Powerchip Technology Corporation (Formerly Powerchip Semiconductor Corporation)

Transcription

1 Powerchip Technology Corporation (Formerly Powerchip Semiconductor Corporation) Financial Statements for the Six Months Ended June 30, 2011 and 2010 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders Powerchip Technology Corporation We have audited the accompanying balance sheets of Powerchip Technology Corporation (formerly Powerchip Semiconductor Corporation) as of June 30, 2011 and 2010, and the related statements of income, changes in shareholders equity and cash flows for the six months then ended. These financial statements are the responsibility of the Corporation s management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as discussed in the following paragraph, 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. As stated in Note 10 to the financial statements, we did not audit the financial statements of equity-method investees as of and for the six months ended June 30, 2011 and The carrying values of the related investments as of June 30, 2011 and 2010 were NT$30,871,042 thousand and NT$32,357,065 thousand, respectively, and the related net investment income for the six months ended June 30, 2011 and 2010 were NT$718,478 thousand and NT$3,629,370 thousand, respectively. These investment amounts, as well as related information disclosed in Note 32 to the financial statements, were based on the investees unaudited financial statements for the same reporting periods as those of the Corporation. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had the financial statements of investees referred to in the preceding paragraph been audited, the financial statements referred to above present fairly, in all material respects, the financial position of Powerchip Technology Corporation as of June 30, 2011 and 2010, and the results of its operations and its cash flows for the six months then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China

3 As stated in Note 1 to the financial statements, due to global economic recession, the Corporation s accumulated deficit amounted to NT$29,745,083 thousand and current liabilities exceeded current assets by NT$37,176,303 thousand as of June 30, Even though the Management s plans concerning these matters are also described in Note 1 to the financial statements, there will be significant doubt on the Corporation s ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. As disclosed in Note 3 to the financial statements, on January 1, 2011, Powerchip Technology Corporation adopted the newly amended Statement of Financial Accounting Standards No Financial Instruments: Recognition and Measurement. We have also reviewed the consolidated financial statements of Powerchip Technology Corporation as of and for the six months ended June 30, 2011 and 2010 and have issued a qualified review report on these financial statements (not presented herewith). August 27, 2011 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

4 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) BALANCE SHEETS JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash (Note 4) $ 1,995,076 2 $ 4,943,254 4 Short-term loans (Notes 16, 28 and 29) $ 4,237,952 4 $ 11,047,467 8 Financial assets at fair value through profit or loss - current (Notes 2 and 5) 5,302-26,515 - Financial liabilities at fair value through profit or loss - current (Notes 2, 5 Available-for-sale financial assets - current (Notes 2, 6, 9, 10 and 21) 897, ,213 - and 18) 112, ,676 - Accounts receivable, net (Notes 2, 3, 7 and 28) Notes and accounts payable (Notes 28 and 29) Related parties 600,947-1,410,968 1 Related parties 12,077, ,547,616 4 Third parties 2,947, ,357,667 3 Third parties 2,861, ,709,589 2 Other receivables (Note 28) 357, ,710 - Accrued expenses (Notes 17 and 28) 2,807, ,066,344 6 Inventories (Notes 2, 8 and 28) 4,761, ,774,784 6 Payables for equipment 1,540, ,379,554 1 Prepaid expenses 129, ,124 - Other payables (Note 18) 39,911-3,638,900 3 Restricted deposits (Notes 4 and 29) 494, ,465 1 Receipts in advance (Note 28) 1,143, ,721 - Refundable deposits - current 1,572, Current portion of bonds payable (Notes 2, 18 and 28) ,373 1 Other current assets 5,683-9,147 - Current portion of long-term loans (Notes 19 and 29) 23,246, ,276, Current portion of obligation under capital leases (Notes 2 and 12) 1,257, ,601 - Total current assets 13,766, ,127, Guarantee deposits - current (Notes 28 and 30) 1,131, ,652,479 1 Other current liabilities (Notes 20, 28 and 30) 487, ,546 1 INVESTMENTS Equity-method investments (Notes 2, 10, 16, 19, 28 and 29) 30,871, ,357, Total current liabilities 50,943, ,411, Prepayments for investments 12, Financial assets carried at cost - noncurrent (Notes 2, 6,9 and 10) 277, ,910 1 LONG-TERM LIABILITIES Long-term loans, net of current portion (Notes 19 and 29) 27,942, ,158, Total investments 31,160, ,114, Hedging derivative liabilities - noncurrent (Notes 2, 11, 21 and 27) 5,139-13,021 - Obligations under capital leases, net of current portion (Notes 2 and 12) 568, ,665 - PROPERTIES (Notes 2, 12, 16, 19 and 29) Deferred revenue - net of current portion (Note 30) ,000 - Cost Buildings 7,434, ,434,693 6 Total long-term liabilities 28,516, ,389, Machinery and equipment 196,921, ,782, Research and development equipment 628, ,064,867 2 OTHER LIABILITIES Facility equipment 19,599, ,523, Accrued pension costs (Notes 2 and 20) 112,714-93,019 - Transportation equipment 11,704-13,724 - Guarantee deposits - noncurrent (Notes 28 and 30) 253, ,957 - Office equipment 471, ,316 - Leased assets 2,696, ,076 - Total other liabilities 366, ,976 - Miscellaneous equipment 1,357, ,356, ,121, ,761, Total liabilities 79,825, ,344, Accumulated depreciation (175,349,392) (164) (152,855,022) (115) 53,771, ,906, SHAREHOLDERS EQUITY (Notes 2, 21, 22 and 23) Construction-in-progress and prepayments for equipment 346,228-4,470,781 3 Common stock - NT$10 par value Authorized - 10,000,000 thousand shares Net properties 54,117, ,377, Issued and outstanding - 5,608,961 thousand shares 56,089, ,089, Capital surplus INTANGIBLE ASSETS Long-term investments 574, ,512 1 Deferred pension cost (Note 2) 32,844-35,454 - Accumulated deficits (29,745,083) (28) (16,873,410) (13) Others OTHER ASSETS Cumulative translation adjustments (39,669) - 31,896 - Assets leased to others, net (Notes 2 and 13) 37,892-75,203 - Net loss not recognized as pension cost (46,256) - (40,234) - Refundable deposits 647, ,464 - Unrealized gain on financial assets (Notes 10 and 27) 585, ,180 - Deferred charges, net (Notes 2, 14 and 28) 4,428, ,968,695 4 Treasury stock (at cost) - 71,060 thousand shares (Note 23) (742,144) (1) (742,144) - Deferred income tax assets - noncurrent (Notes 2 and 24) 1,871, ,226,394 2 Spare parts, net (Note 28) 294, ,488 - Total shareholders equity 26,676, ,113, Other assets - building (Notes 2 and 15) 60,705-62,814 - Others 83,335-87,129 - Total other assets 7,423, ,802,187 6 TOTAL $ 106,501, $ 132,457, TOTAL $ 106,501, $ 132,457, The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated August 27, 2011) - 3 -

5 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except (Loss) Earnings Per Share) Amount % Amount % GROSS SALES $ 23,360,430 $ 42,564,153 SALES RETURNS AND ALLOWANCES 550,818 46,606 NET SALES (Notes 2 and 28) 22,809, ,517, COST OF SALES (Notes 2, 8, 25 and 28) 29,410, ,497, GROSS (LOSS) PROFIT (6,601,191) (29) 11,019, (UNREALIZED) REALIZED INTERCOMPANY GROSS PROFIT (Note 2) (1,398) - 10,844 - REALIZED GROSS (LOSS) PROFIT (6,602,589) (29) 11,030, OPERATING EXPENSES (Notes 25 and 28) Selling 90, ,301 - General and administrative 576, ,466 2 Research and development 1,478, ,299,445 3 Total operating expenses 2,144, ,116,212 5 OPERATING (LOSS) INCOME (8,747,522) (38) 8,914, NONOPERATING INCOME AND GAINS Reversal of allowance for indemnity loss on royalty (Notes 2 and 30) 2,294, Equity in earnings of equity-method investees, net (Notes 2 and 10) 718, ,629,370 9 Gain on disposal of investments, net (Notes 2 and 28) 140, ,734 2 Valuation gain on financial liabilities, net (Notes 2 and 5) 119, Foreign exchange gain, net (Note 2) 93, ,815 - Income from wafer foundry (Note 28) 49,609-47,758 - Valuation gain on financial assets, net (Notes 2 and 5) 47,470-45,541 - Rental income (Note 28) 32,887-22,734 - Gain on disposal of properties (Note 2) 9,714-2,167 - Indemnity income (Note 28) 5,780-35,268 - Interest income (Note 27) 5,779-2,008 - Reversal of provision for loss on spare parts (Note 2) 2, (Continued) - 4 -

6 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except (Loss) Earnings Per Share) Amount % Amount % Dividend income (Note 2) $ - - $ 14,764 - Service income (Note 28) - - 5,694 - Others (Note 28) 122, ,424 - Total nonoperating income and gains 3,643, ,606, NONOPERATING EXPENSES AND LOSSES Interest expense (Notes 12, 16, 18, 19, 27 and 28) 1,105, ,089,629 3 Financial cost (Note 16) 233, ,610 2 Loss on disposal of properties (Note 2) 12, Provision for loss on spare parts (Note 2) - - 5,526 - Valuation loss on financial liabilities, net (Notes 2 and 5) - - 3,695 - Others 20,470-52,198 - Total nonoperating expenses and losses 1,371, ,794,662 5 (LOSS) INCOME BEFORE INCOME TAX (6,475,838) (28) 11,726, INCOME TAX EXPENSES (Notes 2 and 24) - - (1,423,772) (3) NET (LOSS) INCOME $ (6,475,838) (28) $ 10,302, Before Income Tax After Before Income Income Tax Tax After Income Tax (LOSS) EARNINGS PER SHARE (NEW TAIWAN DOLLAR, Note 26) Basic $ (1.17) $ (1.17) $ 2.13 $ 1.88 Diluted $ (1.17) $ (1.17) $ 2.06 $ 1.81 (Continued) - 5 -

7 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except (Loss) Earnings Per Share) The pro forma net (loss) income and (loss) earnings per share after income tax on the assumption that the shares of the Corporation held by its subsidiaries are treated as available-for-sale financial assets instead of treasury stock are shown as follows: NET (LOSS) INCOME $ (6,475,838) $ 10,302,414 Before Income Tax After Before Income Income Tax Tax After Income Tax (LOSS) EARNINGS PER SHARE (NEW TAIWAN DOLLAR) Basic $ (1.17) $ (1.17) $ 2.13 $ 1.87 Diluted $ (1.17) $ (1.17) $ 2.06 $ 1.81 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated August 27, 2011) (Concluded) - 6 -

8 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars) Capital Others (Notes 2, 10, 21 and 27) Surplus- Unrealized Common Stock Long-term Accumulated (Loss) Gain on Net Loss Not Cumulative Total Shares Investments Deficit Financial Recognized as Translation Treasury Stock Shareholders' (Thousands) Amount (Notes 2 and 21) (Note 21) Assets Pension Cost Adjustments (Notes 2 and 23) Equity BALANCE, JANUARY 1, ,608,961 $ 56,089,605 $ 554,713 $ (23,269,301) $ 1,175,259 $ (46,256) $ (34,325) $ (742,144) $ 33,727,551 Adjustment for changes in shareholders equities of equity-method investees ,400 (7) (387,997) - (5,404) - (375,008) Valuation loss on available-for-sale financial assets (211,189) (211,189) Adjustment of equity due to disposal of investments - - 1, , ,023 Valuation gain on derivative financial liabilities for hedging , ,824 Net loss for the six months ended June 30, (6,475,838) (6,475,838) BALANCE, JUNE 30, ,608,961 $ 56,089,605 $ 574,650 $ (29,745,083) $ 585,260 $ (46,256) $ (39,669) $ (742,144) $ 26,676,363 BALANCE, JANUARY 1, ,783,071 $ 87,830,708 $ 447,802 $ (59,588,918) $ 1,131,623 $ (1,745) $ (2,328) $ (1,163,906) $ 28,653,236 Offset of deficit against capital reduction - June 24, 2010 (3,395,950) (33,959,500) - 33,959, Retirement of treasury stock (41,800) (418,000) - (3,762) ,762 - Conversion of bonds into capital stock 263,640 2,636,397 - (1,542,705) ,093,692 Adjustment for changes in shareholders equities of equity-method investees ,120 - (202,065) (13) 34,580 - (113,378) Valuation loss on available-for-sale financial assets (782,048) (782,048) Adjustment of equity due to disposal of investments - - (5,410) 61 (45) - (356) - (5,750) Valuation gain on derivative financial liabilities for hedging , ,715 Change in net loss not recognized as pension cost (38,476) - - (38,476) Net income for the six months ended June 30, ,302, ,302,414 BALANCE, JUNE 30, ,608,961 $ 56,089,605 $ 496,512 $ (16,873,410) $ 151,180 $ (40,234) $ 31,896 $ (742,144) $ 39,113,405 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated August 27, 2011) - 7 -

9 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (6,475,838) $ 10,302,414 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 12,383,301 14,052,633 Amortization 1,123, ,086 Unrealized (realized) intercompany gross profit 1,398 (10,844) Valuation loss (gain) on financial assets 18,853 (26,515) Valuation gain on financial liabilities (248,413) (104,121) (Reversal of allowance) allowance for doubtful accounts (30,173) 47,563 Allowance (reversal of allowance) for sales discounts 92,106 (26,000) Reversal of allowance for losses on inventories and spare parts (1,395,875) (351,748) Reversal of allowance for indemnity loss on royalty (2,294,366) - Equity in earnings of equity-method investees, net (718,478) (3,629,370) Cash dividends from equity-method investees 1,595 7,435 Gain on disposal of investments, net (140,657) (614,734) Loss (gain) on disposal of properties, net 2,791 (2,163) Deferred income tax expense - 1,423,772 Provision for loss on purchase contracts 48,198 - Interest expense of loan extension 232,991 - Cost of stock options 233,023 - Foreign exchange (gain) loss on long-term loans (26,193) 5,608 Foreign exchange gain on bonds payable (5,336) (4,629) Amortization of discount on bonds payable 27,904 28,328 Realized deferred revenue (20,000) (20,000) Net changes in operating assets and liabilities Accounts receivable (2,014,797) (6,088,801) Other receivables 21,338 (35,498) Inventories (122,669) (2,443,253) Prepaid expenses (77,150) (73,969) Other current assets (3,275) 2,552 Accounts payable 3,613, ,672 Accrued expenses (42,517) 93,739 Other payables 39,911 - Receipts in advance (306,000) (112,174) Other current liabilities 290, ,619 Accrued pension costs 7,301 (7,984) Net cash provided by operating activities 4,216,821 14,888,618 (Continued) - 8 -

10 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of: Equity-method investments $ (43,777) $ - Properties (5,422,987) (2,866,342) Deferred charges (2,446,128) (2,645) Proceeds from disposal of: Available-for-sale financial assets 109, ,092 Held-to-maturity financial assets - 25,000 Financial assets carried at cost 84,795 - Equity-method investments 78,012 - Noncurrent assets classified as held for sale 2,900,000 - Properties 11,640 4,305 Proceeds from liquidation of financial assets carried at cost 22 1,869 Increase in prepayments for investments (12,423) - Proceeds from return of capital by investees of equity - method investments 319,765 - Decrease in restricted deposits 79, ,747 Increase in refundable deposits (1,952,500) (38,416) Increase in spare parts (29,134) (96,157) Net cash used in investing activities (6,322,941) (1,955,547) CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term loans 525, ,878 (Decrease) increase in obligation under capital lease (600,570) 355,266 Proceeds from long-term loans 2,843,577 - Repayments of long-term loans (640,815) (8,798,480) (Decrease) increase in guarantee deposits (137,168) 712,174 Repayments of corporate bonds (672,995) (3,315,308) Net cash provided by (used in) financing activities 1,317,423 (10,112,470) NET (DECREASE) INCREASE IN CASH (788,697) 2,820,601 CASH, BEGINNING OF PERIOD 2,783,773 2,122,653 CASH, END OF PERIOD $ 1,995,076 $ 4,943,254 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid (excluding amounts capitalized of $13,560 thousand in 2011 and $2,795 thousand in 2010) $ 769,183 $ 928,596 Income tax paid $ 179 $ 270 (Continued) - 9 -

11 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars) NONCASH INVESTING AND FINANCING ACTIVITIES Offset of short-term loans against accounts receivable $ 986,587 $ 1,401,327 Transfer of financial assets carried at cost to available-for-sale financial assets $ 27,792 $ - Transfer of financial assets carried at cost to equity-method investments $ 35,942 $ - Transfer of equity-method investments to available-for-sale financial assets $ 106 $ - Transfer of equity-method investments to financial assets carried at cost $ 12,792 $ - Merger of equity-method investees $ 20,871 $ 14,809 Offset of short-term loans and interest payable against the proceeds from the disposal of equity-method investments $ - $ 293,093 Reclassification of properties into assets leased to others $ - $ 99,252 Reclassification of short-term loans into receipts in advance $ 1,180,984 $ - Reclassification of accrued expenses into short-term loans $ - $ 141,970 Reclassification of payables for equipment into short-term loans $ - $ 763,561 Current portion of long-term loans $ 23,246,172 $ 21,276,345 Conversion of bonds $ - $ 1,093,692 INVESTING ACTIVITIES AFFECTING BOTH CASH AND NONCASH ITEMS Acquisition of properties $ (4,500,971) $ (1,920,154) Payable, beginning of period (2,462,447) (3,089,303) Payable, end of period 1,540,431 1,379,554 Reclassification of payables for equipment into short-term loans - 763,561 Cash paid $ (5,422,987) $ (2,866,342) Acquisition of deferred charges $ (20,188) $ (1,616,545) (Decrease) increase in payable on technical know-how (2,425,940) 1,613,900 Cash paid $ (2,446,128) $ (2,645) The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated August 27, 2011) (Concluded)

12 POWERCHIP TECHNOLOGY CORPORATION (Formerly Powerchip Semiconductor Corporation) NOTES TO FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATION Powerchip Technology Corporation (the Corporation ) was incorporated on December 20, On June 7, 2010, the Corporation changes its name from Powerchip Semiconductor Corporation to Powerchip Technology Corporation. Its common shares have been traded on the Taiwan GreTai Securities Market (formerly the Over-The-Counter Securities Exchange) since March 23, The Corporation also issued Global Depositary Shares (GDS), which are listed on the Luxembourg Stock Exchange, accepted for quotation on the International Order Book of the London Stock Exchange and eligible for trading as private offerings, reselling and trading through automated inter-market trading linkages of the NASDAQ Stock Market, Inc. The Corporation s business activities mainly include research and development, manufacturing (including on subcontracting), testing, assembling and reselling various integrated circuit products. As of June 30, 2011 and 2010, the Corporation had 4,326 and 4,277 employees, respectively. Due to global economic recession, the Corporation s accumulated deficit amounted to NT$29,745,083 thousand and current liabilities exceeded current assets by NT$37,176,303 thousand as of June 30, To further improve its operating conditions, the Corporation has taken these measures: a. Fund raising: The Corporation is proceeding with the issuance of up to 800 million shares of capital stock and the issuance of up to 400 million private shares, as approved in its shareholders meeting in 2011 and its 20 th meeting of the 6 th section board of directors. Also, the Corporation is negotiating for loans from suppliers/customers to meet its working capital needs and strengthen its financial structure. b. Asset disposal: The Corporation will dispose of its noncore investments to improve its financial structure and strengthen and develop further its main business. c. Enhancement of manufacturing efficiency and cost reduction: The Corporation has transformed the 45nm technology used in its entire manufacturing process, so that the Corporation can keep the cost advantage and competitive capability. d. Negotiating payment terms with suppliers: Because of the recession in the DRAM market, the Corporation is requesting its main suppliers to ease their payment collection terms by allowing the Corporation to pay in installments support its operations. e. Renegotiation of collection terms with customers: The Corporation is requesting its customers to pay in advance or do cash transactions to support its operation. f. Adjusting the necessary strategy to transform operational model by business negotiation: The Corporation intends to strengthen its operational capability through establishing stable operational model, diversifying its products and lowering its long-term capital expenditure

13 g. Negotiating debt extensions with lending banks and nonfinancial institutions to ease up the pressure of repayments on working capital: 1) Negotiating debt extensions with lending banks (involving repayment periods ended in December 2010): The Industrial Development Bureau under the Ministry of Economic Affairs had approved a debt repayment extension. Hua Nan Bank was designated as the lead bank under Letter No A from the Bankers Association of the Republic of China. All lending banks had agreed the framework of negotiation constructed on December 30, 2010 and May 27, 2011, respectively. As of February 25 and August 12, 2011, the majority of lending banks had issued a notice granting half a year s extension of the maturity of the syndicated loans, respectively. 2) Negotiating debt extensions with lenders that are nonfinancial institutions: These negotiations involve loans with maturities in The loans are exposed to default risk or the risk that the Corporation could not repay the loans or reach new debt extensions with lending banks and nonfinancial institutions before the loans mature in the near future. The Corporation may not get proceeds from disposal of assets and repay the loans via regular transactions. Thus, there is significant doubt on the Corporation s ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the Republic of China (ROC). 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. The significant accounting policies are summarized as follows: Foreign-currency Transactions Nonderivative foreign-currency transactions are recorded in New Taiwan Dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses on the settlement of foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies at prevailing exchange rates are recognized as current income. On the balance sheet date, the balances of nonmonetary assets and liabilities, except those carried at cost which are valued at the historical rate on the trade date, are restated at spot rates, and the resulting differences are recorded as follows: a. Financial instruments at fair value through shareholders equity - as an adjustment component under shareholders equity; b. Financial instruments at fair value through profit or loss - credits or charges to current income; and c. Long-term investments accounted for by the equity method - as cumulative translation adjustments under shareholders equity. Spot rates refer to the average of the buying and selling rates quoted by a major correspondent bank

14 Accounting Estimates Under these guidelines and principles, the Corporation should make certain estimates and assumptions on the amounts of allowance for doubtful accounts; allowance for sales discounts, allowance for loss on inventories and spare parts, depreciation of properties, assets leased to others and other assets - building, amortization of deferred charges, impairment losses, pension expenses, income tax, contingent liabilities and default fine. Actual results could differ from these estimates. Current/Noncurrent Assets and Liabilities Current assets are unrestricted cash, assets primarily for the purpose of being traded and other assets to be converted to cash, consumed or sold within one year from the balance sheet date. Current liabilities are those to be settled within one year from the balance sheet date and those primarily for the purpose of being traded. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. Financial Assets/Liabilities at Fair Value Through Profit or Loss Financial instruments at fair value through profit or loss have two categories: (1) held for trading and (2) designated on initial recognition as at fair value through profit or loss. When the Corporation enters into financial instrument agreements, the financial assets or liabilities are recognized; and the financial assets or liabilities are derecognized when the agreements become invalid. These financial instruments, except derivatives, are initially recognized at fair value plus transaction costs that are directly attributable to the instrument acquisition; others are initially recognized at fair value with transaction cost expenses as incurred. When fair value is subsequently measured, the changes in fair value are recognized as earnings or losses. Cash dividends are recognized as income upon declaration by an investee s shareholders under a resolution. The differences between the carrying value and the consideration received shall be recognized in profit or loss. A regular way purchase or sale of financial assets is recognized and derecognized using trade date accounting. Derivatives that do not meet the criteria for hedge accounting are treated as financial assets or liabilities held for trading. When the fair value is a positive amount, the derivative is treated as a financial asset; when the fair value is a negative amount, the derivative is treated as a financial liability. For those instruments without quoted market prices in an active market, the fair value is based on valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. Available-for-sale Financial Assets Investments classified as available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributed to investment acquisition. When subsequently measured at fair value, the changes in fair value are reported as a separate component of shareholders equity. The accumulated gains or losses are recognized when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is recognized and derecognized using trade date accounting. The accounting for fair value and financial asset de-recognition is the same as that for financial instruments at fair value through profit or loss. The fair values of listed stock are the closing price as of the balance sheet date

15 Cash dividends are recognized as investment income upon resolution of the shareholders of an investee but are accounted for as reductions of the original investment cost if these dividends are declared on the earnings of the investees attributable to periods before the purchase of the investments. Stock dividends received are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated on the basis of the new number of shares after the receipt of stock dividends. If there is objective evidence that a financial asset (equity security) is impaired as of the balance sheet date, a loss is recognized. If the impairment loss decreases, the impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders equity. Hedge Accounting Hedge accounting for cash flow hedge recognizes the offsetting changes in fair values of the hedging instrument and the hedged item on profit or loss as follows: The effective portion of changes in the fair value of the cash flow hedges are deferred in equity. The amount recognized in shareholders equity is recognized in profit or loss in the same year or years during which the hedged forecast transaction or an asset or liability arising from the hedged forecast transaction affects profit or loss. However, if all or a portion of a loss recognized in shareholders equity is not expected to be recovered in the future; the amount that is not expected to be recovered is reclassified to profit or loss. Hedging Derivative Financial Instruments Derivatives that qualify as effective hedging instruments are measured at fair value, with subsequent changes in fair value recognized either in profit or loss, or in shareholders equity, depending on the nature of the hedging relationship. Financial Assets Carried at Cost Investments without quoted market prices in an active market and whose fair value cannot be reliably measured, such as nonpublicly traded stocks, are carried at their original cost. The accounting treatment for cash and stock dividend arising from financial assets carried at cost is the same as that for available-for-sale financial assets. If there is objective evidence of financial asset impairment, a loss is recognized. irreversible. This impairment loss is Impairment of Accounts Receivable An allowance for doubtful accounts is provided on the basis of a review of the collectability of accounts receivable. The Corporation assesses the probability of collections of accounts receivable by examining the aging analysis of the outstanding receivables. As discussed in Note 3 to the financial statements, the Corporation adopted the third-time revised Statement of Financial Accounting Standards (SFAS) No. 34, Financial Instruments: Recognition and Measurement on January 1, One of the main revisions is that the impairment of receivables originated by the Corporation should be covered by SFAS No. 34. Accounts receivable are assessed for impairment at the end of each reporting period and considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the accounts receivable, the estimated future cash flows of the asset have been affected. Objective evidence of impairment could include: a. Significant financial difficulty of the debtor; b. The accounts receivable become overdue; or

16 c. It is becoming probable that the debtor will enter bankruptcy or financial re-organization. The amount of the impairment loss recognized is the difference between the asset carrying amount and the present value of estimated future cash flows, after taking into account the related collateral and guarantees, discounted at the receivable s original effective interest rate The carrying amount of the accounts receivable is reduced through the use of an allowance account. When accounts receivable are considered uncollectible, they are written off against the allowance account. Recoveries of amounts previously written off are credited to the allowance account. Changes in the carrying amount of the allowance account are recognized as bad debt in profit or loss. Impairment of Assets If significant asset (mainly properties, assets leased to others, other assets - building and deferred charges) impairment is determined, the carrying amount of an asset in excess of its recoverable amount is recognized as loss. If the recoverable amount increases, the impairment loss reversal is recognized as a gain. However, the increased carrying amount of an asset due to impairment loss reversal should not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior year. Inventories Inventories consist of raw materials, supplies, work-in-process and finished goods. Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Fixed manufacturing overhead is allocated on the basis of the normal capacity of the production equipment. Unallocated overheads due to low production or plant idling are recognized as costs of sales in the period in which they are incurred. For interim financial reporting purposes, fixed manufacturing overhead should be evenly allocated over the estimated production for the year. If production fluctuates over interim periods, the cost variances resulting from this fluctuation and reasonably expected to be offset at the end of the accounting fiscal year-end should be considered a deferral in the interim statements. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost on the balance sheet date. Equity-method Investments Stock investments in which the Corporation exercises significant influence on investees operating and financial decisions are accounted for by the equity method. The difference between the investment cost and the Corporation s equity in the investee s net assets on the acquisition date was previously amortized using the straight-line method over 5 years. However, based on the revised Statement of Financial Accounting Standards ( SFAS ) No. 5 - Long-term Investments under Equity Method, effective January 1, 2006, investment premium, representing goodwill based on analysis of the acquisition cost, is no longer required to be amortized. In addition, goodwill should be assessed for impairment annually or whenever an event or circumstances would result in the goodwill reduction. Further, the unamortized differences on investments, acquired before January 1, 2006 are treated in the same way as goodwill. Stock dividends received are recorded as an increase in the number of shares held on the ex-dividend date and do not affect investment income or the carrying amount of the investment. Cash dividends are accounted for as a reduction of carrying value of the investment

17 The Corporation evaluates whether there are indications of impairment on the investments on the financial statement date. If there is objective evidence that an investee is significantly impaired, the carrying amount of the investment in excess of its recoverable amount is recognized as impairment loss. For those investees over which the Corporation exercises significant influence on their operating and financial decisions, the assessment of impairment is based on individual carrying value. For those investees over which the Corporation holds a controlling interest, the assessment of impairment is based on an estimation of the value in use of the cash-generating units of the consolidated entity. If an investee issues additional shares and the Corporation subscribes for these shares at a percentage different from its current equity in the investee, the resulting difference in the Corporation s equity in the investee s net assets is recorded as an adjustment to capital surplus as well as to the equity-method investment accounts. Any decrease in the Corporation s equity in the investee s net assets is debited to capital surplus. If capital surplus from long-term investments is not enough for debiting purposes, the debit is made against unappropriated retained earnings. The carrying amount may also be adjusted at the Corporation s percentage of interest in the investee if there are changes in the investee s equity, other than capital stocks and retained earnings. If the Corporation s equity in the investee s net income or net loss of an equity-method investee equals to or exceeds the investment carrying value plus advances to the investee, the recognized investment losses, except the Corporation committee to provide further financial support for the investee or the losses of the investee are temporary, should be limited to the extent that makes the investment carrying value and advances equal to zero. Gains or losses on sales by the Corporation to equity-method investees that are not majority owned are deferred in proportion to the Corporation s equity interest in the investees at period-end. However, the entire amounts of the gains or losses on the Corporation s sales to subsidiaries are deferred. Gains or losses on sales generated from equity-method investees to the Corporation are deferred in proportion to the Corporation s equivalent equity interest in the investees. Gains or losses from sales among all equity-method investees are deferred in proportion to the product of the Corporation s equity in one investee multiplied by its equity in the other investee. All of the above deferred gains and losses are realized upon the sale of the related products to third parties. Properties, Assets Leased to Others and Other Assets - Building Properties, assets leased to others and other asset - building are stated at cost less accumulated depreciation. Major additions, renewals, betterments and interest expense incurred during the construction period are capitalized, while maintenance and repairs are expensed currently. Assets held under capital lease are initially recognized as assets of the Corporation at the lower of their fair value at the inception of the lease or present value of the minimum lease payments; the corresponding liability is included in the balance sheet as obligations under capital leases. The interest included in lease payments is expensed when paid. Depreciation is calculated using the straight-line method over service lives which are initially estimated as follows: buildings, 3 to 20 years; machinery and equipment, 1.5 to 8 years; research and development equipment, 1.5 to 5 years; facility equipment, 3 to 15 years; transportation equipment, 5 years; office equipment, 3 to 5 years; leased assets, 5 to 8 years; miscellaneous equipment, 2 to 5 years; assets leased to others, 10 to 20 years; and other asset - building, 10 years. Upon sale or other disposal of properties, assets leased to others and other asset - building, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to current income

18 Deferred Charges Expenditure on research activities and those related development activities that do not meet the criteria for capitalization is recognized as an expense when incurred. Deferred charges are amortized using the straight-line method over the following periods: technical know-how - contract period; computer software system - 2 to 5 years; and others - 2 to 5 years. Capitalized and Other Expenditures Expenditures of certain amounts or more that will benefit periods of more than two years are capitalized. Other expenditures are recorded as expenses or losses. Convertible Bonds The Corporation records total proceeds from the issuance of convertible bonds, issued before December 31, 2005, solely as a liability. In addition, the capital stock account is credited with the par value of the Corporation s common shares into which bonds are converted. The carrying values of the bonds and other assets and liabilities related to those convertible bonds as of the conversion date in excess of the amounts credited to the capital stock account are credited to the capital surplus account. When the bondholder exercises the put option, the difference between the payment and the book value of the bonds and other assets and liabilities related to these convertible bonds is credited or charged to current income. For convertible bonds issued on or after January 1, 2006, the carrying values of host contract are recorded in total proceeds from the issuance less the (1) fair values of embedded derivatives and (2) issuance costs allocated to bond payable under the initially relative recognized amount. When the fair value of the bonds is subsequently measured at amortized cost using the effective rate method, the related interest expense or redemption gain is recognized as losses or earnings. When the bondholder exercises the conversion option before bond maturity, the adjusted carrying value of the debt components (bonds and embedded derivatives are included) is credited to a capital stock accounts. The carrying value of bonds is accounted for by the interest method until the day before the conversion date, and that of embedded derivatives is the fair value of the day before the conversion date. When the bondholder exercises the put option before bond maturity, the adjusted carrying value of the debt components (bonds and embedded derivatives are included) is recorded as gains or losses. The carrying value of bonds is accounted for by the interest method until the day before the put date, and the difference between the price and the book value is recognized as gains or losses. Pension Costs For employees under defined contribution pension plans, pension costs recorded are based on the actual contributions made to employees individual pension accounts during service periods. For employees under defined benefit pension plans, pension costs recorded are based on actuarial calculations. Income Tax The Corporation applies inter-period allocation to its income tax, as follows: Deferred income tax assets and liabilities are recognized for the tax effects of temporary difference, unused tax credits and operating loss carryforwards. Valuation allowance is provided for deferred income tax assets that are not certain to be realized. A deferred income tax asset or liability is classified as current or noncurrent according to the classification of the related asset or liability for financial reporting. But if a deferred income tax asset or liability cannot be related to an asset or liability in the financial statements, it is classified as current or noncurrent on the basis of the expected reversal date of the temporary difference. Tax credits for certain purchases of machinery, equipment and technology, research and development expenditures, personnel training and investments in important technology-based enterprise are recognized by the flow-through method

19 Adjustments of prior years accrued tax are added to or deducted from the current year s tax expense. Income taxes (10%) on undistributed earnings generated since January 1, 1998 are recorded as expenses in the year when the shareholders resolve to retain the earnings. Stock-based Compensation Employee stock options that were modified or granted in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Corporation adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with SFAS No Share-based Payment. Compensation cost determined using fair value method is also recognized in earnings over the employees requisite service period. Treasury Stock The reacquisition of issued stock is accounted for by the cost method. Under this method, the reacquisition cost is debited to the treasury stock account. Treasury stock is shown as a deduction to arrive at shareholders equity. If treasury shares are reissued at a price in excess of the acquisition cost, the excess is credited to paid-in capital from treasury stock. If the treasury shares are reissued at less than acquisition cost, the deficiency is treated first as a reduction of any paid-in capital related to previous reissuance. If the balance in paid-in capital from treasury stock is insufficient to absorb the deficiency, the remainder is recorded as a reduction of retained earnings. When the treasury shares are retired, the capital stock and paid-in capital based on the existing equity are debited. If the treasury shares are retired at a price lower than its par value and paid-in capital, the deficiency is credited to paid-in capital from treasury stock. If the treasury shares are retired at a price in excess of its par value and paid-in capital, the excess is debited to paid-in capital from treasury stock. If the balance in paid-in capital from treasury stock is insufficient to absorb the deficiency, the remainder is recorded as a reduction of retained earnings. The Corporation accounts for its stock held by its subsidiaries as treasury stock. The recorded cost of these treasury shares is based on the carrying value of the investments as shown in the subsidiaries book as of January 1, 2002 or the date after January 1, 2002, when the investees become the Corporation s subsidiaries. Cash dividends received by subsidiaries from the Corporation are recorded under capital surplus - treasury stock transactions. Revenue Recognition and Allowance for Sales Discounts Sales are recognized when titles to products are transferred to customers, primarily upon shipment, since the major part of the earnings process is completed and revenue is realized or realizable. The Corporation does not recognize sales on transactions involving the delivery of materials to subcontractors since the ownership over the materials is not transferred. Allowance for sales discounts is estimated on the basis of any known factors that would affect the allowance and are deducted from sales in the period the products are sold. Sales are determined using the fair value agreed on by the Corporation and its customers. Since the receivables from sales are collectible within one year and sales transactions are frequent, the fair value of receivables is equivalent to the nominal amount of cash to be received