NAMCHOW CHEMICAL INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements

Transcription

1 NAMCHOW CHEMICAL INDUSTRIAL CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements and 2005 (With Independent Auditors' Report Thereon) Address: No. 100, Yanping N. Rd., Sec 4., Taipei, Taiwan, R.O.C. Tel: (02)

2 Independent Auditors' Report The Board of Directors Namchow Chemical Industrial Co., Ltd. : We have audited the accompanying consolidated balance sheets of Namchow Chemical Industrial Co., Ltd. and its subsidiaries (the Company) as of and 2005, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Republic of China generally accepted auditing standards and the "Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants". Those standards and regulations 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 consolidated 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 in the first paragraph present fairly, in all material respects, the consolidated financial position of Namchow Chemical Industrial Co., Ltd. and its subsidiaries as of and 2005, and the consolidated 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 Republic of China generally accepted accounting principles. As described in notes 3 and 7 to the accompanying consolidated financial statements, effective January 1,, the Company adopted Statement of Financial Accounting Standards No. 34 (SFAS 34) "Financial Instruments: Recognition and Measurement" and SFAS No. 36 "Financial Instruments: Disclosure and Presentation", as well as the newly revised SFAS No. 1 "Conceptual Framework for Financial Accounting and Preparation of Financial Statements". These caused net loss and deficit per share of common stock to decrease by $45,886 thousand and $0.19, respectively. In addition, beginning balances of financial assets and liabilities were reclassified and valued at fair value. There was no cumulative effect of changes in accounting principles for the year.

3 As described in notes 3 and 7 to the accompanying consolidated financial statements, effective from year 2005, the Company adopted SFAS No. 35 "Impairment of Assets". In 2005, the Company recognized impairment loss of $101,153, and unrealized revaluation increment decreased by $31,953. Accordingly, the consolidated net loss and deficit per share increased by $79,331 thousand and $0.33, respectively. KPMG Certified Public Accountants April 9, 2007 The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the 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.

4 Consolidated Balance Sheets and 2005 (expressed in thousands of New Taiwan dollars) 2005 Assets Amount % Amount % Current assets: Cash and cash in banks $ 1,140, ,056, Available-for-sale financial assets-current (note 4) 66, ,480 1 Notes receivable 139, ,514 2 Accounts receivable: Non-affiliate, net of allowance for doubtful accounts of $20,942 and $19,619 at and 2005, respectively 811, ,647 9 Affiliate (note 18) 95, ,072 1 Other financial assets-current 36,943-4,496 - Inventories (note 5) 718, ,187 7 Other current assets (note 14) 169, , ,177, ,048, Long-term equity investments (notes 6 and 19): Available-for-sale financial assets-non-current 10,435-35,383 - Long-term equity investments under cost method 278, , , ,463 4 Other financial assets-non-current 6,595-2,925 - Property, plant and equipment, net (notes 3, 7, 19 and 20): Cost: Land 639, ,466 8 Buildings 1,132, ,084, Machinery and equipment 3,156, ,043, Computer equipment 78, ,935 1 Transportation equipment 83, ,455 1 Furniture and fixtures 231, ,789 2 Leased assets 21,565-20,503 - Other equipment 974, , Revaluation increments 1,107, ,107, ,427, ,072, Less: accumulated depreciation 2,891, ,556, Less: accumulated impairment 87, ,359 1 Construction-in-progress and prepayments for equipment 513, , ,961, ,501, Intangible assets: Deferred pension cost (note 13) 60, ,264 1 Goodwill (note 3) 107, , , ,640 2 Other assets: Assets leased to others (notes 9 and 19) ,737 6 Idle assets (notes 7, 9 and 19) 493, ,915 - Others (note 14) 98, , , ,206 7 Total assets $ 9,194, ,721, Liabilities and Stockholders' Equity Amount % Amount % Current liabilities: Financial liabilities at fair value through profit or loss-current (note 17) $ Short-term debt, net (notes 10 and 18) 1,502, ,416, Commercial paper, net (notes 11 and 19) 164, ,807 3 Current portion of long-term debt (notes 12 and 19) 301, ,100 2 Notes payable and accounts payable (note 18) 341, ,375 3 Accrued expenses (note 18) 234, ,252 3 Other current liabilities (notes 8 and 20) 227, , ,772, ,581, Long-term liabilities: Long-term debt, net of current portion (notes 12, 19 and 20) 2,228, ,078, Leased liabilities-non-current (note 8) 2,668-6,318 - Reserve for land value increment tax (note 7) 427, , ,658, ,512, Other liabilities: Accrued pension liabilities (note 13) 237, ,658 3 Guarantee deposit received 2,400-12,524 - Others 2,060-2, , ,199 3 Total liabilities 5,673, ,355, Stockholders' equity (notes 3, 4, 6, 7, 13 and 15): Common stock of $10 par value, authorized 400,000 thousand shares and issued 294,132,962 shares as of and ,941, ,941, Capital surplus 74, ,903 1 Accumulated deficit (141,475) (2) (40,314) - Equity adjustments: Cumulative translation adjustments 17,596 - (198,666) (2) Net loss not recognized as pension cost (97,739) (1) (103,638) (1) Unrealized valuation loss on long-term equity investments (414,981) (5) (421,250) (5) Unrealized revaluation increment 525, ,291 6 Total equity adjustments 30,167 - (198,263) (2) Treasury stock (209,037) (2) (209,037) (3) Stockholders' equity, net 2,695, ,608, Minority interest 825, ,067 9 Total stockholders' equity 3,520, ,366, Commitments and contingencies (notes 8, 10, 17 and 20) Total liabilities and stockholders' equity $ 9,194, ,721, See accompanying notes to financial statements.

5 Consolidated Statements of Income For the years ended and 2005 (expressed in thousands of New Taiwan dollars) Operating revenue: 2005 Amount % Amount % Sales $ 5,609, ,883, Less: Sales returns and discounts 112, ,685 2 Net sales (note 18) 5,497, ,761, Rental income 15,864-40,645 1 Management service income 11,323-3,571 - Processing fee income 14,881-14,165 - Operating cost: 5,539, ,819, Cost of goods sold (notes 13 and 18) 3,781, ,995, Cost of rental income 7,887-12,235 - Processing costs 8,404-7,867-3,797, ,015, Gross profit 1,741, ,804, Operating expenses (note 13): Selling expenses 1,144, ,098, Administrative expenses 491, ,546 8 Research and development expenses 25,682-26,719-1,661, ,617, Operating income 80, ,170 4 Non-operating income: Interest income 22,915-15,642 - Dividend income 7,647-3,511 - Gain on disposal of property, plant and equipment, net (note 7) ,226 - Foreign exchange gain, net (note 17) 31, ,687 - Gain on valuation of financial asset ,072 1 Other income 34, ,210 1 Non-operating expense: 97, ,348 2 Interest expense (note 18) 152, ,919 3 Loss on sale of investments (note 6) 3,406-18,011 - Loss on disposal of property, plant and equipment Loss on market price decline and obsolete and slow-moving inventories 7, Loss on physical inventory, net 4,264-2,324 - Impairment (notes 3, 6 and 7) 32, ,153 2 Other losses 23,157-21, , ,560 5 Income (loss) before income tax and minority interest (47,155) (1) 32,958 1 Income tax expense (note 14) 29, ,502 1 Comprehensive net loss $ (76,270) (2) (2,544) - Attribution: Consolidated net loss $ (141,475) (3) (40,314) (1) Minority interest income 65, ,770 1 $ (76,270) (2) (2,544) - Before tax Net of tax Before tax Net of tax Deficit per share (expressed in New Taiwan dollars) (notes 3 and 16) $ (0.58) (0.58) (0.17) (0.17) If the shares of Namchow Co.'s stock held by its subsidiaries are not deemed to be Namchow Co.'s treasury stock: Before tax Net of tax Before tax Net of tax Net loss $ (141,475) (141,475) (40,314) (40,314) Deficit per share of common stock (expressed in New Taiwan dollars) (notes 3 and 16) $ (0.48) (0.48) (0.14) (0.14) See accompanying notes to financial statements.

6 Consolidated Statements of Changes in Stockholders' Equity For the years ended and 2005 (expressed in thousands of New Taiwan dollars) Accumulated Cumulative Net loss not Unrealized gain (loss) on Unrealized Capital earnings translation recognized as financial revaluation Treasury Minority Capital surplus (deficit) adjustments pension cost assets increment stock Interest Total Beginning balance January 1, 2005 $ 2,941, , ,027 (220,476) (78,598) (423,772) 110,988 (209,037) 679,037 3,049,402 Reversal of prior years' asset revaluation increments used to offset accumulated deficits (note 15) - - (135,027) , Increase in unrealized revaluation increment from reversal of reserve for land value incremental tax (note 7) , ,623 Sale of properly, plant and equipment and reversed unrealized revaluation increment (note 7) (3,387) - - (3,387) Fixed assets revaluation increment of subsidiaries (note 7) , ,993 Subsidiaries' recognized asset impairment loss and reversed asset revaluation increment (notes 3 and 7) (31,953) - - (31,953) Investee's unrealized gain on market price recovery of longterm equity investments (note 6) , ,522 Translation adjustments , ,646 29,456 Net loss not recognized as pension cost (25,040) (25,040) Net loss in (40,314) (40,314) Changes in minority interest ,600 33,600 Effect of first-time inclusion of certain subsidiaries in the consolidated financial statements Net income of minority interest ,770 37,770 Balance as of ,941, ,903 (40,314) (198,666) (103,638) (421,250) 525,291 (209,037) 758,067 3,366,686 Capital surplus used to offset accumulated deficit (note 15) - (40,314) 40, Translation adjustments , , ,156 Net loss not recognized as pension cost , ,899 Unrealized loss on available-for-sale financial assets (note 4) (16,743) (16,743) Subsidiaries' unrealized gain on available-for-sale financial assets (notes 4 and 6) , ,022 Net loss in - - (141,475) (141,475) Net income of minority interest ,205 65,205 Balance as of $ 2,941,330 74,589 (141,475) 17,596 (97,739) (414,981) 525,291 (209,037) 825,176 3,520,750 See accompanying notes to financial statements.

7 Consolidated Statements of Cash Flows For the years ended and 2005 (expressed in thousands of New Taiwan dollars) 2005 Cash flows from operating activities: Consolidated net loss $ (76,270) (2,544) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 402, ,806 Amortization 105, ,806 Provision for allowance for doubtful accounts 14,561 3,009 Impairment loss 32, ,153 Gain on disposal of property, plant and equipment, net (including assets leased to others and idle assets) 326 (16,226) Financial assets at fair value through profit or loss-current net adjustment (227) 314 Loss on sale of investments, net 3,278 18,011 Gain on valuation of financial asset - (46,072) Loss on market price decline and obsolete and slow-moving inventories 7,681 - Increase in notes and accounts receivable (including related parties) (5,477) (136,126) Decrease (increase) in other financial assets-current (32,447) 561 Increase in inventories (97,799) (43,462) Decrease in other current assets 18,750 30,678 Decrease (increase) in deferred income tax assets, net (1,039) 112 (Decrease) increase in notes and accounts payable (including related parties) 63,377 (86,638) Increase (decrease) in accrued expenses (13,579) 47,120 Increase in other current liabilities 55,870 37,261 Increase (decrease) in other liabilities 43 (6,691) Increase in deferred pension cost and accrued pension liabilities, net 10,543 27,388 Net cash provided by operating activities 488, ,460 Cash flows from investing activities: Increase in available-for-sale financial assets-current 37,460 15,330 Return of capital from capital reduction of invested company recognized under cost method 3,780 9,000 Purchase of long-term equity investments (3,285) (11,904) Proceeds from sale of long-term equity investments 56,602 - Purchase of property, plant and equipment (682,047) (382,636) Proceeds from sale of property, plant and equipment (including assets leased to others and idle assets) 3, ,262 Increase in deferred charges - (13,961) Decrease (increase) in other financial assets-non-current (3,670) 29,656 Increase in other assets (68,961) (107,960) Net cash used in investing activities (656,346) (201,213) Cash flows from financing activities: (Decrease) increase in short-term debt 85,771 (126,428) Increase (decrease) in issuance of commercial paper (113,025) 48,028 Increase in long-term debt 369, ,884 Repayment of long-term debt (111,424) (320,913) Increase in minority interest - 33,600 Increase in guarantee deposit received (10,124) - Net cash provided by financing activities 220, ,171 Effects of first-time inclusion of certain subsidiaries in the consolidated financial statements - (53,282) Effects of changes in foreign exchange rates 30,247 (259,609) Net increase in cash and cash in banks 83, ,527 Cash and cash in banks at beginning of year 1,056, ,400 Cash and cash in banks at end of year $ 1,140,154 1,056,927 Supplemental disclosures of cash flow information: Cash payment of interest $ 150, ,213 Cash payment for income tax $ 44,505 35,502 Investing and financing activities not affecting cash flows: Current portion of long-term debt $ 301, ,100 Increase in cumulative translation adjustments $ 216,262 21,810 Decrease in unrealized loss on financial assets $ 6,269 2,522 Cash paid for purchases of property, plant and equipment: Purchase of property, plant and equipment $ 683, ,352 Decrease (increase) in other payables-machinery and equipment (recorded as other current liabilities) (1,740) 35,574 Decrease in leased liabilities, net Cash paid $ 682, ,636 Adjustment of fixed asset: Decrease in proceeds from sale of land received in advance $ - (15,799) See accompanying notes to financial statements.

8 and 2005 (expressed in thousands of New Taiwan dollars, unless otherwise stated) (1) Organization and Business Scope Namchow Chemical Industrial Co., Ltd. (Namchow Co.) was incorporated on March 29, 1952, as a corporation limited by shares under the laws of the Republic of China (ROC). Namchow Co. is engaged in the manufacture, sale, and processing of detergent, butter, and frozen dough, and in providing management consulting services. Namchow Co. directly and indirectly holds 50% or more of the investees' shares. The business of the investees is categorized as follows: (a) Real estate investments 2005 Percentage of Percentage of shares held shares held Mostro (Thailand) Ltd (b) Food, chemicals, cosmetics, oil and fat, dairy, advertisement design, and various food trade 2005 Percentage of Percentage of shares held shares held Namchow (Thailand) Ltd Tien Boh Co., Ltd. (Tien Boh Co.) Chow Chu Distribution Co., Ltd. (Chow Chu Co., liquidated on October 1, ) Lucky Royal Corporation (Lucky Co.) Tianjin Namchow Oil & Fat Co., Ltd. (Tianjin Namchow Co.) Tianjin Yoshi Yoshi Food Co., Ltd. (Tianjin Yoshi Yoshi Co.) Lanneret Communications Co., Ltd. (Lanneret Co., liquidated on April 30, ) Shanghai Paulaner Restaurant and Drink Co. (Paulaner Co.) Chow Ho Enterprise Co., Ltd. (Chow Ho Co.) Navigator Business Publications Co., Ltd. (NBP Co., Ltd.) Dian Shui Lou Food & Restaurant Co. (Dian Shui Lou Co.) Guangdong Namchow Oil & Fat Co., Ltd. (Guangdong Namchow Co.)

9 2 Royal International Gastronomy Co., Ltd. (Royal Co., established in year 2005) 2005 Percentage of Percentage of shares held shares held (c) Holdings of investments 2005 Percentage of Percentage of shares held shares held Nacia International Corporation (Nacia Co.) Ting-Hao (Cayman Island) Holding Company (Ting-Hao Co.) Miyoshi International Corporation (Miyoshi Co.) Namchow British Virgin Islands Ltd. (Namchow BVI Co.) Shanghai Qiao Hao Trading Co., Ltd (Shanghai Qiao Hao Co.) As of, the number of the Company's employees was 3,265. (2) Summary of Significant Accounting Policies The Company prepared the accompanying consolidated financial statements in accordance with R.O.C. generally accepted accounting principles and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers. The preparation of the financial statements, unless otherwise specified, is primarily based on historical costs. The Company's consolidated financial statements are prepared in the Chinese and have been translated into English. The translated information is consistent with the audited financial statements from which it has been derived. The significant accounting policies used in preparing such financial statements are summarized below. (a) Principles of consolidation The consolidated financial statements include the accounts of the Company, Mostro (Thailand) Ltd., Namchow (Thailand) Ltd., Tien Boh Co., Chow Chu Co., Lucky Co., Tianjin Namchow Co., Tianjin Yoshi Yoshi Co., Lanneret Co., Paulaner Co., Chow Ho Co., Nacia Co., Ting-Hao Co., Miyoshi Co., and Namchow BVI Co., NBP Co. Ltd., Dian Shui Lou Co. and Shanghai Qiao Hao Co. In 2005, Namchow Co. increased its holding of shares to over 50% in Royal Co. and Guangdong Namchow Co. In addition, Chow Chu Co. and Lanneret Co. have been liquidated. All intercompany transactions have been eliminated in the consolidated financial statements.

10 3 (b) (c) (d) Classification of current and non-current assets and liabilities Unrestricted cash or cash equivalents and assets held for trading purposes as well as assets held short term and expected to be converted into cash within 12 months after the balance sheet date are classified as current assets; otherwise as non-current assets. Liabilities to be paid in full within 12 months after the balance sheet date are classified as current liabilities; otherwise as non-current liabilities. Foreign currency transactions Namchow Co. and all of its subsidiaries maintain their books in local currency, except for Nacia Co., Namchow BVI Co., Ting-Hao Co., and Miyoshi Co., which maintain their books in US dollars. All foreign currency transactions are recorded in local currency at the exchange rates prevailing on the transaction dates. All assets and liabilities denominated in foreign currencies are revalued into local currency amounts at the exchange rate prevailing on the balance sheet date. The resulting realized and unrealized exchange gains or losses are recorded as non-operating income or expense. The functional currency for the Company's foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into NT dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date, except for stockholders' equity. Stockholders' equity accounts are translated at historical exchange rates with the exception of beginning retained earnings, which are carried over from the previous year-end. Dividends are translated at the exchange rates prevailing at the date of declaration, and income and expense accounts are translated at average rates of exchange prevailing during the year. The related adjustments resulting from such translation are included in stockholders' equity and recognized as income or loss at the time of disposal or liquidation of foreign subsidiaries. Available-for-sale financial assets Effective January 1,, the Company accounts for financial assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 34, "Financial Instruments: Recognition and Measurement". Purchase and disposal of financial assets are recognized and derecognized using trade-date accounting. Available-for-sale financial assets of the Company representing investments in beneficiary certificates and stocks of listed and OTC companies are initially measured at fair value plus transaction costs. Available-for-sale financial assets are subsequently remeasured at fair value, and changes therein are recognized in equity in "unrealized gain (loss) on available-for-sale financial assets". The fair value of open-end funds is based on the net asset value on the balance sheet date. When there is any indication of impairment in the value of available-for-sale financial assets, the impairment loss should be recognized in the income statement. Additionally, it is required for available-for-sale debt instruments that an impairment loss be reversed through profit or loss when fair value increases and the increase can be objectively related to an event after the loss was recognized. When available-for-sale financial assets are sold, cumulative gains or losses previously recognized in equity are recognized in the income statement.

11 4 The investments in beneficiary certificates and stocks of listed and OTC companies by the Company as at 2005, are stated at cost and subsequently valued at the lower of total cost or total market value. Market value is the net value as of the balance sheet date. Cost is determined using the weighted-average method upon sale, and the difference between selling price and cost is recognized as gain (loss) on disposal of investment. (e) (f) (g) (h) Derivative financial instruments Derivative financial instruments are products related to interest or exchange rates, such as forward exchange contracts, interest rate swaps, and other similar contracts and commitments. A hedge forward contract is recorded at the spot exchange rate prevailing on the contract date, and revalued to the exchange rate prevailing on the balance sheet date. The exchange difference is recorded as gain or loss in the accompanying statements of income, as well as when the contract is settled. The exchange difference between the contract and spot exchange rate is amortized over the term of the contract. A non-hedge forward contract is recorded on the trade date using the contracted forward exchange rate, and re-valued at the forward rate of the remaining period of the contract as of the balance sheet date. The resulting gains or losses are recorded in the accompanying statements of income. The balances of receivables and payables resulting from forward contracts are reported as assets or liabilities on a net basis when the Company has a right to offset amounts with the same counterparty and transactions are expected to be settled on a net basis. Effective January 1,, except for financial guarantee contracts and designated hedging instruments, all derivative financial instruments are deemed to be for trading purposes and valued at market price. The realized or unrealized gain or loss resulting from settlement of a contract or revaluation is recorded in the accompanying statements of income. Fair value means the settlement amount under a normal trading situation for which both the buyer and seller have full understanding of the terms of the deal and are willing to accomplish the deal. Fair value usually refers to the fair market price in the open market. If fair market price is unobtainable, fair value shall be estimated by a valuation method. The derivative financial instruments of the Company normally have fair value available from financial institutions for reference. Allowance for doubtful accounts Allowance for doubtful accounts is provided for by considering accounts aging, the quality of customers, and the collectibility of receivables. Inventories Inventories are stated using the lower-of-cost-or-market-value method. Cost is determined by using the moving-weighted-average method. Market value is determined by net realizable value. Long-term equity investments Financial assets under cost method refers to investments in non-listed companies over which Namchow Co. has no control or significant influence. Such investments are measured at acquisition cost as measurement of their fair value is difficult. If any objective evidence exists suggesting impairment loss, this loss shall not be reversed.

12 5 (i) Property, plant and equipment, and related depreciation Property, plant and equipment are stated at acquisition cost and, when appropriate, are revalued in accordance with the regulations prescribed by the ROC government. Interest expense relating to the construction of plants and buildings and to purchases of machinery and equipment is capitalized and included in the cost of related assets. Maintenance and repairs are charged to expenses as incurred. Major additions, improvements, and replacements relating to the construction of plants and buildings are capitalized, while maintenance and repairs are expensed. Except for land, depreciation of property, plant and equipment is provided on a straight-line basis over the estimated useful lives of the respective assets. Depreciation of the revalued assets is provided by the straight-line method over the residual useful lives estimated at the date of revaluation. Residual values of property, plant and equipment used beyond the estimated useful lives are depreciated on the basis of the new estimated useful lives. The estimated useful lives of property, plant, and equipment are as follows: Buildings Machinery and equipment Computer equipment Transportation equipment Furniture and fixtures Leased assets Other equipment 3~60 years 2~20 years 3~8 years 1~10 years 1~10 years 5 years 2~40 years Gain or loss on disposal of property, plant, and equipment is recorded as non-operating income or expenses. Idle assets are included in other assets, and are valued by the lower of net realizable value or book value. (j) (k) Leased assets All assets leased from others are recorded in accordance with the type of lease. For property and equipment leased from others under capital leases, leased assets and liabilities are stated at the lower of the present value of all future rental payments plus the bargain purchase price or the leased asset's market value at the inception date of the lease. If the capital lease contract contains a bargain purchase option or allows the transfer of ownership at the end of the lease term, depreciation is provided on a straight-line basis over the estimated useful life of the leased assets or over the lease term if otherwise specified. For property and equipment leased from others under operating leases, the periodic rent payments are expensed when incurred. Assets leased to others Property and equipment leased to others under operating leases are reclassified as assets leased to others. Depreciation is provided on a straight-line basis over the estimated useful life of the respective assets, and is recorded as non-operating expense. The related estimated useful lives are 32 to 35 years.

13 6 (l) Goodwill The amount by which the acquiring costs of the investees' share interests are greater than the fair value of the identifiable net assets is recorded as goodwill and is amortized over five years by the straight-line method. In accordance with the revised accounting standard "Long-term Investments under Equity Method", for goodwill amortized over a certain period due to unidentifiable reasons, the residual unamortized amount shall no longer be amortized effective from January 1,. (m) Deferred charges (n) (o) Deferred charges consist of computer software and office decoration cost. All deferred charges are amortized over three to five years using the straight-line method. Asset impairment Effective January 1, 2005, the Company adopted SFAS No. 35 "Impairment of Assets". In accordance with this standard, the Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash generating unit) other than goodwill may have been impaired. If any such indication exists, the Company estimates the recoverable amount of the asset, and recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount. The Company may reverse an impairment loss recognized in prior periods for assets other than goodwill, if there is any indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods. If property, plant and equipment revaluation based on certain regulations shows impairment loss, this loss should be recognized as 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 an 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 property, plant and equipment revaluation is recognized as gain. The Company assesses the cash generating unit to which goodwill is allocated on an annual basis and recognizes an impairment loss on the carrying value in excess of the recoverable amount. Recognized impairment loss for goodwill is not allowed to be reversed. Employee pension and severance benefits Namchow Co., Chow Ho Co., Ting-Hao Co. and Lucky Co. established employee retirement plans providing for lump-sum retirement benefits to employees who meet retirement requirements. The pension payment is calculated based on the number of service years and the average salary of the employee for the six months before retirement.

14 7 Tianjin Namchow Co., Tianjin Yoshi Yoshi Co., and Paulaner Co. have established defined contribution pension plans providing lump-sum retirement benefits to employees who meet retirement requirements. Monthly deposits are made in accordance with their local requirements and recorded as expenses in the current period. The consolidated subsidiaries excluding the aforementioned subsidiaries did not provide pension expenses because the subsidiaries did not establish employee retirement plans or the amount of the pension was immaterial. Namchow Co., Chow Ho Co., Ting-Hao Co. and Lucky Co. adopted the provisions of SFAS No. 18, "Accounting for Pensions". The amount of the accumulated benefit obligation exceeding pension plan assets is recognized as a minimum pension liability on the balance sheet date. The companies recognize net periodic pension cost, which includes service costs, interest costs, expected returns on plan assets, and the amortization of the net transition obligation. The net transition obligation is amortized over the average remaining service period of the employees of 15 years, using the straight-line method. The companies contribute a certain rate of monthly paid salary to a designated account with the Central Trust of China. (p) (q) Minimum pension liability usually occurs due to the existence of unrecognized prior service cost and unrecognized transitional net assets or net benefit obligation. If the amount of minimum pension liability does not exceed the sum of unrecognized prior service cost and unrecognized transitional net assets or net benefit obligation, then the difference would be charged to the deferred pension cost account; otherwise, the difference would be charged to the account "net loss not recognized as pension cost". Deferred pension cost is classified as an intangible asset; unrecognized net pension cost are classified as a reduction of stockholders' equity. Starting from July 1, 2005, the Labor Pension Act (the New Act) became effective. Under the New Act, the Company has an obligation to contribute no less than 6% of monthly paid salary to the pension accounts in the Labor Insurance Bureau individually owned by the Company's existing employees who choose to join the new system and employees hired after the effective date. Revenue recognition Sales are recognized upon delivery of goods to customers and transfer of risks. Service income is recognized when service is provided and the account collectibility can be reasonably estimated. As for the restaurant business, revenue and related cost are recognized when an over-the-counter transaction occurs and when service is rendered. Income tax Each entity of the Company is an independent taxable entity, and the taxable income and operating losses of each entity cannot be netted with other entities' losses and income.

15 8 (r) (s) The Company's income tax is estimated based on accounting income. Deferred income tax is determined based on differences in assets and liabilities between the financial statements and tax returns, using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects due to taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects due to deductible temporary differences, utilization of loss carryforwards, and income tax credits are recognized as deferred income tax assets. The realization of deferred income tax assets is evaluated, and a valuation allowance is recognized accordingly. Deferred tax assets and liabilities are classified as current or non-current in accordance with the classification of related assets and liabilities. If no assets or liabilities are related, they are classified according to the expected period of realization. Each entity of the Company is an independent taxable entity, and the deferred income tax asset and deferred income tax liability of each entity cannot be netted with other entities. Namchow Co., Lucky Co., Chow Chu Co., Tien Boh Co., Chow Ho Co., NBP Co., Royal Co., Dian Shui Lou Co. and Lanneret Co. charge the 10% surtax on undistributed earnings to current income tax expense in the year of earnings distribution following a resolution at the shareholders' meeting. Treasury stock The shares of Namchow Co.'s stock held by its subsidiaries are deemed to be treasury stock under SFAS No. 30, "Accounting for Treasury Stock". Earnings per common share Earnings per common share are computed by dividing earnings after income tax by the weightedaverage number of common shares outstanding during the year, while treasury stock reduces the common shares outstanding. Earnings per common share are adjusted retroactively when a stock dividend from retained earnings or capital surplus is issued. Furthermore, if the designated issuance date for a stock dividend is before the publishing of the financial statements, the earnings per common share are adjusted retroactively. (3) Reason for and Effect of Accounting Changes Effective January 1,, Namchow Co. adopted SFAS No. 34 Financial Instruments: Recognition and Measurement, SFAS No. 36 Financial Instruments: Disclosure and Presentation, and the newly revised SFAS No. 1 Conceptual Framework for Financial Accounting and Preparation of Financial Statements. Goodwill resulting from the excess of investment cost over the net book value of investees previously was amortized over 5 years by the straight-line method and recognized as investment gain or loss. The amortization shall cease effective from January 1,. As of January 1,, the difference between the excess of investment cost over the net book value of investees caused by stopping amortization was $31,387. In, net loss and deficit per share decreased by $31,387 and $0.13, respectively.

16 9 In addition, during the fiscal year when SFAS No. 34 and No. 36 were first adopted, the opening balance of financial assets and liabilities had to be revalued by fair value. The Company had no cumulative adjustments due to change in accounting principles after reclassification and revaluation. The adoption of the new standards caused net loss and deficit per share to decrease by $14,449 and $0.06, respectively. Adjustment to stockholders equity amounted to $14,449, which comprised Namchow Co. s unrealized loss on financial assets of $16,743 and unrealized gain on financial commodities of $2,244 recognized in proportion to its holding of shares in the subsidiaries. Effective January 1, 2005, the Company adopted SFAS No. 35 "Impairment of Assets". Namchow Co. assessed its assets and recognized asset impairment loss of $55,406 as of In addition, Tianjin Namchow Co. and Mostro (Thailand) Ltd. recognized asset impairment loss of $45,747 and decreased capital surplus by $31,953 due to asset impairment. The consolidated net loss and loss per share increased by $79,331 and $0.33, respectively, in The Company determined that no goodwill impairment loss would be recognized due to no indication of goodwill impairment being identified. (4) Available-for-sale Financial Assets Available-for-sale financial assets for the Company were as follows: Acquisition cost Unrealized gain (loss) Fair value Listed stocks $ 55,836 (16,743) 39,093 Beneficiary certificates 24,702 2,254 26,956 $ 80,538 (14,489) 66,049 Acquisition cost 2005 Unrealized gain (loss) Fair value Listed stocks $ 162,391 (68,768) 93,623 Beneficiary certificates 22,857-22,857 Total $ 185,248 (68,768) 116,480 Adjustments to unrealized gain (loss) on the Company's available-for-sale financial assets in were as follows: Amount Begining balance $ - Recognized amount during the year (14,489) Disposal amount during the year - Ending balance $ (14,489)

17 10 The consolidated financial statements of the Company were prepared in accordance with SFAS No. 34 for reclassification. As of 2005, those short-term investments valued at the lower of cost or market value, amounting to $116,480, were reclassified to available-for-sale financial assets-current. (5) Inventories 2005 Finished goods $ 209, ,685 Work in process 43,271 40,276 Raw materials 412, ,357 Supplies 37,087 44,614 Merchandise 51,557 55, , ,086 Less: allowance for inventory valuation losses 35,958 35,899 $ 718, ,187 (6) Long-term Equity Investments Percentage of ownership 2005 Percentage of Book value ownership Investment cost Investment cost Book value Available-for-sale financial assets -non-current: Taiwan International Securities Co., Ltd. - $ 32,163 32,163-32,163 32,163 Polaris Securities Co., Ltd ,199 46,199 Namchow Co.-minority interest - 2,061 2,061-2,061 2,060 Less: Unrecognized loss on financial commodities Taiwan International Securities Co., Ltd. 34,224 34,224 80,423 80, , ,093 Polaris Securities Co., Ltd ,759 Namchow Co. -minority ,187 interest Financial assets under cost method -non-current: Global Securities Finance Corporation - 23,789-45,039 34,224 10,435 80,423 35,383-57,832 57,832-57,832 57,832 Taiwan Fixed Network Co., Ltd. - 70,000 70,000-70,000 70,000 Creative Star Co., Ltd ,375 2,375

18 11 Percentage of ownership 2005 Percentage of Book value ownership Investment cost Investment cost Book value Hiwin Technologies Co., Ltd. 3$ 124, , , ,400 Jungsen Investment Co , ,000 30,000 Cheng Yang Venture Capital Investment Co. Kingtel Telecommunication Co., Ltd. Xiamen Jintong Detergent Co., Ltd. 2 9,720 7, ,500 13, , , ,291 18, ,291 19,004 Hsin Tung Yang Co., Ltd Huga Optotece Inc ,388 11, , , , ,080 $ 359, , , ,463 Polaris Securities Co., Ltd. increased its capital by cash in, and the Company subscribed 274,000 shares, amounting to $3,286. All shares were disposed of in the same year, and proceeds from sale totaled $30,383, resulting in loss on sale of investment of $19,102, which is recorded in loss on sale of investments. In, the Company disposed of all 1,192,000 shares of Huga Optotece Inc. Proceeds from sale amounted to $24,902, providing a gain on sale of investment of $12,997, which is recorded in decrease in loss on sale of investments. In, the Company received the return of capital of financial assets under cost method-cheng Yang Venture Capital Investment Co. amounting to $3,780 on a pro rata basis. In the same year, for the Company s holding of financial assets under the cost method consisting of Jungsen Investment Co. and Cheng Yang Venture Capital Investment Co., the Company recognized an impairment loss of $32,611 after considering both companies operating condition. On December 6,, the Company disposed of all its holding of financial assets under the cost method- equity shares in Creative Star Ltd. Please see note 18 for further information. (7) Property, Plant and Equipment Effective February 1, 2005, according to Article 33 of the newly revised Land Tax Act, the land value increment tax rate has been decreased. Namchow Co. and Lucky Co. therefore decreased their reserve for land value incremental tax and increased capital surplus by $277,623 and $37,123, respectively. Consequently, Lucky Co. increased its capital surplus by $37,123 and Namchow Co. increased its capital surplus by $36,993 on a pro rata basis.

19 12 Balances of the difference between total revaluation increment and unrealized revaluation increment were as follows: 2005 Total increment from revaluation $ 1,075,780 1,075,780 Add: Retained earnings reversed back to capital surplus 200, ,870 Less: Reserve for land increment tax 243, ,229 Increase in capital 190, ,076 Offset for losses 531, ,974 Reversal of proceeds on disposal of property, plant and 3,387 3,387 equipment to unrealized revaluation increment Subtotal 307, ,984 Subsidiaries' property, plant and equipment revaluation 217, ,307 increment, net The Company's unrealized revaluation increment, total $ 525, ,291 The balance of revaluation increments under property, plant and equipment was as follows: 2005 Land $ 1,079,470 1,079,470 Buildings 24,257 24,257 Machinery and equipment 3,771 3,771 Others $ 1,107,859 1,107,859 Namchow Co. disposed of real estate in Netting reserve for land value increment tax of $4,267 and decreasing unrealized revaluation increment of $3,387 resulted in a gain of $16,817, which is recorded in gain on disposal of property, plant and equipment. According to SFAS No. 35 "Impairment of Assets", an impairment loss of $55,406 was recognized in 2005, resulting from the estimated recoverable amount being lower than the book value. The discount rates used for estimating value were 8.85% and 9.80% for and 2005, respectively. In 2005, the subsidiary Tianjin Namchow Co. assessed its small pack oil manufacturing equipment as having no useful value in the future and no profitable market for sale. The possibility of recovery is remote; therefore, the full book value was recognized as impairment loss. The subsidiary Mostro (Thailand) Ltd. also recognized an impairment loss on real estate. In total, impairment loss amounted to $45,747, and unrealized revaluation increment decreased by $31,953.

20 13 Adjustments to the consolidated cumulative impairment loss in and 2005 were as follows: 2005 Opening balance $ 139,499 5,186 Impairment loss for the current period - 101,153 Impairment loss net of unrealized revaluation increment - 31,953 Foreign currency adjustments - 1,207 Closing balance $ 139, ,499 Details of the consolidated cumulative impairment loss in and 2005 were as follows: 2005 Property, plant and equipment $ 87,359 87,359 Idle assets 52,140 52,140 $ 139, ,499 Property, plant and equipment leased to other subsidiaries by Namchow Co. and Lucky Co. were reclassified to property, plant and equipment in the consolidated financial statements. (8) Leased Assets The Company incurred lease liabilities from its capital leases from others as follows: 2005 Lease liabilities $ 7,183 11,235 Less: current portion (recorded as other current liabilities) 4,515 4,917 Non-current portion (recorded as long-term liabilities) $ 2,668 6,318 The lease term was from October 2003 to February 2010, and the rental payment schedule for the aforementioned capital leases was as follows: Period Amount January 1~ 2007 $ 4,967 January 1~ ,562 January 1~ January 1~ ,032 Less: unrealized interest expense (recorded as a reduction of 849 lease liabilities) $ 7,183

21 14 (9) Assets Leased to Others and Idle Assets (a) Assets leased to others 2005 Cost: Land $ - 12,634 Buildings - 209,309 Machinery and equipment Other equipment - 12,219 Revaluation increment - 418, ,050 Less: accumulated depreciation - 160,313 $ - 493,737 The rental contract between Lucky Co. and Nabisco Co. was expired in June. This asset was then transferred to idle assets. (b) Idle assets Numerous properties, plants, and equipment located of Lucky Co. in Tainan and a portion of the machinery and equipment of Tianjin Namchow were idle Cost: Land $ 23,800 11,166 Building 207,594 7,495 Machinery and equipment 66, ,876 Transportation equipment Furniture and fixtures Other equipment 16,434 3,584 Revaluation increment 418, , ,086 Less: Accumulated depreciation 189,552 73,031 Accumulated impairment 52,140 52,140 $ 493,270 11,915

22 15 (10) Short-term Debts 2005 Usance L/C loan $ 110,841 62,337 Unsecured credit loan 1,091,725 1,009,386 Others 300, ,196 $ 1,502,690 1,416,919 The annual interest rates on the short-term debts ranged from 1.43% to 8.00% and 1.85% to 2.37% for and 2005, respectively. The annual interest rates for the L/C loans ranged from 1.18% to 6.78% and 2.76% to 5.74% for and 2005, respectively. The terms to maturity were all within one year. As of and 2005, the unused short-term credit facilities amounted to approximately $916,583 and $881,662, respectively, which included the credit facilities shared with related parties were $30,000 and $43,260, respectively. (11) Commercial Paper 2005 Commercial paper $ 165, ,000 Less: discounts on commercial paper $ 164, ,807 The terms to maturity were all within one year. The average annual interest rates on the commercial paper ranged from 1.87% to 2.14% and 1.01% to 2.388% for and 2005, respectively. As of and 2005, the unused commercial paper facilities amounted to approximately $343,000 and $212,000, respectively. (12) Long-term Debt Bank Description Period Repayment term Interest rate (%) 2005 First Commercial Bank Loan secured by Namchow Co.'s machinery and equipment ~.5.24 Monthly principal repayable with interest from June 24, in 2005 $ - 5,914 Loan secured by Namchow Co.'s land and plant ~ Principal repayable in 10 semiannual installments beginning in June ~3.545 in ,000

23 16 Bank Description Period Repayment term Interest rate (%) 2005 First Commercial Bank Unsecured credit loan ~ Principal repayable in 8 semiannual installments of $25,000 beginning on September 30, 3.13~3.51 in and 3.35 in 2005 $ 175, ,000 Unsecured credit loan ~ Principal repayable in 8 semiannual installments of $12,500 beginning on October 18, 3.14~3.32 in and 3.30 in , ,000 Unsecured credit loan ~ Principal repayable in 8 semiannual installments of $25,000 beginning on March 5, ~3.74 in and 3.67 in , ,000 Bangkok Bank Unsecured credit loan.1.13~ Repayable at the end of loan 2.78~2.92 in 200,000 - Industrial Bank of Taiwan together with fourteen other banks Solidify medium-term operating fund and purchase machinery (Type A) ~ (note 1) (note 2) 2.98~3.20 in and 3.26 in , ,000 Industrial Bank of Taiwan together with fourteen other banks Solidify medium-term operating fund and purchase machinery (Type B) ~ (note 1) (Note 3) 2.44~2.54 in and 0.8 in 2005; the discount on commercial paper was $4,052 and $3,042 on December 31, and 2005, respectively 695, ,958