PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS

Transcription

1 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS JUNE 30, 2008 AND 2007 These English financial statements and report of independent accountants were translated from the financial statements and report of independent accountants originally prepared in Chinese.

2 REPORT OF INDEPENDENT ACCOUNTANTS PWCR To the Board of Directors and Shareholders of ProMOS Technologies Inc. We have audited the accompanying non-consolidated balance sheets of ProMOS Technologies Inc. as of June 30, 2008 and 2007, and the related non-consolidated statements of income, of changes in shareholders equity and of cash flows for the six-month periods then ended. 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. Except as explained in the following paragraph, we conducted our audits in accordance with the Rules Governing the Examination of Financial Statements by Certified Public Accountants and generally accepted auditing standards in the Republic of China. Those standards and rules 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 provides a reasonable basis for our opinion. As described in Note 4(8), the non-consolidated financial statements include balances of certain long-term investments accounted for under the equity method amounting to $4,804,465 thousand and ($923,776) thousand as of June 30, 2008 and $2,109,786 thousand and ($498,879) as of June 30, The related investment loss of $400,704 thousand and $486,124 thousand for the six-month periods then ended were based solely on these investees unaudited financial statements. In our opinion, except for the effect of such adjustments, if any, as might have been determined to be necessary had certain investee companies financial statements been audited by independent accountants as explained in the preceding paragraph, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of ProMOS Technologies Inc. as of June 30, 2008 and 2007, and the results of its operations and its cash flows for the six-month periods then ended in conformity with the Rules Governing the Preparation of Financial Statements by Securities Issuers, Business Entity Accounting Law, Regulation on Business Entity Accounting Handling and generally accepted accounting principles in the Republic of China. ~2~

3 We have also reviewed the consolidated financial statements of ProMOS Technologies Inc. and its subsidiaries (not presented herein) as of and for the six-month periods ended June 30, 2008 and In our review report dated August 14, 2008, we expressed a modified unqualified opinion on the consolidated financial statements based on our review and the report of the other auditor. PricewaterhouseCoopers Hsinchu, Taiwan Republic of China August 14, The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying non-consolidated financial statements and audit report of the independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice. ~3~

4 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED BALANCE SHEETS JUNE 30, (Expressed in Thousands of New Taiwan Dollars) ASSETS Current Assets Cash and cash equivalents (Note 4 (1)) $ 2,635,238 $ 23,344,512 Financial assets at fair value through profit or loss - current (Note 4 (2)) 10, ,707 Available-for-sale financial assets current (Notes 4 (3) and 6) 399,167 - Accounts receivable, net (Note 4 (4)) 4,377,137 5,856,184 Accounts receivable - related parties (Notes 4 (4) and 5) 70,237 70,846 Other receivables (Note 4 (20)) 268, ,263 Other receivables - related parties (Note 5) 129, ,626 Inventories, net (Note 4 (5)) 8,977,835 9,079,392 Prepaid expenses 199, ,922 Prepayments ,633 Temporary payments ,037 Deferred income tax assets - current (Note 4 (20)) 134, ,309 Restricted assets (Notes 4 (13) and 6) 1,303, ,919 Total current assets 18,505,751 40,964,350 Funds and Investments Derivative financial assets for hedging-noncurrent (Note 10) 69,192 - Financial assets carried at cost - noncurrent (Note 4 (6)) 68, ,000 Investments in bonds without active markets - noncurrent (Note 4 (7)) 650, ,000 Long-term equity investments accounted for under the equity method (Note 4 (8)) 4,743,637 2,109,786 Prepaid long-term investments (Note 4 (8)) 60,828 - Total funds and investments 5,592,057 3,304,786 Property, Plant and Equipment, Net (Notes 4 (9), 5 and 6) Cost Land 207, ,762 Buildings 42,928,313 32,161,295 Machinery and equipment 130,010, ,393,245 Computer and communication equipment 948, ,050 Transportation equipment 8,349 8,349 Office equipment 1,686 1,686 Leased assets 2,642,998 2,275,827 Leasehold improvements 2,286 2,286 Cost 176,750, ,000,500 Less: Accumulated depreciation ( 62,094,961 ) ( 74,705,591 ) Construction in progress and prepayments for equipment 6,073,852 32,364,213 Total property, plant and equipment, net 120,729, ,659,122 Intangible Assets (Notes 4 (10) and 5) Patents 2,146,239 2,647,235 Technology know-how 2,606,470 3,371,665 Total intangible assets 4,752,709 6,018,900 Other Assets Rental assets 39,757 57,669 Refundable deposits 8,666 72,725 Deferred charges (Notes 4 (10) and 5) 1,045,254 1,387,537 Deferred income tax assets - noncurrent (Note 4 (20)) 3,433,167 1,600,577 Restricted assets (Notes 4 (13) and 6) - 1,075,344 Total other assets 4,526,844 4,193,852 TOTAL ASSETS $ 154,106,668 $ 162,141,010 (Continued) ~4~

5 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED BALANCE SHEETS (CONTINUED) JUNE 30, (Expressed in Thousands of New Taiwan Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term loans (Notes 4 (11) and 6) $ 6,841,227 $ - Financial liabilities at fair value through profit or loss - current (Note 4 (12)) 1,113, ,671 Accounts payable 4,487,724 5,251,148 Income tax payable (Note 4 (20)) - 60,144 Accrued expenses 4,125,697 2,755,770 Other payables related parties (Note 5) 1,449,911 1,882,825 Dividends payable - 6,663,019 Accrued employee bonuses - 1,311,745 Payables for equipment (Note 4 (13)) 5,184,369 16,299,071 Other payable other 48, ,333 Bonds payable current portion (Notes 4 (13) and 6) 9,457,028 - Long-term loans current portion (Notes 4 (13) and 6) 9,158,008 5,134,166 Total current liabilities 41,866,197 39,723,892 Long-term Liabilities, net of current portion (Notes 4 (13) and 6) Bonds payable - 10,927,202 Long-term loans 47,784,239 23,213,682 Long-term payables - 4,381,563 Capital lease payable - noncurrent 560, ,399 Total long-term liabilities 48,344,239 38,727,846 Other Liabilities Accrued pension liabilities (Note 4 (19)) 110, ,953 Guarantee deposits received 1,676 1,918 Unrealized gain from sales leaseback transactions (Note 4 (9)) 184,818 - Other liabilities other (Note 4 (8)) 1,048, ,879 Total other liabilities 1,345, ,750 Total Liabilities 91,556,067 79,079,488 Shareholders' Equity Capital (Note 4 (14)) Common stock 67,069,537 65,829,285 Capital Surplus (Note 4 (15)) Additional paid-in capital 7,172,279 7,857,147 Treasury stock 17,948 17,425 Long-term investment (Note 4 (8)) 2, Stock warrants (Notes 4 (13) and 4 (18)) 2,420,864 2,420,558 Retained Earnings (Note 4 (16)) Legal reserve - 1,631,142 (Accumulated deficit) retained earnings ( 13,674,403 ) 5,495,818 Unrealized gain or loss on financial instruments (Notes 4 (3) and 10) ( 370,986 ) - Cumulative Translation Adjustments 117,186 36,890 Treasury Stock (Note 4 (17)) ( 203,972 ) ( 227,107 ) Total Shareholders' Equity 62,550,601 83,061,522 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 154,106,668 $ 162,141,010 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated August 14, ~5~

6 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (Expressed in Thousands of New Taiwan Dollars, Except for (Loss) Earnings Per Share Amounts) Operating revenues (Note 5) Sales revenues $ 17,323,390 $ 28,552,796 Sales returns ( 171,049 ) ( 956,408 ) Net operating revenues 17,152,341 27,596,388 Operating costs (Notes 4 (22) and 5) Cost of goods sold ( 26,642,960 ) ( 24,359,427 ) Gross (loss) profits ( 9,490,619 ) 3,236,961 Operating expenses (Notes 4 (22) and 5) Selling and marketing expenses ( 751,728 ) ( 815,338 ) General and administrative expenses ( 530,004 ) ( 614,309 ) Research and development expenses ( 1,281,955 ) ( 1,390,046 ) ( 2,563,687 ) ( 2,819,693 ) Operating (loss) income ( 12,054,306 ) 417,268 Non-operating income and gains Interest income 53, ,994 Gain on valuation of financial assets (Note 4 (2)) 3,752 25,268 Gain on valuation of financial liabilities (Note 4 (12)) - 490,150 Foreign exchange gain, net 888, ,570 Rental income (Note 5) 11,245 27,722 Other non-operating income (Note 5) 9, , ,944 1,254,148 Non-operating expenses and losses Interest expense (Note 4 (9)) ( 1,296,265 ) ( 599,397 ) Loss on valuation of financial assets (Note 4 (2)) ( 27,127 ) - Loss on valuation of financial liabilities (Note 4 (12)) ( 283,004 ) ( 37,918 ) Investment loss accounted for under the equity method, net (Note 4 (8)) ( 400,704 ) ( 486,124 ) Provision for obsolescence and decline in market value of inventory (Note 4 (5)) ( 147,221 ) ( 34,876 ) Impairment loss (Notes 4 (6) and 4 (8)) ( 392,000 ) - Other non-operating losses (Note 4 (22)) ( 40,720 ) ( 9,122 ) ( 2,587,041 ) ( 1,167,437 ) Net (loss) income ( $ 13,674,403 ) $ 503,979 Before tax After tax Before tax After tax Basic earnings per share (Note 4 (21)) Net (loss) income ($ 2.05 ) ($ 2.05 ) $ 0.08 $ 0.08 Diluted earnings per share (Note 4 (21)) Net (loss) income ( $ 2.05 ) ( $ 2.05 ) $ 0.02 $ 0.04 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated August 14, ~6~

7 2007 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (Expressed in Thousands of New Taiwan Dollars) Common Stock Capital Surplus Legal Reserve Retained Earnings Special Reserve Retained Earnings (Accumulated Deficit) Unrealized gain or loss on financial instruments Cumulative Translation Adjustments Treasury Stock Total Balance at January 1, 2007 $65,343,958 $ 7,828,893 $ 177,579 $ 35,390 $ 14,535,626 $ - $ 36,138 ( $ 247,523 ) $ 87,710,061 Conversion of convertible bonds 485,327 45, ,544 Appropriation of 2006 earnings Legal reserve - - 1,453,563 - ( 1,453,563 ) Reversal of special reserve ( 35,390 ) 35, Employees cash bonus ( 1,311,745 ) ( 1,311,745 ) Remuneration to directors and supervisors ( 150,850 ) ( 150,850 ) Cash dividends ( 6,663,019 ) ( 6,663,019 ) Net income for the six-month period ended June 30, , ,979 Transfer of treasury stocks to employees ,416 20,878 Capital reserve from stock warrants - 2,420, ,420,558 Translation adjustment of long-term investments Proportional adjustment due to change of investee s equity Balance at June 30, 2007 $65,829,285 $10,295,494 $ 1,631,142 $ - $ 5,495,818 $ - $ 36,890 ( $ 227,107 ) $ 83,061, Balance at January 1, 2008 $67,069,537 $10,310,394 $ 1,631,142 $ - ( $ 2,329,293 ) ( $ 261,001 ) $ 124,640 ( $ 203,972 ) $ 76,341,447 Appropriation of 2007 loss Legal reserve used to cover accumulated deficit - - ( 1,631,142 ) - 1,631, Capital surplus used to cover accumulated deficit - ( 698,151 ) , Net loss for the six-month period ended June 30, ( 13,674,403 ) ( 13,674,403 ) Proportional adjustment due to change of investee s equity - ( 1 ) ( 1 ) Employee compensation plan employee stock options Adjustment of available-for-sale financial assets ( 158,963 ) - - ( 158,963 ) Adjustment of derivative financial assets for hedging , ,978 Translation adjustment of long-term investments ( 7,454 ) - ( 7,454 ) Balance at June 30, 2008 $67,069,537 $ 9,613,239 $ - $ - ( $ 13,674,403 ) ( $ 370,986 ) $ 117,186 ( $ 203,972 ) $ 62,550,601 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated August 14, ~7~

8 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (Expressed in Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income ( $ 13,674,403 ) $ 503,979 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Payroll expense employee stock options Provision for doubtful accounts 3,295 - Depreciation 9,302,435 7,851,810 Amortization 652, ,558 Amortized of the unrealized gain from on sale and leaseback ( 661,080 ) - Loss (gain) on valuation of financial assets 23,375 ( 25,268 ) Loss (gain) on valuation of financial liabilities 283,004 ( 452,232 ) Foreign exchange gain on convertible bonds ( 639,905 ) ( 16,445 ) Amortization of discount on convertible bonds 274, ,074 Investment loss accounted for under the equity method 400, ,124 Provision for loss on obsolescence and decline in market value of inventory 147,221 34,876 Impairment loss 392,000 - Changes in assets and liabilities (Increase) decrease in assets: Accounts receivable 451,507 5,051,469 Accounts receivable - related parties ( 34,299 ) 79,543 Other receivables 617,318 87,575 Other receivables - related parties 32,773 ( 106,938 ) Inventories 1,855,660 ( 620,603 ) Prepaid expenses 135,288 ( 537,431 ) Prepayments 16,780 1,959 Temporary payments 1,404 17,456 Deferred income tax assets - 399,184 Increase (decrease) in liabilities: Accounts payable ( 1,210,469 ) 1,201,505 Income tax payable - ( 1,072,520 ) Accrued expenses 1,585,232 ( 417,040 ) Other payables ( 616,563 ) ( 52,150 ) Other payables - related parties ( 515,097 ) 84,333 Accrued pension liabilities ( 8,674 ) ( 7,734 ) Net cash (used in) provided by operating activities ( 1,184,481 ) 13,663,084 (Continued) ~8~

9 PROMOS TECHNOLOGIES INC. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (Expressed in Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES Decrease in restricted assets $ 186,743 $ 703,289 Decrease in financial assets at fair value through profit or loss 3,752 2,431,072 Decrease in investment in bonds without active markets 100,000 - Acquisition of long-term equity investments accounted for under the equity method ( 1,407,664 ) ( 1,085,221 ) Acquisition of property, plant and equipment ( 9,977,350 ) ( 23,279,035 ) Decrease (increase) in refundable deposits 36,111 ( 16,529 ) Acquisition of patents - ( 792,175 ) Increase in deferred charges ( 96,114 ) ( 114,234 ) Net cash used in investing activities ( 11,154,522 ) ( 22,152,833 ) CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term loans 6,627,796 - Decrease in commercial papers payable - ( 380,000 ) Proceeds from issuance of convertible bonds - 11,347,980 Payment of convertible bonds - ( 1,080,000 ) Proceeds from long-term loans 2,767,000 9,910,000 Payment of long-term loans ( 2,224,841 ) ( 3,780,232 ) Decrease in long-term payables ( 96,865 ) ( 875,601 ) Decrease in obligations under capital leases - financing - ( 947,131 ) Decrease in capital lease payable ( 397,584 ) ( 322,706 ) Decrease in guarantee deposits received ( 146 ) ( 91 ) Proceeds from disposal of treasury stocks - 20,878 Net cash provided by financing activities 6,675,360 13,893,097 (Decrease) increase in cash and cash equivalents ( 5,663,643 ) 5,403,348 Cash and cash equivalents at beginning of period 8,298,881 17,941,164 Cash and cash equivalents at end of period $ 2,635,238 $ 23,344,512 Supplemental disclosures of cash flow information Interest paid $ 1,209,647 $ 791,961 Less: Capitalized interest ( 231,289 ) ( 150,641 ) Interest paid, excluding capitalized interest $ 978,358 $ 641,320 Income tax paid $ 6,120 $ 668,831 Non-cash flows from financing activities Bonds payable converted into common stocks and additional paid-in capital $ - $ 530,544 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated August 14, ~9~

10 PROMOS TECHNOLOGIES INC. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2008 AND 2007 (Expressed in thousands of New Taiwan dollars, except as otherwise indicated) 1. HISTORY AND ORGANIZATION ProMOS Technologies Inc. (the Company ) was incorporated on December 12, 1996 as a joint venture company of Mosel Vitelic Inc. (MVI) and Siemens Aktiengesellschaft (Siemens) and is headquartered in Hsinchu Science-Based Industrial Park. The Company s shares have been traded on the GreTai Securities Market (GTSM) in the Republic of China since May 13, In March 2002, Siemens transferred a portion of its shareholding to Infineon Technologies A.G. (Infineon). Infineon sold all of its shareholding in The Company is engaged in the design, research, development, manufacturing, sales and import/export of semiconductor products. As of June 30, 2008, the Company had approximately 6,900 employees. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements are prepared in accordance with the Rules Governing the Preparation of Financial Statements by Securities Issuers, Business Entity Accounting Law, Regulation on Business Entity Accounting Handling and accounting principles generally accepted in the Republic of China. The Company s significant accounting policies are summarized below: (1) Foreign currency transactions The accounts of the Company are maintained in New Taiwan dollars. Transactions arising in foreign currencies are translated into New Taiwan dollars at the exchange rates prevailing at the relevant dates of the transactions. The exchange gains or losses arising from the difference between the exchange rates at the dates of transactions and the related dates of actual receipts and payments are charged to current year s results of operations. Assets and liabilities denominated in foreign currencies are translated into New Taiwan dollars at the exchange rate prevailing at the balance sheet date. Gains or losses from foreign currency translations are included in current year s results of operations. When a gain or loss on a nonmonetary item is recognized directly in equity, any exchange component of that gain or loss shall be recognized directly in equity. Conversely, when a gain or loss on a nonmonetary item is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss. However, nonmonetary items that are measured on a historical cost basis are translated using the exchange rate at the transaction date. The initial investments in foreign subsidiaries and investee companies accounted for under the equity method are carried at cost using the historical rates, and investment income or losses recognized are translated into New Taiwan dollars at the average rates of exchange prevailing during the year. Assets and liabilities of foreign subsidiaries and equity investee companies are translated into New Taiwan dollars at ~10~

11 the exchange rate prevailing at the balance sheet date; equity accounts are translated at historical rates, except for retained earnings as of the beginning of the year which is transferred from retained earnings as of the end of last year; income and expense accounts are translated into New Taiwan dollars at the average rates of exchange prevailing during the year. Translation adjustments are taken directly to a separate component of shareholders equity under Cumulative translation adjustments. (2) Classification of current and noncurrent assets and liabilities A. Assets that meet one of the following criteria are classified as current assets; otherwise they are classified as noncurrent assets: a) Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle; b) Assets held mainly for trading purposes; c) Assets that are expected to be realized within twelve months from the balance sheet date; and d) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date. B. Liabilities that meet one of the following criteria are classified as current liabilities; otherwise they are classified as noncurrent liabilities: a) Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle; b) Liabilities arising mainly from trading activities; c) Liabilities that are to be paid off within twelve months from the balance sheet date; and d) Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date. (3) Cash equivalents Cash equivalents are short-term, highly liquid investments, which are readily convertible to known amount of cash and which are subject to insignificant risk of changes in value resulting from fluctuations in interest rates. The Company s non-consolidated statements of cash flows were prepared on the basis of cash and cash equivalents. (4) Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss are initially recognized at fair value. Those in the form of equity securities are accounted for using the trade date accounting, while those in the form of debt securities, beneficiary certificates, and derivative instruments are accounted for using the settlement date accounting. These financial instruments are subsequently remeasured and stated at fair value, and the gain or loss is recognized in profit or loss. The fair values of listed equity securities, closed-end funds and beneficiary certificates are determined by the closing prices at the balance sheet date. The fair value of open-end funds is determined by the net asset value at the balance sheet date. ~11~

12 When a derivative is an ineffective hedging instrument, it is initially recognized at fair value on the date a derivative contract is entered into and is subsequently remeasured at its fair value. If a derivative is a non-option derivative, the fair value initially recognized is zero. For call options and put options, which are embedded in bonds payable, please refer to Note 2 (16). (5) Available-for-sale financial assets A. Equity investments are recognized and derecognized using trade date accounting and are initially stated at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. B. The financial assets are remeasured and stated at fair value, and the gain or loss is recognized in equity, until the financial asset is derecognized, at which time the cumulative gain or loss previously recognized in equity shall be recognized in profit or loss. The fair values of listed stocks and OTC stocks are based on the latest quoted fair prices at the balance sheet date. C. If there is any objective evidence that the financial asset is impaired, the cumulative loss that had been recognized directly in equity shall be transferred from equity to profit or loss. When the fair value of an equity instrument subsequently increases, impairment losses recognized previously in profit or loss shall not be reversed and the reduction of impairment losses shall be recognized in equity. (6) Derivative financial instruments for hedging Derivatives are initially recognized at fair value on the date a contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the hedged item. Cash flow hedges: the changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. a. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognized directly in equity are transferred to profit or loss in the same period or periods when the hedged item affects profit or loss. b. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized directly in equity are transferred into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. The Company shall apply the above method consistently. (7) Financial assets carried at cost Financial assets carried at cost are initially recognized at fair value plus transaction costs and are accounted for using the trade date accounting. Impairment loss is recognized when there is objective evidence that the assets are impaired. Reversal of the foregoing impairment loss is not allowed. ~12~

13 (8) Investments in bonds without active markets Investments in bonds without active markets are initially recognized at fair value plus transaction costs and are accounted for using the trade date accounting. Subsequent measurements are based on amortized costs. Impairment loss is recognized when there is objective evidence that the investments are impaired. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss shall be reversed. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal shall be recognized in profit or loss. (9) Allowance for doubtful accounts Allowance for doubtful accounts is provided for according to the evaluation of the collectibility of ending balances of notes, accounts and other receivables. (10) Inventories Inventories are stated at standard costs, which are adjusted to actual costs based on the weighted-average method at the balance sheet date. At the end of period, inventories are evaluated at the lower of aggregate cost or market value. The market value is determined based on the replacement cost for raw materials and supplies and net realizable value for work in process and finished goods. Allowance for slow moving items and decline in the market value is provided when necessary. (11) Long-term equity investments accounted for under the equity method Long-term equity investments in which the Company owns at least 20% of the investee company s voting rights and has the ability to exercise significant influence over the investee company are accounted for under the equity method. The excess of the acquisition cost over the investee company's fair values of identifiable net assets is recognized as goodwill, which is subject to an annual impairment assessment. Retrospective adjustment for prior years is not required. The Company prepares semiannual and annual consolidated financial statements which include investee companies in which the Company owns more than 50% of voting rights or has effective control. Effective January 1, 2005, investment loss on the non-controlled entities over which the Group has the ability to exercise significant influence is recognized to the extent that the amount of long-term investments in such investees is written down to zero. However, if the Group continues to provide endorsements, guarantees or financial support for such investees, the investment loss is recognized continuously in proportion to the Group s equity interest in such invetees. The capital reserve and long-term equity investment amounts are adjusted for the variance between the investment costs and net asset values of the investee companies arising from the disproportionate changes of interest in connection with the capital increase or reduction by the investee company. ~13~

14 (12) Property, plant and equipment Property, plant and equipment are stated at cost. Interest incurred relating to the acquisition and construction of property, plant and equipment is capitalized. Significant renewals and improvements are capitalized and depreciated accordingly. Maintenance and repairs are expensed as incurred. Depreciation is provided using the straight-line method over the estimated economic service lives that range as follows: 1) Building: 20 years 2) Facilities: 10 years 3) Machinery and equipment: 5 years 4) Computer and communication equipment: 3 years 5) Transportation equipment: 3 to 5 years 6) Office equipment: 3 years 7) Leasehold improvements: 3 years 8) Leased assets: Remaining useful lives of leasehold objects. When the estimated economic lives expire, the property, plant and equipment that are still in service are depreciated over the newly estimated remaining useful lives based on their salvage values. Properties under capital leases are carried at the lower of the market value of the leased equipments or the present value of the minimum lease payments at the inception of the leases and are depreciated over the useful lives of the leased properties. Interest expense is accrued on the basis of the outstanding capital lease obligation using the effective interest rate method. The gain or loss resulting from the sale of leased property should be deferred using the unearned gain or loss on sale-leaseback account. If the fair value of the leased property is smaller than its book value, then the difference between the fair value and the book value should be recognized as a loss. The amortization of the unearned gain or loss on sale-leaseback depends on the nature of the lease. For operating leases, the unearned gain or loss should be amortized using the lease term and charged to rent expense. For capital leases, however, the unearned gain or loss should be amortized over the remaining useful lives of the leased properties and charged to depreciation. Assets held for lease are classified as other assets. Depreciation of such assets is charged to non-operating expense. As of June 30, 2008, the Company entered into a sale-leaseback agreement for certain equipments. Due to the repurchase option with specific criteria, significant risks and rewards of ownership were not fully transferred to the buyer. In accordance with the Emerging Issues Task Force ( AEDF ) issued by the Accounting Research and Development Foundation of the R.O.C. on December 14, 2007, the Company accounted for the foregoing sale-leaseback as a financing transaction and accordingly, recognized related liabilities and interest expense. ~14~

15 (13) Intangible assets License fee payments for patents and acquired technology know-how are made in installments when transferred to the Group according to contract terms, and upon reaching working condition, it is amortized using the straight-line method over their economic service lives or the related contract periods. (14) Deferred charges Computer software costs are amortized using the straight-line method over 3 to 7 years. In accordance with ARDF issued by the Accounting Research and Development Foundation of the R.O.C. on March 27, 1998, management service fees and transaction fees charged by the banks on syndicated loans are capitalized and amortized over the borrowing period.fixed Royalty payments are amortized over the estimated period of economic benefits under the straight-line method. (15) Impairment of non-financial assets The Group recognizes impairment loss when there is indication that the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of the asset in an arm s length transaction after deducting any direct incremental disposal costs. The value in use is the present value of estimated future cash flows to be derived from continuing use of the asset and from its disposal at the end of its useful life. When the impairment no longer exists, the impairment loss recognized in prior years shall be reversed. However, impairment loss on goodwill shall not be reversed. (16) Convertible bonds For bonds payable issued after January 1, 2006, the issuer of a financial instrument shall segregate the instrument on initial recognition into a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument. These instruments are accounted for as follows: (A) The fair value of the liability portion of a convertible bond is determined using a market interest rate for an equivalent non-convertible bond. Premium or discounts shoud be amortized using the effective interest rate method until extinguished on conversion or maturity of the bond. (B) The value of any derivative features (such as a call option, put option and conversion price reset option) embedded in the compound financial instrument is recognized as financial assets and financial liabilities at fair value through profit or loss. At the maturity of the redemption period, if the fair value of common stock exceeds the redemption price, the fair value of the derivative is recognized as paid-in capital ; however, if the fair value of common stock is less than the redemption price, the fair value of the derivative is recognized as gain or loss. ~15~

16 (C) A conversion option embedded in the bonds issued by the Company, which is convertible to an equity instrument, is recognized and included in capital reserve from stock warrants. When a bondholder exercises his/her conversion rights, the liability component of the bonds (including corporate bonds and embedded derivatives) shall be revalued, and the resulting difference shall be recognized as gain or loss in the current period. The book value of the common stock issued due to the conversion shall be based on the adjusted book value of the abovementioned liability component plus the book value of the stock warrants. For convertible bonds issued prior to and including December 31, 2005, in accordance with the ARDF issued by the Accounting Research and Development Foundation of the R.O.C. on March 10, 2006, the Company elected not to bifurcate the embedded derivatives and accounted for those convertible bonds as follows: (A) The entire convertible bond is recorded as a liability at an amount equal to the proceeds received, and no value is allocated to the conversion rights and the embedded derivative instruments. (B) Any discount or premium to the par value of the convertible bond is amortized using the effective interest rate method during the period from the issuance date to the maturity, or over the period to redemption date if the convertible bond contains a redemption option. Where bonds are not redeemed during the redemption period, the interest on redemption is amortized under the interest method over the remaining life of the bonds. If the fair value of the underlying shares at the expiry date of the redemption option exceeds the redemption price, the interest on redemption is reclassified to capital reserve. (C) The excess of the stated redemption price over the par value is recognized as interest expense and compensation interest payable using the effective interest rate method for the period from the issuance date to the last day of redemption period. When bondholders exercise their conversion rights, the book value of bonds is credited to common stock at an amount equal to the par value of the common stock and the excess is credited to capital reserve; no gain or loss is recognized on bond conversion. In the event that the bondholders may exercise put options within one year, the underlying bonds payable shall be reclassified as current liabilities. The bonds payable with put options unexercised during the redemption period shall be reversed to noncurrent liabilities. (17) Retirement plan and net periodic pension cost Under the defined benefit pension plan, net periodic pension cost, which includes service cost, interest cost, expected return on plan assets, and amortization of unrecognized net transition obligation and gains or losses on plan assets, is recognized based on an actuarial valuation report. Unrecognized net transition obligation is amortized on a straight-line basis over 15 years. Under the defined contribution pension plan, net periodic pension cost is recognized as incurred. ~16~

17 (18) Treasury stock Treasury stocks are accounted for in accordance with R.O.C. Statement of Financial Accounting Standards ( SFAS ) No. 30 Accounting for Treasury Stocks. Related policies are summarized as follows: A. When the Company repurchases its outstanding common stock, the cost of the reacquired stock is recorded as treasury stock as a deduction to shareholders equity. B. When treasury stock is sold, the related gain is first credited to capital reserve-treasury stock and any loss is offset against this capital reserve account. Any remaining amount is charged to retained earnings. C. When treasury stock is retired, the treasury stock account is credited and all capital account balances related to the treasury shares, including capital reserve from additional paid-in capital in excess of par, are debited on a proportionate basis. When the book value of treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is first charged to capital reserve-treasury stock and any remaining amount is charged to retained earnings. When the book value of treasury stock is less than the sum of the par value and additional paid-in capital, the difference is credited to capital reserve-treasury stock. For treasury stocks with grant date set on or after January 1, 2008, the Company shall adopt the R.O.C. SFAS No. 39 Accounting for Share-based Payment. (19) Share-based payment employee compensation plan (A) The employee stock options granted from January 1, 2004 through December 31, 2007 are accounted for in accordance with ARDF , ARDF and ARDF Accounting for Employee Stock Options, prescribed by the R.O.C. Accounting Research and Development Foundation. Under the share-based employee compensation plan, compensation cost is recognized using the intrinsic value method and pro forma disclosures of net income and earnings per share is prepared under the fair value method. (B) For share-based payment agreements with grant date set on or after January 1, 2008, the Company shall measure the services received during the vesting period by reference to the fair value of the equity instruments granted and account for those amounts as payroll expense during that period. (20) Employees bonuses and directors and supervisors remuneration Effective January 1, 2008, pursuant to EITF of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007, Accounting for Employees Bonuses and Directors and Supervisors Remuneration, the costs of employees bonuses and directors and supervisors remuneration are accounted for as expenses and liabilities, provided that such a recognition is required under legal obligation or constructive obligation and those amounts can be estimated reasonably. However, if the accrued amounts for employees bonuses and directors and supervisors remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their annual stockholders meeting subsequently, the differences shall be recognized as gain or loss in the following year. ~17~

18 In addition, according to EITF of the Accounting Research and Development Foundation, R.O.C., dated March 31, 2008, Criteria for Listed Companies in Calculating the Number of Shares of Employees Stock Bonus, the Company calculates the number of shares of employees stock bonus based on the closing price of the Company s common stock at the previous day of the stockholders meeting held in the year following the financial reporting year, and after taking into account the effects of ex-rights and ex-dividends. (21) Income tax The Company uses inter-period as well as intra-period tax allocation for income tax. Any over-provision or under-provision of prior years income tax liabilities is included in current year s income tax expense. Any tax credit arising from the purchase of machinery and equipment and research and development expenditures is recognized in the year the related expenditure is incurred. The additional 10% income tax on undistributed earnings is recognized in the year the shareholders approve the resolution to retain the earnings. (22) Revenue, cost and expense recognition Revenue is recognized when the earning process is substantially completed and is considered realized or realizable. Costs and expenses are recognized as incurred. (23) Capital expenditure and operating expenditure Costs and expenditures which have future economic benefits are capitalized as assets. Otherwise they are expensed when incurred. (24)Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those assumptions and estimates. (25) Settlement date accounting Under the settlement date accounting, any change in the fair value of the asset to be received during the period between the trade date and the settlement date / balance sheet date is not recognized for assets carried at cost or amortized cost. Such change in fair value is recognized in profit or loss for assets classified as financial assets at fair value through profit or loss, and is recognized in equity for assets classified as available-for-sale. ~18~

19 3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES (1) Share-based payment employee compensation plan Effective January 1, 2008, the Company adopted the R.O.C. SFAS No. 39, Accounting for Share-based Payment. The adoption of SFAS No. 39 had no significant effect on the Company s financial statements as of and for the six-month period ended June 30, (2) Employees bonuses and directors and supervisors remuneration Effective January 1, 2008, the Company adopted the ARDF Accounting for Employees Bonuses and Directors and Supervisors Remuneration, prescribed by the R.O.C. Accounting Research and Development Foundation. The adoption of ARDF had no effect on the Company s financial statements as of and for the six-month period ended June 30, DETAILS OF SIGNIFICANT ACCOUNTS (1) Cash and cash equivalents June 30, Cash and bank deposits $ 1,363,453 $ 6,161,706 Time deposits 1,271,785 15,182,806 Cash equivalents - 2,000,000 $ 2,635,238 $23,344,512 (2) Financial assets at fair value through profit or loss - current June 30, Financial assets for trading beneficiary certificates $ - $ 615,000 Fair value adjustment - 3, ,297 Fair value adjustment financial derivatives 10, $ 10,144 $ 618,707 A. For the six-month periods ended June 30, 2008 and 2007, loss and income recognized for the changes in fair values of the financial assets at fair value through profit or loss were $23,375 and $25,268, respectively. ~19~

20 B. The nature and contractual terms of derivatives are as follows: Financial instruments Contract amount June 30, 2008 (in thousands) Fair value Contract term Cross currency and interest rate swap JPY 2,350,396 $ 7, ~ Knock out forward Sell U.S.$ 46, ~ Buy JPY 4,672,700 Knock out forward Sell U.S.$ 50,000 Buy JPY 5,133,800 2,790 $ 10,144 June 30, ~ Financial instruments Contract amount Fair value Contract term Knock out forward Sell U.S. 25,517; buy EUR 19,200 $ ~ a) For the six-month period ended June 30, 2008, the Company entered into cross currency and interest rate swap contracts to sell NTD and buy JPY for the purpose of reducing the foreign exchange rate risks on machinery and equipment purchases. In addition, the Company used NTD fixed-to-jpy fixed interest rate swaps, without adopting hedge accounting. b) For the six-month periods ended June 30, 2008 and 2007, the Company entered into knock out forward contracts to sell USD and buy JPY and EUR for the purpose of reducing foreign exchange rate risks on accounts receivable denominated in USD and reducing future cash flow risk of JPY and EUR without adopting hedge accounting. Please refer to Note 10 (6) for the related risk on knock out forward. (3) Available-for-sale financial assets current June 30, Overseas listed stocks $ 839,345 $ - Adjustment of available-for-sale financial assets ( 440,178 ) - $ 399,167 $ - 1. The fair values of overseas listed stocks are based on their closing prices from the NASDAQ Stock Exchange at the balance sheet date. 2. As of June 30, 2008, the above available-for-sale financial assets have been pledged as guarantees for loans. Please refer to Note 6. ~20~

21 (4) Notes and accounts receivable, net June 30, Notes receivable $ 362 $ - Accounts receivable 4,380,070 5,856,184 Accounts receivable - related parties 70,237 70,846 4,450,669 5,927,030 Less: Allowance for doubtful accounts ( 3,295 ) - $ 4,447,374 $ 5,927,030 (5) Inventories June 30, Raw materials and supplies $ 1,480,940 $ 2,265,962 Work in process 6,302,825 5,837,457 Finished goods 2,675,251 1,286,639 10,459,016 9,390,058 Less: Allowance for obsolescence and decline in market value of inventory ( 1,481,181 ) ( 310,666 ) $ 8,977,835 $ 9,079,392 (6) Financial assets carried at cost noncurrent June 30, Integrated Digital Technologies, Inc. $ 45,000 $ 45,000 AMOS Technologies Inc. 23,400 - Chinese Bank - 250,000 $ 68,400 $ 295,000 A. The above financial assets are held at cost as they are not traded in active markets and their fair values can not be measured reliably. B. The shares held in Chinese Bank are preferred stocks. In December 2006, Chinese Bank suffered a bank run due to the application for restructuring by China Rebar Company, Ltd. and Chia Hsin Food and Synthetic Fiber Co., Ltd. with the Taipei District Court. The Bank was taken over by Central Deposit Insurance Corporation (CDIC) which was appointed by ROC Financial Supervisory Commission. The CDIC sold certain assets and liabilities of Chinese Bank to HSBC in December 2007, and transferred related assets, liabilities, and operations of Chinese Bank to HSBC in March As the Company s preferred shares held in Chinese Bank were not included in the transfer items, the Company recognized an impairment loss equivalent to the book value of these shares in March ~21~

22 (7) Investments in bonds without active markets noncurrent June 30, Debenture of HSBC( formerly Chinese Bank) $ 250,000 $ 250,000 Debenture of Chinfon Commercial Bank 400, ,000 Debenture of Standard Chartered Bank (formerly Hsinchu International Bank) - 150,000 $ 650,000 $ 900,000 A. As of June 30, 2008 and 2007, the effective interest rates for the bond investments ranged from 3.683% to 3.885% and 3.358% to 3.695%, respectively. B. The debenture of Standard Chartered Bank was sold to third parties at carrying values plus interest receivable in August C. In March 2008, HSBC acquired certain assets and liabilities of Chinese Bank. The 2004 first financial debenture formely issued by Chinese Bank was assumed by HSBC. D. As stated in the offering rule of the debenture of Chinfon Commercial Bank, starting from June 28, 2008 in which the bond has reached its 3 years matury, repayment of the principle would take place in 5 equal installments per annum of 20% each. As of June 2008, the Company has received principle repayment in the amount of NT $100 million. (8) Long-term equity investments accounted for under the equity method A. Long-term equity investments Name of investee Amount June 30, % of ownership Amount % of ownership Mosel Vitelic Corporation $ 198,206 50% $ 187,128 50% United Memories, Inc. 175, % 178, % ProMOS Technologies PTE. Ltd. ( 910,007 ) 100% ( 485,805 ) 100% Flourishing Moment Limited 30, % 32, % Putian Maode Technologies (Chongqing) Corporation 20,016 49% 98,843 49% ProMOS Technologies Japan Limited ( 13,769 ) 100% ( 13,074 ) 100% Epileds Technologies, Inc. 172, % 148, % Inapac Technology, Inc. 245, % 436, % Capso Vision, Inc. 17, % 35, % ProQ Technologies Incorporated 3,849, % 991, % ProImage Technolgies Inc. 35, % - - 3,819,861 1,610,907 Add: Long-term investments with negative balances which are classified as other liabilities 923, ,879 4,743,637 2,109,786 Add: Prepaid long-term investments 60,828 - $ 4,804,465 $ 2,109,786 ~22~