PROMOS TECHNOLOGIES INC. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003 TOGETHER WITH INDEPENDENT AUDITORS REPORT

Transcription

1 FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004 AND 2003 TOGETHER WITH INDEPENDENT AUDITORS REPORT Name of the Company: PROMOS TECHNOLOGIES INC. Address: NO.19 LI HSIN RD., SCIENCE-BASED INDUSTRIAL PARK, HSINCHU, TAIWAN, R. O. C. Telephone:

2 INDEX TO FINANCIAL STATEMENTS Independent Auditors Report 3 Page Balance Sheets on 4 Statements of Income for the Year Ended 5 Statements of Changes in Stockholders Equity for the Year Ended December 31, 2004 and Statements of Cash Flows for the Year Ended 7 Notes to Financial Statements

3 English Translation of a Report Originally Issued in Chinese INDEPENDENT AUDITOR S REPORT THE BOARD OF DIRECTORS PROMOS TECHNOLOGIES INC. We have audited the accompanying balance sheets of ProMOS Technologies Inc. as of, and the related statements of income, changes in stockholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Regulations for Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 ProMOS Technologies Inc. as of, and the results of its operations and its cash flows for the year then ended, in conformity with the Guidelines for Securities Issuers Financial Reporting and accounting principles generally accepted in the Republic of China. BDO TAIWAN UNION & CO. January 31,

4 English Translation of Financial Statements Originally Issued in Chinese PROMOS TECHNOLOGIES INC. BALANCE SHEETS (In Thousands) Assets December 31, 2004 December 31, 2003 Liabilities & Stockholders' Equity December 31, 2004 December 31, 2003 Current Assets Current Liabilities Cash and Cash Equivalents (Notes 2, 4) 10,882, ,697, Short-term Borrowings (Note 12) 1,048, ,192, Short-term Investments (Notes 2, 5) 6,025, ,780, Commercial Papers Payable (Note 13) , Accounts Receivable (Notes 2, 6) 5,776, ,795, Accounts Payable 2,031, ,666, Accounts Receivable - Related Parties (Notes 2, 25) 3,754, ,072, Income Taxes Payable 212, Other Receivables 196, , Accrued Expenses (Note 14) 1,379, ,070, Other Receivables - Related Parties (Notes 2, 25) 605, , Other Payables-Related Parties (Note 25) 1,289, , Inventories - Net (Notes 2, 7) 4,232, ,418, Other Payables 3,184, ,226, Prepaid Expenses 11, , Advance Receipts Prepayment 102, , Long-term Borrowings-Current Portion (Notes 15, 16, 17) 5,292, ,799, Temporary Debits 42, , Temporary Credits 1, , Deferred Income Taxes (Notes 2, 23) 1,213, , Receipts Under Custody 16, , Restricted Current Assets (Notes 8, 26) 68, , Sub-total 14,456, ,212, Sub-total 32,912, ,473, Funds and Long-term Investments Long-term Investments (Notes 2, 9) Long-term Liabilities Long-term Investments in Stocks (Equity method) 1,514, Bonds Payable (Notes 2, 15) 4,653, ,847, Long-term Investments in Stocks (Cost method) 120, , Long-term Borrowings (Note 16) 5,953, ,868, Long-term Investments in Bonds 950, , Obligation Under Capital Lease (Notes 2, 17) 97, , Prepayments for Long-term Investments ,619, Sub-total 10,704, ,841, Sub-total 2,585, ,940, Property and Equipment (Notes 2, 10) Other Liabilities Cost Accrued Pension Liability (Notes 2, 30) 142, , Buildings and Structures 17,554, ,270, Guarantee Deposits Machinery and Equipment 62,513, ,829, Sub-total 142, , Computers 891, , Transportation Equipment 3, , Total Liabilities 25,303, ,171, Office Equipment 3, , Equipment Under Capital Lease 600, ,552, Leasehold Improvement 2, , Stockholders' Equity Cost & Revaluation Increment 81,569, ,421, Capital Stock (Note 18) Less Accumulated Depreciation (46,441,764) (54.47) (38,588,189) (57.35) Common Stock 44,498, ,691, Prepayment for Equipment 5,962, ,092, Capital Collected in advance 9, Sub-total 41,089, ,925, Capital Surplus (Note 19) Intangible Asset Additional Paid-In Capital 5,638, ,478, Patents (Notes 2, 11) 1,986, ,482, Retained Earnings (Note 20) Special Technology Rights (Notes 2, 11) 2,541, ,476, Legal Reserve 33, Sub-total 4,528, ,959, Unappropriated Earnings (Accumulated Deficits) 10,395, , Other Assets Equity Adjustments Leased Assets 102, Cumulative translation adjustments (74,328) (0.09) Guarantee Deposits Paid 267, , Treasury Stock (Notes 2, 21) (551,328) (0.65) (1,392,814) (2.07) Deferred Charge (Note 2) 340, , Total Stockholders' Equity 59,949, ,108, Deferred Income Taxes (Notes 2, 23) 662, ,288, Other Assets - Other (Note 26) 2,763, ,060, Sub-total 4,136, ,982, Total Assets 85,252, ,280, Total Liabilities and Stockholders' Equity 85,252, ,280, The accompanying notes are an integral part of financial statements 4

5 English Translation of Financial Statements Originally Issued in Chinese PROMOS TECHNOLOGIES INC. STATEMENTS OF INCOME For the Years Ended (In Thousands, Except Earnings Per Share) Items Net Revenue (Note 2) 42,958, ,129, Cost of Revenue (Note 2) (26,305,137) (61.23) (21,502,548) (85.57) Gross Profit (Loss) 16,653, ,627, Operating Expenses Marketing Expenses (1,330,625) (3.10) (628,051) (2.50) General and Administrative Expenses (1,358,781) (3.16) (1,012,791) (4.03) Research and Development Expenses (Note 2) (2,379,538) (5.54) (1,138,846) (4.53) Income (Loss) from Operations 11,584, , Non-Operating Income Interest Income 234, , Gains on Disposal of Fixed Assets 13, , Gains on Disposal of Investments 268, , Rental Income 7, , Reversal of Provision for Losses on Inventory 2, Others 55, , Sub-total 582, , Non-Operating Expenses Interest Expense (549,003) (1.28) (760,163) (3.02) Investment Loss Recognized Under Equity Method (731,220) (1.70) Loss on Disposal of Fixed Assets (2,522) (0.01) (7,289) (0.03) Foreign Exchange Loss-Net (492,287) (1.15) (113,931) (0.45) Provision for Losses on Inventory (39,781) (0.16) Others (28,665) (0.07) (55,169) (0.22) Sub-total (1,803,697) (4.21) (976,333) (3.88) Income (Loss) Before Income Tax 10,363, , Income Tax (Expenses) Benefits (265,000) (0.61) 123, Net Income (Loss) 10,098, , Primary Earnings (Loss) Per Share: (Note 24) Pretax After tax Pretax After tax Net Income (Loss) Diluted Earnings (Loss) Per Share: (Note 24) Net Income (Loss) The accompanying notes are an integral part of financial statements 5

6 English Translation of Financial Statements Originally Issued in Chinese PROMOS TECHNOLOGIES INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended (In Thousands) Summary Common Stock Capital Surplus Legal Reserve Unappropriated Earnings (Deficits) Treasury Stock Balance on January 1, ,698, ,350,051 0 (2,047,720) 0 (1,392,814) 35,607,995 Appropriations and Distributions for 2002 Offset Deficits (2,047,720) 2,047,720 0 Bonds Payable Converted into Common Stock and Capital Surplus 2,993,320 1,176,065 4,169,385 Bonds Payable Converted into Entitlement Certificates Entitlement Certificates Converted into Common Stock 184 (184) 0 Net Income (Loss) after Tax for the Year Ended December 31, , ,603 Balance on January 1, ,691, ,478, ,603 0 (1,392,814) 40,108,752 Appropriations and Distributions for 2003 Certificates of Bond-to-stock Conversion Capital Collected in Advance Retained Earnings Cumulative Translation Adjustments Legal Reserve 33,060 (33,060) 0 Bonds Payable Converted into Common Stock 56,056 39,492 95,548 Issuance of Common Stock for Cash / Capital Collected in Advance 5,750,000 9,374 3,120,166 8,879,540 Treasury Stock Sold to Employees 841, ,486 Cumulative Translation Adjustments (74,328) (74,328) Net Income (Loss) after Tax for the Year Ended December 31, ,098,061 10,098,061 Rounding Difference (1) (1) Balance on December 31, ,498, ,374 5,638,639 33,060 10,395,603 (74,328) (551,328) 59,949,058 Total The accompanying notes are an integral part of financial statements 6

7 English Translation of Financial Statements Originally Issued in Chinese PROMOS TECHNOLOGIES INC. STATEMENTS OF CASH FLOWS For the Years Ended (In Thousands) Items Cash Flows from Operating Activities Net Income (loss) 10,098, ,603 Adjusted Items: Depreciation 8,795,105 10,167,108 Amortization 1,791,327 1,649,788 Reversal of Provision for losses on Inventory (2,050) 0 Losses on Disposal of Assets 2,522 7,289 Gain on Disposal of Assets (13,962) (5,810) Losses on Inventory Obsolescence 15, Losses on Inventory Valuation Loss 0 39,781 Investment Income on Equity Method Dividends Inventees 731,220 0 Increase (Decrease) in Accrued Redemption Premium (140,067) (75,713) (Increase) Decrease in Accounts Receivable (2,981,195) 4,325,583 (Increase) Decrease in Accounts Receivable-Related Parties 1,317,865 (4,640,803) (Increase) Decrease in Other Receivables (96,095) (10,238) (Increase) Decrease in Other Receivables-Related Parties 53,753 (620,252) (Increase) Decrease in Inventories 171,658 (1,901,998) (Increase) Decrease in Prepaid Expenses 11,347 5,018 (Increase) Decrease in Prepayments 57,584 (140,571) (Increase) Decrease in Other Current Assets (608,771) (4,452) (Increase) Decrease in Deferred Income Tax Asset Noncurrent 626,328 (121,683) Increase (Decrease) in Notes Payable 0 (315) Increase (Decrease) in Accounts Payable 365, ,628 Increase (Decrease) in Income Taxes Payable 212,000 0 Increase (Decrease) in Accrued Expenses 309, ,569 Increase (Decrease) in Other Payables - Related Parties 302, ,842 Increase (Decrease) in Other Payables (1,107,764) 1,220,584 Increase (Decrease) in Advance Receipts 0 (981) Increase (Decrease) in Other Current Liabilities 5,708 (2,173) Increase (Decrease) in Accrued Pension Liabilities 25,616 24,341 Net Cash Provided by (Used in) Operating Activities 19,942,867 11,933,221 Cash Flows from Investing Activities (Increase) Decrease in Time Deposits Pledged 51,413 (117,907) (Increase) Decrease in Short-term Investments (2,245,576) (3,777,123) Acquisition of Long-term Investments (700,770) (1,740,110) Increase (Decrease) in Long-term Investments in Bonds (750,000) 0 Acquisition of Assets Leased to Others (107,479) 0 Increase (Decrease) in Payable to Contractors and Equipment Suppliers 65, ,463 Disposal of Property and Equipment 61, ,710 Acquisition of Property and Equipment (15,004,157) (4,701,684) Acquisition of Intangible Assets 0 (2,482,920) (Increase) Decrease in Guarantee Deposits Paid (164,503) (88,135) (Increase) Decrease in Deferred Charges (170,163) (295,001) (Increase) Decrease in Other Assets - Other 296,563 (60,090) Net Cash Provided by (Used in) Investing Activities (18,668,043) (11,969,797) Cash Flows from Financing Activities Increase (Decrease) in Short-term Borrowings (1,143,697) (2,313,179) Increase (Decrease) in Commercial Papers Payable (258,000) 258,000 Increase (Decrease) in Bonds Payable (1,958,813) 1,404,830 Increase (Decrease) in Long-term Borrowings 1,710,406 (2,300,732) Increase (Decrease) in Long-term Notes and Accounts Payable (160,000) (155,000) Increase (Decrease) in Guarantee Deposit (822) 0 Increase in Capital Collected in Advance 9,374 0 Capital Increment 8,870,166 0 Treasury Stock Sold to Employees 841,486 0 Net Cash Provided by (Used in) Financing Activities 7,910,100 (3,106,081) Increase (Decrease) in Cash and Cash Equivalents 9,184,924 (3,142,657) Cash and Cash Equivalents at the Beginning of Year 1,697,479 4,840,136 Cash and Cash Equivalents at the End of Year 10,882,403 1,697,479 Supplemental Disclosure of Cash Flows Information Interest Paid 685, ,025 Interest Expense (Excluding Capitalized Interest) 685, ,025 Income Tax Paid 10,215 3,079 Supplemental Disclosure of Noncash Investing and Financing Activities Long-term Borrowings Current Portion 5,292,570 2,799,594 Bonds Payable Converted into Common Stock and Capital Surplus 95,547 4,169,385 Bonds Payable Converted into Entitlement Certificates Entitlement Certificates Converted into Common Stock The accompanying notes are an integral part of financial statements 7

8 English Translation of Financial Statements Originally Issued in Chinese PROMOS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS SCOPE ProMOS Technologies Inc. ( the Company ) was incorporated by Mosel Vitelic Inc. (MVI) and Siemens Aktiengesellschaft (SAG) on December 12, Its operations are currently based at the Hsinchu Science-Based Industrial Park. SAG transferred a portion of its shareholding in the Company to Infineon Technologies A. G. (Infineon) in March Infineon sold down its shareholding of the Company during year The Company designs, researches, develops, manufactures and sells semiconductor products such as DRAM chips. The Company s shares have been traded on the ROC GreTai Securities Market (GTSM) in the Republic of China since May 13, As of, the Company had 3,234 and 2,653 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are presented in conformity with the Guidelines for Securities Issuers Financial Reporting and accounting principles generally accepted in the Republic of China. Significant accounting policies are summarized as follows: (1) Distinction between Current and Noncurrent Asset and Liability Current assets are cash and other assets that are reasonably expected to be realized in cash, or sold, or consumed during the normal operating cycle of the business within one year. Excluded from the classification of current assets are noncurrent assets. Current liabilities are obligation that are due on demand or will be due on demand within one year or the operating cycle, if longer. Excluded from the classification of current liabilities are noncurrent liabilities. (2) Cash and cash equivalents Cash equivalents represent all highly liquid debt instruments, such as treasury bills, commercial paper and bank acceptance purchases with a maturity of three months or less, and other highly liquid investments with insignificant interest rate risk. 8

9 (3) Short-term investments Open-end funds are stated at the lower of aggregate cost or market value. Market value refers to the net asset value of the funds. An allowance for loss is recognized when the aggregate carrying value of the investments exceeds the total market value, with the related provision for loss charged to current income. Any recovery of the aggregate market value to the extent of the original carrying value is recognized as income. Costs of investments sold are determined using the first-in, first-out method. (4) Allowance for bad and doubtful debts Allowance for bad and doubtful debts on notes receivables, accounts receivables, accounts overdue and other receivables is determined based on the aging of outstanding balances of such accounts and the past experience of the Company. (5) Inventories Inventories are stated at the lower of standard cost (adjusted to approximate weighted-average cost) or market value. Market value refers to net realizable value for finished goods and work in process, and replacement cost for raw materials and supplies. (6) Long-term investments Long-term investments represent investments in unlisted common stocks and are valued at cost if the Company has less than 20% of the investee s voting shares and the Company does not have significant influence over operating and financial policies of an investee. However, when there is evidence indicating that a decline in the value of such investments is other than temporary, the investments are written down to reflect such decline and the resulting losses are recognized in the period in which such write-down occurs. Stock dividends are not recognized as income but treated as an increase in the shares held. Long-term Investments in equity securities are accounted for by the equity method when the Company owns 20% or more of the investee s voting shares and has significant influence over the investee. Under the equity method, the difference between the acquisition cost of an investment and the underlying net equity of the investee is amortized over 5-20 years on a straight-line basis and recognized as investment income or loss. Investments in debt securities are stated at cost. 9

10 (7) Property, equipment and leased assets Property and equipment are stated at cost. Major additions, renewals and betterments are capitalized, while maintenance and repairs are expensed in the period incurred. Leased assets are fixed assets rented to other parties in the form of operating lease. Idle or unused fixed assets shall be classified as other assets and used lower of book value or net realized value to determine the cost of assets. The related depreciation expense is then classified as non-operating expenses or losses when incurred. Upon sale or disposal of property, equipment and leased assets, the related cost and accumulated depreciation are removed from the accounts. The gain or loss resulting from such a disposal is recorded as a non-operating income or expense. Depreciation is computed using the straight-line method over the estimated service lives which range as follows: buildings and auxiliary equipment, 20 years; facilities, 10 years; machinery and equipment, 5 years; computers, 3 years; transportation equipment, 3 to 5 years; furniture and fixtures, 3 years, equipment under capital lease, 5 years and leasehold improvements, 3 years. Property covered by agreements qualifying as capital leases are carried at the lower of the market value of the leased equipment or the present value of the minimum lease payments on the starting date of the lease and are depreciated over the useful lives of the leased equipment. The effective interest method is used to allocate each lease payment between principal and interest expense. The difference between the proceeds and the book value of the leaseback assets is recorded as an unrealized loss on sale-leaseback and is amortized over remaining service lives as depreciation expense. (8) Intangible assets Patents and Special Technology Rights are amortized using the straight line method over their economic lives or the related contract periods. (9) Deferred charges The cost of computer software is stated at cost and amortized using the straight-line method over three to seven years, and the issuance costs of convertible bonds are amortized using the straight-line method over the term of the bonds. 10

11 (10) Convertible bonds The stated redemption price in excess of the face value of the bond is recognized as interest expense from the issue date to the last day of the redemption period or the actual redemption date, whichever comes earlier, using the effective interest rate method. Capital stock account is credited for the face value of the bond that is converted into the Company s stock. The carrying value of the bond on the date of its conversion in excess of its face value is then credited to the capital surplus account. (11) Retirement plan The Company established a retirement plan for all of its employees. Pension plan benefits are based primarily on participants compensation and years of credited service. In compliance with ROC SFB regulations, the Company implemented ROC Statement of Financial Accounting Standards (SFAS) No. 18, Accounting for Pensions. An actuarial valuation of pension liability is performed as of the balance sheet date, and a minimum pension liability in the amount of the excess of the accumulated benefit obligation over the fair value of plan assets is recognized in the financial statements. In accordance with SFAS No. 18. The unrecognized transitional net benefit obligation and pension gain or loss is amortized on a straight-line basis over the average remaining service period. (12) Research and development Research and development costs consist of expenditures incurred during the course of planned research and investigation aimed at the discovery of new knowledge which will be useful in developing new products or process, or significantly enhancing existing products or production processes, and the implementation of such through design, testing of product alternatives or construction of prototypes. All expenses incurred related to research and development activities of the Company are charged to current income. (13) Treasury stock The reacquisition of issued stock is accounted for by the cost method. The treasury stock account is debited for the reacquisition cost and this account is stated as a deduction to arrive at shareholders equity. If the 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 as a reduction of any paid-in capital related to previous reissuances. If the balance in paid-in capital from treasury stock is insufficient to absorb the deficiency, the remainder is recorded as reduction of retained earnings. 11

12 (14) Income tax The Company uses inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for the tax effects of taxable/deductible temporary differences, unused tax credits, and operating loss carryforwards. A valuation allowance is recognized if, based on available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. A deferred tax asset or liability is classified as current or non-current according to the classification of its related asset or liability; or the expected reversal date of temporary differences. Adjustments of prior years tax liabilities are added to or deducted from the current year s tax provision. The additional 10% income tax on undistributed accumulated earnings is recorded as expenses in the year when the shareholders have resolved to retain earnings. (15) Recognition of revenue and expense Revenue is mainly from product sales to customers and is recognized at the time of shipment, indicating that revenue has been realized and earned. The four criteria for revenue being realized and earned are the existence of evidence of sale, actual shipment, fixed or determinable selling price, and reasonable assurance of collectibility. (16) Derivative financial instruments The Company uses forward exchange contracts to manage currency exposures in foreign currency-denominated assets and liabilities. The premium or discount on the forward contracts, recorded in New Taiwan dollars as assets and/or liabilities, is computed using the foreign-currency amount of the contract multiplied by the difference between the contracted forward rate and the spot rates on the starting dates of the contract. The premium or discount is amortized using the straight-line method over the term of the forward contracts, with the amortization charged to income. On the balance sheet dates, the gains or losses on the contracts, computed by multiplying the foreign-currency amount of the contracts by the difference between the spot rates on the contract starting dates and the spot rates on the balance sheet dates (or the spot rates last used to measure a gain or loss on that contract for an earlier period), are charged to income. Also, the receivables and payables related to the forward contracts are netted out, and the net amount is presented as either an asset or a liability. Any resulting gain or loss upon settlement is credited or charged to income in the period of settlement. 12

13 The Company also uses foreign-currency option contracts for hedging purposes. The notional amounts of these contracts are not recognized as either assets or liabilities on the contract dates. However, the amounts received on call options written and the amounts paid on put options bought are carried at cost as either assets or liabilities and are amortized using the straight-line method over the terms of the contracts, and are charged to current income. Any resulting gain or loss upon settlement is credited or charged to income in the period of settlement. The foreign currency options are measured at fair value on the balance sheet date and are recognized as assets or liabilities. (17) Foreign currency transactions Foreign-currency transactions are recorded in New Taiwan Dollars at the rates of exchange in effect when the transactions occurred. Gains or losses, caused by different foreign currency exchange rates applied when cash in foreign currency is actually converted into New Taiwan Dollars, or when foreign currency receivable or payable are settled, are credited or charged to income in the period of actual conversion or settlement. Period - end balances of receivable and payable denominated in foreign currencies are translated at the period-end exchange rates, and resulting gains or losses are credited or charged to current income. (18) Capital expenditure and expenses Expenditure is capitalized and amortized over its useful life if it involves a significant amount and benefits future periods. Otherwise, it is expensed in the year of expenditure. 3. CHANGES IN ACCOUNTING PRINCIPLES AND ITS EFFECTS: None 4. CASH AND CASH EQUIVALENTS December 31, Cash and bank deposits... 3,420, ,034 Time deposits... 5,466,582 1,071,850 Cash equivalents... 1,994, ,595 Total ,882,403 1,697,479 13

14 5. SHORT-TERM INVESTMENTS December 31, Mutual funds... 6,025,700 3,780,123 Less: Allowance for valuation loss of short-term investments. (0) (0) Net... 6,025,700 3,780,123 Please refer to note 31 for more information. 6. ACCOUNTS RECEIVABLE December 31, Accounts receivable ,776,825 2,795,630 Less: Allowance for bad and doubtful debts.. (0) (0) Total... 5,776,825 2,795, INVENTORIES-NET December 31, Materials and supplies , ,928 Work in process... 3,211,637 3,649,943 Finished goods , ,813 Total... 4,404,326 4,591,684 Less: Allowance for inventory valuation loss and obsolescence... (171,387) (173,437) Net... 4,232,939 4,418,247 14

15 8.RESTRICTED CURRENT ASSETS December 31, Pledged time deposits... 68, ,906 9.LONG-TERM INVESTMENTS (1)Long-term investments are as follows: December 31, Amount % Amount % A.Equity Method Mosel Vitelic Corporation... 1,181, United Memories, Inc , ProMOS Technologies PTE. LTD , Flourishing Moment Limited... 31, Sub-total... 1,514,592 0 B.Cost Method Inapac Technology, Inc. (Preferred Stock) C.Long-term investments in bonds 120, ,740 Debenture of Macoto Bank , ,000 Debenture of Chinese Bank ,000 0 China Rebar Company, LTD 250,000 0 Chia Hsin Food and Synthetic Fiber Co. LTD. 250,000 0 Sub-total , ,000 15

16 D.Prepayments for Long-term Investments December 31, Amount % Amount % Mosel Vitelic Corporation ,424,430 United Memories, Inc ,940 Sub-total ,619,370 Total... 2,585,332 1,940,110 (2)The investment gains or losses recognized based on the investees audited financial statements on December 31, 2004 are summarized as follows: Investee December 31, Mosel Vitelic Corporation (176,953) 0 United Memories, Inc. (6,266) 0 ProMOS Technologies PTE. LTD. (548,001) 0 Total (731,220) 0 (3)On April 28, 2004, the Company s Board of Directors approved to invest directly 100% of the shares of ProMOS Technologies PTE. LTD. and Flourishing Moment Limited. (4)The Company s Board of Directors approved the acquisition of 50% of the shares of MVC (Mosel Vitelic Corporation) and 100% of the shares of UMI (United Memories, Inc.), both of which are U.S. subsidiaries of the MVI in On January 2, 2004, the stock transfer procedures had been completed. (5)Please refer to Note 31 for more information. 16

17 10.PROPERTY AND EQUIPMENT December 31, 2004 Item Cost Accumulated Depreciation Net Value Buildings and structures ,554,259 8,278,393 9,275,866 Machinery and equipment... 62,513,406 37,439,562 25,073,844 Computers , , ,741 Transportation equipment... 3,602 3,602 0 Office equipment... 3,354 3, Equipment under capital lease ,715 82, ,954 Leasehold improvement... 2,286 2,286 0 Sub-total... 81,569,322 46,441,764 35,127,558 Prepayments for equipment... 5,962, ,962,236 Total... 87,531,558 46,441,764 41,089,794 December 31, 2003 Item Cost Accumulated Depreciation Net Value Buildings and structures ,270,651 6,714,379 10,556,272 Machinery and equipment... 51,829,224 31,059,175 20,770,049 Computers , , ,580 Transportation equipment... 3,602 3,602 0 Office equipment... 3,574 3, Equipment under capital lease... 1,552, ,890 1,253,485 Leasehold improvement... 2,285 2, Sub-total... 71,421,038 38,588,189 32,832,849 Prepayment for equipment... 2,092, ,092,445 Total... 73,513,483 38,588,189 34,925,294 17

18 (1)On October 27, 2004, the Company s board of directors approved to purchase office building from Mosel Vitelic Inc. Based on appraisal reports and related market information, the acquisition price is negotiated in the amount of $1,100,000 thousand dollars. As of December 31, 2004, the Company had paid $990,000 thousand dollars according to the contract. The property title had been transferred to the Company on January 11, The Company is waiting for final approval of the transfer from the governmental authority. (2)The Company entered into sale-leaseback agreements with a domestic leasing company covering certain equipment. The agreement terms qualify as a capital lease. The leases are payable quarterly for the period from December 31,2001 to January 31, Please refer to Note 17 for details. (3)Part of the property and equipment had been pledged for bank borrowings. Please refer to Note 26 for details. 11.INTANGIBLE ASSETS December 31, Patents.. 1,986,336 2,482,920 Special technology rights... 2,541,982 3,476,570 Total 4,528,318 5,959,490 (1)To enhance the Company's core technology of memory manufacturing processes, design technologies, patent portfolio and distribution and global logistic capability in the worldwide market, on December 22, 2003, the Company s Board of Directors approved the purchase from MVI DRAM-related patents and the process technologies of flash memory in the amount of US$72,500 thousands. The acquisitions had been assessed for valuation by Pricewaterhouse Coopers, an independent expert and a professional financial consulting company. In addition, the Company had requested an independent CPA to review the transaction price and an opinion of fair valuation of the purchase price had been issued. 18

19 (2)The rights to technology and know-how relate to technology transfer fees pertaining to the use of the dynamic random access memory (DRAM) manufacturing processes and product technologies under license from Siemens AG and Infineon Technologies AG. On March 15, 2000, the Company entered into a License Agreement with Infineon (which was a spun-off of the semiconductor business division of Siemens AG). This Agreement provides for the (a) transfer by Infineon of the 0.17 micron to 0.11 micron manufacturing processes and product technologies, and (b) total license fee by the Company of US$72,000 thousand, payable separately upon completion of transfer of each generation of technologies involved as well the running royalties by the Company based on certain percentage of the sales of the Company. As of December 31, 2004, the Company had paid technology transfer fee of US$47,000 thousand. The Agreement also requires the Company to sell to MVI or Infineon 90% of the Licensed Products, and the remaining 10% could be sold to other parties at the Company s discretion. However, on January 27, 2003, Infineon informed the Company it was terminating the License Agreement unilaterally, and declared that the Company could no longer use the licensed technology to develop, manufacture and sell any semiconductor products. After consultation with the Company s legal counsel, it was of the opinion that Infineon had no right to terminate the Agreement unilaterally if there is no event of breach (which refers to bankruptcy, liquidation, attachment of substantial assets or other material default) by the Company. Due to the material disputes between both parties with respect to performance of the Agreement, the Company filed a request for arbitration against Infineon on May 5, 2003 before the Court of Arbitration of the International Chamber of Commerce ("ICC"). The Company claims from Infineon the payment of the principal plus interest for the delayed payment in respect of products previously shipped to Infineon. Further, the Company requested the Arbitral Tribunal to affirm that Infineon has breached the S17 to S12 License Agreement, and the Company is entitled to continue to exercise any and all rights granted to it by Infineon under the License Agreement. The Company had received Infineon s response in the arbitration proceedings dated July 29, Infineon not only denied the Company s claims but also raised counterclaims before the ICC against the Company for declaration of the validity of its termination of the License Agreement with the Company and for recovery of damages. 19

20 On December 19, 2003, June 18, 2004 and subsequent dates, the Company filed detailed statement of claims and reply with the Arbitral Tribunal, and reiterated in details the claims set forth in its arbitration request dated May 5, The Company made claims against Infineon for outstanding payment and for damages for breach of the Agreement, with due reservation of any and all rights and claims to amend the relief sought, including but not limited to the amount of damage incurred by the Company. Infineon thereafter submitted its defense and counterclaim, alleging that the Company should cease using the licensed technologies due to Infineon s termination of the Agreement, and seeking damage. Subsequently, both parties settled the disputes of the Agreement and related disputes on November 10, 2004 and agreed to waive and release each other liability regarding the claims and assertions by each party as of the settlement date and agreed to withdraw the request for arbitration, counterclaim and related legal proceedings against each other. On the same day, both parties entered into the First Amendment to the S17 to S12 License Agreement. This Amendment confirms that the Company has the perpetual license of the know-how transferred by Infineon to the Company. In addition, the Company may develop its own state-of-the-art processes and products, and to sublicense to its subsidiaries. Instead of paying royalty based on certain percentage of the sales of the Company as stipulated in the Agreement, the parties agreed to change to the royalties in the fixed amount payable in installments; i.e., the Company would pay Infineon US$70 million by December 15, 2004, US$36 million by March 31, 2005 (which would offset the account payable by Infineon to the Company), US$25 million by August 31, 2005, and US$ 25 million by April 30, 2006 and the Company would not have obligations to pay any license fees or royalties thereafter. As of December 31, 2004, the Company had accounts receivable of 1,160,977 thousand, other receivables of 1,785 thousand, and other payable of 21,826 thousand, with respect to Infineon. 20

21 12.SHORT-TERM BORROWINGS December 31, Working capital loans ,877 2,062,151 Foreign-currency loans , ,220 Total... 1,048,675 2,192,371 Interest rates %~3.62% 1.40% ~ 3.45% 13.COMMERCIAL PAPERS PAYABLE December 31, Commercial papers payable... 0 $258,000 Interest rates % ~ 2.65% 14.ACCRUED EXPENSES December 31, Maintenance payable , ,437 Indirect material payable... 87,426 80,053 Salary and bonus payable ,980 81,575 Service charge payable... 26,310 4,896 Interest payable... 70,095 69,260 Subcontract expenses payable.. 354, ,782 Other accrued expenses , ,127 Total... 1,379,757 1,070,130 21

22 15.BONDS PAYABLE December 31, 1.Domestic secured bonds payable... 2,700,000 2,700,000 Less: Current portion... (810,000) (0) Sub-total... 1,890,000 2,700,000 2.Convertible bonds payable (The ECBs) ,780 6,213,260 Accrued redemption premium ,067 Less: Redemption of convertible bonds payable (806,780) (1,724,713) Conversion of convertible bonds payable (0) (3,651,866) Sub-total , Convertible bonds payable (The New ECBs)... 2,859,715 3,057,300 Premium on convertible bonds payable ,907 Less: Conversion of convertible bonds payable.. (96,188) 0 Sub-total... 2,763,527 3,171,207 Total... $4,653,527 $6,847,955 (1) Bonds payable are five-year domestic secured bonds issued between May 23, 2002 and June 4, 2002 with aggregate face value of 2,700,000 thousand. The bonds bear interest at 4.20%, payable annually. The bonds are due in annual installments from May 2005 and should be fully repaid by June A guarantee in the amount of 2,700,000 thousand has been provided by a syndicate of banks led by the Bank of Taiwan, Taiwan Cooperative Bank and Chinatrust Commercial Bank to support our obligations under the bonds. Among the terms of agreement on the bonds is the maintenance of specific financial ratios, including current ratio, liability ratio, and interest coverage ratio and endorsement amount over capital ratio, which is tested semiannually and annually. (2) The Company issued Zero Coupon Convertible Bonds (ECBs) with face value of US$180,000 thousand. The ECBs were listed on the Luxembourg Stock Exchange (LSE) on April 6, As of December 31, 2004, the ECBs were redeemed, repurchased and converted. 22

23 The Company previously repurchased ECBs in amount of US$15,350 thousand on January 31, The accrued redemption premium in respect of these ECBs was US$1,893 thousand and the Company recorded a gain of 16,472 thousand as other income. And then the Company also repurchased ECBs in the amount of US$34,490 thousand and the accrued redemption premium in respect of these ECBs was US$4,495 thousand as of April 7, The ECBs had been converted into common shares in the amount of US$20 thousand, and the redemption premium was US$3 thousand as of December 31, According to a special reset provision for the period from July 3 to July 11, 2003, US$105,510 thousand ECBs were converted into 299,332 thousand shares of common stock. On April 28, 2004, the Company repurchased the outstanding ECBs principal in the amount of US$24,630 thousand and the corresponding accrued redemption premium was US$4,483 thousand. (3) The Company had been approved by Taiwan SFB to issue Zero Coupon Credit Enhanced Convertible Bonds (New ECBs) on September 5, The New ECBs were listed on the Luxembourg Stock Exchange (LSE) on October 8, 2003 with face value of US$90,000 thousand, zero interest rates, offering price at 105%, and with the benefit of an irrevocable direct pay letter of credit issued by ABN AMRO Bank. The New ECBs are redeemable on October 8, The New ECBs may be converted at any time on or after November 7, 2003 and prior to the close of business on September 28, 2008 into the Company s share, and the conversion price will initially be per share, subject to adjustment in the manner provided in the indenture. The bondholders have the right to require the Company to repurchase its bonds at 100% face value as redemption price after October 8, Under the letter of credit facility, the Company has pledged foreign currency-us cash (classified as other assets-other) as collateral. The amount of collateral will be reduced only when the outstanding principal amount of the New ECBs is reduced, either through conversion, repurchase or cancellation. As of December 31, 2004, approximately US$87,150 thousand cash were pledged as collateral. As of December 31, 2004, US$2,850 thousand of the New ECBs were converted into 5,606 thousand shares of common stocks. 23

24 16.LONG-TERM BORROWINGS Long-term borrowings sources and related information are as follows: December 31, Bank of Taiwan (BOT) led bank consortium: 5,000,000 thousand, repayable in 6 consecutive semiannual installments from August 2004 to August 2007; semiannual repayment 833,333 thousand. Bank of Taiwan (BOT) led bank consortium: 2,650,000 thousand, repayable in 6 consecutive semiannual installments from March 2004 to March 2007; semiannual repayment 441,667 thousand. China Development Industrial Bank Inc. (CDIB): 500,000 thousand, repayable in 8 consecutive semiannual installments from May 2001 to November 2004; semiannual repayment - 62,500 thousand, On May 2004, early repayment of 12,500 thousand was made. CDIB: 400,000 thousand, repayable in 15 consecutive quarterly installments from July 2002 to January 2006; quarterly repayment 26,667 thousand. CDIB: 400,000 thousand, repayable in 17 consecutive quarterly installments from August 2003 to August 2007; quarterly repayment 23,529 thousand. Chiao Tung Bank: 400,000 thousand, repayable in 7 consecutive semiannual installments from August 2004 to August 2007; semiannual repayment - 57,143 thousand. Ta Chong Bank (TCB): 300,000 thousand, repayable in June ,166,667 5,000,000 1,766,666 2,650, , , , , , , , ,000 24

25 December 31, The Farmers Bank of China: 300,000 thousand, repayable in 6 consecutive semiannual installments from April 2004 to October 2006; semiannual repayment-50,000 thousand. Taiwan Cooperative Bank-led bank consortium: 3,000,000 thousand, repayable in 5 consecutive semiannual installments from March 2005 to September 2007; semiannual repayment - 600,000 thousand. Ta Chong Bank (TCB): 300,000 thousand, repayable in 6 consecutive semiannual installments from June 2004 to June 2007; semiannual repayment - 50,000 thousand. Bank of Kaohsiung (BOK): 150,000 thousand, repayable in 6 consecutive semiannual installments from July 2004 to July 2007; semiannual repayment - 25,000 thousand. 200, ,000 3,000, , ,000 0 Sub-total 10,268,346 9,367,940 Less: Current portion (4,315,070) (2,499,594) Total 5,953,276 6,868,346 Interest rates 3.20%~4.43% 2.50%~6.80% (1) The loans from a bank consortium led by BOT and TCB were obtained to finance the purchase of machinery and equipment for a 12-inch wafer fabrication plant and required expansion of an 8-inch wafer fabrication plant. Among the loan agreement terms is the maintenance of specific financial ratios - current ratio, liability ratio, and interest coverage ratio and endorsement amount over capital ratio, which is tested semiannually and annually. (2) Part of the property and equipment had been pledge for long-term borrowings. Please refer to Note 26 for details. 25

26 17.OBLIGATION UNDER CAPITAL LEASE December 31, Obligation under capital lease , ,000 Less: current portion... (167,500) (300,000) Net... 97, ,000 The Company entered into sale-leaseback agreements with a domestic leasing company covering certain equipment. The agreements terms qualify as a capital lease. The leases are payable quarterly for the period from December 31, 2001 to January 31, COMMON STOCK (1) As of, the capital issued were 44,498,038 thousand and 38,691,982 thousand for 4,449,804 thousand and 3,869,198 thousand ordinary shares, with 10 par value per share. (2) The New ECBs had been converted into 5,606 thousand common shares as of December 31, (3) The ECBs had been converted into 299,350 thousand common shares on (4) On November 14, 2003, the Company s stockholders meeting approved the increase in its authorized share capital to 65,000,000 thousands, and increased capital by issuing an additional 575,000 thousand shares (with 10 par value) at a price of per share on the Luxembourg Stock Exchange in the form of global depositary shares (GDSs). The share issuance had been approved by SFB and registered with the authorities on March 2, (5) On June 25, 2003, the Company s stockholders meeting decided to offset deficits 2,047,720 thousand by capital surplus. 26

27 19.CAPITAL SURPLUS The Company s capital surpluses are as follows: December 31, Additional paid-in capital-common stock... 4,422,497 1,302,331 Additional paid-in capital-bond conversion... 1,216,142 1,176,650 Total... 5,638,639 2,478,981 Pursuant to the ROC Company Law, capital surplus can only be used to offset a deficit or to increase share capital. Capital surplus cannot be distributed as cash dividends. According to the SFB regulations, capital increases from capital surplus per year cannot exceed 10% of total capital surplus and can only commence in the year following the capital surplus incurred. 20.RETAINED EARNINGS (1)Legal Reserve Pursuant to the Company Law, 10% of the annual after-tax net income of each company must be appropriated as legal reserve until the total amount of the legal reserve equals to the issued share capital. Such reserve can only be used to offset a deficit. When the reserve has reached 50% of the aggregate par value of the Company s outstanding capital stock, up to 50% thereof can be distributed as stock dividend. (2)Retained Earnings As stipulated in the Company s Articles of Incorporation, the restrictions and sequences for distributing annual net income are as follows: A. Paying income tax; B. Covering previous deficits; C. Appropriating 10% of the remaining net income as legal reserve; D. Appropriating special reserve; and E. Appropriation of the remainder of the net income as proposed by the board of directors and approved by the stockholders as follows: (a)bonus to employees: 10% of the remaining net income; (b)remuneration to the directors and supervisors: 2%; and (c)distributing dividends to stockholders. 27

28 (3)The Board of Directors had not passed the apportionment of earnings for According to the resolution of stockholders in May 26, 2004, there were no bonus and compensations available for employees and directors in The information on earnings appropriation can be accessed through the Market Observation Post System on the Web Site of the Taiwan Stock Exchange. 21.TREASURY STOCK (COMMON STOCK) Purpose of Reacquisition Beginning Increase Decrease Ending (Shares in Thousands) Sale to employees 110, ,785 43,496 (1) Under the regulations of the Securities and Futures Bureau, a company may acquire up to 10% of its total outstanding shares. In addition, the aggregate acquisition cost cannot exceed the sum of the balances of retained earnings, the excess of the issue price over the par value of the capital stock issued, and realized capital surplus. In addition, the Company should not pledge the reacquired shares or exercise stockholders rights on those shares. (2) As of the December 31, 2004, the advance receipts for treasury stock sale to employees were NT9,374 thousand. 22.THE INFORMATION OF PERSONNEL COST, DEPRECIATION AND AMORTIZATION ARE AS FOLLOWS: Item Function Personnel cost December 31, 2004 December 31, 2003 Classified to Classified to Total Classified to Classified to operating operating operating operating costs expenses costs expenses Total Salary and wages 1,698, ,968 2,206,410 1,231, ,331 1,530,073 Labor and health insurance expense 98,066 28, ,457 88,342 20, ,064 Pension cost 41,807 11,681 53,488 36,755 10,171 46,926 Other personnel cost 17,788 4,081 21,869 18,374 3,005 21,379 Depreciation (Note1) 8,595, ,687 8,790,078 9,941, ,733 10,167,108 Amortization 870, ,821 1,791,327 1,140, ,173 1,649,788 Note1: The depreciation expense of Lease Assets amounted to 5,027 thousand, was recognized as non-operating expenses. 28

29 23.INCOME TAX (1) Income tax (expenses) benefits consisted of: December 31, Income tax expense-current (212,000) 0 Net change in deferred income tax: Temporary differences ,187 58,470 Loss carryforwards... (2,406,866) (214,341) Tax credits for investments in machinery and equipment ,203 87,862 Tax credits for R & D expenditures... 7,629 0 Valuation allowance... 1,251, ,808 Income tax (expenses) benefits... (265,000) 123,799 (2) Deferred income tax assets and liabilities are as follows: December 31, Current: Temporary differences , ,110 Loss carryforwards ,133 Tax credits for investments in machinery and equipment.. 941,114 0 Tax credits for R & D expenditures... 36,419 0 Less: Valuation allowance... (0) (0) Noncurrent: Net... 1,213, ,243 Temporary differences... (1,219,026) (1,493,285) Loss carryforwards ,899,733 Tax credits for investments in machinery and equipment.. 1,874,262 2,098,173 Tax credits for R&D expenditures , ,754 Less: Valuation allowance... (214,613) (1,466,460) Net ,587 1,288,915 29