KOLON CORPORATION (FORMERLY KOLON INDUSTRIES, INC.) AND SUBSIDIARIES

Transcription

1 KOLON CORPORATION (FORMERLY KOLON INDUSTRIES, INC.) AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 AND INDEPENDENT AUDITORS REPORT

2 Independent Auditors Report English Translation of a Report Originally Issued in Korean To the Stockholders and Board of Directors of Kolon Corporation (Formerly Kolon Industries, Inc.) We have audited the accompanying consolidated statements of financial position of Kolon Corporation (Formerly Kolon Industries, Inc.) (the Company ) and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders equity and cash flows for the years then ended, all expressed in Korean won. These financial statements are the responsibility of the Company s managements. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, whose statements reflect total assets of 45.63% and 48.15% of consolidated total assets as of December 31, 2009 and 2008, respectively, and total sales of 33.26% and 59.27% of consolidated total sales for the years then ended, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of such other auditors. We conducted our audits 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 audits provide a reasonable basis for our opinion In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations, changes in its stockholders equity and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the Republic of Korea.

3 Without qualifying our opinion, we draw attention to the following: (1) Property, plant and equipment revaluation As described in Note 10 to consolidated financial statements, the Company adopted the amendment to the statement of Korea Accounting Standard ( SKAS ) No. 5 Property, Plant and Equipment, which permits certain item of its land to be revalued after acquisition date. As a result, the book value of land and equity increased by 63,374 million and 46,255 million, respectively, as of December 31, (2) Split-off As described in Note 30 to consolidated financial statements, the Company spun off all business divisions. The assets and liabilities were transferred to newly incorporated corporation. As a result, the assets and liabilities decreased by 2,522,473 million and 1,789,946 million, respectively. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in stockholders equity 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 knowledgeable about Korean accounting procedures and auditing standards and their application in practice. April 28, 2010 Notice to Readers This report is effective as of April 28, 2010, the auditors report date. Certain subsequent events or circumstances may have occurred between the auditors report date and the time the auditors report is read. Such events or circumstances could significantly affect the accompanying financial statements and may result in modification to the auditors report.

4 KOLON CORPORATION (FORMERLY KOLON INDUSTRIES, INC.) AND SUBSIDIAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009 AND ORGANIZATION AND DESCRIPTION OF THE BUSINESS a. Parent Company Kolon Corporation (Formerly Kolon Industries, Inc.) (the "Company") was established in 1957 to engage primarily in manufacturing and selling fibers, industrial materials, films, electronic materials, plastics and specialty chemicals. The Company listed its stock on the Korean Exchange on June 23, As of December 31, 2009, the capital stock of the Company is 37,903,150 thousand (including 5,381,950 thousand of preferred stock). For the purpose of holding a stable business foundation in the market, reinforcing business efficiency and improving financial structures, the Company merged with FnC Kolon Corp. on August 1, On December 31, 2009, the Company spun off all business divisions. As a result, Kolon Industries, Inc. was newly established from the split-off divisions. Kolon Corporation was restructured as a holding company (Note 30). In addition, to rearrange its business portfolios, the Company split-off Fiber Business Division, and it sold its Plastics Business Division, PI Film Business Division and Super Absorbent Polymer (SAP) Business Division to its related parties and others in As of December 31, 2009, the shares of common stock are held by the following: Ownership Number of shares percentage (%) Largest stockholder 1,019, % Other stockholder 591, % Treasury stock 1,294, % Others 3,598, % Total 6,504, % The largest stockholder does not owned share of preferred stock as of December 31, The shares of preferred stock are held by other companies and individual stockholders. b. Consolidated Subsidiaries The consolidated financial statements included all majority-owned subsidiaries and entities of which the Company owns more than 30% of total outstanding voting stocks and is also the largest stockholder. The subsidiaries included in the consolidation as of December 31, 2009 and 2008 are as follows (In millions of Korean won):

5 (2009) Subsidiary Primary business Location Number of invested shares Amount of total equity Ownership (%) (Note 1) Financial year end Kolon I Networks Corp. Solution service Korea 18,459,210 87, % Dec.31 Kolon Pharmaceuticals Inc. Medicine production Korea 536,448 27, % Dec.31 Kolon Benit Co., Ltd. Computer system service Korea 481,000 8, % Dec.31 Kolon WellCare Co., Ltd. Drug store Korea 718,800 4, % Dec.31 Tissuegene Inc. Medicine development USA 2,877,985 9, % Dec.31 Environmental Facilities Management Corporation. Sewage disposal Korea 732,000 71, % Dec.31 (2008) Subsidiary Primary business Location Number of invested shares Amount of total equity Ownership (%) (Note 1) Financial year end Kolon Glotech, Inc. Fibers and car material production Korea 1,741, , % Dec.31 Kolon I Networks Corp. Solution service Korea 19,169,480 85, % Dec.31 Kolon Fashion Material, Inc. Production of chemical fibers Korea 14,896,677 99, % Dec.31 Maunaocean Development Co., Ltd. Golf service Korea 1,579,500 10, % Dec.31 Kolon Nanging Co., Ltd. Tire code production China (Note 2) 42, % Dec.31 Korea eplatform Ltd. Venture company consulting Korea 2,485,135 31, % Dec.31 Zhangjiagang Kolon Glotech, Inc. Production of car seats China (Note 2) 23, % Dec.31 Kolon Pharmaceuticals Inc. Medicine production Korea 510,392 21, % Dec.31 Kolon Plastics, Inc. Fibers production Korea 4,060,000 19, % Dec.31 Kolon Life Science, Inc. R&D & production related to biotech Korea 817,650 24, % Dec.31 Neoview Kolon OLED material production Korea 26,065,343 8, % Dec.31 Kolon GP Chemical Plastics and specialty chemicals China (Suzhou) Co., Ltd. production (Note 2) 13, % Dec.31 Surplus Global, Inc. Buying & selling of devices for Korea producing semiconductor 120,000 4, % Dec.31 Kolon Benit Co., Ltd. Computer system service Korea 481,000 7, % Dec.31 Beijing Kolon Glotech, Inc. Fibers and car material production China (Note 2) 10, % Dec.31 Kolon USA Inc. Films production USA 11,000 1, % Dec.31 Kolon WellCare Co., Ltd. Drug store Korea 3,593,999 7, % Dec.31 ipacific Partners Inc. Financing service Korea 2,544,000 9, % Dec.31 Tissuegene Inc. Medicine development USA 2,742,608 4, % Dec.31 P.T. Kolon Ina Films production Indonesia 15,750 (29,519) 78.75% Dec.31 FnC Kolon Co., Ltd. Production and sales of fibers Korea 10,638, , % Dec.31 Cambridge Members Co., Ltd. Production and sales of business suits Korea 1,419,608 88, % Dec.31 Kolon Fashion Corp. Wholesale and retail of fashion clothes Korea and fibers 2,195,301 46, % Dec.31 (Note 1) The sum of equity ratios owned by the Company and its subsidiaries

6 c. The condensed financial information of the subsidiaries (In thousands of Korean won): (2009) Total Total Total stockholders Net Subsidiaries assets liabilities equity Revenue income (loss) Kolon I Networks Corp. 227,849, ,314,090 87,535, ,224,973 3,567,284 Kolon Pharmaceuticals Inc. 77,143,646 49,752,526 27,391,120 74,002,880 1,033,081 Kolon Benit Co., Ltd. 21,045,573 12,791,654 8,253,919 48,773, ,109 Kolon WellCare Co., Ltd. 8,674,963 3,927,584 4,747,379 13,852,177 (2,400,341) Tissuegene Inc. 11,827,606 1,854,586 9,973, ,078 (4,658,504) Environmental Facilities Management Corporation. 105,579,942 34,458,067 71,121, ,106,254 11,254,100 (2008) Total Total Total stockholders Net Subsidiaries assets liabilities equity Revenue income (loss) Kolon Glotech, Inc. 451,213, ,158, ,055, ,391,413 10,107,016 Kolon I Networks Corp. 231,081, ,959,387 85,122, ,951,700 8,888,245 Kolon Fashion Material, Inc. 215,552, ,087,826 99,464, ,838,579 7,170,061 Maunaocean Development Co., Ltd. 139,690, ,071,870 10,618,264 22,734,747 (394,999) Kolon Nanging Co., Ltd. 122,418,574 80,102,520 42,316,054 76,000,102 7,455,700 Korea eplatform Ltd. 114,095,804 82,384,162 31,711, ,926,409 2,071,830 Zhangjiang Kolon Glotech, Inc. 75,285,734 52,093,816 23,191,918 35,709,821 (2,061,922) Kolon Pharmaceuticals Inc. 69,151,764 47,280,810 21,870,954 62,839, ,580 Kolon Plastics, Inc. 58,929,867 39,309,851 19,620,016 84,612,938 2,166,456 Kolon Life Science, Inc. 55,054,826 30,771,151 24,283,675 70,247,079 7,588,482 Neoview Kolon 35,425,979 26,968,678 8,457,301 3,323,314 (22,206,510) Kolon GP Chemical (Suzhou) Co., Ltd. 21,014,570 7,779,503 13,235,067 26,045, ,145 Surplus Global, Inc. 19,453,787 14,560,856 4,892,931 20,744,218 57,645 Kolon Benit Co., Ltd. 18,816,658 10,906,848 7,909,810 38,909, ,404 Beijing Kolon Glotech, Inc. 18,184,472 7,194,653 10,989,819 19,818,670 2,869,650 Kolon USA Inc. 17,010,538 15,993,199 1,017,339 53,926, ,176 Kolon WellCare Co., Ltd. 11,539,913 4,390,193 7,149,720 12,649,977 (2,972,801) ipacific Partners Inc. 9,364, ,836 9,032,044 3,690,383 (2,513,744) Tissuegene Inc. 6,119,708 1,893,285 4,226, ,108 (5,156,907) P.T. Kolon Ina 72,583, ,103,058 (29,519,107) 69,285,929 (11,471,457) FnC Kolon 378,377, ,067, ,309, ,398,050 9,479,952 Cambridge Members Co., Ltd. 142,555,506 53,634,192 88,921, ,716,170 (4,296,548) Kolon Fashion Corp. 137,995,872 91,073,576 46,922, ,316,606 (1,835,484)

7 d. Changes in Consolidated Subsidiaries The changes in consolidated subsidiaries in the 2009 and 2008 consolidated financial statements are as follows: (2009) Subsidiary Detail Reason Environmental Facilities Management Corporation. Kolon Glotech, Inc. Kolon Fashion Material, Inc. Maunaocean Development Co., Ltd. Kolon Nanging Co., Ltd. Korea eplatform Ltd. Zhangjiang Kolon Glotech, Inc. Kolon Plastics, Inc. Kolon Life Science, Inc. Neoview Kolon Kolon GP Chemical (Suzhou) Co., Ltd. Surplus Global, Inc. Beijing Kolon Glotech, Inc. Kolon USA Inc. Kolon Investment, Inc. P.T. Kolon INA. FnC Kolon Co., Ltd. Cambridge Kolon Co., Ltd. Kolon Fashion, Corp. Newly included Reclassification from a consolidated subsidiary to an equity method investee Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Reclassification from a consolidated subsidiary to an equity method investee Excluded from consolidated subsidiary Excluded from consolidated subsidiary Reclassification from a consolidated subsidiary to an equity method investee Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Excluded from consolidated subsidiary Reclassification from a consolidated subsidiary to an equity method investee Excluded from consolidated subsidiary Increased equity ratio Decreased equity ratio Split-off Decreased equity ratio Split-off Decreased equity ratio Split-off Split-off after merger and acquisition Decreased equity ratio Split-off after merger and acquisition

8 (2008) Subsidiary Detail Reason FnC Kolon Co., Ltd. Reclassification from an Increased equity ratio equity method investee to a consolidated subsidiary Kolon Life Science, Inc. Cambridge Members Co., Ltd. Newly included Kolon Fashion, Corp. Kolon Fashion Material, Inc. Incorporated based on a physical split-off Surplus Global, Inc. The amount of total assets has exceeded 7 billion. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Financial Statement Presentation The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. 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 consolidated financial statements have been condensed, restructured and translated into English with certain expanded descriptions from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company's financial position, results of operations, changes in stockholders equity or cash flows, is not presented in the accompanying consolidated financial statements. In addition, the balance sheets were renamed to statements of financial position in accordance with the revised Act on External Audit for Stock Companies. The accompanying financial statements to be submitted to the Company s general stockholders meeting were authorized by the board of directors on April 28, 2010.

9 b. Adoption of Statements of Korea Accounting Standards ( SKAS ) Among the amended SKASs, which also include Interpretations or Opinions on SKASs, by the Korea Accounting Standards Board ( KASB ) during the prior period, amendments applied from the current period are as follows: SKASs or Interpretation SKAS No. 5 "Property, Plant and Equipment SKAS No. 9 "Convertible Securities" SKAS No. 25 "Consolidated Financial Statements" Summary of major changes Choosing either cost model or revaluation model as an accounting policy and apply it to the same group of property, plant and equipment Issuer's accounting of separated type bonds with stock warrants corresponds with non-separated type bonds with stock warrants If the Company s proportionate equity is incurred, it is first charged to related consolidated capital surplus, and the remaining amount is then recorded as a consolidated capital adjustment. As a result of adopting the above amended standards, the effects to the Company are as follows: 1) SKAS No. 5 "Property, Plant and Equipment As a result of the adoption of revaluation model in 2009, the Company s net assets as of December 31, 2009 increased by 46,254,563 thousand. This change did not have an effect on the net income of the Company for the years ended December 31, c. Cash and Cash Equivalents Cash and cash equivalents includes cash, substitute securities including checks issued by others, and checking accounts, ordinary deposits and financial instruments, which can be easily converted into cash and whose value changes due to changes in interest rates are not material, with maturities(or date of redemption) of three months or less from acquisition. d. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts to cover estimated losses on receivables (account receivable - trade, account receivable - other, loans and other), based on collection experience and analysis of the collectibility of individual outstanding receivables. e. Inventories Inventories with cost determined using the moving average method, except for goods-in-transit and land for construction for which cost are determined using the specific identification method. The Company maintains perpetual inventory system which is adjusted to physical inventory counts performed at year end.

10 When the market value of inventories (net realizable value for merchandise and current replacement cost for supplies) is less than the carrying value, carrying value is stated at the lower of cost or market. The Company applies the lower of cost or market method by group of inventories and loss on inventory valuation is presented as a deduction from inventories and charged to cost of sales. Loss on valuation of inventories for the years ended December 31, 2009 and 2008 were 5,192,537 thousand and 4,819,088 thousand, respectively. However, when the circumstances that previously caused inventories to be written down below cost no longer exist and the new market value of inventories subsequently recovers, the valuation loss is reversed to the extent of the original valuation loss and the reversal is deducted from cost of sales. Reversal of loss on valuation of inventories is 3,414,355 thousand and 2,622,648 thousand for the years ended December 31, 2009 and 2008, respectively. f. Securities (Excluding the Equity Method Investment Securities) Debt and equity securities are initially stated at the market value of consideration given for acquisition (market value of securities acquired if market value of consideration given is not available) plus incidental costs attributable to the acquisition of the securities and are classified into trading, available-for-sale and held-to-maturity securities depending on the purpose and nature of acquisition. The Company presents trading securities as short-term investments, and available-forsale securities and held-to-maturity securities as short-term investments or long-term investment securities depending on their nature in the statements of financial position. The moving average method for equity securities and the specific identification method for debt securities are used to determine the cost of securities for the calculation of gain (loss) on disposal of those securities. The following is the specific valuation method applied for debt and equity securities: - Trading securities Securities that are bought and held principally for sale in the near-term to generate profits from short-term price differences are classified as trading securities. Trading securities are recorded at their fair value and valuation gains or losses from trading securities are recorded in current earnings. - Held-to-maturity securities Debt securities that have fixed or determinable payments with a fixed maturity are classified as held-to-maturity securities only if the Company has both the positive intent and ability to hold those securities to maturity. However, debt securities, whose maturity dates are due within one year from the financial statements reporting date, are classified as current assets. After initial recognition, held-to-maturity securities are stated at amortized cost in the statements of financial position. When held-to-maturity securities are measured at amortized costs, the difference between their acquisition cost and face value is amortized using the effective interest rate method and the amortization is included in the cost and interest income.

11 When the possibility of not being able to collect the principal and interest of held-to-maturity securities according to the terms of the contracts is high, the difference between the recoverable amount (the present value of expected cash flows using the effective interest rate upon acquisition of the securities) and book value is recorded as loss on impairment of held-to-maturity securities included in the non-operating expense and the held-to-maturity securities are stated at the recoverable amount after impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss is recorded as reversal of impairment loss on heldto-maturity securities included in non-operating income. However, the resulting carrying amount after the reversal of impairment loss shall not exceed the amortized cost that would have been measured, at the date of the reversal, if no impairment loss was recognized. - Available-for-sale securities Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized and presented as available-for-sale securities included in investment assets. However, if an available-for-sale security matures or it is certain that such security will be disposed of within one year from the financial statements reporting date, it is classified as a current asset. Available-for-sale securities are recorded at fair value. Unrealized gain or loss from available-forsale securities are presented as gain or loss on valuation of available-for-sale securities included in accumulated other comprehensive income (loss) in stockholders equity. In addition, accumulated gain or loss on valuation of available-for-sale securities is reflected in either gain or loss on disposal of available-for-sale securities or loss on impairment of available-for-sale securities upon disposal or recognition of impairment of the securities. However, available-for-sale equity securities that are not marketable and whose fair value cannot be reliably measured are recorded at acquisition cost. When there is objective evidence that the available-for-sale securities are impaired and the recoverable amount is lower than the cost (amortized cost for debt securities) of the available-forsale securities, an impairment loss is recognized as loss on impairment of available-for-sale securities in non-operating expense and the related unrealized gain or loss remaining in stockholders equity is adjusted to impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss can be recognized up to the previously recorded impairment loss as a reversal of loss on impairment of available-for-sale securities in non-operating income. However, if the fair value increases after the impairment loss is recognized but does not relate to the recovery of impairment loss as described above, the increase in fair value is recorded in stockholders equity.

12 g. Equity Method Investment Securities Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting. - Accounting for changes in the equity of the investee Under the equity method of accounting, the Company records changes in its proportionate equity of the net assets of the investee depending on the nature of the underlying changes in the investee as follows: (i) equity in income (loss) of associates in the non-operating income (expense) for net income (loss) of the investee; (ii) increase (decrease) in retained earnings of associates in the retained earnings for changes in beginning retained earnings of the investee; and (iii) increase (decrease) in equity of associates in accumulated other comprehensive income (loss) for other changes in stockholders equity of the investee. When the equity method investee s unappropriated retained earnings carried over from prior period changes due to significant error corrections, the Company records the changes in equity as equity in income (loss) of associates included in the non-operating income (expense) if the impact of the changes on the Company s non-consolidated financial statements is not significant. If the changes results from the changes in accounting policies of the equity method investee, they are reflected in unappropriated retained earnings carried over from prior period in accordance with SKAS on changes in accounting policy and errors corrections. When the investee declares cash dividends, the dividends to be received are deducted directly from equity method investment securities. - Treatment of investment difference Difference between the acquisition cost and the Company s proportionate equity in the fair value of net assets of the investee upon acquisition ( Investment difference ) is considered as (negative) goodwill and accounted for in accordance with accounting standards for business combination. The goodwill portion is amortized over useful lives (within 20 years) on a straight line method and the negative goodwill portion is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee. The amortization is included in equity in income (loss) of associates. When the Company s equity interest in the investee increases due to an increase (or decrease) in contributed capital with (or without) consideration, the changes in the Company s proportionate equity in the investee is accounted for as investment difference. If the Company s equity interest decreases, the changes are accounted for as gain (loss) on disposal of the equity method investment securities. However, if the investee is the Company s subsidiary, those changes are accounted for as increase (decrease) in equity of associates included in accumulated other comprehensive income (loss).

13 - Difference between the fair value and book value of net assets of the investee Upon acquisition of the equity method investment securities, the Company s proportionate shares in the differences between the fair values and book values of the identifiable assets and liabilities of the investee are amortized/reversed and included in equity in income (loss) of associates in accordance with the investee s methods of accounting for the assets and liabilities. - Elimination of unrealized gain or loss from intercompany transactions The Company s proportionate share in the gain (loss) arising from transactions between the Company and the investee, which remains in the book value of assets held as of financial statements reporting date is considered as unrealized gain (loss) and adjusted to equity method investment securities. - Impairment loss on equity method investment securities When there is objective evidence that the equity method investment securities is impaired and the recoverable amount is lower than the carrying amount of the equity method investment securities, an impairment loss is recognized as loss on impairment of equity method investment securities included in non-operating expense and the unamortized investment difference shall be first reduced. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss can be recognized as income up to the previously recorded impairment loss. The book value of the equity method investment securities after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss had not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed. - Translation of financial statements of overseas investees For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas subsidiaries for consolidated financial statements. The Company s proportionate share of the difference between assets net of liabilities and stockholders equity after translation into Korean won is accounted for as increase (decrease) in equity of associates included in accumulated other comprehensive income (loss).

14 h. Property, Plant and Equipment Property, plant and equipment are stated at cost (acquisition cost or manufacturing cost plus expenditures directly related to preparing the asset ready for use) and assets acquired from investment in kind, by donation or free of charge in other ways are stated at fair value. Expenditures after acquisition or completion that increase future economic benefit in excess of the most recently assessed capability level of the asset are capitalized. Other expenditures are charged to expense as incurred. Borrowing costs in relation to the manufacture, purchase, construction or development of assets are changed to current operations. When the expected future cash flow from use or disposal of the property, plant and equipment is lower than the carrying amount due to obsolescence, physical damage or other causes, the carrying amount is adjusted to the recoverable amount (the higher of net sales price or value in use) and the difference is recognized as an impairment loss. When the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before previous impairment as adjusted by depreciation. The Company recorded loss on impairment of property, plant and equipment totaling 179,295 thousand and 1,575,402 thousand for the years ended December 31, 2009 and 2008, respectively. Depreciation is computed by the straight-line method (except for Machinery, Vehicles, Tools and office equipment which are depreciated using the declining-balance method) based on the following useful lives as follows: i. Intangible Assets Useful lives (years) Buildings Structures Machinery 6-10 Vehicles 4-5 Tools 5 Office equipment 4-5 Other property, plant and equipment 5 To assess whether an internally generated intangible asset meets the recognition criteria, the Company classifies the generation process into a research phase and a development phase. All costs incurred during the research phase are expensed as incurred. Costs incurred during the development phase are recognized as assets only if they satisfy all criteria for recognition. An intangible asset is recognized only if (1) it is probable that future economic benefits that are attributable to the asset will flow into the entity and (2) the cost of the asset can be measured reliably. If the costs incurred fail to satisfy all of these criteria, they are recorded as periodic expenses as incurred.

15 Intangible assets are initially recognized at acquisition cost (purchase cost plus expenditures directly related to preparing the asset ready for use) and subsequently presented at amortized cost using the straight-line method, with amortization from the time the asset is available for use. Intangible assets are amortized based on the following useful lives: Useful lives (years) (Negative) Goodwill Within 20 Industrial rights 5-10 Software 4-5 Other intangible assets 5-10 For newly acquired related entities that are being consolidated, the Company recorded negative goodwill in financial statements, which is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee. The Company tests for impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the recoverable amount of the assets. When the recoverable amount (the higher of net sales price or value in use) of intangible assets is significantly lower than the carrying amount due to obsolescence and other, the difference is recognized as an impairment loss. When the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before previous impairment as adjusted by amortization. The Company recorded loss on impairment of intangible assets totaling 1,385,036 thousand and 1,041,160 thousand for the years ended December 31, 2009 and 2008, respectively Goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired related to entities that are being consolidated, is amortized on a straight-line basis over a reasonable period. However, if the expected net cash inflows are assessed at less than its current book value, the Company records an impairment loss on goodwill reducing its book value to the recoverable value, and the impairment loss is included in operating expenses. Negative goodwill, which represents the excess of the fair value of net identifiable assets acquired over the acquisition cost, is recorded as a contra account (reduction) to intangible assets. For the year ended December 31, 2009, amortization of goodwill of 4,951,512 thousand is included in operating expenses and reversal of negative goodwill of 109,020 thousand is included in other income in the consolidated statements of income.

16 j. Government Subsidy and Others Government subsidy and contribution for construction granted for the purpose of acquisition of certain assets are recorded as a deduction from the assets granted or other assets acquired for temporary use of the assets granted. When the related assets are acquired, they are recorded as a deduction from the acquired assets and are offset against the depreciation of the acquired assets over their useful lives. In addition, government subsidy and contribution for construction without any repayment obligation is offset against the related expenses for which they are intended to be compensated; however, if there is no matching expense, they are recorded as operating revenue or non-operating revenue depending on whether they are directly related to the Company s principal operating activities. Government subsidy and contribution for construction with a repayment obligation is recorded as a liability. k. Present Value Discount for Assets and Liabilities Receivables or payables from long-term installment transactions, long-term loans/borrowings or the other similar transactions are stated at present value which is determined by discounting total receivable or payable amounts in the future using the effective interest rate, if the nominal value is significantly different from the present value. The discount or premium resulting from the determination of present value is reported in the statements of financial position as a direct deduction from or addition to the nominal value of the related receivables or payables and the amortization by the effective interest rate method is included in the period income (loss). l. Translation of Assets and Liabilities Denominated in Foreign Currency Transactions denominated in foreign currencies are recorded in Korean won translated at the exchange rate prevailing on the transaction date and the resulting gain (loss) from foreign currency transactions is included in non-operating income (expense). Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money Brokerage Services, Ltd. on the financial statements reporting dates, which were 1, and 1, to USD 1.00 at December 31, 2009 and 2008, respectively. m. Accrued Severance Indemnities In accordance with the Company's policy, all employees with more than one year of service are entitled to receive lump-sum severance payments upon termination of their employment, based on their current rates of salary and length of service. The accrual for severance indemnities is computed as if all employees were to terminate at the financial statements reporting dates and amounted to 24,644,154 thousand and 121,049,027 thousand as of December 31, 2009 and 2008, respectively.

17 In accordance with the National Pension Law of Korea, a portion of its severance indemnities, which had been transferred in cash to the National Pension Fund through March 1999 for the transferred employees, were presented as a deduction from accrued severance indemnities. The Company has insured a portion of its obligations for severance indemnities by making deposits that will be directly paid to employees by Woori Bank and other, and records them as deposits for severance indemnities which are directly deducted from accrued severance indemnities. Actual payments for severance indemnities for the years ended December 31, 2009 and 2008 totaled 26,538,594 thousand and 23,997,839 thousand, respectively. n. Provisions The Company recognizes a provision for a liability with uncertain timing or amount when (1) there is a present obligation of the Company arising from past events, (2) it is highly likely that an outflow of resources will be required to settle the obligation, and (3) the amount for the settlement of the obligation can be reliably measurable. If there is a material difference between the nominal value and present value of such provision, the provision is stated at the present value of the expenditures expected to be required to settle the obligation. o. Derivative Instruments The Company records rights and obligations arising from derivative instruments in assets and liabilities, which are stated at fair value. Gains and losses that result from the changes in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments the cash flow hedge accounting applies to, the effective portion of the gain or loss on the derivatives instruments are recorded as gain (loss) on valuation of derivatives included in accumulated other comprehensive income (loss). p. Accounting for Leases A lease is classified as a finance lease or an operating lease depending on the extent of transfer to the Company of the risks and rewards incidental to ownership. If a lease meets any one of the following criteria, it is accounted for as a finance lease: The lease transfers ownership of the asset to the lessee by the end of the lease term; The lessee has the option to purchase the asset at a bargain price and it is certain that the option will be exercised; The lease term is for the major part (75% or more) of the economic life of the asset even if title is not transferred; At the date of lease commencement the present value of the minimum lease payments amounts to at least substantially all (90% or more) of the fair value of the leased asset; or The leased assets are of such a specialized nature that only the Company can use them without major modifications.

18 All other leases are treated as operating leases. For operating leases, lease payments excluding guaranteed residual value are recognized as an expense on a straight-line basis over the lease term and contingent rent is expensed as incurred. Finance leases are recognized as assets and liabilities at the lower of fair value of the leased property or the present value of the minimum lease payments discounted using the implicit interest rate of the lessor (or the Company s incremental borrowing rate if the implicit interest rate is not practicable to determine). Any initial direct costs incurred by the Company are added to the amount recognized as an asset. The depreciation policy for depreciable leased assets is consistent with that for similar depreciable assets that are owned by the Company. Annual minimum lease payments excluding guaranteed residual value is allocated to interest expense, which is calculated using the effective interest rate, and finance lease repayment amount. Contingent rent relating to finance are charged as expenses in the periods in which they are incurred, however, if the amount is material it is allocated to principal and interest, respectively, over the remaining lease term. q. Revenue Recognition Revenue generated from sale of goods is recognized upon delivery; however, revenue is recognized when the terms of the sales have been fully met if there are sales terms related with post-delivery. Revenue recognition on service or construction contract is recognized based on percentage-ofcompletion method. When loss from service or construction contract is probable, the loss is immediately recognized as provision for construction losses and charged to cost of sales or cost of construction in the same period. In addition, when the Company has an obligation for construction warranty after the construction or service is complete, total estimated construction warranty expense is included in cost of construction or service in the fiscal year during which the construction is completed or service is rendered, and records the provision for construction warranty liability in the statements of financial position. r. Income Tax When the Company recognizes deferred income tax asset or liability for the temporary differences between the carrying amount of an asset and liability and tax base, a deferred income tax liability for taxable temporary difference is fully recognized except to the extent in accordance with related SKAS while a deferred tax asset for deductible temporary difference is recognized to the extent that it is almost certain that taxable profit will be available against which the deductible temporary difference can be utilized. Deferred income tax asset (liability) is classified as current or non-current asset (liability) depending on the classification of related asset (liability) in the statements of financial position. Deferred income tax asset (liability), which does not relate to specific asset (liability) account in the statements of financial position such as deferred income tax asset recognized for tax loss carryforwards, is classified as current or non-current asset (liability) depending on the expected reversal period. Deferred income tax assets and liabilities in the same tax jurisdiction and in the same current or non-current classification are presented on a net basis.

19 Current and deferred income tax expense are included in income tax expense in the statements of income and additional income tax or tax refunds for the prior periods are included in income tax expense for the current period when recognized. However, income tax resulting from transactions or events, which was directly recognized in stockholders equity in current or prior periods, or business combinations, is directly adjusted to equity account or goodwill (or negative goodwill). s. Use of Estimates The Company s management uses reasonable estimates and assumptions in preparing the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea. The estimates and assumptions can change according to additional experiences, changes in circumstances, new information and other and may be different from actual results. 3. PRINCIPLES OF CONSOLIDATION a. Offset of Investments in Subsidiaries against Stockholders Equity As of the date of initial investment in subsidiaries, the Company s investments in subsidiaries are offset against their corresponding stockholders equity of subsidiaries. The difference between the acquisition cost and the Company s proportionate equity in the fair value of net assets of subsidiaries upon acquisition ( Investment difference ) is considered as goodwill or negative goodwill. If the Company acquires equities of its subsidiary on a date which is not the financial statements reporting date of the subsidiary, the Company assumes that the acquisition date is the nearest financial statements reporting date of the subsidiary. b. Treatment of Negative Goodwill Part of the negative goodwill due to depreciable non-monetary assets is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee, and the other part due to undepreciable non-monetary assets is amortized at once when these assets are disposed. c. Treatment of Investment Difference Difference between the acquisition cost and the Company s proportionate equity in the fair value of net assets of the investee upon acquisition ( Investment difference ) is considered as (negative) goodwill and accounted for in accordance with accounting standards for business combination. The goodwill portion is amortized over useful lives on a straight line method and the negative goodwill portion is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee. The amortization is included in equity in income (loss) of associates.

20 d. Elimination of Inter-company Unrealized Gains and Losses The significant unrealized gains and losses from inter-company transactions are fully eliminated. Transactions from the Company to subsidiaries (investees under equity method) are fully assigned to equity attributable to equity holders of the parent, and transactions from subsidiaries (investees under equity method) to the Company are assigned to equity attributable to equity holders of the parent and minority interests according to the Company s proportionate equity of subsidiaries and investees. e. Translation of Financial Statements of Subsidiaries For overseas subsidiaries whose financial statements are prepared in foreign currencies, assets and liabilities are translated at the exchange rate at the financial statements reporting date, stockholders equity is translated at the historical exchange rate, and items in the statements of income are recorded at the average exchange rate during the month. Net translation adjustments are recorded as a component of stockholders equity. f. Basis of Net income Attributable to Equity Holders of the Parent and Minority Interests (In thousands of Korean won) Net income attributable to equity holders of the parent and minority interests 108,976,744 Net income on changes in consolidated entities 42,106,163 Elimination of unrealized gains (losses) (31,148,833) Net 119,934,074 Attributable to equity holders of the parent 107,882,067 Attributable to minority interests 12,052,007

21 4. SIGNIFICANT TRANSACTIONS AMONG THE COMPANY AND SUBSIDIARIES Significant transactions and account balances with subsidiaries for the years ended and as of December 31, 2009 and 2008 are as follows: a. Significant Transactions (In thousands of Korean won): Sales Purchases Acquisition of fixed assets and others Company Related party Kolon Corp. Kolon Glotech, Inc. - 4,038,263-1,099,836-12,213 Kolon I Networks Corp. 21,367,755 28,820, , , Kolon Fashion Material, Inc ,779,303-1,927, Maunaocean Development Co., Ltd. - 2,083,372-3,524, Kolon Nanging Co., Ltd. - 27,276,691-6,030, Korea eplatform Ltd. - 1,138-53,041, Kolon Pharmaceuticals, Inc. 115,411 93,855 49,058 46, ,500 - Kolon Plastics Inc. - 41,582,794-32, Kolon Life Science Inc. - 6,248,868-1,897, Neoview Kolon - 119, Kolon Chemical (Suzhou) Co., Ltd. - 1,555,955-11,844, Kolon Benit Co., Ltd. 1,147,657 1,100,316 8,529,375 5,123, ,700 - Kolon USA, Inc. - 37,491, Kolon Wellcare Co., Ltd. 72, ,402 2, P.T. Kolon Ina - 45,149, , FnC Kolon Corp. (Note 1) - 2,386, , Cambridge Members Co., Ltd. (Note 2) - 57, Kolon Fashion Corp. (Note 2) - 873,946-3, Environmental Facilities Management Corporation (Note 3) 172, , ,386 3,229 33,000,000 - Kolon Glotech, Cambridge Members Co., Ltd. Inc ,481-2, Beijing Kolon Glotech, Inc. - 4,779,434-22, FnC Kolon Corp. - 1,018, , Zhangjiagang Kolon Glotech, Inc ,429-25,158, Neoview Kolon Maunaocean Development Co., Ltd. - 4,439-1,025, Korea eplatform Ltd. - 2,348-1,403, Kolon Benit Co., Ltd. - 16,713-2,057, Kolon Life Science Inc. - 50, Kolon I Networks Corp. - 2,836, , Kolon Wellcare Co., Ltd. - 1,

22 Sales Purchases Acquisition of fixed assets and others Company Related party Kolon Glotech, Inc. Kolon Pharmaceuticals, Inc ,863-3, Kolon Fashion Corp. - 90,780-2, Kolon Fashion Material, Inc. - 3,070, , Kolon Plastics Inc. - 24,279-1, Kolon I Networks Corp. Kolon Investment, Inc. - 5, Cambridge Members Co., Ltd. (Note 2) - 5, FnC Kolon Corp. (Note 1) - 780, , Neoview Kolon - 23, Maunaocean Development Co., Ltd. - 27,676-33, Korea eplatform Ltd , , Kolon Glotech, Inc ,784-2,836, Kolon Benit Co., Ltd. 1,447,531 1,952,409 1,361,393 1,477, ,905 - Kolon Life Science Inc. - 1,300,847-3,044, Kolon Wellcare Co., Ltd. 2,200 5, Kolon Pharmaceuticals, Inc. 27,535 30, , , Kolon Fashion Corp , Kolon Fashion Material, Inc ,128-1,314, Kolon Plastics Inc. - 11,093-4,422, Kolon Fashion Material, Inc. Cambridge Members Co., Ltd. (Note 2) FnC Kolon Corp. (Note 1) - 622,063-55, Maunaocean Development Co., Ltd , Korea eplatform Ltd ,066, Kolon Glotech, Inc , ,615-2,103,706 Kolon Benit Co., Ltd ,193, Kolon I Networks Corp. - 1,314, , Kolon Wellcare Co., Ltd , Kolon Pharmaceuticals, Inc , Kolon Fashion Corp. (Note 2) - 36,337-1, Maunaocean Development Co., Ltd. Kolon Investment, Inc. - 1, Cambridge Members Co., Ltd. (Note 2) - 467, FnC Kolon Corp. (Note 1) - 1,059,827-97, Neoview Kolon - 6, Korea eplatform Ltd. - 3,727-38, Kolon Glotech, Inc. - 1,025,820-4, Kolon Benit Co., Ltd. - 9, , Kolon Life Science Inc. - 12,