HYNIX SEMICONDUCTOR INC. NON-CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 NON-CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2005 with INDEPENDENT AUDITORS REPORT

2 g ERNST & YOUNG HAN YOUNG Yeoido Post Office Box , Yeoido-dong Youngdeungpo-gu, Seoul Korea g Phone: , Fax : , , , The Board of Directors and Stockholders Hynix Semiconductor Inc. Independent Auditors Report We have audited the accompanying non-consolidated balance sheet of Hynix Semiconductor Inc. (the Company ) as of December 31, 2005, and the related non-consolidated statements of income, appropriations of unappropriated retained earnings, 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 audit. The accompanying non-consolidated financial statements of the Company as of and for the year ended December 31, 2004, presented for comparative purpose, were audited by KPMG Samjong, whose report thereon dated January 25, 2005, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the Republic of Korea. Those 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 audit provides a reasonable basis for our opinion. In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hynix Semiconductor Inc. as of December 31, 2005 and the results of its operations, appropriations of unappropriated retained earnings and cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of Korea. The following matters may be helpful to the readers in their understanding of the financial statements: (1) As described in Note 22 (1) to the accompanying financial statements, in October 2001 the Company was placed under the joint management by the members of the Creditor Financial Institutions Council ( Creditor Council ), and since then the Company has significantly improved its financial condition through debt restructuring and execution of various self-rescue plans such as disposals of business divisions, business work-out and achievement of net income of W1,692,478 million in On April 21, 2005, the Creditor Council decided to terminate the joint management earlier than the original date, if the Company satisfies certain pre-conditions of raising external funds of more than agreed amount and entering into a special agreement with the Creditor Council for appropriate follow-up steps. In accordance with this decision, the Company raised external funds in an aggregate amount of US$1,800 million in July 2005 (see Note 17) and effective from July 12, 2005, operational control by the Creditor Council was terminated under a

3 The Board of Directors and Stockholders Hynix Semiconductor Inc. Page 2 special agreement between the Company and the Council, whereby the Company is required to consult with the Creditor Council in advance all events that could have significant influence on the Company s management. However, various issues, such as the significant amount of investments to be required for memory chip facilities in the near future, the final ruling on the imposition of countervailing duties on the Company s DRAM sales in the United States, the European Union territory and Japan, the final outcome of the settlements with DRAM users related to the breach of the Anti- Trust Act in the United States, the final settlement of litigation involving the infringement of the Rambus patent and other claims, and future price fluctuations in the global semiconductor market, may have a significant impact on the Company s future results of operations. The accompanying non-consolidated financial statements are prepared based on the current representation of the Company s management for the anticipated outcome of the various issues referred to above. The final outcome of the issues may differ from the management s current representation and may have a material impact on the Company s financial statements. (2) As described in Note 22 (2), in 2003, the Department of Commerce ( DOC ) and the International Trade Commission ( ITC ) of the United States, and the European Commission ( EC ) had determined that the United States and the EU DRAM manufacturers had suffered damages from the Company s debt restructuring by the Creditor Council, and imposed approximately 44% and 35% countervailing duties on imports of DRAM manufactured in Korea into the United States and the EU territory, respectively. In September 2005, the DOC made the first preliminary annual review that the countervailing duties should be imposed at the rate of 60.7%. A final ruling is expected to be made in March 2006 and the ultimate result of the DOC s ruling cannot be determined as of December 31, In relation to the countervailing duty investigation against the Company requested by DRAM manufacturers in Japan in June 2004, on January 27, 2006, the Japanese government made a final ruling to impose a 27.2% countervailing duty on DRAM products that are manufactured in Korea and imported into Japan. Effective after January 27, 2006, 27.2% countervailing duty is now imposed on DRAM products that are manufactured in Korea and imported into Japan. (3) As described in Note 22 (3), in June 2002, the United States Department of Justice ( DOJ ) notified the Company that the DOJ had commenced an investigation into whether certain semiconductor manufacturers had breached the U.S. Anti-Trust Act. Meanwhile, DRAM users in the United States filed lawsuits claiming damages from breach of the U.S. Anti-Trust Act by the Company and Hynix Semiconductor America Inc. ( HSA ), its sales subsidiary located in the United States. In this regard, the Company recorded a non-operating expense of W337,174 million (US$323 million) in 2004, which consisted of the fine and estimated future losses

4 The Board of Directors and Stockholders Hynix Semiconductor Inc. Page 3 expected to be incurred as settlements. In order to settle the investigation commenced by the DOJ, on April 22, 2005, the Company agreed with the DOJ to pay a fine in the amount of US$185 million in installments over the next five years without interest. Apart from the settlement of the investigation, the Company has reached settlements through separate negotiations with major DRAM users in 2004 and As of December 31, 2005, the Company continues to negotiate with other DRAM users. (4) As described in of Note 22 (4), the Company is a defendant to certain litigations brought by Rambus Inc. ( Rambus ), a developer of high-bandwidth chip connection technologies, with respect to the alleged infringements of its patents by the Company s manufacture, sale, offer for sale, use or otherwise disposal of Single Data Rate ( SDR ) Synchronous Dynamic Random Access Memory ( SDRAM ) and Double Data Rate ( DDR ) SDRAM products. These litigations have been brought in Germany, France, the United Kingdom and the United States. In 2004, the European Patent Office revoked Rambus s certain key patent asserted against the Company in the EU territory. Accordingly, the litigation in the United Kingdom was dismissed in Meanwhile, in connection with the litigation in the United States, trials are scheduled in March and May In 2005, Rambus also has brought another lawsuit against the Company and its subsidiary in the United States by alleging that the Company and its subsidiary s DDR2 and Graphic DDR SDRAM products have infringed on its patents. In the meantime, in 2004, Rambus filed a lawsuit against the Company, its subsidiary in the United States, and other major memory chip manufacturers, alleging that these companies kept Rambus Dynamic Random Access Memory ( RDRAM ) products from entering the market. As of December 31, 2005, the ultimate outcome of the lawsuits described above cannot be determined and it could have material effect on the Company s financial statements. (5) As described in of Note 22 (4), in 2004, Toshiba Corporation ( Toshiba ) filed patent infringement lawsuits against the Company in the Tokyo District Court and the U.S. District Court in relation to DRAM and NAND Flash products. Toshiba also filed a separate complaint with the U.S. International Trade Commission ( ITC ) against the Company, alleging that the Company s NAND Flash products infringed Toshiba s patents. In response to these actions from Toshiba, the Company filed a complaint with the ITC for infringement of the Company s patents on NAND Flash products by Toshiba s products. As of December 31, 2005, the ultimate outcome of the lawsuits described above cannot be determined and it could have material effect on the Company s financial statements. (6) As described in of Note 22 (4), in 2004, the Company paid Hyundai Heavy Industries Co., Ltd. ( HHI ) a total of W123,677 million for its share in the compensation to be paid with codefendant Hyundai Securities Co., Ltd ( HSC ) including interest, in connection with a ruling of the Seoul District Court made in January 2002 against the Company and HSC to pay W171,822

5 The Board of Directors and Stockholders Hynix Semiconductor Inc. Page 4 million as compensation to HHI. However, the Company continues to contest this case by entering an appeal in February In addition, HHI initiated a separate lawsuit in December 2004 claiming that HSC and the Company should compensate for taxes of W48,770 million levied on HHI and any related losses incurred by HHI in connection with HHI s repurchase of shares. In this regard, the Company recorded non-operating expenses of W22,843 million for apportionment of loss with HSC in (7) As described in Note 22 (5), under a loan agreement between HSMA, an overseas manufacturing subsidiary of the Company in the U.S. (borrower) and J.P. Morgan Chase Bank (JPMC) (lender), the Company was required by the lender to enter into an off-take agreement with HSMA, as part of the loan covenant between lender and borrower. According to the Offtake Agreement, the Company is committed to purchase all dies produced by HSMA that meet certain specifications. In addition, HSMA entered into a Group Support Agreement with Hyundai Heavy Industries Co., Ltd., Hyundai Merchant Marine Co., Ltd., and Hyundai Corporation (collectively the Supporters ) for the performance of the Off-take agreement. The Group Support Agreement has also been provided as collateral for the long-term debt to JPMC. Under the loan agreement entered into between HSMA and JPMC, JPMC can request an early redemption of the debts depending on the Company s compliance with the Off-take Agreement relating to wafer and the financial status of HSMA and the Supporters. However, there still remains a possibility that any adverse change in the financial status of the Company, HSMA and the Supporters can trigger JPMC s exercise of its right to requesting an early redemption. Furthermore, the ultimate effect of this uncertainty on the Company s operating results and financial condition cannot be presently determined. Accordingly, the accompanying financial statements do not include any adjustments in relation to this matter. (8) As described in Note 22 (10), the Company entered into a cooperation agreement with the city government of Wuxi in Jiangsu Province, China on August 18, 2004 in connection with a construction of memory chip manufacturing facilities in Wuxi. On April 26, 2005, the Company established Hynix-ST Semiconductor Ltd. ( HSSL ), a joint venture with STMicroelectronics NV ( STMicro ). Of the required investments of US$2,000 million, the Company and STMicro will invest US$500 million and US$250 million, respectively, and the remaining required investments totaling US$1,250 million will be financed by financial institutions and others. In this regard, the Company has invested US$75 million in 2005 and additional US$30 million in January (9) As described in Note 8, the Company has sales and purchases with related parties, primarily with overseas subsidiaries. The Company recorded sales of W5,365,218 million and purchases of W1,122,143 million to and from subsidiaries for the year ended December 31, 2005, of which, W1,124,497 million and W244,901 million were due from and due to related parties, respectively,

6 The Board of Directors and Stockholders Hynix Semiconductor Inc. Page 5 as of December 31, In addition, the Company provided payment guarantees to financial institutions on behalf of its overseas subsidiaries to the extent of US$150 million and JPY1,100 million, as of December 31, (10) As described in Note 28, the Company expects to utilize the deductible temporary differences and tax loss carryforwards totaling W1,158,385 million, to offset against taxable temporary differences and projected taxable income in 2006 and later years; accordingly, the Company recognized deferred tax assets for the tax effects of temporary differences and tax loss carryforwards to the extent that taxable income will be available based on the Company s business forecasts. As of December 31, 2005, the Company recognized short-term and long-term deferred income tax assets of W174,772 million and W117,209 million, respectively, resulting in income tax benefit of W293,485 million for the year then ended. The realization of deferred tax assets should be reassessed at each balance sheet date as the Company s business prospective changes and resulted difference may have a material impact on the Company s financial statements. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those who are knowledgeable about Korean accounting principles and auditing standards and their application in practice. February 20, 2006 This audit report is effective as of February 20, 2006, the auditors report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the auditors report date to the time this audit report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report.

7 NON-CONSOLIDATED BALANCE SHEETS Korean won in thousands ASSETS Current assets: Cash and cash equivalents (Notes 3, 4 and 20) W 896,947,820 W 355,557,532 Short-term financial instruments (Notes 3, 4, 18 and 20) 319,350, ,576,165 Accounts and notes receivable - trade, less allowance for doubtful accounts of W31,927,254 thousand in 2005 and W54,157,160 thousand in 2004 (Notes 8 and 20) 973,668, ,612,616 Accounts and notes receivable - other, less allowance for doubtful accounts of W11,539,655 thousand in 2005 and W41,683,675 thousand in 2004 (Notes 8 and 20) 136,730,678 99,863,228 Advance payments 20,505,895 34,145,541 Prepaid expenses (Note 22) 33,894,434 36,509,620 Inventories, net of valuation allowance (Notes 5, 11 and 22) 444,841, ,934,543 Short-term deferred income tax assets (Note 28) 174,771,886 - Other current assets (Notes 6, 8 and 20) 10,501,506 4,743,104 Total current assets 3,011,212,521 2,274,942,349 Long-term financial instruments (Notes 3 and 4) 8,249,603 13,099,730 Long-term advance payments (Note 22) 202,225, ,315,854 Long-term loans, less allowance for doubtful accounts of W4,098 thousand in 2005 and W7,279 thousand in 2004 (Notes 8, 19 and 20) 203,005, ,480,634 Long-term deferred income tax assets (Note 28) 117,209,455 - Investments in securities (Note 7): Available-for-sale securities 15,902, ,499,584 Investments in affiliated companies 478,396, ,336,745 Total investments in securities 494,299, ,836,329 Property, plant and equipment (Notes 9, 10, 11 and 18): 13,722,780,984 11,667,646,355 Less accumulated depreciation (8,093,863,663) (7,434,762,825) Less accumulated impairment loss (114,650,578) (180,965,816) Net property, plant and equipment 5,514,266,743 4,051,917,714 Intangible assets, net of amortization (Note 12) 598,668, ,548,702 Other assets (Notes 8, 9, 14, 20 and 23) 116,263, ,880,473 Total assets W 10,265,400,752 W 8,255,021,785 (continued) see accompanying notes.

8 NON-CONSOLIDATED BALANCE SHEETS (CONT'D) Korean won in thousands LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts and notes payable - trade (Notes 8 and 20) W 310,575,179 W 265,973,676 Short-term borrowings (Notes 8, 15, 18 and 20) 126,445, ,518,958 Accounts and notes payable - other, net of discount on present value (Notes 17 and 20) 711,199, ,621,803 Accrued expenses (Note 5, 8, 20 and 22) 427,873, ,724,227 Current portion of long-term debts, net of discount on bonds and discount on present value (Notes 10, 17 and 21) 199,884,447 64,872,947 Other current liabilities (Notes 8, 16 and 23) 34,283,549 22,448,960 Total current liabilities 1,810,261,280 1,725,160,571 Long-term debts, net of current portion, discount on bonds and discount on present value (Notes 10, 11, 17, 18, 20, 21 and 22) 1,315,273,660 1,558,707,285 Long-term accounts and notes payable - other, net of discount on present value (Notes 16, 17, 20, 21 and 22) 447,359, ,669,344 Long-term advances received from customers (Note 22) 253,175,000 - Severance and retirement benefits, net (Note 19) 206,133, ,539,347 Other long-term liabilities (Note 8) 5,401,020 57,565,971 Total liabilities 4,037,604,187 3,794,642,518 Commitments and contingencies (Note 22) - - Stockholders' equity: Common stock W5,000 par value: Authorized - 9,000,000,000 shares in 2005 and 2004 Issued and outstanding 451,300,715 shares in 2005 and 448,393,682 shares in 2004 (Note 24) 2,256,503,575 2,241,968,410 Capital surplus (Note 25) 508,775, ,588,203 Retained earnings 3,556,173,765 1,740,540,569 Capital adjustment accounts (Note 26) (93,655,877) (22,717,915) Total stockholders equity 6,227,796,565 4,460,379,267 Total liabilities and stockholders' equity W 10,265,400,752 W 8,255,021,785 see accompanying notes.

9 NON-CONSOLIDATED STATEMENTS OF INCOME Years ended Korean won in thousands Sales (Notes 8, 33 and 34) W 5,753,365,445 W 5,864,353,574 Cost of sales (Notes 8, 31, 32, 34 and 35) 3,605,764,592 3,269,377,749 Gross profit on sales 2,147,600,853 2,594,975,825 Selling and administrative expenses (Notes 27, 32, 34 and 35) 717,590, ,102,222 Operating income 1,430,010,295 1,845,873,603 Other income (expense) Interest income 33,764,338 17,825,381 Interest expense (160,559,332) (185,683,551) Unrealized foreign currency translation gain, net 56,982,186 14,042,594 Realized foreign currency exchange gain (loss), net 41,494,811 (52,664,007) Reversal of allowance for doubtful accounts 25,880,367 32,378,181 Impairment loss on available-for-sale securities (Note 7) (29,185,571) (3,124,469) Gain on disposal of available-for-sale securities, net (Note 7) 79,888, ,379 Gain on valuation of investments in affiliated companies using the equity method, net (Note 7) 243,613, ,839,465 Gain on disposal of investments in affiliated companies using the equity method, net (Note 7) 1,809,773 22,704,203 Gain on disposal of property, plant, and equipment, net (Note 9) 6,012,346 24,424,157 Gain on sale of non-memory business unit (Note 36) - 446,118,500 Impairment losses on investments - (62,120,550) Impairment losses on property, plant, and equipment (Note 9) (22,032,505) - Impairment losses on intangible asstes (Note 12) (7,827,445) (181,020,298) Loss on valuation of derivatives, net (Note 23) (3,713,455) (676,787) Loss on transaction of derivatives, net (Note 23) (13,925,665) - Other, net (168,359,268) (382,478,166) 83,842,573 (197,122,968) Ordinary income 1,513,852,868 1,648,750,635 Extraordinary gain 10,071,222 43,727,381 Income before income taxes 1,523,924,090 1,692,478,016 Benefit from income taxes (Note 28) 293,485,094 - Net income W 1,817,409,184 W 1,692,478,016 Basic earnings per share (Korean won in units) (Note 29): Ordinary income W 4,048 W 3,707 Net income W 4,070 W 3,806 Diluted earnings per share (Korean won in units) (Note 29): Ordinary income W 4,037 W 3,696 Net income W 4,059 W 3,794 see accompanying notes.

10 NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF UNAPPROPRIATED RETAINED EARNINGS Years ended Korean won in thousands Unappropriated retained earnings before appropriations: Unappropriated retained earnings (deficit) carried forward from the prior year W 1,740,540,569 W (363) Effect on valuation of investments in affiliated companies using the equity method (Note 7) (1,775,988) 48,062,916 Net income for the year 1,817,409,184 1,692,478,016 3,556,173,765 1,740,540,569 Appropriation of retained earnings - - Unappropriated retained earnings to be carried forward to the next year W 3,556,173,765 W 1,740,540,569 see accompanying notes.

11 NON-CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended Korean won in thousands Cash flows from operating activities: Net income W 1,817,409,184 W 1,692,478,016 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,077,812, ,694,021 Amortization 51,241,871 70,293,071 Provision for severance and retirement benefits 52,451,118 76,278,089 Bad debt expense - other 71,450 28,084,964 Reversal of allowance for doubtful accounts (25,880,367) (32,378,181) Research and development costs 27,537,684 30,200,594 Loss on valuation of inventories 27,162,313 38,164,821 Unrealized foreign currency translation gain, net (56,982,186) (14,042,595) Interest expense 60,014,462 54,324,251 Impairment loss on available-for-sale securities 29,185,571 3,124,469 Gain on disposal of available-for-sale securities, net (79,888,649) (312,379) Gain on valuation of investments in affiliated companies using the equity method, net (243,613,344) (112,839,465) Gain on disposal of investments in affiliated companies using the equity method, net (1,809,773) (22,704,203) Gain on disposal of property, plant, and equipment, net (6,012,346) (24,424,157) Gain on sale of non-memory business unit - (446,118,500) Impairment losses on investments - 62,120,550 Impairment losses on property, plant, and equipment 22,032,505 - Impairment loss on intangible assets 7,827, ,020,298 Loss on valuation of derivatives, net 3,713, ,787 Loss on transaction of derivatives, net 13,925,665 - Others, net 207,906,841 (21,866,341) Changes in operating assets and liabilities: Accounts and notes receivable - trade (171,807,955) (239,772,838) Accounts and notes receivable - other (32,183,172) (54,163,424) Advance payments 24,999,598 (3,958,700) Prepaid expenses 4,754,937 14,134,099 Inventories (94,069,069) (123,396,138) Short-term deferred income tax assets (174,771,886) - Other current assets (1,490,743) (2,708,044) Long-term advance payments (54,241,805) 23,952,599 Long-term deferred income tax assets (117,209,455) - Other assets (7,836,001) (2,226,425) Accounts and notes payable - trade 80,098,972 10,900,239 Accounts and notes payable - other (29,503,500) 260,185,965 Accrued expenses 53,607, ,955,669 Other current liabilities 7,062,797 (56,663,834) Long-term accounts and notes payable - other 24,986,328 - Long-term advances received from customers 253,175,000 - Other long-term liabilities (52,164,951) (2,081,457) Severance and retirement benefits, net (15,857,085) (25,831,511) Net cash provided by operating activities 2,681,654,233 2,591,100,310 (continued) see accompanying notes.

12 NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) Years ended Korean won in thousands Cash flows from investing activities (Note 30): Decrease in short-term financial instruments 252,225,485 - Increase in short-term financial instruments - (569,969,007) Decrease in other current assets 324, ,409 Increase in long-term financial instruments (1,602,118) - Decrease in long-term financial instruments 6,452,246 7,915,321 Disposal of available-for-sale securities 138,520, ,104 Disposal of investments in affiliated companies using the equity method 83,326,885 46,025,034 Dividend on investments in affiliated companies using the equity method 30,040 - Increase in long-term loans (70,000) (232,155,587) Decrease in long-term loans 118,307 - Increase in other assets (27,278,305) (4,992,125) Decrease in other assets 53,285,535 5,471,342 Disposal of property, plant and equipment 56,787,561 96,664,846 Disposal of intangible assets - 250,000 Proceeds from sale of non-memory business unit - 472,114,254 Payments related to derivatives, net (14,655,000) - Acquisition of available-for-sale securities (14,391,738) (5,673,631) Acquisition of investments in affiliated companies using the equity method (84,986,076) (428,534) Acquisition of property, plant and equipment (2,552,217,016) (1,766,289,019) Acquisition of intangible assets (12,199,665) (19,477,166) Net cash used in investing activities (2,116,328,685) (1,969,051,759) Cash flows from financing activities (Note 30): Increase in short-term borrowings 49,425,865 - Increase in long-term borrowings 859,619,086 - Issuance of bonds 784,606,389 20,284,780 Proceeds from stock option exercise 12,826,980 - Proceeds from sale of treasury stock, net - 16,201,021 Repayment of short-term borrowings - (54,079,777) Repayment of current portion of long-term debts (65,485,828) (8,074,675) Repayment of bonds (1,148,953,482) (41,133,484) Repayment of long-term debts (515,899,719) (320,032,408) Stock issuance costs (74,551) (20,189) Net cash used in financing activities (23,935,260) (386,854,732) Net increase in cash and cash equivalents 541,390, ,193,819 Cash and cash equivalents at beginning of year 355,557, ,363,713 Cash and cash equivalents at end of year W 896,947,820 W 355,557,532 see accompanying notes.

13 1. 1. Organization and business Hynix Semiconductor Inc. (the Company ) was incorporated in 1949 under the laws of the Republic of Korea, and the Company s shares were listed on the Korea Stock Exchange in The Company has its headquarters in I-cheon and a branch office in Seoul. Production facilities of the Company are located in I-cheon and Cheong-ju. The Company changed its name from Hyundai Electronics Industries Co., Ltd. to its current name in March 2001 and disaffiliated from the Hyundai Business Group in August The Company originally engaged in the manufacturing and marketing of semiconductors, communication systems, liquid crystal display ( LCD ), and related activities. In 1999, the Company merged with LG Semicon Co., Ltd. as directed by the policy of the Korean government. During 2001, as part of a self-rescue plan and specialization in the semiconductor industry, the Company separated its nonsemiconductor business divisions including the LCD division. Further, the Company sold its nonmemory business unit in October Since 2000, the Company has suffered from a serious liquidity shortage due to the significant global decline of the semiconductor market price and the highly condensed maturity of debts. As a result, the Company had been under the joint management of the members of the Creditor Financial Institutions Council ( Creditor Council ) in accordance with the Corporate Restructuring Promotion Act ( CRPA ). As the Company diminished its liquidity shortage through debt restructuring and the execution of various self-rescue plans such as the disposal of business divisions, business work-out and achievement of net income amounting to W1,692,478 million in 2004, the joint management by Creditor Council was terminated on July 12, 2005 (see Note 22 (1)). As of December 31, 2005, the major stockholders of the Company are as follows: Number of shares Ownership (%) Creditor council: Korea Exchange Bank 42,816, Woori Bank 41,834, Chohung Bank 31,740, Korea Development Bank 32,412, Resolution and Finance Corporation 18,589, National Agricultural Cooperative Federation 6,693, Other financial institutions 52,648, ,734, Individual investors 221,037, ,772,

14 2. 1. Organization and business (cont d) On October 6, 2005, the Creditor Council decided to sell a part of its equity shares in the Company acquired through debt-for-equity swaps, in the form of Block Trading in domestic market as well as Global Depository Receipts in overseas market. These stock sales have been completed as of October 31, Accordingly, the equity of the Creditor Council decreased from 330,309 thousand shares (73.8% interest in the Company) to 226,735 thousand shares (50.6% interest in the Company) after the completion of the stock sales. 2. Summary of significant accounting policies Basis of financial statement preparation The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea ( Korean GAAP ). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. Certain supplementary information attached to the statutory Korean language financial statements, but not required for a fair presentation of the Company s financial position, results of operations and cash flows, is not presented in the accompanying non-consolidated financial statements. Consolidation and investments securities in affiliated companies The Company s consolidated financial statements, to be prepared as a separate report and filed with the Financial Supervisory Commission by April 30, 2006, were not prepared as of February 20, Investment securities in affiliated companies are stated using the equity method. Korean GAAP revisions for 2005 The Korean Accounting Standards Board has issued new Statements of Korean Accounting Standards ( SKAS ) with the intention to revise Korean GAAP and disclosure rules to meet international practices. The revised accounting standards which are to be applied from the first fiscal year starting after December 31, 2004 include changes in equity method investments (see Note 2 and 7) and income taxes (see Note 2 and 28). The Company adopted these new statements in its financial statements for the year ended December 31, The adoption of these new statements did not have any material effect on the Company s financial statements for the year ended December 31, 2005.

15 3. 2. Summary of significant accounting policies (cont d) The accompanying non-consolidated balance sheet as of December 31, 2004 and the related statements of income and cash flows for the year then ended, presented for comparative purposes, were restated by reflecting the cumulative effect on prior years in respect of these changes in accounting standards. However, these changes had no effect on the Company s retained earnings as of December 31, 2004 and net income for the year then ended, as previously reported. Cash equivalents Highly liquid deposits and marketable securities with original maturities of three months or less, and which have no significant risk of loss in value by interest rate fluctuations, are considered as cash equivalents. Financial instruments Financial instruments, such as time deposits and restricted bank deposits, which are traded by financial institutions and are held for short-term cash management purposes or which will mature within one year, are accounted for as short-term financial instruments. Financial instruments other than cash equivalents and short-term financial instruments are recorded as long-term financial instruments. Allowance for doubtful accounts The Company provides an allowance for doubtful accounts in consideration of the estimated losses that may arise from non-collection of its receivables. The estimate of losses, if any, is based on a review of the aging and current status of the outstanding receivables. Inventories Inventories are valued at the lower of cost or market, determined using the total average cost method for finished goods and work-in-process; specific identification method for materials in-transit; and the moving average cost method for all other inventories. Investment securities Upon acquisition, the Company classifies certain debt and equity securities into one of the three categories: held-to-maturity, available-for-sale, or trading securities. Investments in debt securities that the Company has the positive intention and ability to hold to maturity are classified as held-tomaturity. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities. Such determination should be reassessed at each balance sheet date. Available-for-sale securities are stated at fair value. The unrealized gains and losses related to changes in the fair value of available-for-sale securities are reported as a separate component of stockholders equity until realized. Trading securities are stated

16 4. 2. Summary of significant accounting policies (cont d) at fair value, with unrealized holding gains and losses reported as part of current operations. Investments in equity securities that do not have readily determinable fair values are stated at cost determined using the moving average cost method. Debt securities, classified as held-to-maturity, are stated at the acquisition cost adjusted for the amortization of discount or premium using the effective interest method. Marketable securities are at the quoted market prices as of the balance sheet date. Non-marketable equity securities are recorded at cost, determined using the moving average cost method, if a fair value is not reliably measurable. Non-marketable debt securities are recorded at the fair values derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate is determined by the issuers credit rate announced by the accredited credit rating agencies in Korea. Beneficiary certificates which are securities indicating beneficiary right on certain investment securities held by the investment management companies are recorded at fair value as determined by the investment management companies. Investment in securities is evaluated to determine if they have suffered a loss in value that is other than temporary. The impairment loss is charged to current operations. Investment in affiliated companies Investments in affiliated companies over which the Company has significant influence are accounted for using the equity method, whereby the Company s initial investment is recorded at acquisition cost and subsequently the carrying value is increased or decreased to reflect the Company s share of the investee s income or loss. If the increase or decrease is derived from changes in the investee s retained earnings, such change is presented as an increase or decrease in the Company s retained earnings. If the increase or decrease is derived from the investee s changes in capital surplus or capital adjustments, then such amount is presented as a valuation gain or loss on investment securities, and is shown in a capital adjustment account within stockholders equity. Under the equity method of accounting, if the Company s share in the losses of the investee equals or exceeds its interest in the investee, it discontinues recognizing its share of further losses unless it has guaranteed obligations of the investee or is otherwise committed to provide additional financial support. In addition, if the Company has other long-term interests in the investee, it continues recognizing its share of further losses to the extent of the carrying amount of such long-term interests. At the time of acquisition of the investment, any difference between the cost of the investment and the Company s share of the net fair value of the investee's identifiable assets and liabilities is accounted for as goodwill which is amortized over its useful life using the straight-line method. The amortization of goodwill is recorded against the equity income (loss) of affiliates. When events or circumstances indicate that the carrying amount may not be recoverable, the Company reviews goodwill for impairment.

17 5. 2. Summary of significant accounting policies (cont d) Assets and liabilities of foreign-based companies accounted for using the equity method of accounting are translated at the current rate of exchange at the balance sheet date, while profit and loss items in the statement of income are translated at average rate and capital accounts at historical rates. The translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based companies are offset and the net balance is accumulated as capital adjustment. The Company s share in the investee s unrealized profits and losses resulting from transactions between the Company and its investee are eliminated. Property, plant and equipment Property, plant and equipment are stated at cost, except for assets which were revalued in accordance with the Korean Assets Revaluation Law. The revaluation of assets is no longer allowed effective from January 1, Maintenance and repairs are expensed in the year in which they are incurred. Expenditures which result in the enhancement of the value of the facilities involved are capitalized as additions to property, plant and equipment. When an asset is acquired by means of capital contributions in kind, donations and/or other forms of unilateral transfers, the cost shall be recorded at its fair value. When the estimated cost of dismantling and removing the asset and restoring the site, after the termination of the asset s useful life, meets the criteria for recognition of provisions, the present value of the estimated expenditure shall be included in the cost of the asset. Depreciation of property, plant and equipment is provided using the straight-line method. The estimated useful lives of assets are as follows: Years Buildings 10 ~ 60 Structures 5 ~ 40 Machinery and equipment 5 ~ 20 Vehicles 5 Other 5 ~ 10 The Company recognizes depreciation expense on idle property, plant and equipment, which are temporarily not in operation, as part of non-operating expenses. In addition, if the net realizable value of an asset is less than its book value at the balance sheet date, the carrying amount is reduced to the net realizable value, and the difference is recognized as an impairment loss in the current period. Impairment of an asset that is subsequently recovered is recognized as a recovery on impairment losses. The book value of an asset subsequent to such recovery may not exceed the carrying amount of an asset prior to the impairment, net of depreciation expense to be applied during the period an asset had been impaired.

18 6. 2. Summary of significant accounting policies (cont d) The Company capitalizes interest costs, discounts and other financial charges, including certain foreign exchange transaction gains and losses, on all borrowings, incurred prior to completion of the acquisition, as part of the cost of assets. Significant additions or improvements extending useful lives of assets are capitalized. However, normal maintenance and repairs are charged to expense as incurred. Leases Capital lease obligations are recorded at the present value of future minimum lease payments. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Intangible assets Intangible assets are stated at cost less accumulated amortization and impairment losses. Goodwill represents costs in excess over the fair value of net identifiable assets of businesses acquired or merged. Goodwill is amortized using the straight-line method over 20 years. Other intangible assets are amortized using the straight-line method over periods ranging from 5 to 10 years, based on the nature of the assets. However, when the recoverable value of intangible assets falls below their book value, the difference between the recoverable value and the book value is charged to current operations. Accrual for loss on purchase commitments The Company has entered into a purchase agreement ( Off-take Agreement ) with Hynix Semiconductor Manufacturing America ( HSMA ), an overseas manufacturing subsidiary in the United States, which obligate the Company to purchase all dies produced by HSMA that meet certain specifications. With respect to the obligation, if the total manufacturing costs, consisting of purchase price and additional processing cost on purchased dies, are expected to be greater than the sale price of finished products, the Company accrues the expected sales loss as current liabilities. Allowance for sales return The Company provides an allowance for sales return in consideration of the anticipated sales return in the period of sale. The anticipated sales returns are adjusted to sales and cost of sales and related gross profit and estimated expenses are recorded as accrued expenses Discount (premium) on bonds Discount (premium) on bonds is presented as a direct deduction from (addition to) the nominal value of the bonds and is amortized using the effective-interest-rate method over the life of the bonds.

19 7. 2. Summary of significant accounting policies (cont d) Severance and retirement benefits In accordance with the Korean Law on Guarantee of Employees Severance and Retirement Benefits and the Company s regulations, employees and directors terminating their employment with at least one year of service are entitled to severance and retirement benefits, based on the rates of pay in effect at the time of termination, years of service and certain other factors. The provision for the years ended is sufficient to state the liability under the Korean Law on Guarantee of Employees Severance and Retirement Benefits and the Company s regulations at the estimated obligation arising from services performed to and at rates of pay in effect at these dates. Funding of this liability is not required by Korean law. The lesser of 10% of annual payroll expense or 40% of the accumulated severance and retirement benefits provision is deductible for corporate income tax reporting purposes unless benefits are actually paid or the non tax-deducted portion is deposited with financial institutions. Accordingly, the Company had deposited a portion of its severance and retirement benefits obligation with an insurance company as deposits for severance and retirement benefits. Since the Company s employees are individually nominated as the vested beneficiaries of the deposits in respect of what is due to them as of, those deposits have been offset against the Company s liability for severance and retirement benefits as of such dates. In accordance with the Korean National Pension Law prior to revision, the Company had prepaid a portion of its severance and retirement benefits obligation to the Korean National Pension Corporation ( KNPC ) at the rate of 3% of payroll expense up through March 31, Such prepayments have been offset against the Company s liability for severance and retirement benefits. In accordance with a revision in the Korean National Pension Law, additions to these prepayments were no longer required effective from April 1, Valuation of receivables and payables at present value Receivables and payables arising from long-term installment transactions are stated at present value if the difference between the carrying amount of receivables or payables and their present value is material. The present value discount is amortized using the effective-interest-rate method and the amortization is credited or charged to current operations over the installment period. When credit terms (e.g., principal, interest rate, payment period) of receivables from or payables to debtors or creditors, respectively, are unfavorably changed from the perspective of the Company due to court receivership, debt restructuring and/or financial workout, such receivables or payables are stated at present value and the difference between the carrying amount of such receivables or payables and their present value is amortized using the effective-interest-rate method and charged to current operations.

20 8. 2. Summary of significant accounting policies (cont d) Foreign currency translation Transactions involving foreign currencies are recorded at the exchange rates prevailing at the time the transactions are made. Assets and liabilities denominated in foreign currencies are translated into Korean won at the appropriate exchange rates on the balance sheet dates. The resulting unrealized foreign currency translation gains (losses) are credited (charged) to current operations. Derivatives Derivative financial instruments, regardless of whether they are entered into for trading or hedging purposes, are valued at fair value. Derivative contracts not meeting the requirements for hedge accounting treatment are classified as trading contracts with the changes in fair value included in current operations. Derivative financial instruments used for hedging purposes are accounted for in a manner consistent with the accounting treatment appropriate for the transactions being hedged or associated with such contracts. The instruments are valued at fair value when underlying transactions are valued at fair value, and the resulting unrealized valuation gains (losses) are credited (charged) to current operations. If a quoted market price is not available, a reasonable fair value is determined based on a pricing model. Stock options The stock option program allows the Company s employees to acquire shares of the Company. The option exercise price is generally fixed at an amount lower than the market price of underlying shares at the date of the grant. The Company values stock options based upon an option pricing model under the fair value method and recognizes this value as an expense over the period in which the options vest. When the options are exercised, equity is increased by the amount of the proceeds received, and the difference between the exercise price and the market price is included in compensation cost and credited to the capital adjustment account. When stock options are forfeited because the specific vesting requirements are not satisfied, previously recognized compensation costs and corresponding capital adjustments are reversed to earnings. When stock options expire unexercised, previously recognized compensation costs and corresponding capital adjustments are reversed to capital surplus. Revenue recognition The Company recognizes revenue from sale of products upon transfer of the significant risks and rewards of ownership of the goods to the buyer. Product sales are reported net of allowance for estimated discounts and product returns. Revenue from other than the sale of products is recognized when the Company s revenue-earning activities have been substantially completed, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Company.

21 9. 2. Summary of significant accounting policies (cont d) Income taxes Income tax expense or benefit on earnings includes both current and deferred taxes. Current tax assets and liabilities are measured at the amount expected to be recovered or paid to the tax authorities, respectively. Deferred income taxes are provided using the liability method for the tax effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the accompanying financial statements. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse, and are classified as current or non-current, respectively, based on the classification of the related assets or liabilities in the balance sheet. In addition, current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity. Per share amounts Basic earnings per share ( EPS ) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year while basic ordinary earnings per share is computed by reversing the effect of extraordinary items (net of effect of income taxes), if any. Diluted EPS measures the performance of the Company over the reporting period while giving effect to the stock option that was dilutive and outstanding during the year. Reclassifications Certain amounts in the 2004 financial statements have been reclassified to conform with the 2005 presentation. Such reclassifications had no effect on the Company s net income and retained earnings as previously reported. Use of estimates The preparation of financial statements in accordance with Korean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Cash and cash equivalents, and financial instruments Cash and cash equivalents, and financial instruments as of consisted of the following (Korean won in millions): 2005 Short-term Long-term Cash and cash equivalents financial instruments financial instruments Cash on hand W 15 W - W - Checking accounts 17, Passbook accounts 12 8,536 -