VIA Technologies, Inc. Financial Statements for the Years Ended December 31, 2005 and 2004 and Independent Auditors Report

Transcription

1 VIA Technologies, Inc. Financial Statements for the Years Ended December 31, 2005 and 2004 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders VIA Technologies, Inc. We have audited the accompanying balance sheets of VIA Technologies, Inc. as of December 31, 2005 and 2004, and the related statements of income, changes in stockholders equity, and cash flows for the years then ended (all expressed in New Taiwan dollars). These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VIA Technologies, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. As mentioned in Note 3, effective December 31, 2004, VIA Technologies, Inc. adopted SFAS No. 35, Impairment of Assets. As a result, a decrease in long-term investment under equity method of $1,210,375 thousand and investment loss under equity method of the same amount were recognized in

3 We have also audited the consolidated financial statements of VIA Technologies, Inc. and its subsidiaries for the years ended December 31, 2005 and 2004 (not accompanied herein) and have issued our report, dated March 23, 2006, thereon expressing an unqualified opinion on such financial statements. March 23, 2006 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. Also, as stated in Note 2 to the financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English

4 VIA TECHNOLOGIES, INC. BALANCE SHEETS DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars) ASSETS % % CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) $ 7,497, $ 6,628, Short-term investments (Notes 2 and 5) 2, ,740 1 Notes receivable, net (Note 2) 254, ,575 2 Accounts receivable, net (Notes 2 and 6) 3,211, ,636,353 7 Notes and accounts receivable from related parties, net (Notes 2, 7 and 24) 267, ,744 1 Other financial assets, current (Notes 2, 8, 22, 24 and 29) 198, ,703 1 Inventories (Notes 2 and 9) 4,336, ,145, Deferred tax asset, current (Notes 2 and 22) 380, ,247 1 Other current assets (Note 10) 101,931-81,012 - Total current assets 16,250, ,950, LONG-TERM INVESTMENTS (Notes 2, 3, 11 and 20) Long-term investments under equity method 6,683, ,627, Long-term investments under cost method 85, ,365 1 Prepayment for long-term investments 258, Total long-term investments 7,026, ,857, PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 24) Land 946, ,605 4 Buildings and improvements 658, ,383 3 Machinery and equipment 131, ,942 1 Computer equipment 261, ,960 1 Research and development equipment 521, ,308 2 Transportation equipment 7,420-8,119 - Furniture and fixtures 34,736-47,130 - Leasehold improvements 29, , ,592, ,933, Less accumulated depreciation (755,266) (3) (1,117,949) (5) Prepayments on purchase of equipment, land and buildings - - 9,634 - Property, plant and equipment, net 1,837, ,825,451 7 OTHER ASSETS Leased-out assets (Notes 2, 12 and 24) 304, ,632 2 Refundable deposits 12,078-11,865 - Deferred bond issuance cost (Note 2) 4,683-14,325 - Deferred charges (Notes 2 and 24) 422, ,169 3 Deferred tax asset, noncurrent (Notes 2 and 22) 920, ,915 3 LIABILITIES AND STOCKHOLDERS EQUITY % % CURRENT LIABILITIES Notes payable $ 5,474 - $ 5,629 - Accounts payable 6,527, ,887, Notes and accounts payable to related parties (Note 24) 126, ,860 3 Income tax payable (Notes 2 and 22) 347, ,332 1 Accrued expenses (Notes 14 and 24) 809, ,567 3 Current portion of long-term liabilities (Note 17) 222, ,110 1 Other current liabilities (Note 15) 719, ,846 3 Total current liabilities 8,757, ,528, LONG-TERM LIABILITIES Corporate bonds payable (Notes 2 and 16) 1,904, ,905,161 8 Long-term capital lease liabilities (Notes 2 and 17) 166, ,890 1 Total long-term liabilities 2,071, ,294,051 9 OTHER LIABILITIES (Notes 2, 18 and 24) 329, ,755 1 Total liabilities 11,159, ,078, STOCKHOLDERS EQUITY Common stock (Note 19) 13,333, ,704, Stock dividend to be distributed (Note 19) ,336 2 Capital surplus Additional paid-in capital 4,335, ,110, Long-term equity investments (Note 11) 217, ,529 1 Retained earnings (Note 19) Legal reserve - - 1,708,059 7 Special reserve ,501 2 Unappropriated earnings (accumulated deficit) 8,347 - (4,828,078) (20) Unrealized valuation losses on long-term equity investments (Notes 2 and 11) (14,956) - (33,183) - Cumulative translation adjustments (Note 2) 499, ,495 1 Treasury stock (Notes 2, 11 and 20) (2,760,319) (11) (2,760,205) (11) Total stockholders equity 15,619, ,409, Total other assets 1,664, ,854,906 8 TOTAL $ 26,778, $ 24,488, TOTAL $ 26,778, $ 24,488, The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 23, 2006) - 3 -

5 VIA TECHNOLOGIES, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars, Except Earnings per Share) % % OPERATING REVENUES: (Note 2) Sales $20,334, $20,667, Less Sales returns (68,218) - (187,291) (1) Sales discounts (1,077,605) (6) (1,054,152) (5) Net sales (Note 24) 19,188, ,425, Other operating revenues (Note 24) 3,990-23,667 - Total operating revenues 19,192, ,449, COST OF OPERATING REVENUES (Note 24) (14,518,797) 76 (13,985,854) (72) GROSS PROFIT 4,673, ,463, UNREALIZED PROFIT FROM INTERCOMPANY TRANSACTIONS (Notes 2 and 15) (18,670) - (87,752) - REALIZED PROFIT FROM INTERCOMPANY TRANSACTIONS 87, ,057 - REALIZED GROSS PROFIT 4,742, ,387, OPERATING EXPENSES (Note 24) General and administrative expenses 2,339, ,365, Research and development expenses 2,424, ,453, Total operating expenses 4,763, ,819, (LOSS) INCOME FROM OPERATIONS (20,830) - 568,000 3 NON-OPERATING INCOME Interest income 58, ,736 - Dividend income 5, Gain on disposal of property, plant and equipment 31,099 - $20,455 - Gain on sale of investments 1,542, ,108 3 Gain on physical inventory - - 7,307 - Foreign exchange gain 52, Rental income (Note 24) 44,027-53,917 - Recovery from loss on short-term investments devaluation ,160 - Gain on reversal of bad debts 9, Other (Note 24) 269, ,260 2 Total non-operating income 2,013, ,930 5 (Continued) - 4 -

6 VIA TECHNOLOGIES, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars, Except Earnings per Share) % % NON-OPERATING EXPENSES Interest expenses $ 72,724 1 $ 95,801 - Investment losses under equity method (Notes 2 and 11) 1,513, ,380, Other investment losses (Note 11) ,488 1 Loss on disposal of property, plant and equipment Loss on physical inventory 1, Foreign exchange loss (Note 2) ,899 - Loss on inventory devaluation 238, ,899 4 Other 28,293-27,812 - Total non-operating expenses 1,854, ,351, INCOME (LOSS) BEFORE INCOME TAX 138,846 1 (4,903,155) (25) INCOME TAX EXPENSE (Notes 2 and 22) (12,981) - (77,997) (1) NET INCOME (LOSS) $ 125,865 1 $ (4,981,152) (26) Before Income Tax After Income Tax Before Income Tax After Income Tax BASIC EARNINGS (LOSS) PER SHARE (Note 23) $ 0.11 $ 0.10 $ (3.78) $ (3.84) DILUTED EARNINGS (LOSS) PER SHARE (Note 23) $ 0.11 $ 0.10 $ (3.78) $ (3.84) If the Company s stock held by subsidiaries is not considered as treasury stock: NET INCOME (LOSS) $ 125,865 $ (4,981,152) BASIC EARNINGS (LOSS) PER SHARE (Note 23) $ 0.10 $ (3.79) DILUTED EARNINGS (LOSS) PER SHARE (Note 23) $ 0.10 $ (3.79) The accompanying notes are an integral part of the financial statements. (Concluded) (With Deloitte & Touche audit report dated March 23, 2006) - 5 -

7 VIA TECHNOLOGIES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars) Capital Stock Capital Surplus Retained Earnings Unrealized Gain on Valuation Stock Dividend Disposal of Property, Long-Term Unappropriated Earnings Losses on Long-Term Cumulative Common Stock to be Distributed Additional Paid-in Capital Plant and Equipment Equity Investments Legal Reserve Special Reserve (Accumulated Deficit) Equity Investments Translation Adjustments Treasury Stock Total BALANCE, JANUARY 1, 2004 $ 12,704,467 $ - $ 7,739,781 $ 1,770 $ 213,035 $ 1,708,059 $ 996,057 $ (253,410) $ (59,063) $ 655,438 $ (2,040,649) $ 21,665,485 Appropriation and distribution of 2003 net income Capital surplus and special reserve transfer to unappropriated earnings (1,770) - - (650,556) 652, Transfer of capital surplus to capital stock - 629,336 (629,336) Employees bonuses (190,000) (190,000) Effect of changes of ownership interests in equity method investees , (55,842) (50,367) Recovery of unrealized valuation losses on long-term equity investment , ,880 Cumulative translation adjustments (339,943) - (339,943) Net loss for (4,981,152) (4,981,152) Purchase of treasury stock (720,537) (720,537) BALANCE, DECEMBER 31, ,704, ,336 7,110, ,529 1,708, ,501 (4,828,078) (33,183) 315,495 (2,760,205) 15,409,366 Appropriation and distribution of 2004 net income Capital surplus and special reserve transfer to cover accumulated deficit - - (2,774,518) - - (1,708,059) (345,501) 4,828, Transfer of undistributed stock dividend to capital stock 629,336 (629,336) Effect of changes of ownership interests in equity method investees (190) - - (117,518) - - (114) (117,822) Recovery of unrealized valuation losses on long-term equity investment , ,227 Cumulative translation adjustments , ,142 Net income for , ,865 BALANCE, DECEMBER 31, 2005 $ 13,333,803 $ - $ 4,335,927 $ - $ 217,339 $ - $ - $ 8,347 $ (14,956) $ 499,637 $ (2,760,319) $ 15,619,778 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 23, 2006) - 6 -

8 VIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 125,865 $ (4,981,152) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization (including depreciation of leased-out assets) 631, ,658 Provision for redemption of convertible bonds (341) 68,196 Gain on sale of long-term investment (545,130) (410,611) Loss on disposal of property, plant and equipment Gain on disposal of property, plant and equipment (31,099) (20,455) Costs of property, plant and equipment expensed 1,103 3,640 Amortization of bond issuance costs 9,642 1,343 Investment losses on equity-method investees 1,513,524 5,380,637 Cash dividends on equity-method investees 418, ,831 Loss on long-term investment devaluation - 130,488 Gain from redeemed convertible bonds - (6,881) Accrued pension cost 21,149 40,838 Deferred tax benefit (331,435) 8,168 Net changes in operating assets and liabilities Notes receivable, net 289, ,995 Accounts receivable, net (1,574,833) 447,742 Notes and accounts receivable from related parties, net (114,735) 449,063 Other financial assets, current (27,868) 86,275 Inventories (190,744) (740,850) Other current assets (20,919) (3,668) Notes payable (155) (3,830) Accounts payable 2,639, ,100 Notes and accounts payable to related parties (693,188) 505,900 Income tax payable 209, ,643 Accrued expenses 80,659 (268,160) Other current liabilities (52,074) 62,981 Other liabilities (5,787) (8,775) Net cash provided by operating activities 2,352,543 2,563,665 (Continued) - 7 -

9 VIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES Decrease in short-term investments $ 213,472 $ 69,735 Acquisition of property, plant, equipment and leased-out assets (120,375) (183,219) Proceeds from disposal of property, plant, equipment and deferred charges 336,650 5,531 Payment for long-term investments (2,342,845) (3,430,739) Proceeds from sale of long-term investments (including proceeds from capital reduction) 930,240 2,630,856 (Increase) decrease in refundable deposits (213) 697 Increase in deferred charges (286,387) (451,741) Increase in deferred bond issuance costs - (15,668) Decrease in current account with others - 367,937 Net cash used in investing activities (1,269,458) (1,006,611) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in long-term bank loans (111,111) 500,000 Increase in bonds payable - 1,900,000 Decrease in long-term capital lease obligation - (12,957) Decrease in convertible bonds - (2,344,393) Payment for employees bonuses and directors remuneration (103,509) - Increase (decrease) in guarantee deposits received 73 (1,018) Purchase of treasury stock - (720,537) Net cash used in financing activities (214,547) (678,905) NET INCREASE IN CASH AND CASH EQUIVALENTS 868, ,149 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,628,773 5,750,624 CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,497,311 $ 6,628,773 SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid during the year Interest $ 72,933 $ 427,484 Income tax $ 138,319 $ 33,624 (Continued) - 8 -

10 VIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars) NONCASH INVESTING AND FINANCING ACTIVITIES Transfer of capital surplus to capital stock $ - $ 629,336 Transfer of long-term investments to short-term investments $ - $ 267,215 Current portion of long-term liabilities $ 222,222 $ 111,110 Transfer of long-term investments to other liabilities $ 59,221 $ 46,336 Transfer of deferred credits to gain on disposal of property, plant and equipment $ 712 $ 20,414 Transfer of leased-out assets to property, plant and equipment$ 27,175 $ - PURCHASE OF PROPERTY, PLANT AND EQUIPMENT Increase in property, plant, equipment and leased-out assets $ 266,598 $ 175,720 Decrease (increase) in payable for acquisition of property, plant and equipment (146,223) 7,499 Cash payment $ 120,375 $ 183,219 PURCHASE OF DEFERRED CHARGES Increase in deferred charges $ 177,220 $ 387,933 Decrease in payable for acquisition of deferred charges 109,167 63,808 Cash payment $ 286,387 $ 451,741 BONUSES TO EMPLOYEES AND DIRECTORS REMUMERATION Employees bonuses and directors remuneration $ - $ 190,000 Add payable due to bonuses to employees and directors remuneration, beginning of year 265,975 75,975 Minus payable due to bonuses to employees and directors remuneration, end of year (162,466) (265,975) Cash payment $ 103,509 $ - The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 23, 2006) (Concluded) - 9 -

11 VIA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005 and 2004 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS VIA Technologies, Inc. (the Company ) was incorporated in September 1992 under the Company Law of the Republic of China to engage in the programming, designing, manufacturing and selling of semiconductors and PC chipsets. In March 1999, the Company s common stock was officially listed on the Taiwan Stock Exchange. There are 1,543 and 1,462 employees in the Company at December 31, 2005 and 2004 respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (ROC). In preparing financial statements in conformity with these guidelines and principles, the Company is required to make certain estimates and assumptions that could affect the amounts of allowance for doubtful accounts, allowance for inventory devaluation, property depreciation, pension cost and accrued litigation loss. Actual results could differ from these estimates. For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. However, the accompanying financial statements do not include English translation of the additional footnote disclosures that are not required under generally accepted accounting principles but are required by the Securities and Futures Bureau (SFB, formerly the Securities and Futures Commission before July 1, 2004) for their oversight purposes. The Company s significant accounting policies are summarized as follows: Current/Non-Current Assets and Liabilities Current assets are those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year, whichever is longer. Current liabilities are obligations to be paid or settled within one year or the normal operating cycle. Assets or liabilities which were excluded from current assets or current liabilities should be classified as non-current assets or non-current liabilities. Cash Equivalents Cash equivalents consist primarily of bankers acceptance and commercial paper which are highly liquid investments with a maturity of three months or less at the date of acquisition

12 Short-Term Investments Short-term investments include investments in marketable equity securities and mutual funds, which are carried at the lower of cost or market. The net change on the investment valuation allowance used in the determination of net income is the result of changes in the difference between aggregate costs and market values of investments still held at the respective year end. The cost of investments sold is determined using the moving average method. Stock dividends received are not recognized as income but are reflected as an increase in the number of shares held. Allowance for Doubtful Accounts Allowance for doubtful accounts is generally provided for notes and accounts receivable due from unrelated and related parties based on management s evaluation of the collectibility of individual accounts, past loss experience, and other pertinent factors. Inventories Inventories are stated at the lower of cost or market ( LCM ). Cost is determined using the moving average method. Market value is based on replacement cost. The LCM method is applied to each inventory category. Long-Term Investments Investments in companies in which the Company s ownership interest is 20% or more, or where the company can exercise significant influence, are accounted for under the equity method of accounting. Payment in excess of the proportionate net book value, at the time of investment, of the investee accounted for under the equity method is amortized over five years. All other long-term investments are accounted for under the cost method. Marketable equity securities are valued at the lower of cost or quoted market value. Unrealized losses, if any, are shown as a deduction to stockholders equity. Permanent decline in value of investment that is not readily marketable is recognized as a realized loss. The cost of investments sold is determined by the weighted-average method. Property, Plant and Equipment and Leased-out Assets Property, plant and equipment are stated at cost less accumulated depreciation. Interest incurred in connection with the purchase or construction of property, plant and equipment is capitalized. Major renewals and betterments are capitalized, while maintenance and repairs are expensed in the period incurred. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited to or charged against income. Depreciation is provided on a straight-line basis over the estimated service lives of the assets as prescribed in the tax regulations, plus one additional year for salvage value. The value of the leased property is the smaller of the following two values: (a) the present value of all future rental payments (less the lessee s executory costs) plus the bargain purchase price or lessee s guaranteed residual value, and (b) the leased property s market value at the inception date of the lease. Fixed assets rented out, the related costs and accumulated depreciation, are classified as other assets - leased-out assets

13 Pension Plan Under the ROC Labor Standards Law (the Law ), which provides for a defined benefit pension plan, the Company has a pension plan covering all eligible employees. Based on Statement of Financial Accounting Standards No.18, Accounting for Pensions, issued by the Accounting Research and Development Foundation of the ROC, pension cost under the defined benefit pension plan should be calculated by the actuarial method. The Labor Pension Act (the Act ), which provides for a new defined contribution plan, took effect on July 1, Employees already covered by the Law can choose to remain to be subject to the pension mechanism under the Law or to be subject to the Act. Under the Act, the rate of an employer s monthly contribution to the pension fund should be at least 6% of the employee s monthly wages, and the contribution should be recognized as pension expense in the income statement. Deferred Charges Deferred charges which consist of telephone installation charges, computer software installations and deferred authorization charges are amortized on a straight-line basis over three to five years or authorization period. Impairment of Tangible and Intangible Assets Excluding Goodwill At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cashgenerating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase

14 Income Tax The Company adopted the provisions of SFAS No. 22, Accounting for Income Tax, which require asset and liability approach to financial accounting and reporting for income tax. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Company adopted the flow-through method for income tax credits resulting from purchase of equipment, research and development expenditures, investments in equity stock and loss carryforward. Adjustment of prior years income tax is made to current income tax expense in the year the adjustment is made. Under the Amended Income Tax Law of ROC, the 25% regular corporate income tax and the 20% separate income tax on interest income from short-term investment remain and a 10% additional income tax is levied on distributable earnings earned in 1998 onward that remain undistributed in the following year. Beginning in 1998, every enterprise (except branch, partnership, and not-for-profit organization) is required to maintain an Imputation Credit Account ( ICA ) to keep track of all its income taxes paid and income tax credits received, collectively called Imputation Credit ( IC ), and the allocation of IC to shareholders. When the earnings are distributed as cash or stock dividends to: (a) resident individual shareholders ( RIS ), the RIS include the dividend income in their taxable income and claim an IC issued by the enterprise as deduction from their income tax payable; (b) non-resident individual or non-resident corporate shareholders ( NRS ), the NRS exclude the dividend income from their taxable income and do not claim an IC; dividends paid to NRS are subject to 20% withholding tax which can be offset by the 10% additional income tax paid on undistributed earnings; (c) resident corporate shareholders ( RCS ), the RCS exclude the dividend income from their taxable income and do not claim the IC as deduction from income tax payable; the IC received is added to the RCS own ICA until the IC is allocated to RIS or NRS when the earnings are finally distributed to RIS or NRS. Bonds Payable Bonds were issued at face value and recorded as bonds payable. Each month interest expense is booked at face value multiplied by the stated interest rate. For bonds with purchase back condition, interest is calculated according to purchase back value and recognized as interest expense period by period. The direct and necessary expenses caused by issuing convertible bonds were recorded as issuance expenses and amortized over the period from issuance date to maturity date. When a conversion is requested by a holder of convertible bonds, unamortized issuance expenses, interest payable and recognized interest expense is written off with convertible bonds payable. The exceeding value of bonds to stock face value is recognized as capital surplus

15 Treasury Stock The Company adopted the provisions of Statement of Financial Accounting Standards ( SFAS ) No. 30, Accounting for Treasury Stock to account for the Company s reacquisition of its outstanding shares. Under the provisions of SFAS No. 30, the cost of shares purchased or fair value of shares donated by outside parties is charged to the treasury stock account. If numerous acquisitions of blocks of treasury shares are made at different prices, the average costing method is used to identify the cost of the treasury shares at the date of reissuance. Upon reissuance, the discrepancy between the cost of the treasury shares and the price received is reflected in stockholders equity accounts. If the treasury shares are reissued to settle stock warrants, the price received is the sum of the issuance price and the exercise price of the stock warrants. Revenue Recognition Revenue from sales of inventories is recognized upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations remain. Product revenues from customers are subject to agreements allowing for limited rights of returns. Allowance for sales returns is generally based on historical rates of returns, inventory levels in the channel and other pertinent factors. Stock-Based Employee Compensation Plans When the grant date of stock-based employee compensation plans is at or after January 1, 2004, the Company will apply the accounting guidelines for stock-based compensation issued by the Accounting Research and Development Foundation of Republic of China. The fair value of option compensation is recorded initially as an asset. This asset is amortized as expense over the service period of the options granted to employees. Foreign Currency Transactions Foreign currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused by different foreign exchange rates applied when cash in foreign currency is actually converted into New Taiwan dollars, or when the foreign currency receivables or payables are settled, are credited or charged against income in the period of actual conversion or settlement. Balances of assets and liabilities denominated in foreign currencies are translated at the balance sheet date exchange rate and any resulting gains or losses are credited to or charged against current income. Long-term investments denominated in foreign currencies are restated at the balance sheet date exchange rate. Related translation adjustments are reported as a separate component of stockholders equity under the caption cumulative translation adjustments

16 Derivative Financial Instruments Forward exchange contracts that are designated and effective as a hedge of net foreign asset or liability position are recorded at the contract date exchange rate. The premium or discount on the forward contract, which is the difference between the forward rate and the spot rate on the contract date multiplied by the principal amount of foreign currency, is separately accounted for and amortized to current income over the term of the contract. At year-end, existing forward exchange contracts are restated at the year-end exchange rates, and resulting gains or losses are credited or charged to current income. At closing dates of forward exchange contracts, the difference between the forward rate and the spot rate is credited or charged to current income. Receivables or payables from forward exchange contract are shown on the accompanying balance sheets in net balance. Changes in forward rates with respect to foreign currency options contracts which do not qualify as hedges for financial reporting purposes are reflected directly in income. Premiums received on short options or paid on long options, which do not qualify as hedges for financial reporting purpose, are included in other current liabilities or other current assets, and are amortized to current income or expense over the term of the contracts by using average method. Gain or loss from the execution of the foreign currency option contracts are credited to or charged against current income. The option contracts are measured at the balance sheet date using the market value, and gain or loss is credited or charged against current income. Receivables and payables generated from the option contracts shall be offset and the net balance will be included in other current assets and other current liabilities. The deposit paid for security credit transactions shall be listed as short sales refundable deposit and memo entries shall be made for the contract portion. The closing market price of balance sheet date of the short sales refundable deposit and un-offset portions shall be adopted. However, if such price is unavailable, the nearest closing market price of the balance sheet date shall be adopted and adjustment shall be made for short sales refundable deposit. The profit and loss due to the execution of contract shall be listed as disposal profit/loss. The Company enters into interest rate swap transactions to manage exposures to changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to interest income or expense. Non-Derivative Financial Instruments The recognition and valuation for non-derivative financial assets and liabilities and its related income or expenses are in accordance with the Company s accounting policies described herein and accounting principles generally accepted in the Republic of China. 3. ACCOUNTING PRINCIPLE CHANGES AND EFFECTS Effective December 31, 2004, the Company adopted SFAS No. 35, Impairment of Assets. As a result, a decrease in long-term investment under equity method of $1,210,375 thousand and investment loss under equity method of the same amount were recognized in

17 4. CASH AND CASH EQUIVALENTS Cash on hand $ 444 $ 430 Cash in banks 1,948,532 1,651,136 Time certificates of deposit 2,473,815 2,192,477 Cash equivalents - short-term bills 3,074,520 2,784,730 $ 7,497,311 $ 6,628,773 At December 31, 2005 and 2004, interest rates on time certificates of deposit ranged from 1.005% to 1.75% and 0.65% to 2.52%, respectively. At December 31, 2005 and 2004, interest rate on cash equivalents - short-term bills ranged from 1.36% to 1.40% and 0.985% to 1.10%, respectively. 5. SHORT-TERM INVESTMENTS Mutual fund investments $ 2,268 $ 2,223 Marketable equity securities - 213,517 Less allowance for decline in market value - - Short-term investment, net $ 2,268 $ 215, ACCOUNTS RECEIVABLE Accounts receivable $ 3,466,395 $ 1,792,420 Less allowance for doubtful accounts (24,583) (36,257) Less allowance for sales returns and discounts (230,626) (119,810) Accounts receivable, net $ 3,211,186 $ 1,636, NOTES AND ACCOUNTS RECEIVABLE FROM RELATED PARTIES Accounts receivable $ 268,486 $ 153,937 Less allowance for sales returns and discounts (1,007) (1,193) Notes and accounts receivable from related parties, net $ 267,479 $ 152,

18 8. OTHER FINANCIAL ASSETS, CURRENT Income tax refunds receivable $ 4,118 $ 18,406 Value-added tax refunds receivable 97,044 74,762 Other receivables (Note 24) 90,244 71,719 Interests receivable 7,165 4,664 Receivable on forward exchange contracts, net (Note 27) - 1,152 $ 198,571 $ 170,703 At December 31, 2005 and 2004, other receivables are the amount of equipment receivables, technical service fees, professional fees, rental income and other income, etc. 9. INVENTORIES Resale merchandise $ 10,266 $ 11,306 Finished goods 1,821,385 2,131,650 Work-in-process 2,461,497 2,610,757 Raw materials 1,284, ,427 5,577,425 5,490,140 Less valuation allowance (1,241,240) (1,344,699) $ 4,336,185 $ 4,145,441 At December 31, 2005 and 2004, insurance coverage for inventories amounted to $4,763,214 thousand and $4,378,570 thousand, respectively. 10. OTHER CURRENT ASSETS Prepaid expenses $ 80,897 $ 65,293 Excess business tax paid 5 - Temporary debits 21,029 15,719 $ 101,931 $ 81,012 On December 31, 2005 and 2004, prepaid expenses were primarily prepayments for suppliers, software cost and insurance premiums

19 11. LONG-TERM INVESTMENTS Original Cost Ownership Carrying % Value Carrying Value Ownership % At equity Viabase Co., Ltd. $ 7,308,389 $ 2,753, $ 2,753, Viatech Co., Ltd. 2,173,584 1,234, , VIA Technologies GmbH 1,433 5, , Premier Development & Investment (B.V.I.) Co., Ltd , Linkage Technology Co., Ltd. 120,017 89, , VIA Communications, Inc. 10,000 10, , VIA Telecom, Inc. 5,000 5, , Way-Xing Technologies, Inc , VIA -Cyrix Technologies, Inc. 1,190,033 1,008, , Way-Hao Investment Corp , Way-Hao International Corp. (formerly Lian-Mei Investment Corp.) 1,297, , Way-Cheng Investment Corp , Way-Ming Investment Corp , Way-Mao Investment Corp , Way-Shuo Investment Corp Vate Technology Co., Ltd. 985, , , VIA Networking, Inc. 633, , , VIA Optical Solution, Inc. 999, , S3-VIA Inc. 15, Way-Lien Technologies, Inc. 29, , , At cost Openfind Information Technology Corporation, Ltd. 63,897 63, , Global Communication Technology, Inc , Wireless Information Networking Semiconductors Corp. 22,455 10, North American Venture Fund II Lp. 42,106 3, , Phoenix Precision Technologies, Inc , Yeh-Chiang Technologies, Corp. 6,429 6, , Day-Shine Technologies, Inc , Chander Electronic, Corp Prepayments for long-term investments 258, ,270 - $ 15,163,977 $ 7,026,620 $ 6,857,137 In 2004, the Company invested $3,430,739 thousand in Viabase Co., Ltd., Viatech Co., Ltd., Premier Development & Investment (B.V.I.) Co., Ltd., Global Communication Technology, Inc. and Day-Shine Technologies, Inc. In 2005, the Company invested $2,342,845 thousand in Viabase Co., Ltd., Viatech Co., Ltd., Via Optical Solution, Inc., VIA Networking, Inc. and other 7 companies. However, the procedures about the issuance of securities of Via Optical Solution, Inc. had not been completed as of December 31, Therefore, the Company recognized the amount as prepayment for long-term investment

20 In 2004, the Company sold part of its investment in High Tech Computer Corp., Phoenix Precision Technologies Inc., and Yeh-Chiang Technologies, Corp. amounted to $597,695 thousand, $47,359 thousand and $62,711 thousand, and recognized $414,039 thousand and $3,545 thousand as gain on sales of such long-term investment and $6,973 thousand as loss on sales of such long-term investment, respectively. In 2005, the Company sold part of its investment in Phoenix Precision Technologies Inc., Yeh-Chang Technologies Corp., and all of its investment in Premier Development & Investment Co., Ltd., amounted to $195,220 thousand, $4,623 thousand and $630,407 thousand, and recognized $55,082 thousand, $469 thousand and $489,579 thousand as gain on sales of such long-term investment, respectively. In addition, Way-Hao International Corp. had reduced its capital and returned $99,990 thousand of capital to the Company. In 2004, VIA Networking, Inc. issued additional common stock. Due to the changes of ownership interest in investees and due to the increase in capital surplus and unrealized valuation losses on long-term investments of Way-Ming Investment Corp. and Way-Shuo Investment Corp. and so forth, the Company proportionately increased its capital surplus by $4,494 thousand, unrealized valuation losses on long-term investments by $25,880 thousand, treasury stock by $981 thousand and decreased its retained earnings by $55,842 thousand. In 2005, Via Networking, Inc. had transferred employee bonuses to capital stock, and the ownership of the Company had been changed. Furthermore, due to the decrease in capital surplus, retained earnings, and unrealized valuation losses on long-term equity investments of Viabase Co., Ltd., Via-Cyrix Technologies, Inc. and so forth, the Company proportionately decreased its capital surplus by $190 thousand, retained earnings by $117,518 thousand, unrealized valuation losses on long-term investments by $18,227 thousand, and increased its treasury stock by $114 thousand. For the year ended December 31, 2004, North American Venture Fund II, Global Communication Technology, Inc. and Day-Shine Technologies, Inc had loss from their operations. The Company recognized $4,369 thousand, $105,032 thousand and $21,087 thousand as realized valuation losses on long-term investments proportionately. For the year ended December 31, 2004, Global Communication Technology, Inc. and Day- Shine Technologies, Inc. had decreased their capital by $92,956 thousand and $48,500 thousand to make up for past losses, respectively. In addition, for the year ended December 31, 2005, Viabase Co., Ltd. and Viatech Co., Ltd. had decreased their capital by $2,511,820 thousand (US$72,997 thousand) and $169,147 thousand (US$4,916 thousand) to make up for past losses, respectively. In 2004, Linkage Technology Co., Ltd., North American Venture Fund II Lp., Via-Cyrix Technologies, Inc., Way-Cheng Investment Corp., and Way-Ming Investment Corp. had reduced their capital and returned to the Company $1,923,091 thousand. In addition, Ase Moterial Inc. had been merged in Ase Semiconductor Engineering Corp., and the Company has no intention to hold the investment in High Tech Computer Corp. for a long term, so both were reclassified as short-term investments. At the beginming of 2005, Global Communication Technology, Inc. has merged with Wireless Information Networking Semiconductors Corp. and ownership interest in investees went down to 1.09%. In addition, in November of the same year, Day-Shine Technologies, Inc. has merged with Phoenix Precision Technologies, Inc. and the Company received 334 shares from this transaction. Due to the operating consideration, the Company has combined nine subsidiaries, which included Via Telecom Inc., Wan-Xing Technologies Inc., Way-Hao Investment Corp., Way-Shuo Investment Corp., Way-Mao Investment Corp., Lian-Mei Investment Corp., VIA-Cyrix Technolgoies Inc., Way-Ming Investment Corp., and Way

21 Cheng Investment Corp., to become three subsidiaries, which included VIA Telecom Inc., Lian-Mei Investment Corp., Via-Cyrix Technologies, Inc. and meanwhile, Lian-Mei Investment Corp. was renamed Way-Hao International Corp. Via-Cyrix Technologies, Inc., Way-Hao International Corp. held the Company s common stock amounted to 17,456 thousand shares. The Company proportionately recognized $1,633,176 thousand as its treasury stock (see Note 20). Effective December 31, 2004, the Company adopted SFAS No. 35 Impairment of Assets. As a result, a decrease in long-term investment under equity method of $1,210,375 thousand and investment loss under equity method of the same amount were recognized in 2004 after revaluation. In accordance with SFAS No. 7 and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the Company prepared consolidated financial statements which included the accounts of the Company, Viabase Co., Ltd. Viatech Co., Ltd., Via-Cyrix Technologies, Inc., Vate Technology Co., Ltd., Way-Cheng Investment Corp., Way-Ming Investment Corp., Way-Hao Investment Corp., Way-Hao International Corp., Way-Shuo Investment Corp., Way-Mao Investment Corp., Via Technologies GmbH, Via Communication, Inc., Via Telecom, Inc., Way-Xing Technologies, Inc., Linkage Technology Co., Ltd., VIA Optical Solution, Inc., and VIA Networking, Inc. The equity of Via Optional Solution, Inc. was negative at December 31, The Company recognized investment losses proportionately and recorded as other liabilities due to continuous financial support to the investee. Equity in net loss of affiliates amounted to $1,513,524 thousand and $5,380,637 thousand in 2005 and 2004, respectively which consisted of the following: Viatech Co., Ltd. $ (439,303) $ (636,563) Viabase Co., Ltd. (1,165,963) (3,778,246) Via Technologies GmbH Premier Development & Investment (B.V.I.) Co., Ltd. (3,185) (575) S3 VIA, Inc Linkage Technology Co., Ltd. 3,392 4,739 VIA Networking, Inc (25,900) 80,617 Via-Cyrix Technologies, Inc. 61,951 45,206 Way-Hao Investment Corp. 68,983 39,695 Way-Hao International Corp. (31,548) (61,255) Way-Cheng Investment Corp. 27,688 1,364 Way-Ming Investment Corp. (2,166) 83,463 Way-Mao Investment Corp. (1,084) (48,735) Way-Shuo Investment Corp. (17,275) (66,065) VIA Optical Solution, Inc. (185,175) (714,841) Way-Lien Technologies, Inc. 205,060 14,572 High Tech Computer Corp. - 56,101 VIA Communications, Inc. (20) (18) VIA Telecom, Inc Vate Technology, Co., Ltd. (10,071) (401,157) Way-Xing Technologies, Inc $ (1,513,524) $ (5,380,637)

22 12. PROPERTY, PLANT AND EQUIPMENT Cost Accumulated Carrying Carrying Depreciation Value Value Land $ 946,707 $ - $ 946,707 $ 962,605 Buildings and improvements 658,927 (172,021) 486, ,791 Machinery and equipment 131,324 (93,533) 37,791 37,368 Computer equipment 261,625 (195,946) 65,679 94,330 Research and development equipment 521,707 (233,542) 288, ,975 Transportation equipment 7,420 (6,508) 912 2,128 Furniture and fixtures 34,736 (30,560) 4,176 8,892 Leasehold improvements 29,921 (23,156) 6,765 11,728 Prepayments on purchase of equipment, land and buildings ,634 $ 2,592,367 $ (755,266) $ 1,837,101 $ 1,825,451 The acquisition of land, buildings and improvements, which is primarily used as an office, amounted to $122,446 thousand in The Company sold the land and building in Xing-Dian (including leased-out assets) to High Tech Computer Corp. and the carrying value amounted to $300,125 thousand (including the carrying value of leased-out assets amounted to $229,244 thousand), whose selling price amounted to $304,630 thousand and the Company recognized $4,505 thousand as gain on disposal of property. The Company rented out parts of its land, buildings and improvements to other companies and the carrying value of the related assets had been transferred to leased-out assets (see Note 13). The Company had no interest capitalization as of December 31, 2005 and Insurance coverage of property, plant and equipment, including leased-out assets at December 31, 2005 and 2004 amounted to $1,087,763 thousand and $930,997 thousand, respectively. 13. LEASED-OUT ASSETS Cost Accumulated Carrying Carrying Depreciation Value Value Land $ 202,715 $ - $ 202,715 $ 381,953 Buildings and improvements 112,296 (10,625) 101, ,679 $ 315,011 $ (10,625) $ 304,386 $ 565,632 The above land and buildings and improvements were rented out to the related parties, Xander International Corp., High Tech Computer Corp., Chander Electronics Corp., VIA Optical Solution Inc., VIA Networking, Inc., and Vate Technology Co., Ltd. and leased-out assets with High Tech Computer Corp. was sold to lessee in (see Notes 12 and 24)

23 14. ACCRUED EXPENSES Salaries & bonuses $ 235,784 $ 306,611 Royalties (Notes 24 and 26) 187, ,205 Commission 97,189 98,938 Insurance 18,760 12,802 Advertisement 48,582 20,113 Research and development 41,145 3,862 Interest 20,083 20,014 Professional fees 53,432 74,511 Pension 14,689 - Import/Export 10,134 7,214 Others 82,056 72,297 $ 809,226 $ 728, OTHER CURRENT LIABILITIES Advance receipts $ 36,892 $ 21,856 Balance payable - machinery and equipment 165,057 18,834 Employees bonuses payable 90, ,779 Compensation due to directors and supervisors 72,196 72,196 Temporary receipts 15,060 18,714 Receipts under custody 19,207 13,581 Deferred credits - profit from intercompany transactions 18,670 87,752 Other payables 301, ,134 $ 719,319 $ 837,846 On December 31, 2005 and 2004, other payables were primarily sales rebates payable and software expense payables. On December 31, 2005 and 2004, deferred credits - profit from intercompany transactions were the unrealized profit from intercompany transactions between the Company and its subsidiaries. 16. CORPORATE BONDS PAYABLE On August 31, 2000 the Company issued unsecured convertible corporate bonds of $4,300,000 thousand for investments in affiliates and purchases of equipment. The interest rate is zero and the bonds will mature on August 30, $ 4,300 $ 4,