 14) $ 1,505, $ 2,368, Short-term notes and bills payable (Notes 2 and 15) 1,884, ,362,485 8 Notes payable (Notes 2 and 16) 83, ,844 1 Notes payable, related parties (Note 28) 2,658-34,491 - Accounts payable 508, ,947 1 Accounts payable, related parties (Note 28) 173, ,263 5 Income tax payable 15, Accrued expenses 210, ,019 1 Other payable, related parties Other payables 14,622-67,548 - Advance receipts 43, ,456 1 Long-term liabilities, current portion (Notes 17 and 18 ) 142, ,296, Other current liabilities 46,482-62,784 - Total current liabilities 4,631, ,766, LONG-TERM LIABILITIES Long-term borrowings (Note 18) 3,789, ,666, RESERVE Reserve for land increment value tax 19,863-29,805 - OTHER LIABILITIES Accrued pension liability (Note 20) 128, ,226 - Guarantee deposits received (Note 19) 550, ,555 3 Other liabilities - other 3,020-3,040 - Total other liabilities 681, ,821 3 Total liabilities 9,123, ,066, STOCKHOLDERS EQUITY Capital stock (Note 21) 7,880, ,880, Capital surplus (Note 22) Reserve for land revaluation increment 127, ,953 1 Adjustment on long-term equity investment 342, ,285 2 Legal reserve 28, Accumulated earnings (Note 23) 363, ,084 2 Cumulative translation adjustments 70, ,858 1 Treasury stock (Note 24) (1,886,632) (12) (1,889,768) (11) Total stockholders equity 6,926, ,940, TOTAL $ 16,049, $ 18,007, TOTAL $ 16,049, $ 18,007, The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 22, 2005) - 3 -

5 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Except for Earnings Per Share) Amount % Amount % OPERATING REVENUES Sales (Notes 2 and 28) $ 5,947, $ 7,784, Less Sales returns (31,783) (1) (70,591) (1 Sales discounts and allowances (15,147) - (34,707) - Investment income 7, Interest income 3,261-1,323 - Dividends income 43, ,218 1 Construction income 730, , Other operating income 148, ,389 3 Net operating revenues 6,834, ,014, OPERATING COSTS Cost of goods sold (Notes 2 and 28) 4,897, ,708, Losses on sale of investment Investment losses 41, ,284 1 Interest expense 37,068-46,207 - Cost of construction sales 596, ,353 9 Total operating costs 5,573, ,613, GROSS INCOME FROM OPERATIONS 1,261, ,401, REALIZED GAIN ON AFFILIATE ACCOUNTS NET GROSS INCOME FROM OPERATIONS 1,261, ,401, OPERATING EXPENSES Selling expenses 731, ,054, General and administrative expenses 231, ,390 3 Total operating expenses 962, ,304, INCOME FROM OPERATIONS 298, ,766 1 NON-OPERATING INCOME Interest income 33,839-27,065 - Equity in net earnings of affiliates 42, Investment income 85, ,425 1 Gains on disposal of property, plant and equipment (Notes 2 and 28) ,754 6 Gains on sale of investments (Note 2) 211, ,286 - Gains on exchange (Note 2) 6,908-3,793 - Rent revenue Income from sale of scrap and wastes 6,702-6,310 - Gains on market price recovery of short-term investment ,361 1 Gains from price recovery of inventory ,202 1 Miscellaneous income (Note 28) 102, ,222 8 Total non-operating income 488, ,474, (Continued) - 4 -

6 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Except for Earnings Per Share) Amount % Amount % NON-OPERATING EXPENSES Interest expense $ 241,571 4 $ 413,988 5 Equity in net earnings of affiliates ,075 1 Investment losses (Note 2) 33, ,720 1 Losses on disposal of property, plant and equipment (Note 2) 12,511-45,256 1 Losses on sale of investments (Note 2) 5,702-40,334 1 Losses on physical inventory - - 1,418 - Loss for market price decline and obsolete and slowmoving inventories 24, Losses on idle assets depreciation and valuation loss 2,533-13,520 - Impairment losses (Note 3) 280, Miscellaneous disbursements 23,338-31,240 - Total non-operating expenses 623, ,551 9 CONTINUING OPERATIONS INCOME BEFORE TAX 163, ,062 9 INCOME TAX EXPENSE (Notes 2 and 25) (37,218) - (78,576) 1 CONTINUING OPERATIONS INCOME AFTER TAX 126, ,486 8 LOSS FOR MINORITY INTEREST NET INCOME $ 126,540 2 $ 702,653 8 BASIC EARNINGS PER SHARE (Notes 2 and 26) Net income $0.19 $1.03 PROFORMA DATA AS SHARES OF THE COMPANY HELD BY SUBSIDIARY TREATED AS NON- TREASURY-STOCK Net income $0.02 $0.78 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 22, 2005) (Concluded) - 5 -

7 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars) Capital Stock Reserve for Land Revaluation Increment Capital Surplus Retained Earnings Change of Equity Adjustment on Long-Term Equity Investment Legal Reserve Unappropriated Earnings (Deficit) Cumulative Translation Adjustments Unrealized Valuation Losses on Long- Term Equity Investments Treasury Stock Total Stockholders Equity BALANCE, JANUARY 1, 2003 $ 7,880,511 $ 127,953 $ 362,066 $ - $(436,245) $ 239,257 $ (349,730) $ (1,889,768) $ 5,934,044 Prior period adjustment - investee , ,676 Effect on capital surplus of change in ownership percentage - - (18,049) (18,049) Effect on change of capital surplus - investee - - (2,732) (2,732) Cumulative translation adjustments (42,399) - - (42,399) Unrealized valuation losses on long-term equity investment , ,730 Net gain after tax for the year of , ,653 BALANCE, DECEMBER 31, ,880, , , , ,858 - (1,889,768) 6,940,923 Prior period adjustment - investee (16,672) (16,672) Appropriation of prior year s earnings Legal reserve ,408 (28,408) Reserve for assets revaluation increment Effect on change of capital surplus - investee - - 1, ,110 Cumulative translation adjustments (126,467) - - (126,467) Transfer of gain on disposal of treasury stock (2,481) - - 3, Net gain after tax for the year of , ,540 BALANCE, DECEMBER 31, 2004 $ 7,880,511 $ 127,963 $ 342,395 $ 28,408 $ 363,063 $ 70,391 $ - $ (1,886,632) $ 6,926,099 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 22, 2005) - 6 -

8 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 126,540 $ 702,653 Adjustments to reconcile net income to net cash provided by operating activities Bad debts Gain on reversal of bad debts (171) (935) Depreciation expense 244, ,875 Transfer of property, plant and equipment to expense 1, Amortization expense 25,853 36,777 Transfer of deferred assets to expense 3,435 8,954 (Gains) loss on sale of long-term investments (210,312) 4,458 Gain on sale of short-term investment (705) (28,286) Losses on sale of short-term investment 5,702 35,876 Loss for minority interest (80) (167) Valuation losses on short-term investments 7,346 10,876 Gains on market price recovery of short-term investment - (89,361) Losses on disposal of assets 12,511 45,256 Gains on disposal of assets (54) (484,754) Abandonment losses on assets 3, Loss for market price decline and obsolete and slowmoving inventories 24,053 - Gain on market price recovery of short-term investment - (79,202) Losses on idle assets valuation loss - 9,291 Realized gross profits (22) (22) Amount of (income) loss under equity method exceeding cash dividends received from the investee (49,429) 156,499 Impairment losses 280,299 - Losses on decrease of capital and liquidation of short and long-term investments 67, ,704 Amortization of consolidation debits Net changes in operating assets and liabilities Notes receivable 20,548 31,271 Notes receivable, related parties (613) (613) Accounts receivable (21,824) 75,725 Accounts receivable, related parties 8,122 (5,224) Other receivable (19,627) 33,627 Other receivable, related parties 3,780 4,140 Inventories 598, ,181 Prepaid expenses 2,642 (3,935) Other prepayments (8,272) 113,670 Other current assets 4,608 (7,149) Overdue accounts receivable (389) (746) Deferred income tax assets, noncurrent 25,053 69,133 Deferred income tax assets, current (6,008) 6,694 Notes payable (23,109) (21,785) Notes payable, related parties (31,833) 28,401 Accounts payable 319,401 (47,587) Accounts payable, related parties (618,184) (27,552) (Continued) - 7 -

9 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars) Income tax payable $ 15,138 $ - Accrued expenses (55,038) (4,267) Other payables, related parties Other payables (52,651) 53,275 Advance receipts (62,290) 36,109 Other current liabilities (16,305) 5,230 Accrued pension liabilities 7, Net cash provided by operating activities 632,656 1,928,362 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in restricted current assets 653,633 (504,178) Proceeds from sales of short-term investment 6,711,569 4,361,164 Acquisitions of short-term investment (6,716,567) (4,009,923) Proceeds from sale of long-term investments 542,683 17,560 Acquisitions of long-term investments (150,240) (359,456) Proceeds from disposal of property, plant and equipment 2, ,517 Acquisitions of property, plant and equipment (127,602) (97,429) Proceeds from disposal of idle assets ,788 Increase in other receivable - related parties (276,900) (100,900) Decrease in guarantee deposits paid Increase in deferred charges (23,182) (16,903) Decrease in long-term notes and accounts receivable - 224,250 Decrease in other assets - others 68 - Net cash provided by investing activities 617, ,824 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term borrowings (862,826) (231,512) Increase (decrease) in short-term notes and bills payable 521,551 (653,470) Decrease in corporate bonds payable (600,000) (200,000) Decrease in long-term borrowings (430,542) (1,317,410) Increase in guarantee deposits received 28,540 28,000 Cash dividends paid (274) (23) Net cash used in financing activities (1,343,551) (2,374,415) NET DECREASE IN CASH AND CASH EQUIVALENTS (93,740) (27,229) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 132, ,240 CASH AND CASH EQUIVALENTS, END OF YEAR $ 38,271 $ 132,011 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year Interests (excluding capitalized interest) $ 303,965 $ 469,421 Income tax $ 2,981 $ 5,141 Current portion of long-term liabilities $ 142,504 $ 2,296,727 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 22, 2005) (Concluded) - 8 -

10 RUENTEX INDUSTRIES LIMITED AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS The consolidated financial statements are prepared for Ruentex Industries Limited (the Parent Company ) and its subsidiary, Chin-An Investment Company Limited (collectively, the Company ). Ruentex Industries Limited holds percent of ownership in Chin-An Investment Company Limited. Ruentex Industries Limited (Formerly Hua-Hsin & Ruen-Tai Company Limited) was consolidated from Hua-Hsin Textile Company Limited and Ruen-Tai Textile Dyeing Finishing Industries Company Limited on January 14, Its major operating activities include: (a) yarning of natural cotton, chemical fiber, synthetic fabric and line wool, etc.; manufacturing, processing, finishing, printing and marketing of weave cloth, knitted fabric and products; (b) import and export of fabric products and materials; (c) import of raw cotton, chemical fiber, dyeing materials, and raw materials; (d) construction and leasing of commercial buildings and government funded residential housing units; (e) manufacturing, processing and marketing of construction materials and (f) retailing and wholesaling of consumer products. Chin-An Investment Company Limited was incorporated on January 19, 1988 under the provisions of the Company Law of the Republic of China (ROC). Major businesses of this subsidiary are investments in: (a) textile products; (b) constructions and (c) security investment firms, banks, insurance companies, trading companies and cultural businesses. At December 31, 2004 the parent and the subsidiary company have 1,553 and 1 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Company are in accordance with generally accepted accounting principles in the ROC and conform to general practices within the industry. 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. However, the accompanying financial statements do not include English translation of the additional footnote disclosures that are not required under generally accepted - 9 -

11 accounting principles but are required by the Securities and Futures Bureau (SFB, formerly the Securities and Futures Commission before July 1, 2004) for their oversight purposes. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements is as follows: Basis of Presentation of Consolidated Financial Statements The consolidated financial statements include the accounts of the Parent Company, Ruentex Industries Limited and its subsidiary, Chin-An Investment Company Limited. Since the individual total assets and operating revenues of Chin-An Investment Company Limited were more than 10% of the corresponding amount of the Parent Company as of December 31, 2004 and 2003, the financial statements of the subsidiary should be included in the consolidated financial statements. Reporting Classifications of Current and Noncurrent Items The Parent Company s construction - related assets and liabilities are divided into current and non-current sections based on the normal operating cycle. The classification standard for other business related items is one year. Cash Equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates. Short-Term Investments Marketable securities are recorded at cost when acquired and stated at the lower of aggregate cost or market value. Stock dividends received are not recognized as income but are reflected as an increase in the number of shares held. The cost of marketable securities sold is determined on the weighted average method. Government bonds are recorded at cost when acquired and stated at the lower of aggregate cost or market value on the balance sheet date, if the market value is available. The cost of the bonds, interest revenue, and gain or loss either due to maturity or sale before maturity are determined by the specific identification cost method. Short-term notes are recorded at cost when acquired and stated at the lower of aggregate cost or market value on the balance sheet date, if the market value is available. The cost of the notes, interest revenue, and gain or loss either due to maturity or sale before maturity are determined by the specific identification cost method. Beneficiary certificates are recorded at cost when acquired and stated at the lower of aggregate cost or market value on the balance sheet date. The cost of beneficiary certificates sold and gain or loss are determined by the weighted average method. Any provision for decline in market value is classified as a non-operating loss. Allowance for Doubtful Accounts Allowance for doubtful accounts is provided for notes, accounts receivable, overdue accounts and other receivables based on management s evaluation of the collectibility of accounts, past loss experience, aging of accounts, notes, overdue and other receivables and other pertinent factors

12 Inventories The inventory system which the Company has adopted is perpetual inventory system. Inventories are recorded at cost when purchased. The inventories are stated at the lower of cost or market with cost being determined by the weighted average method. The lower of cost or market rule is applied to the total of the inventories. Market for inventories is either the net realizable value or the replacement cost. Inventories that are defective, damaged or obsolete are stated at their net realizable value. The inventories of construction business are temporarily listed under land held for sale upon acquisition of land and before work commencement and listed under land under construction during work in progress. Cost incurred for construction is temporarily listed under prepayment for construction prior to commencement of work and listed under construction in progress when construction is engaged. Construction in progress and land for development and sale are carried at cost. The related construction profits or losses are recognized by the percentage-of-completion method. The cost is allocated to building and land for development based on the average ratio of construction area for different batches and land holding percentage. Construction in progress and land for development and sale are stated at the lower of aggregate cost or market value on the balance sheet date. The interest incurred should be capitalized in accordance with generally accepted accounting principles. Long-Term Investments Investments in stocks of non-publicly-traded companies in which the Company s ownership interest is less than 20% and over which the Company is unable to exercise significant influence are accounted for by the cost method. Other than temporary declines, any loss in value of an investment is reflected in income. Stock dividends received are recorded only as an increase in the number of shares, not as an investment income. The Company uses the lower-of-cost-or-market method to account for investments in stocks of listed companies in which the Company s ownership interest is less than 20% on the balance sheet date. Unrealized loss on long-term equity investments resulting from decline in market value is reflected as a separate component of stockholders equity. Investments in corporations in which the Company s ownership interest is 20% or more, except where the Company cannot exercise significant influence, are accounted for by use of the equity method of accounting. Investments in majority-owned subsidiaries of the Company are also accounted for under the equity method as permitted under accounting principles generally accepted in the Republic of China. Under the equity method, investments, originally recorded at cost, are adjusted to recognize the Company s share of the net earnings or losses of the affiliates as they occur, rather than as dividends or other distributions are received, limited to the extent of the Company s investment in, advances to, and guarantees for the investees. The Company s share of net earnings or losses of affiliates includes amortization of purchase adjustment. The difference between the underlying equity in net assets of the investee and the cost of the investment is fully amortized at once when the situation of under-or-over-valuation no longer exists. When the reason of the difference cannot be identified, the difference is amortized on a straight-line basis over ten years. Other than temporary declines, any loss in value of an investment is reflected in income

13 A company is consolidated as a subsidiary if more than 50% of its outstanding voting stocks are held by the Parent Company. Consolidated financial statements should be prepared including all such subsidiaries except for subsidiaries that have different business nature from that of the Parent Company or whose individual total assets and operating revenues are less than 10% of the corresponding amount of the Parent Company. If the total assets and operating revenues of subsidiaries not otherwise required to be consolidated are in aggregate more than 30% of the corresponding amount of the Parent Company, in which case a subsidiary whose total assets or operating revenues are more than 3% of the corresponding amount of the Parent Company must be consolidated to the extent that total assets and operating revenues of the remaining non-consolidated subsidiaries are not more than 20% of the corresponding amount of the Parent Company. When additional shares issued by an investee are not purchased on a prorated basis by its existing stockholders, the change in the Company s share of the investee s equity is adjusted to capital surplus and long-term investments accounts. If there is any deficiency in the capital surplus account, the differences will be debited to the retained earnings account. The cost on the disposal of an investment and gain or loss on the sale of an investment are determined by the weighted average method. Gains or losses resulting from the transactions between the Company and its investees accounted for by the equity method or transactions among investees are deferred and recognized when realized. Gains or losses resulting from transactions of depreciable or amortizable assets are deferred and recognized over the assets estimated useful life. Gains or losses resulting from transactions of other assets are recognized in the year of realization. Real Estate Investments Real estate investments are stated at cost. Major replacements and improvements that would increase the value or extend the useful lives of the assets are capitalized, while regular repairs and maintenance are expensed. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any related loss is charged to non-operating expenses. Gain on sale of property, plant and equipment is included in non-operating income. Impairment loss is recognized immediately for any significant decline in the value of PPE- LTREI. If the loss is reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount should not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is immediately recognized as gain. If PPE-LTREI revaluation based on certain regulations shows impairment loss, this loss should be recognized as a reduction of the capital surplus-property, plant and equipment revaluation increment. If the impairment loss is greater than this revaluation increment, the difference is recognized as loss. A reversal of an impairment loss on a revalued asset is recognized as the addition to the revaluation increment. However, to the extent that an impairment loss on the same revalued asset was previously recognized as loss, a reversal of the impairment loss on PPE-LTREI revaluation is recognized as gain

14 Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation, or at cost plus revaluation increment for certain assets which have been revalued in accordance with government regulations. The revaluation increment, net of reserve for land value increment tax, is credited to capital surplus. Expenditures that increase the value or extend the useful lives of property, plant and equipment are capitalized, while normal repairs and maintenance costs are expensed in the period incurred. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any related loss is charged to non-operating expenses. Gain on sale of property, plant and equipment is included in nonoperating income. Depreciation is calculated on a straight-line basis over the following estimated useful lives of the related assets, plus one additional year for salvage: Buildings and improvements Land improvements Machinery equipment Lease-out assets Transportation equipment Leasehold improvement Leasehold assets Other equipment 10 to 60 years 10 years 3 to 7 years 5 to 60 years 5 to 8 years 1 to 3 years 7 years 5 to 8 years The useful lives of the related assets may be modified, if the assets are still usable after being fully depreciated over their depreciation bases. The salvage values of the assets may be depreciated over their estimated additional useful lives. Impairment loss is recognized immediately for any significant decline in the value of PPE- LTREI. If the loss is reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount should not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is immediately recognized as gain. If PPE-LTREI revaluation based on certain regulations shows impairment loss, this loss should be recognized as a reduction of the capital surplus-property, plant and equipment revaluation increment. If the impairment loss is greater than this revaluation increment, the difference is recognized as loss. A reversal of an impairment loss on a revalued asset is recognized as the addition to the revaluation increment. However, to the extent that an impairment loss on the same revalued asset was previously recognized as loss, a reversal of the impairment loss on PPE-LTREI revaluation is recognized as gain. Capitalization of Interest Costs Interest is capitalized in connection with the property, plant and equipment constructed. Depreciation is provided over the estimated useful lives. Deferred Charges Deferred charges are amortized on the straight-line method over the contract period or the estimated service lives. Electric wire subsidy is amortized over five years and interior decoration is amortized over ten years. All other accounts are amortized over three years

15 Retirement Plan The Company adopted the provisions of Statement of Financial Accounting Standards ( SFAS ) No. 18, Accounting for Pensions, issued by the Accounting Research and Development Foundation of the ROC. Based on the actuarial report, minimum liability is determined by the amounts of accrued pension cost and accumulated benefits obligation exceeding fair value of plan assets. The related benefits obligation and recognition of net periodic pension cost are disclosed. Foreign Currency Transactions and Translation Foreign currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused by different foreign exchange rates applied when foreign currency is actually converted into New Taiwan dollars, or when the foreign currency receivables or payables are settled, are credited or charged to income in the year of actual conversion or settlement. Year-end balances of cash, receivables and payables denominated in foreign currencies are translated at the year-end exchange rates, and resulting gains or losses are credited or charged to current income. Gains or losses (the differences between the balance sheet date spot exchange rates and the spot exchange rates at the inception of the contracts, multiplied by the principal amounts of foreign currencies) on all hedge forward foreign exchange contracts are recognized in net income of the period in which the exchange rate changes. The discounts or premiums (the differences between the contract rates and the spot rates on the dates of purchase, multiplied by the principal amounts of foreign currencies) involved in all forward foreign exchange contracts are separately accounted for and amortized to net income over the terms of the contracts. A foreign subsidiary s financial statements accounted for by the equity method are translated into New Taiwan dollars as follows: All assets and liabilities denominated in foreign currencies are translated at the rates of exchange on the balance sheet date. The accounts of stockholders equity are translated at the applicable historical rates except for the beginning balance of retained earnings which is taken directly from the year-end balance of prior year. The accounts of income statements are translated at weighted average rate for the year. Differences arising from translation are recorded as cumulative translation adjustments and reported as a separate component of stockholders equity. If the recording currency is not the functional currency, the financial statements of the subsidiary should be first translated into functional currency before they are further translated into New Taiwan dollars. As such re-measurements affect the cash flows of foreign subsidiary, any differences due to the re-measurements are treated as exchange gains or losses in the current period. Income Tax The Company adopted the provisions of SFAS No. 22, Accounting for Income Tax, which require an asset and liability approach to financial accounting and reporting for income tax. Deferred income tax assets and liabilities are computed at balance sheet dates for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities

16 If a property, plant and equipment of the Company meets the requirements of Statute for Encouragement of Investment and Statute for Upgrading Industries, the income tax credit resulting from machinery acquisition or R&D expenditure is accounted for as a deduction of the estimated income tax payable in the year of actual expenditure. The distributable unappropriated earnings may be reserved at the discretion of the Board of Directors. Starting from January 1, 1998, the unappropriated earnings may subject to onetime additional 10% tax rate if they are not appropriated within certain period according to the modified Tax Law of the ROC. Revenue and Expense Recognition The Company recognizes revenues and expenses as follows: Textile and wholesales: The Company recognizes revenues from product sales upon shipment or sale of goods. Revenue from service contracts is recognized when services are performed. Revenue is considered realized when the earnings process is complete or virtually complete, and an exchange has taken place. Anticipated sales returns and allowances are charged against sales revenue in the statement of operations. Expenses are determined by applying the expense recognition principles on the basis of relationships between costs and either the independently determined revenue or accounting periods. In order to match expenses against revenue and to reflect the proper liabilities at the end of the period, expenses are recognized based on accrual basis. Construction: Construction revenues are classified into three categories: Pre-sold residential units: The Company pre-sells residential units to customers prior to completion of construction. The Company recognized income under percentage-ofcompletion method when the Company subcontract the construction with a third party and the following conditions exist. Otherwise, completed-contract method is used: (a) The planning stage is completed. That is, designing, planning, subcontracting and land clearing of the construction are all completed. (b) Total sales exceed estimated total construction cost. (c) The payments from buyers exceed fifteen percent of total contract price. (d) The collectibility of contracts receivable can be reasonably estimated. (e) The total construction costs and percentage of completion can be reasonably estimated. (f) The cost for the sales of residential units can be reasonably identified. Residential units ready for sales: It is the unsold residential units (finished goods) that have been completed. The Company recognized operating income when they are sold out. Construction site: Operating income is recognized when the construction site is sold (Title is transferred). Construction costs are totaled on a project-by-project basis. Under the completed-contract method, the costs are allocated to each construction unit (Ping) upon completion. Percentage-of-ping method or percentage-of-revenue method is used to allocate the costs. Costs of construction sites are totaled on a lot-by-lot basis. The costs are allocated to each construction unit (Ping) under percentage-of-ping method. Upon sales, the cost of goods sold is determined based in the number of pings sold. Construction income is recognized when titles of land and building have been registered and exchange of properties has taken place. Revenue is considered realized when either registration is complete or an exchange has taken place by balance sheet date

17 Rental Income and Costs Rental income is recognized for properties rented by other companies, organizations or individuals. Revenue is considered realized when earning process of the rent service is complete according to the contract terms. Rental costs include depreciation and handling expenses. Deferred Costs and Current Costs Costs incurred in connection with potential future benefits are capitalized and will be amortized over the estimated lives. Costs incurred in connection with immaterial future benefits or without future benefits are recognized as expenses or losses. Derivative Financial Instruments The Company is a party to certain derivative transactions, including forward exchange contracts and option contracts. These contracts are entered into for purposes of reducing the Company s price risk in those transactions engaged in foreign currencies. These derivative financial instruments qualify for hedge accounting. As such, the realized and unrealized gains and losses on these contracts are deferred and included as a component of the related transaction. Also, any premium or discount on forward exchange contracts, determined based on the foreign currency amount of the contract multiplied by the difference between the contracted forward rate and the spot rate at the date of inception of the contract, is accreted or amortized over the life of the forward contract and included in net income. Any contracts that do not qualify for hedge accounting are marked to market with the resulting gains or loss recognized in other income or expense. Non-Derivative Financial Instruments Recognition and valuation of non-derivative financial assets and liabilities, and revenues and expenses arising by those assets and liabilities are based on the accounting policies previously stated and generally accepted accounting principles. Treasury Stocks Parent Company s shares held by subsidiaries are treated as stocks re-acquired by the Parent Company in consolidation. Such treasury stocks are accounted for as deduction from stockholders equity of consolidated balance sheet. Consolidated Debit (Credit) Consolidated debit (credit) is the excess (deficiency) of the Parent Company s acquisition costs of subsidiaries against the net equity of the subsidiaries. Consolidated debit (credit) is amortized on a straight-line basis over five to ten years. 3. REASONS AND EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 35, Accounting for Asset Impairment, effective from the year ended December 31, 2004, accordingly, the Company s long-term investment decreased $303,163 thousand, property, plant and equipment decreased $47,562 thousand and consolidated debit decreased $1,348 thousand on December 31, The Company recognized investment losses under equity method $71,775 thousand and impairment losses $280,298 thousand in

18 4. CASH AND CASH EQUIVALENTS Cash and cash equivalents at December 31, 2004 and 2003 consist of the following: Cash on hand $ 2,576 $ 14,463 Revolving fund 4,678 2,429 Cash in banks 27,248 93,789 Time certificates of deposit 1,690 21,330 Cash equivalents 2,079 - $ 38,271 $ 132,011 At December 31, 2004 and 2003, cash equivalents were those securities - short-term notes that mature within 3 months from the investment dates. 5. SHORT-TERM INVESTMENTS The carrying value of short-term investments at December 31, 2004 and 2003 is as follows: Marketable securities of listed companies $ 640,377 $ 637,165 Beneficiary s certificates 38,944 38, , ,109 Less allowance for valuation loss of short-term investment (357,724) (347,246) $ 321,597 $ 328,863 At December 31, 2004 and 2003, some of the short-term investments were pledged as collaterals. See Note NOTES RECEIVABLE A summary of notes receivable at December 31, 2004 and 2003 is as follows: Notes receivable $ 49,890 $ 70,329 Other notes receivable Less allowance for doubtful accounts (2,498) (2,819) $ 47,652 $ 67,

19 7. ACCOUNTS RECEIVABLE A summary of accounts receivable at December 31, 2004 and 2003 is as follows: Accounts receivable $ 287,740 $ 265,916 Less allowance for doubtful accounts (3,149) (3,387) $ 284,591 $ 262, OTHER RECEIVABLES A summary of other receivables at December 31, 2004 and 2003 is as follows: Tax refund receivable $ 13,120 $ 1,679 Non-operating revenues receivable 52,728 39,426 Other non-operating receivables 1,637 6,754 $ 67,485 $ 47, INVENTORIES Inventories at December 31, 2004 and 2003 consist of the following: Textile Raw materials $ 541,002 $ 596,218 Supplies 41,033 44,879 Work-in-process 58,069 78,652 Finished goods 279, ,913 Goods in transit , ,824 Less allowance for inventory valuation losses (29,782) (3,879) 890, ,945 Wholesale Work-in-process 1, Merchandise inventory 102, ,517 Less allowance for inventory valuation losses (4,107) (4,272) 100, ,141 Constructions Land for sale 53, ,448 Parking spaces for sale 16,220 12,312 Land for construction 240, ,176 Less allowance for inventory valuation losses - (9,030) 310, ,906 $ 1,300,957 $ 1,667,

20 As of December 31, 2004 and 2003, inventories pledged as collateral amounted to approximately $241,519 thousand and $482,864 thousand, respectively. See Note 29. As of December 31, 2004 and 2003, insurance coverage of the Parent Company for inventories amounted to approximately $1,132,866 thousand and $1,401,011 thousand, respectively. 10. OTHER PREPAYMENTS Other prepayments at December 31, 2004 and 2003 are summarized as follows: Prepaid materials $ 86,465 $ 77,718 Other prepayments $ 86,920 $ 78, LONG-TERM INVESTMENTS Long-term bond investments at December 31, 2004 and 2003 are summarized as follows: Corporate Bond $ 50,000 $ 50,000 Bank Bond 15,000 15,000 $ 65,000 $ 65,000 Long-term equity investments at December 31, 2004 and 2003 are summarized as follows: Carrying Ownership Carrying Ownership Value Percentage Value Percentage At equity method Full Shine International Holdings Ltd. $ 604, $ 600, Gold Leaf International Group Co., Ltd. 10, , Kompass Global Sourcing Solutions Ltd. 65, , East Capital International Limited. 10, , New Zone International Limited 63, Fu-Li Investment Co., Ltd. 132, , Fu-Yi Investment Co., Ltd. 331, , Gin-Hong Investment Co., Ltd. 363, , Ruentex Cement Co., Ltd. 86, , Ruenfu Newlife Corp. 2, , Ruentex Development Co., Ltd. 2,882, ,839, Shing Yen Construction & Development Co., Ltd. 128, , Hau-Hsia Leasing Ltd , Concord Greater China Limited 899, , Ho-Chi Investment Co., Ltd. 14, , At cost method or lower of cost or market Ruentex Resources Integration Co., Ltd. 165, , Fu-Hwan Securities Co., Ltd ,

21 Carrying Ownership Carrying Ownership Value Percentage Value Percentage Fuh Hua Real Estate Management Co., Ltd , RT-MART International Ltd. 351, , Sinopac Co., Ltd , China Recreation Development Co., Ltd. 5, , CDC Finance & Leasing Corp. 57, , BA-HE Investment Co., Ltd. 2, , Sunny Friend Environmental Technology Co., Ltd. 30, Cheng-Feng Co., Ltd. 16, , Cosmactive Broadband Networks Co., Ltd. 12, , Bank Sinopac Co., Ltd. 2,498, ,498, IP Fund Two Co. 19, Bigger Buyer Co., Ltd. 39, , Century Development Corp. 23, , Tai-Sur Co., Ltd. 8, , Evengreen Development Corp. 13, , Naluwan Corporation & Development Co., Ltd. 2, , Uni Airlines Co., Ltd. 7, , City Link Co., Ltd Less treasury stocks (1,601,497) (1,604,633) Less allowance for decline in value of long-term investments (5,000) (5,000) $ 7,247,202 $ 7,769,395 The investments accounted by equity method, including Ruentex Development Co., Ltd., Ruenfu Newlife Corp, Shing Yen Construction & Development Co., Ltd., Fu Yi Investment Co., Ltd., Gin-Hong Investment Co., Ltd, Ho-Chi Investment Co., Ltd., Kompass Global Sourcing Solutions Ltd., Full Shine International Holdings Ltd., Concord Greater China Limited were computed by financial statements audited by other auditors. Equities in earnings (losses) of affiliates for the years ended December 31, 2004 and 2003 are summarized as follows: Ruentex Development Co., Ltd. $ 82,385 $ 53,732 Ruentex Cement Co., Ltd. 12 (282) Ruenfu Newlife Corp. (1,172) (330) Shing Yen Construction & Development Co., Ltd. (112,588) (62,140) Hau-Hsia Leasing Ltd. (38,979) (37,072) Full Shine International Holdings Ltd. 36,850 7,732 Concord Greater China Limited 97,648 40,005 Fu-Yi Investment Co., Ltd. 11,888 (22,452) Fu-Li Investment Co., Ltd. (1,445) (1,875) Gin-Hong Investment Co., Ltd. 21,743 (76,886) Ho-Chi Investment Co., Ltd. (587) (5,008) Gold Leaf International Group Co., Ltd. (406) (5,139) Kompass Global Sourcing Solutions Ltd. (18,830) (38,835) East Capital International Limited. (9,902) (7,949) New Zone International Limited (17,188) - $ 49,429 $ (156,499)

22 The Company according to the different amount between investment cost and stockholders equity of investment in Shing Yen Construction & Development Co., Ltd., Gin-Hong Investment Co., Ltd. and Ho-Chi Investment Co., Ltd. estimated the recoverable amount and recognized impairment losses $180,297 thousand included in non-operating losses - impairment loss. The Company s investee adopted Statement of Financial Accounting Standards (SFAS) No. 35, Accounting for Asset Impairment, for the year ended December 31, The Company according to the holding rate recognized impairment loss $71,775 thousand included in investment losses under equity method. According to SFAS No. 30, Accounting for Treasury Stock and SFC s related rulings, the Company is required to treat its subsidiaries interest holdings on the Company as treasury stock. These are as follows: Investee Chin-An Investment Co., Ltd. $ 285,135 $ 285,135 Ruentex Cement Co., Ltd. 8,272 8,917 Fu-Yi Investment Co., Ltd. 702, ,766 Fu-Li Investment Co., Ltd. 153, ,079 Gin-Hong Investment Co., Ltd. 737, , $ 1,886,632 $ 1,889,768 Equity in earnings of Ruentex Cement Co., Ltd., Fu-Yi Investment Co., Ltd., Fu-Li Investment Co., Ltd. and Gin-Hong Investment Co., Ltd. was based on treasury stock method and investment income (loss) accounted for by the equity method follows: Investee Chin-An Investment Co., Ltd. $ 16,949 $ 13,396 Ruentex Cement Co., Ltd Fu-Yi Investment Co., Ltd. 41,410 33,110 Fu-Li Investment Co., Ltd. 9,099 7,192 Gin-Hong Investment Co., Ltd. 43,861 34,665 $ 111,723 $ 88,782 Equity in earnings of Ruentex Development Co., Ltd. was based on treasury stock method since the Parent Company and Ruentex Construction and Development Co. invested in each other and were accounted for by the equity method. Shing Yen Construction & Development Co., Ltd. ( Shing Yen ) increased capital by cash subscription in The Parent Company did not invest according to the interest holding in Shing Yen that resulted in a decrease in capital surplus amounted to approximately $18,263 thousand. On March 27, 2003 the Board of Directors of the Parent Company resolved to invest in Fuhwa Trust Co., Ltd. which acquired 4,500,000 shares for $202,500 thousand that resulted in an ownership interest of 14.57%. And the Board of Directors made a resolution to sell this investment on February 11, 2004 at $83 dollars per share totalling $373,500 thousand, gain was $182,029 thousand. In 2003, Concord Greater China Limited, an investee under equity method, increased capital by cash subscription, the Parent Company did not follow its subscription ratio. As a result, the change of interest holding increased the Company s capital surplus by $214 thousand.