Yageo Corporation and Subsidiaries Consolidated Financial Statements for the Six Months Ended June 30, 2005 and 2006 and Independent Auditors Report

Transcription

1 Yageo Corporation and Subsidiaries Consolidated Financial Statements for the Six Months Ended June 30, 2005 and 2006 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders Yageo Corporation We have audited the accompanying consolidated balance sheets of Yageo Corporation (the Corporation ) and subsidiaries as of June 30, 2005 and 2006, and the related consolidated statements of income, changes in stockholders equity and cash flows for the six months then ended, all expressed in New Taiwan dollars. These consolidated financial statements are the responsibility of the Corporation s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. However, We did not audit the financial statements of Phycomp Holding B.V. ( Phycomp ) and Ferroxcube International Holding B.V. ( Ferroxcube ) as of and for the six months ended June 30, 2005 and 2006 (together, the consolidated subsidiaries ). The total assets of these consolidated subsidiaries were 15.99% (NT$7,283,573 thousand) and 17.19% (NT$7,737,794 thousand) of the related consolidated totals, as of June 30, 2005 and 2006, respectively, and the total revenues of these consolidated subsidiaries were 27.54% (NT$2,011,407 thousand) and 25.13% (NT$2,439,723 thousand) of the related consolidated totals for the six months ended June 30, 2005 and 2006, respectively. Also, we did not audit the financial statements of Fubon Venture Capital. ( Fubon ) as of and for the six months ended June 30, 2005, and of Fubon and Strong Components Co., Ltd. ( Strong ) as of and for the six months ended June 30, 2006.These investments are accounted for using the equity method in the accompanying financial statements. The carrying values of these investments were 0.15% (NT$70,457 thousand) and 0.57% (NT$257,861 thousand) of total assets, as of June 30, 2005 and 2006, respectively. The equity in their net loss amounted to NT$563 thousand and the equity in their net gain amounted to NT$10,999 thousand, which were 0.77% and 1.04%, respectively, of income (loss) before income tax expense for the six months ended June 30, 2005 and The financial statements of the consolidated subsidiaries and Fubon as of and for the six months ended June 30, 2005 and 2006 and of Strong as of and for the six months ended June 30, 2006 were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these investees, is based solely on the reports of the other auditors. Except for the matter described in the next paragraph, we conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. As disclosed in Note 2 to the consolidated financial statements, the financial statements as of and for the six months ended June 30, 2005 and 2006 of the following subsidiaries were unaudited: Yageo Holding International Limited, Rancher International Limited (B.V.I.), Luminary International Limited (B.V.I), Phycomp Singapore PTE. LTD., Phycomp Malaysia SDN. BHD., Paracatu Gestao E. Investimentos, Steller Inc., Kuo Ding Venture Capital Limited, Ferroxcube Taiwan Ltd., Ferroxcube Holding (Samoa) Ltd., and Ferroxcube Electronics (Dongguan) Co., Ltd. as of and for the six months ended June 30, 2005 ; and Yageo Holding - 1 -

3 International Limited, Phycomp Singapore PTE. LTD., Phycomp Malaysia SDN. BHD., Paracatu Gestao E. Investimentos, Steller Inc., Kuo Ding Venture Capital Limited, Ferroxcube Taiwan Ltd., Ferroxcube Holding (Samoa) Ltd., and Ferroxcube Electronics (Dongguan) Co., Ltd. as of and for the six months ended June 30, The total assets of the above subsidiaries were 6.07% (NT$2,763,800 thousand) and 2.85% (NT$1,283,638 thousand), and the total liabilities of the above subsidiaries were 0.60% (NT$134,428 thousand) and 0.86% (NT$152,638 thousand), of the related consolidated totals as of June 30, 2005 and 2006, respectively. Of the consolidated totals in the six months ended June 30, 2005 and 2006, the total revenues of the above subsidiaries were 1.12% (NT$81,959 thousand) and 0.84% (NT$81,665 thousand), respectively, and their total net loss was 2.06% (NT$1,956 thousand) and their total net income was 2.76% (NT$25,524 thousand), respectively. Also, as disclosed in Note 10 to the consolidated financial statements, the aggregate carrying values of those equity-method investments based on unaudited financial statements were NT$956,042 thousand and NT$1,066,202 thousand as of June 30, 2005 and 2006, respectively, and the equity in net gain was NT$4,124 thousand and NT$86,046 thousand for the six months ended June 30, 2005 and In our opinion, based on our audits and the reports of the other auditors, and except for the matters described in the preceding paragraph, the consolidated financial statements of the Corporation and subsidiaries referred to in the first paragraph present fairly, in all material respects, the financial position of the Corporation and subsidiaries as of June 30, 2005 and 2006, and the results of their operations and their cash flows for the six months then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. As disclosed in Notes 2 to the consolidated financial statements, the consolidated financial statements as of and for the six months ended June 30, 2006 included the Compostar Technology Co., Ltd. ( Compostar ) and its subsidiaries since the equity interest of Compostar owned by the Corporation and subsidiaries was more than 50% of its outstanding common stock on July 1, As disclosed in Notes 3 to the consolidated financial statements, on January 1, 2006, the Corporation and subsidiaries adopted the newly released Statements of Financial Accounting Standards No. 34, Accounting for Financial Instruments, and No. 36, Disclosure and Presentation of Financial Instruments and also with the newly revised Statements of Financial Accounting Standards No. 5, Long-term Investments in Equity Securities and No. 25, Business Combinations - Accounting Treatment under Purchase Method. Since January 1, 2006, amortization of goodwill ceased but will be tested for impairment regularly. Our audits also comprehended the translation of the 2006 New Taiwan dollars amounts into U.S. dollar amounts and, in our opinion, this translation has been made in conformity with the basis stated in Note 4. Such U.S. dollar amounts are presented solely for the convenience of readers. August 11, 2006 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail

4 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2005 AND 2006 (In Thousands of Dollars, Except Number of Shares and Par Value) New Taiwan Dollars U.S. Dollars (Note 4) New Taiwan Dollars U.S. Dollars (Note 4) ASSETS Amount % Amount % Amount LIABILITIES AND STOCKHOLDERS EQUITY Amount % Amount % Amount CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Notes 2 and 5) $ 6,141, $ 2,679,152 6 $ 82,692 Short-term loans (Notes 15 and 27) $ 2,946,948 6 $ 2,711,305 6 $ 83,685 Financial assets at fair value through profit or loss (Notes 2, 3 Commercial paper issued, net (Note 16) , ,129 and 6) 3,680-25, Notes payable 250,856-85,397-2,636 Available-for-sale financial assets (Notes 2, 3 and 7) 60,900-62,857-1,940 Accounts payable 1,755, ,715, ,813 Notes receivable, net of allowance for doubtful accounts of Accounts and notes payable to related parties (Note 25) 46, ,332-3,313 NT$76 thousand in 2005 (Note 2) 152, ,746-5,393 Other payable 31, ,222-4,050 Accounts receivable, net of allowance for doubtful accounts Income tax payable (Notes 2 and 22) 28,949-36,890-1,139 of NT$48,907 thousand in 2005 and NT$96,919 thousand Accrued expenses 719, ,265, ,062 (US$2,991 thousand) in 2006 (Note 2) 3,599, ,138, ,588 Financial liabilities at fair value through profit or loss Accounts and notes receivable from related parties, net of (Notes 2, 3 and 6) 1,369-13, allowance for doubtful accounts of NT$5,017 thousand Current portion of long-term liabilities (Notes 2, 17 and 27) 6,212, ,011, ,956 (US$155 thousand) in 2006 (Notes 2 and 25) 102, ,855-3,206 Deferred income tax liabilities (Notes 2 and 22) 47, Other financial assets (Notes 8 and 27) 542, ,833-4,779 Other current liabilities 105,668-92,774-2,863 Inventories, net (Notes 2 and 9) 4,223, ,625, ,761 Deferred income tax assets (Notes 2 and 22) , ,631 Total current liabilities 12,146, ,920, ,057 Other current assets 412, , ,807 LONG-TERM LIABILITIES, NET OF CURRENT PORTION Total current assets 15,238, ,497, ,596 (Notes 2, 17 and 27) 9,949, ,301, ,493 LONG-TERM INVESTMENTS (Notes 2, 3, 7, 10, 11 and 27) OTHER LIABILITIES Investments accounted for 2,000, ,230, ,844 Accrued pension costs (Notes 2 and 24) 93, ,822-3,760 Real estate 168, ,582-5,173 Deposit received (Note 25) 165, , ,279 Financial assets measured at holding cost 1,234, ,253, ,688 Other liabilities 122, ,293-4,145 Available-for-sale financial assets ,833-4,254 Other financial assets 632, Total other liabilities 381, , ,184 Total long-term investments 4,035, ,789, ,959 Total liabilities 22,477, ,648, ,734 PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 27) STOCKHOLDERS EQUITY OWNED BY THE PARENT Cost COMPANY Land 720, , ,971 Capital stock - NT$10 par value Buildings 6,509, ,785, ,559 Authorized - 3,500,000 thousand shares Machinery and equipment 15,413, ,568, ,530 Issued - 2,274,863 thousand shares in 2005 and 2,406,469 Miscellaneous equipment 1,302, ,641, ,650 thousand shares in ,748, ,064, ,760 Total cost 23,945, ,803, ,710 Capital surplus: Less - accumulated depreciation 8,772, ,578, ,782 Paid-in capital in excess of par value 974, ,037, ,010 15,172, ,225, ,928 Equity in capital surplus reported by equity-method Construction in progress and advances for acquisition of investees 475, , ,319 equipment 821, ,954, ,310 Total capital surplus 1,449, ,501, ,329 Retained earnings (accumulated deficit) Net property, plant and equipment 15,994, ,179, ,238 Legal reserve , Special reserve , ,350 INTANGIBLE ASSETS Unappropriated earnings (accumulated deficit) (95,044 ) - 880, ,191 Goodwill (Notes 2 and 3) 2,401, ,492, ,917 (95,044 ) - 1,181, ,469 Land use rights (Note 27) 88,177-91,482-2,824 Others: Cumulative translation adjustments (979,570 ) (2 ) (214,190 ) - (6,611 ) Total intangible assets 2,489, ,583, ,741 Unrealized gain or loss on financial instrument (38,373 ) - 40,847-1,261 Total others (1,017,943 ) (2 ) (173,343 ) - (5,350 ) OTHER ASSETS Properties leased to others, net (Notes 2, 12, 13 and 27) 4,315, ,312, ,115 Total stockholders equity owned by the parent company 23,085, ,573, ,208 Idle assets (Notes 2, 12 and 26) 256, , ,145 Refundable deposits 94,455-82,575-2,549 MINORITY INTEREST , ,559 Deferred income tax assets (Notes 2 and 22) 2,121, ,961, ,547 Pledged assets (Notes 2, 14 and 27) 341, , ,624 Total stockholders equity 23,085, ,369, ,767 Miscellaneous (Note 2) 674, , ,987 Total other assets 7,804, ,969, ,967 TOTAL $ 45,562, $ 45,018, $ 1,389,501 TOTAL $ 45,562, $ 45,018, $ 1,389,501 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated August 11, 2006) - 3 -

5 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of Dollars, Except Earnings (Loss) Per Share) U.S. Dollars New Taiwan Dollars (Note 4) Amount % Amount % Amount GROSS SALES $ 7,433, $ 9,860, $ 304,348 LESS: SALES RETURNS 56, , ,298 SALES ALLOWANCES 72, , ,422 NET SALES (Note 25) 7,303, ,707, ,628 COST OF SALES (Note 25) 5,747, ,870, ,047 GROSS PROFIT 1,556, ,837, ,581 OPERATING EXPENSES Sales and marketing 717, , ,165 General and administrative 411, , ,121 Research and development 190, , ,727 1,319, ,490, ,013 OPERATING INCOME 236, ,346, ,568 NONOPERATING INCOME AND GAINS Investment income, net 152, , ,689 Rental 94, , ,118 Interest 51, , ,770 Gain on disposal of property, plant and equipment Financial asset revaluation gain - - 4, Other income 74, ,217-1,581 Total nonoperating income and gains 372, , ,293 NONOPERATING EXPENSES AND LOSSES Interest 223, , ,349 Loss on disposal of property, plant and equipment , ,366 Impairment loss on financial assets measured at holding cost , ,958 Inventory losses 50, ,222-1,056 Foreign exchange loss, net , Financial liability revaluation loss 1,369-13, Bond issue costs 13, Reorganization cost 91, (Continued) - 4 -

6 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of Dollars, Except Earnings (Loss) Per Share) U.S. Dollars New Taiwan Dollars (Note 4) Amount % Amount % Amount Financial asset valuation loss $ 86,342 1 $ - - $ - Other expenses (Note 25) 215, , ,274 Total nonoperating expenses and losses 682, , ,121 INCOME (LOSS) BEFORE INCOME TAX EXPENSE (73,138) (1) 1,060, ,740 INCOME TAX EXPENSE (Notes 2 and 22) 21, , ,209 CONSOLIDATED NET INCOME (LOSS) $ (95,044 ) (1 ) $ 924, $ 28,531 ATTRIBUTE TO: Parent company's stockholders $ (95,044) (1) $ 884,023 9 $ 27,286 Minority interest , ,245 $ (95,044 ) (1 ) $ 924, $ 28,531 U.S. Dollars New Taiwan Dollars (Note 4) Loss Income Income Before Before Before Income Income Income Tax Net Tax Net Tax Net Expense Loss Expense Income Expense Income NET EARNINGS (LOSS) PER SHARE (Note 21) Basic $ (0.03) $ (0.04) $ 0.42 $ 0.37 $ 0.01 $ 0.01 Diluted $ (0.03) $ (0.04) $ 0.42 $ 0.37 $ 0.01 $ 0.01 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated August 11, 2006) (Concluded) - 5 -

7 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of New Taiwan Dollars) Capital Surplus (Notes 2, 17, 18 and 20) Equity in Retained Earnings (Accumulated Deficit) Unrealized Capital (Notes 2, 18 and 22) Cumulative Gain or Loss Capital Stock Premium from Surplus Unappropriated Translation on Financial Issued (Notes 17 and 18) Paid-in Capital Conversion of Reported by Earnings Adjustments Instrument Total Shares in Excess of Convertible Treasury Stock Equity-method Special (Accumulated (Notes 2 (Notes 2, 3 Minority Stockholders (Thousands) Amount Par Value Bonds Transaction Investees Legal Reserve Reserve Deficit) and 18) and 18) Interest Equity BALANCE, JANUARY 1, ,274,863 $ 22,748,635 $ 11,041,834 $ 135,260 $ 1,650 $ 473,376 $ - $ - $ (10,204,525 ) $ (111,178 ) $ (39,204 ) $ - $ 24,045,848 Offset of deficit against capital surplus - - (10,067,615 ) (135,260 ) (1,650 ) ,204, Consolidated net loss for the six months ended June 30, (95,044 ) (95,044 ) Effect of changes in percentage of ownership of investees , ,009 Reversal of equity in the unrealized loss on financial instrument reported by equity-method investees Changes in translation adjustments (868,392 ) - - (868,392 ) BALANCE, JUNE 30, ,274,863 $ 22,748,635 $ 974,219 $ - $ - $ 475,385 $ - $ - $ (95,044 ) $(979,570 ) $ (38,373 ) $ - $ 23,085,252 BALANCE, JANUARY 1, ,406,469 $ 24,064,694 $ 1,037,080 $ - $ - $ 458,433 $ - $ - $ 300,577 $(489,068 ) $ (39,509 ) $ 740,238 $ 26,072,445 Effect of adopting the newly released SFAS No ,753-47,753 Appropriation of 2005 earnings Legal reserve ,058 - (30,058 ) Special reserve ,519 (270,519) Increase in minority interest ,116 15,116 Consolidated net income for the six months ended June 30, , , ,360 Changes in unrealized gain or loss on available-for-sale financial assets ,431-6,431 The unrealized gain or loss charged to income upon sale of available-for-sale financial assets (12,039 ) - (12,039 ) Effect of changes in percentages of ownership of investees , (3,056) (476 ) - - (8 ) Equity in the changes in capital surplus reported by equity-method investees , ,979 Equity in the unrealized gain or loss on available-for-sale financial assets reported by equity-method investees ,211-38,211 Changes in translation adjustments , ,354 BALANCE, JUNE 30, ,406,469 $ 24,064,694 $ 1,037,080 $ - $ - $ 463,936 $ 30,058 $ 270,519 $ 880,967 $(214,190 ) $ 40,847 $ 795,691 $ 27,369,602 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated August 11, 2006) - 6 -

8 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2006 (In Thousands of U.S. Dollars - Note 4) Capital Surplus (Notes 2 and 18 ) Equity in Capital Unrealized Surplus Cumulative Gain or Loss Capital Stock Paid-in Reported by Retained Earnings Translation on Financial Issued (Notes 18) Capital Equity- (Notes 2, 18 and 22) Adjustments Instrument Total Shares in Excess of method Legal Special Unappropriated (Notes 2 (Notes 2, 3 Minority Stockholders (Thousands) Amount Par Value Investees Reserve Reserve Earnings and 18) and 18) Interest Equity BALANCE, JANUARY 1, ,406,469 $ 732,563 $ 31,570 $ 13,956 $ - $ - $ 9,150 $ (14,888 ) $ (1,203 ) $ 22,534 $ 793,682 Translation Adjustment (Note 4) - 10, (207 ) (16 ) ,048 Effect of adopting the newly released SFAS No ,474-1,474 Appropriation of 2005 earnings Legal reserve (928 ) Special reserve ,350 (8,350 ) Increase in minority interest Consolidated net income for the six months ended June 30, , ,245 28,531 Changes in unrealized gain or loss on available-for-sale financial assets The unrealized gain or loss charged to income upon sale of available-for-sale financial assets (371 ) - (371 ) Effect of changes in percentages of ownership of investees (94 ) (15 ) Equity in the changes in capital surplus reported by equity-method investees Equity in the unrealized gain or loss on available-for-sale financial assets reported by equity-method investees ,179-1,179 Changes in translation adjustments , ,499 BALANCE, JUNE 30, ,406,469 $ 742,760 $ 32,010 $ 14,319 $ 928 $ 8,350 $ 27,191 $ (6,611 ) $ 1,261 $ 24,559 $ 844,767 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated August 11, 2006) - 7 -

9 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of Dollars) U.S. Dollars New Taiwan Dollars (Note 4) CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net (loss) income $ (95,044 ) $ 924,360 $ 28,531 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Investment income, net (152,007 ) (184,303 ) (5,689 ) Depreciation and amortization 1,223,894 1,309,202 40,409 Financial instrument revaluation loss, net 87,711 8, Provision (reversal of allowance) for decline in value of inventories (116,342 ) 3, Impairment loss on financial assets measured at holding cost - 63,451 1,958 Net (gain) loss on disposal of property, plant and equipment (130 ) 109,065 3,366 Deferred income taxes 2,139 75,733 2,338 Net changes in operating assets and liabilities: Financial assets at fair value through profit or loss 1,391 (15,020 ) (464 ) Financial liabilities at fair value through profit or loss (24 ) (5,349 ) (165 ) Notes receivable 3,133 45,241 1,396 Accounts receivable 172,703 (153,518 ) (4,738 ) Accounts and notes receivable from related parties (26,399 ) 30, Inventories 1,111,405 (395,725 ) (12,214 ) Other financial assets - other receivables 20,645 53,402 1,648 Other financial assets - imprest bank accounts - 20, Other current assets 123,263 24, Notes payable (7,501 ) 19, Accounts payable (77,252 ) 332,974 10,277 Accounts and notes payable to related parties (32,180 ) 34,602 1,068 Income tax payable 2,509 4, Accrued expenses (296,076 ) 191,897 5,923 Other payables (12,689 ) 33,146 1,023 Other current liabilities (996,691 ) (65,486 ) (2,021 ) Accrued pension costs 13,305 10, Net cash provided by operating activities 949,763 2,475,693 76,413 (Continued) - 8 -

10 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of Dollars) U.S. Dollars New Taiwan Dollars (Note 4) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of financial assets measured at holding cost and other financial assets $ 53,985 $ 646,634 $ 19,958 Proceeds from disposal of long-term investments accounted for 90, ,578 6,962 Proceeds from disposal of available-for-sale financial assets 141,016 24, Acquisition of long-term investments accounted for (42,011 ) (59,081 ) (1,824 ) Acquisition of available-for-sale financial assets - (119,982 ) (3,703 ) Acquisition of financial assts measured at holding cost (1,408 ) - - Acquisition of property, plant and equipment (224,058 ) (750,262 ) (23,157 ) Proceeds from disposal of property, plant and equipment 203 2, Decrease (increase) in pledged assets (140,313 ) 129,911 4,010 Decrease in refundable deposits 8,191 10, Increase in other assets (25,858 ) (118,256 ) (3,650 ) Net cash used in investing activities (140,253 ) (8,313 ) (257 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term loans 1,283,845 (741,326 ) (22,881 ) Net decrease in commercial paper - (99,203 ) (3,062 ) Increase in long-term liabilities - 1,421,591 43,878 Decrease in long-term liabilities (912,874 ) (3,673,167 ) (113,373 ) Increase in deposits received 12,276 29, Increase (decrease) in other liabilities (39,955 ) 15, Net cash provided by (used in) financing activities 343,292 (3,047,358 ) (94,057 ) EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (88,076 ) (89,217 ) (2,754 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,064,726 (669,195 ) (20,655 ) CASH, BEGINNING OF PERIOD 5,076,404 3,348, ,347 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,141,130 $ 2,679,152 $ 82,692 (Continued) - 9 -

11 YAGEO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of Dollars) U.S. Dollars New Taiwan Dollars (Note 4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 242,555 $ 237,742 $ 7,338 Less - amounts capitalized 4,738 5, Net interest paid $ 237,817 $ 232,105 $ 7,164 Income tax paid $ 16,229 $ 41,089 $ 1,268 NONCASH FINANCING ACTIVITIES: Current portion of long-term liabilities $ 904,234 $ 929,689 $ 28,695 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated August 11, 2006) (Concluded)

12 YAGEO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2005 AND 2006 (In Thousands of Dollars, Except Exchange Rate and Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Yageo Corporation (the Corporation ) was incorporated in 1987 in the Republic of China (ROC). The Corporation s shares are traded on the Taiwan Stock Exchange. The Corporation manufactures and sells passive components. manufacture passive components. It also produces and sells equipment used to The Corporation and consolidated subsidiaries had 7,117 and 8,748 employees, as of June 30, 2005 and 2006, respectively. The Corporation s subsidiaries were as follows: a. Subsidiaries that manufacture and market passive components - Ferroxcube Taiwan, Ltd., Yageo Electronics (Dongguan) Co., Ltd., Yageo Electronics (China) Co., Ltd., Phycomp Electronics (Su Zhou) Co., Ltd. (eliminated after being merged into Yageo Electronics (China) Co., Ltd. in 2005) Ferroxcube Electronics (Dongguan) Co., Ltd., Guo Chuang Electronics (Dongguan) Co., Ltd., Yageo Components (Su Zhou) Co., Ltd., Yageo USA (H.K.) Limited, Compostar Technology Co., Ltd., Compostar Technology (Dongguan) Co., Ltd., Compostar Technology (Su Zhou) Co., Ltd., Compostar Technology (Shanghai) Co., Ltd., Yageo Europe GmbH, Vitrohm Portuguesa LDA, Paracatu Gestao E Investimentos, Phycomp Holding B.V., Ferroxcube International Holding B.V., Yageo Korea, Yageo Japan, Yageo America Corporation, Phycomp Singapore PTE. LTD., Phycomp Malaysia SDN. BHD. and Steller, Inc. b. Investment holding subsidiaries - Yageo Holding (Bermuda) Limited, Kuo-E Holding (Cayman), Ltd., Vitrohm Holding GmbH, Kuo Shin Investment Limited, Lee Tai Investment Limited (eliminated after being merged into Kuo Shin Investment Limited in 2005), Kuo Chung Development Limited, Kuo Ding Venture Capital Limited, Ferroxcube Holding (Samoa), Ltd., Hsu Tai International (H.K.), Compostar Technology (Cayman), Ltd., Rancher International Limited (B.V.I.) (eliminated after being merged into Yageo Holding (Bermuda) Limited in the first half year of 2006), Luminary International Limited (B.V.I.) (eliminated after being merged into Yageo Holding (Bermuda) Limited in the first half year of 2006) and Yageo Holding International Limited. The organization chart of the Corporation and the consolidated subsidiaries (collectively, the Group ) as of June 30, 2006 is shown as Table SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the ROC. In preparing financial statements in conformity with these guidelines and principles, the Group is required to make certain estimates and assumptions that could affect the amounts of allowance for doubtful receivables; allowance for decline in market value of inventories; depreciation and impairment of tangible assets; amortization and impairment of intangible assets and pension expenses. Actual results could differ from these estimates because of the uncertainty of circumstances

13 For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. The Group s significant accounting policies are summarized as follows: Current/Noncurrent Assets and Liabilities Unrestricted cash and cash equivalents and other assets to be converted to cash, used up or consumed within one year are classified as current. Liabilities to be redeemed, paid or settled within one year are classified as current. All other assets and liabilities are classified as noncurrent. Basis of Consolidated Financial Statements The consolidated financial statements include the accounts of the Corporation and its direct and indirect subsidiaries. Significant transactions between the Corporation and the consolidated subsidiaries are eliminated. When a subsidiary was acquired, the difference, if any, between the acquisition cost of the investment and the Group s proportionate equity in the fair value of the subsidiary s net assets was recognized as goodwill and was previously amortized over 20 years. Effective January 1, 2006, amortization of goodwill ceased but will be tested for impairment at least on an annual basis. If an event occurs or circumstances change that more likely than not goodwill is impaired, an impairment test is implemented. The Corporation and its subsidiaries incorporated in the ROC (hereinafter collectively referred to as Taiwan Entities ) maintain their accounts and prepare their financial statements in New Taiwan dollars. The accounts of consolidated foreign subsidiaries are maintained and their separate financial statements are prepared using their respective functional currencies. Those financial statements are translated into New Taiwan dollars, for consolidation purposes, at the following foreign exchange rates: (a) assets and liabilities - prevailing exchange rates on the balance sheet dates, (b) stockholders equity - historical rates, and (c) profit and loss accounts - weighted average rates for six months. The consolidated financial statements as of and for the six-month period ended June 30, 2005 include the accounts of the Corporation and its subsidiaries - Ferroxcube Taiwan, Ltd., Yageo Electronics (Dongguan) Co., Ltd., Yageo Electronics (China) Co., Ltd., Phycomp Electronics (Su Zhou) Co., Ltd., Ferroxcube Electronics (Dongguan) Co., Ltd., Guo Chuang Electronics (Dongguan) Co., Ltd., Yageo Components (Su Zhou) Co., Ltd, Yageo USA (H.K.) Limited, Yageo Europe GmbH, Vitrohm Portuguesa LDA, Paracatu Gestao E Investimentos, Phycomp Holding B.V., Ferroxcube International Holding B.V., Steller, Inc., Yageo Korea, Yageo Japan, Yageo America Corporation, Phycomp Singapore PTE. LTD., Phycomp Malaysia SDN. BHD., Yageo Holding (Bermuda) Limited, Vitrohm Holding GmbH, Kuo Shin Investment Limited, Lee Tai Investment Limited, Kuo Chung Development Limited, Kuo Ding Venture Capital Limited, Ferroxcube Holding (Samoa), Ltd., Hsu Tai International (H.K.), Rancher International Limited (B.V.I.), Luminary International Limited (B.V.I.), and Yageo Holding International Limited. Apart from the preceding companies, the consolidated financial statements as of and for the six months ended June 30, 2006 included the accounts of Compostar Technology Co., Ltd. ( Compostar ) and its subsidiaries since the equity interest of Compostar owned by the Corporation s and subsidiaries was more than 50% of its outstanding common stock on July 1, Also, the consolidated financial statement as of and for the six months ended June 30, 2006 included the accounts of Kuo-E Holding (Cayman), Ltd., which was incorporated in 2006 and was owned by the Yageo Holding (Bermuda) Limited., for more than 50% of its outstanding shares

14 In 2005, Phycomp Electronics (Su Zhou) co., Ltd. and Lee Tai Investment were eliminated after being merged into Yageo Electronics (China) Co., Ltd. and Kuo Shin Investment Limited, respectively. In 2006, Rancher International Limited (B.V.I.) and Luminary International Limited (B.V.I.) were eliminated after being merged into Yageo Holding (Bermuda) Limited. The financial statements as of and for the six months ended June 30, 2005 and 2006 of the following subsidiaries were unaudited: Yageo Holding International Limited, Rancher International Limited (B.V.I.), Luminary International Limited (B.V.I.), Phycomp Singapore PTE. LTD., Phycomp Malaysia SDN. BHD., Paracatu Gestao E. Investimentos, Steller, Inc., Kuo Ding Venture Capital Limited, Ferroxcube Taiwan, Ltd., Ferroxcube Holding (Samoa), Ltd. and Ferroxcube Electronics (Dongguan) Co., Ltd. as of and for the six months ended June 30, 2005; Yageo Holding International Limited, Phycomp Singapore PTE. LTD., Phycomp Malaysia SDN. BHD., Paracatu Gestao E. Investimentos, Steller, Inc., Kuo Ding Venture Capital Limited, Ferroxcube Taiwan, Ltd., Ferroxcube Holding (Samoa), Ltd. and Ferroxcube Electronics (Dongguan) Co., Ltd. as of and for the six months ended June 30, The total assets of the above subsidiaries were 6.07% (NT$2,763,800 thousand) and 2.85% (NT$1,283,638 thousand), and the total liabilities of the above subsidiaries were 0.60% (NT$134,428 thousand) and 0.86% (NT$152,638 thousand), of the related consolidated totals as of June 30, 2005 and 2006, respectively. Of the consolidated totals for the six months ended June 30, 2005 and 2006, the subsidiaries total revenues were 1.12% (NT$81,959 thousand) and 0.84% (NT$81,665 thousand), respectively, and their total loss was 2.06% (NT$1,956 thousand) for the six months ended June 30, 2005 and their total income was 2.76% (NT$25,524 thousand) for the six months ended June 30, 2006, respectively. Cash Equivalents Commercial paper with maturities of up to three months from the date of purchase are classified as cash equivalents. Financial Assets/Liabilities at Fair Value Through Profit or Loss Trading financial assets/liabilities are initially recognized at fair value. After initial recognition, the derivatives are remeasured at fair value with the changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is recognized and derecognized based on the settlement date accounting. Derivatives that do not meet the criteria for hedge accounting are classified as financial assets/liabilities as fair value through profit or loss. Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is a positive amount, the derivative is recognized as a financial asset; when the fair value is a negative amount, the derivative is recognized as a financial liability. Available-for-sale Financial Assets Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. When subsequently measured at fair value, the changes in fair value are excluded from earnings and reported as a separate component of stockholders equity. The accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is recognized and derecognized based on the settlement date accounting. Cash dividends are recognized as investment income upon resolution of the shareholders of an investee but are accounted for as reductions to the original cost of investment if such dividends are declared on the earnings of the investees attributable to periods prior to the purchase of the investments. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new number of shares

15 If there is objective evidence that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to stockholders equity; for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized. Inventories Inventories are stated at the lower of aggregate weighted-average cost or market (net realizable value or replacement cost). These are also evaluated for any loss on slow-moving items. Investments Accounted for Using Equity Method The following investments in shares of stock are accounted for by the equity method if: (a) the combined equity of the Group is at least 20% of the investees outstanding common shares, or (b) the Group have a combined equity of less than 20% of their outstanding shares but exercises significant influence over the investee s financial and operating policy decisions. Under the equity method, the Group s investment is stated at cost on the acquisition date and subsequently adjusted for the proportionate share of the Group in the net income or net loss of the investees. Any cash dividends received from the investees are accounted for as a reduction of the carrying value of the investments. The differences between the acquisition cost of the investments and the Group s equity in the fair value of the investees net assets when the investments are acquired or when the equity method is first adopted, are amortized over 5 to 20 years. Effective January 1, 2006, pursuant to the revised Statement of Financial Accounting Standards No. 5 Long-term Investments in Equity Securities ( SFAS No. 5 ), investment cost should be analyzed first; the amount that investment cost exceeds the fair value of identifiable net assets is accounted for as goodwill, ceased to be amortized but will be tested for impairment that at least on an annual basis. If an event occurs or circumstances change which indicated that fair value of goodwill is more likely than not below its carrying amount, an impairment test should be done, and related loss is charged to current income. Effective January 1, 2006, the unamortized premiums of previously acquired long-term investments accounted for using the equity method, attributed to the amounts that investment cost exceeds fair value of identifiable net assets, the same as goodwill, also ceased to be amortized. If an investee issues additional shares and the Group subscribes for these shares at a rate not equal to its current equity in the investee, the increase in the Group s equity in the investee s net assets is credited to a capital surplus account. Any decrease in the Group s equity in the investee s net assets is debited to the balance of the capital surplus account arising from similar transactions. If the capital surplus account is not enough for debiting purposes, any remaining decrease is debited to unappropriated retained earnings. On the balance sheet date, investments are subjected to an impairment test. If there are an objective evidence indicating that an impairment is occurred, the impairment loss shall be charged to current income. If the Group has significant influence but control ability over an investee, the impairment test shall be measured on the basis of the carrying value of individual investment. Stock dividends received are recorded only as an increase in the number of shares held and not as investment income. The investment carrying value per share is recalculated on the basis of the increased number of shares. Costs of investments sold are determined using the weighted-moving-average method. Real Estate The real estate are carried at the lower of recoverable amount or carrying value

16 Financial Assets Measured at Holding Cost Investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are carried at original cost, such as non-publicly traded stocks and emerging stocks. The costs of non-publicly traded stocks and emerging stocks are determined using the weighted-average method. If there is objective evidence that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment is prohibited. The accounting treatment for cash and stock dividends arising from financial assets measured at holding cost is the same as cash and stock dividends arising from available-for-sale financial assets. Property, Plant and Equipment and Properties Leased to Others These assets are carried at cost, net of accumulated depreciation and accumulated impairment loss. Major improvements or renewals are capitalized, while maintenance and repairs are charged to current expense. Depreciation is calculated using the straight-line method over service lives initially estimated as follows: buildings - 3 to 55 years; and machinery and miscellaneous equipment - 1 to 15 years. Properties still in use beyond their originally estimated service life are depreciated over their newly estimated service lives. An impairment loss should be recognized whenever the carrying amount of properties leased to others exceeds their recoverable amount, and this impairment loss should be charged to current income. An impairment loss recognized in prior years could be reversed if there is a recovery in the estimates used to determine recoverable amount since the last impairment loss was recognized. However, an impairment loss is reversed only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined for the asset (net of depreciation) had no impairment loss been recognized in prior years. A reversal of an impairment loss should be recognized in the income statement for assets carried at cost and treated as a revaluation increase for assets carried at the revalued amount. Upon sale or other disposal of assets, the related cost, accumulated depreciation and accumulated impairment loss are removed from the accounts, and any gain or loss is accounted as nonoperating income or loss. Idle Assets These assets are stated at the lower of recoverable amount or carrying value. Assets Impairment The Group determines the cash-generating unit to which tangible and intangible asset belong in accordance with Statement of Financial Accounting Standards No. 35, Accounting for Asset Impairment, before the impairment test is analyzed. An impairment loss should be recognized whenever the aggregated carrying amount of specific cash-generating units exceeds their recoverable amount, and this impairment loss should be charged to current income. For the reduction of the carrying amounts of the assets of cash-generating units, the impairment loss should be allocated in the following order: a. Goodwill should be allocated to the cash-generating unit, if any. b. The identifiable intangible and tangible assets of the unit should be allocated pro rata based on the carrying amount of each asset in the unit

17 An impairment loss recognized in prior years may be reversed if there is a recovery in the estimates used to determine the recoverable amount since the last impairment loss was recognized. However, an impairment loss is reversed only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined for the asset (net of depreciation) had no impairment loss been recognized in prior years. Reversal of a previously recognized impairment loss on goodwill is prohibited. Foreign Convertible Bonds Foreign convertible bonds issued before December 31, 2005 are carried at their issue price. The premium, which is the difference between the specified redemption price and the face value, is accrued from the bond issuance date to the contracted redemption date using the effective interest rate method. Direct and necessary convertible bond issue cost is classified as a deferred charge. This cost is amortized as bond issue expense from the bond issuance date to the contracted redemption date. The book value approach is used to account for bond conversion by bondholders. Under this method, convertible bonds and related accounts are transferred to capital and capital surplus without recording gain or loss. Also, the unamortized bond issue costs are debited to capital surplus. Pension Costs The Group recognizes its pension cost in accordance with the statement of Financial Accounting Standards No. 18 Accounting for Pension. The gain or loss generated from plan curtailments or settlements is recorded as part of net pension cost as they occur. Income Tax Deferred tax assets are recognized for the tax effects of deductible temporary difference, unused operating loss carryforwards, unused income tax credits, and deferred tax liabilities are recognized for the tax effects of taxable temporary differences. A valuation allowance is recognized for deferred income tax assets when it is more than 50% probable that these assets will not be realized. Deferred tax assets or liabilities are classified as current or noncurrent on the basis of the classification of the related assets or liabilities for financial reporting. A deferred tax liability or asset that cannot be related to an asset or liability for financial reporting, including deferred tax assets related to net loss carryforwards, is classified on the basis of the expected realization date of the temporary difference. The Group uses the flow-through method to recognize income tax credits for certain purchases of eligible equipment, research and development expenditures, personnel training expenditures and investments in shares of stock. Adjustments to prior years tax liabilities are added to or deducted from the current year s income tax expense. Income taxes of 10% on undistributed earnings generated starting January 1, 1998 are recorded as expenses in the year the stockholders approve the retention of the earnings. Revenue Recognition, Account Receivable and Allowance for Doubtful Accounts Sales are recognized when titles to products and risks of ownerships are transferred to customers, primarily upon shipment. Sales are measured at fair value based on the price, including commercial discount and quantity discount negotiated with the buyer. However, for frequent sales transactions, selling price is considered a short-term account receivable discounted at an imputed rate when the variance between the fair value and the amount due from the buyer is small

18 The allowances are provided on the basis of a review of the collectibility of individual receivables. The Group periodically evaluates the collectibility of receivables in consideration of client s receivable aging analysis credit worthiness and economic environment. Treasury Stock If the Corporation buys back issued stocks, the reacquisition cost will be debited to the account treasury stock. Upon disposal of the treasury stock, if disposal price is higher than carrying value, the difference will be recorded as capital surplus- trading of treasury stock. Otherwise, the difference is debited to capital surplus- trading of treasury stock. If capital surplus is not enough for debiting purposes, the difference is debited to unappropriated retained earnings. Compensatory Stock Option Plan If the Corporation decides that the grant date or amendment date of the compensatory stock option plan is after January 1, 2004, it will adopt the intrinsic value method to recognize its compensation cost, which will be recognized as expense under the plan. Foreign-currency Transactions Foreign currency transactions (except derivative transactions) are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Upon settlement of foreign-currency assets and liabilities at prevailing rates, differences between the transaction rates and settlement rates are credited or charged to current income. Period-end balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates, and the resulting differences are credited or charged to current income. On the balance sheet date, foreign non-monetary assets or liabilities (for example, equity instrument) measured at fair value are restated at the prevailing exchange rates, and the resulting gains or losses are accounted for as follows: a. Assets and liabilities at fair value through adjustments to stockholders equity- as adjustments to stockholders equity. b. Assets and liabilities at fair value through profit or loss- as credits or charges to current income. c. Assets and liabilities measured at holding cost- measured at historical rates of transaction date. Foreign-currency long-term stock investments accounted for using the equity method are according to the results of its translated financial statements, the exchange difference reported as cumulative translation adjustments under stockholders equity. Derivative Financial Instruments Held for Hedging The carrying amounts of derivative financial instruments for hedging purposes are stated at fair value. The changes of fair value are either charged to income or recognized in stockholders equity depending on the hedged risks. Cash Flow Hedge Accounting Derivatives that meet all criteria for hedge accounting are recognized at the offsetting effects on changes in fair value of hedging instruments and hedged items