TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2008 AND INDEPENDENT AUDITORS REPORT
Independent Auditors Report English Translation of a Report Originally Issued in Korean To the Shareholders and Board of Directors of Taihan Electric Wire Co., Ltd. We have audited the accompanying consolidated balance sheet of Taihan Electric Wire Co., Ltd. (the Company ) and its subsidiaries as of December 31, 2008 and the related consolidated statement of income, changes in shareholders' equity and cash flows for the year ended December 31, 2008, all expressed in Korean Won. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of certain subsidiaries including Namkwang Engineering & Construction Co., Ltd. whose financial statements reflect 57.01% of the Company s consolidated total assets (before eliminating inter-company transactions) as of December 31, 2008 and 54.90% of the Company s consolidated total sales (before eliminating inter-company transactions) for the year then ended. 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 consolidated subsidiaries, is based solely on the reports of the other auditors. The consolidated financial statements of the Company as of December 31, 2007, which are presented for comparative purposes, were audited by Samil PricewaterhouseCoopers, whose report dated April 29, 2008, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of other auditors, the 2008 financial statements referred to above, present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2008, and the results of their operations, the changes in their shareholders equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in the Republic of Korea.
Without qualifying our opinion, we draw attention to the following: (1) Asset revaluation As explained in Notes 2 and 8 to the consolidated financial statements, the Company and its certain subsidiaries adopted the amendment to the Statement of Korea Accounting Standards ( SKAS ) No. 5 Property, Plant and Equipment, which permits certain items of its lands and buildings to be revalued after acquisition date, applying the revaluation models permitted under SKAS No. 5. As a result of this adoption, the book value of the lands & buildings as of December 31, 2008 increased by 138,612 million, the Company accounted for the amount of gain on revaluation as Gain on revaluation of property, plant and equipment in accumulated other comprehensive income ( 108,608 million) and the amount of loss on revaluation as Loss on revaluation of property, plants and equipment in non-operating expenses ( 491 million). (2) Hedging with non-derivatives As explained in Notes 2 and 24 to the consolidated financial statements, according to the Interpretation for SKAS No. 53-70 Accounting for Derivatives (newly amended on December 30, 2008), the Company designated the foreign currency denominated borrowings as a hedging instrument to the exposure of fluctuating expected future cash flows produced by a foreign currency risk and accordingly, the effective portion of the gain or loss on the derivatives instruments, which incurred from July 1, 2008 to December 31, 2008, was recorded as loss on valuation of derivatives included in accumulated other comprehensive loss. In addition, such adoption of the above Interpretation for SKAS increased net income for the year ended December 31, 2008 by 21,934 million. (3) Changes in the scope of consolidated subsidiaries As explained in Note 1 to the consolidated financial statements, the Company had substantial control over Namkwang Engineering & Construction Co., Ltd., Aldex Co., Ltd., Onse Telecom Co., Ltd., Aldex Canada Enterprises Ltd. and SJD Co., Ltd.; therefore, they were added to the scope of consolidated subsidiaries. In addition, Muju Enterprises City Co., Ltd. and Taihan Global Canada Investments Ltd. were added to the scope of consolidated subsidiaries since its total assets were more than the required level of 7,000 million for consolidation with substantial control as of the prior year end, while Taihan Bulk Terminal Co., Ltd. was excluded from the scope of consolidated subsidiaries due to the disposal of its shares. 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 shareholders equity and cash flows in conformity with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. In addition, the procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those who are informed about Korean accounting procedures or auditing standards and their application in practice. March 27, 2009 Notice to Readers This report is effective as of March 27, 2009, 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 modifications to the auditors report.
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007 ASSETS 2008 2007 CURRENT ASSETS: Cash and cash equivalents (Note 14) 225,097 467,191 Short-term financial instruments (Notes 3 and 14) 711,396 195,619 Short-term marketable securities (Note 6) 79 1,714 Available-for-sale securities (Notes 6 and 14) 23,014 9,828 Held-to-maturity securities (Note 6) 648 807 Trade accounts and notes receivable, net of allowance for doubtful accounts of 137,599 million in 2008 and 11,765 million in 2007 (Notes 14, 22 and 24) 498,003 523,191 Receivables from construction revenue, net of allowance for doubtful accounts of 29,559 million in 2008 and 4,380 million in 2007 438,504 122,250 Other accounts receivable, net of allowance for doubtful accounts of 10,576 million in 2008 and 4,078 million in 2007 (Note 14) 120,697 48,610 Short-term loans, net of allowance for doubtful accounts of 64,917 million in 2008 and 6,489 million in 2007 (Note 14) 440,086 207,493 Accrued income, net of allowance for doubtful accounts of 9 million in 2008 and 280 million in 2007 (Note 14) 50,693 19,153 Advanced payments, net of allowance for doubtful accounts of 16,361 million in 2008 and 15 million in 2007 (Note 14) 263,661 12,032 Prepaid expenses 41,584 8,872 Guarantee deposits (Notes 4 and 14) 6,817 80 Current portion of deferred tax assets (Note 13) 23,300 1,285 Financial derivative assets 64,807 15,339 Inventories (Note 5) 415,927 349,202 Others 14,587 5,747 Total current assets 3,338,900 1,988,413 NON-CURRENT ASSETS: Long-term financial instruments (Notes 3 and 14) 16,800 9,884 Available-for-sale securities (Notes 6 and 14) 600,937 565,022 Held-to-maturity securities (Note 6) 55,166 5,415 Equity method investments (Note 7) 554,601 293,675 Long-term loans, net of allowance for doubtful accounts of 34,468 million in 2008 and 1,730 million in 2007 (Note 14) 259,517 211,729 Other investments, net of allowance for doubtful accounts of 836 million in 2008 and 69 million in 2007 130,644 15,254 Deferred tax assets (Note 13) 140,086 3,423 Property, plant and equipment, net (Notes 8 and 23) 1,550,808 1,385,068 Intangible assets, net (Notes 9 and 23) 53,553 (26,085) Other non-current assets 125,670 73,621 Total non-current assets 3,487,782 2,537,006 (Continued) Total assets 6,826,682 4,525,419
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF DECEMBER 31, 2008 AND 2007 LIABILITIES AND SHAREHOLDERS EQUITY 2008 2007 CURRENT LIABILITIES: Trade accounts and notes payable (Notes 14 and 22) 515,675 137,958 Short-term borrowings (Notes 10 and 14) 1,785,987 1,205,981 Other accounts payable (Note 14) 166,942 73,502 Advances from construction revenue 32,703 28,262 Accrued expenses 80,798 30,992 Income tax payable (Note 13) 80,094 52,128 Current maturities of long-term debts, net (Note 11) 813,391 225,632 Current portion of deferred tax liabilities (Note 13) 561 1,574 Financial derivative liabilities 262,238 16,789 Others 114,635 95,790 Total current liabilities 3,853,024 1,868,608 NON-CURRENT LIABILITIES: Long-term borrowings, net of current maturities (Notes 11 and 14) 479,082 209,875 Debentures, net (Note 11) 508,090 432,378 Bonds with stock warrants, net (Notes 11 and 14) - 133,673 Convertible bonds, net (Note 11) 42,561 207,011 Exchangeable bonds, net (Note 11) 43,306 - Finance lease liabilities (Notes 11, 14 and 24) 7,570 22 Guarantee deposits received 349,980 324,924 Financial derivative liabilities (Note 24) 6,887 - Deferred tax liabilities (Note 13) 24,567 2,722 Accrued severance benefits, net (Note 12) 29,420 12,505 Others (Note 15) 36,359 17,077 Total non-current liabilities 1,527,822 1,340,187 Total liabilities 5,380,846 3,208,795 COMMITMENTS AND CONTINGENCIES (Note 24): SHAREHOLDERS EQUITY (Note 15): Capital stock 122,650 122,650 Capital surplus 508,798 623,148 Capital adjustments (68,609) (23,650) Accumulated other comprehensive loss (Note 18) (159,219) (91,613) Retained earnings 478,070 432,303 Minority interests 564,146 253,786 Total shareholders' equity 1,445,836 1,316,624 Total liabilities and shareholders equity 6,826,682 4,525,419 See accompanying notes to consolidated financial statements.
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 Sales (Notes 22 and 23) 4,734,656 3,130,719 Cost of sales (Notes 16 and 22) 4,003,641 2,830,196 Gross profit 731,015 300,523 Selling and administrative expenses 624,354 175,027 Operating income (Note 23) 106,661 125,496 Non-operating income Interest income 80,881 43,784 Dividend income 16,583 1,045 Gain on foreign currency transactions 133,857 21,633 Gain on foreign currency translation 102,071 10,184 Reversal of allowance for doubtful accounts 1,926 13,632 Gain on valuation of available-for-sale securities - 622 Gain on disposal of available-for-sale securities 5,839 10,205 Recovery of impairment losses on available-for-sale securities 621 36 Gain on valuation of equity method investments (Note 7) 42,845 2,532 Gain on disposal of equity method investments (Note 7) 6,902 5,390 Gain on disposal of property, plant and equipment (Note 8) 382,904 68,304 Gain on futures transactions 72,415 16,798 Gain on valuation of financial derivatives 51,613 4,487 Gain on financial derivatives transactions 63,240 844 Amortization of negative goodwill 9,242 7,834 Gain on recovery of bad debts 7,045 6,513 Gain on debt exemption 499 10,744 Others 26,191 9,012 1,004,674 233,599 Non-operating expenses Interest expenses 287,289 99,619 Loss on foreign currency transactions 84,869 24,346 Loss on foreign currency translation 130,031 6,391 Other bad debt expenses 83,734 1,734 Loss on disposal of available-for-sale securities 1,134 88 Impairment losses on available-for-sale securities (Note 6) 1,148 5,572 Loss on valuation of equity method investments (Note 7) 50,212 1,901 Loss on disposal of equity method investments 4 - Loss on disposal of property, plant and equipment 4,745 4,285 Loss on valuation of financial derivatives 216,342 6,509 Loss on financial derivatives transactions 25,841 400 Loss on valuation of inventories 26 915 Loss on redemption of bonds 7,307 247 Loss on futures transactions 94,906 15,510 Impairment losses on investments 24,174 - Others 30,290 31,677 1,042,052 199,194 (Continued)
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 (In millions, except per share amounts) Income from continuing operations before income tax 69,283 159,901 Income tax expense (Note 13) 60,026 61,802 Net loss of newly consolidated subsidiaries before acquisition (6,766) (19,315) Income from continuing operations 16,023 117,414 Income (loss) from discontinued operations, net (15,793) 2,857 Net income 230 120,271 Parent interests in net income 69,954 76,289 Minority interests in net income (69,724) 43,982 Basic earnings per share from continuing operations (Note 19) 1,564 1,535 Basic earnings per share (Note 19) 1,473 1,595 Diluted earnings per share from continuing operations (Note 19) 1,557 1,535 Diluted earnings per share (Note 19) 1,466 1,595 See accompanying notes to consolidated financial statements.
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOE THE YEARS ENDED DECEMBER 31, 2008 AND 2007 Common stock Capital surplus Capital adjustments Accumulated other comprehensive income (loss) Retained earnings Minority interests Total Balance as of January 1, 2007 119,465 558,843 (37,801) 22,207 379,515 225,648 1,267,877 Payment of dividends - - - - (23,200) - (23,200) Balance after appropriations 119,465 558,843 (37,801) 22,207 356,315 225,648 1,244,677 Net income - - - - 76,289 43,982 120,271 Conversion of convertible bonds 3,185 20,209 - - - - 23,394 Issuance of bonds with stock warrants - 10,444 - - - - 10,444 Issuance of convertible bonds - 16,281 - - - - 16,281 Disposal of treasury stock - 21,266 11,024 - - - 32,290 Changes in capital surplus of consolidated subsidiaries - (3,804) - - - - (3,804) Changes in equity arising from equity method investments - - - 1,622 - - 1,622 Loss on valuation of available-for-sale securities - - - (139,603) - - (139,603) Compensation expenses associated with stock options - - 2,940 - - - 2,940 Changes in the scope of consolidation - (91) - - - (28,886) (28,977) Decrease from translation of foreign currency of minority interest - - - - - (497) (497) Changes in minority interests - - - - - 14,937 14,937 Others - - 187 24,161 (301) (1,398) 22,649 Balance as of December 31, 2007 122,650 623,148 (23,650) (91,613) 432,303 253,786 1,316,624 Balance as of January 1, 2008 122,650 623,148 (23,650) (91,613) 432,303 253,786 1,316,624 Payment of dividends - - - - (24,187) (3,487) (27,674) Balance after appropriations 122,650 623,148 (23,650) (91,613) 408,116 250,299 1,288,950 Net income - - - - 69,954 (69,724) 230 Acquisition of treasury stock - - (43,117) - - - (43,117) Changes in capital surplus of consolidated subsidiaries - (117,303) - - - - (117,303) Changes in capital adjustments of consolidated subsidiaries - - (1,781) - - - (1,781) Changes in equity arising from equity method investments - - - 29,476 - - 29,476 Loss on valuation of available-for-sale securities - - - (257,148) - - (257,148) Gain on revaluation of property, plant and equipment, - - - 73,111 - - 73,111 Changes in the scope of consolidation - - (61) - - 148,790 148,790 Changes in minority interests - - - - - 193,414 193,414 Others - 2,952-86,955-41,368 131,275 Balance as of December 31, 2008 122,650 508,797 (68,609) (159,219) 478,070 564,147 1,445,836 See accompanying notes to consolidated financial statements.
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 230 120,271 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation 111,979 86,769 Amortization of intangible assets 39,138 7,116 Provision for severance benefits 16,522 9,687 Bad debt expenses 22,555 3,635 Other bad debt expenses 83,734 1,734 Compensation expenses associated with stock options, net (89) 2,617 Interest, net 97,594 3,337 Loss on valuation of short-term marketable securities 1,919 24 Loss on disposal of short-term marketable securities 7 - Gain on valuation of available-for-sale securities - (622) Gain on disposal of available-for-sale securities, net (4,701) (10,117) Gain on valuation of equity method investments, net (1,618) (32) Gain on disposal of equity method investments (6,898) (5,390) Impairment losses of available-for-sale securities 1,148 5,572 Gain on disposal of property, plant and equipment, net (378,262) (63,987) Loss (gain) on foreign currency translation, net 57,440 (3,317) Loss on valuation of financial derivatives, net 164,729 2,022 Impairment losses of investments 24,174 - Reversal of allowance for doubtful accounts (1,914) (13,632) Amortization of negative goodwill (8,667) (7,834) Net loss of newly consolidated subsidiaries before acquisition - (19,315) Others 20,970 (6,711) 239,760 (8,444) Changes in operating assets and liabilities Decrease (increase) in trade accounts and notes receivable 114,962 (73,758) Decrease (increase) in other accounts receivable (49,407) 27,478 Increase in accrued income (33,070) (20,067) Decrease (increase) in advanced payments (99,407) 5,245 Increase in prepaid expenses (12,045) (2,160) Increase in inventories (61,491) (64,311) Cash dividends from equity method investments 3,358 4,716 Decrease (increase) in other current assets (271) 266 Increase in current maturities of deferred tax assets (730) - Increase in deferred tax assets (33,833) (1,191) Increase (decrease) in trade accounts and notes payable 85,054 (86,591) Increase (decrease) in other accounts payable (76,738) 15,453 Increase in accrued expenses 5,724 17,943 Increase in income tax payable 24,349 17,822 Decrease in other current liabilities (1,942) (2,167) Decrease in current maturities of deferred tax liabilities (7,339) (1,220) Payment of severance benefits (8,220) (5,849) Decrease in contribution to National Pension Fund 17 38 Increase in pension plan assets (7,485) (2,075) Decrease in deferred tax liabilities (6,221) (20,411) Others (55,872) 51,179 (220,607) (139,660) Net cash provided by (used in) operating activities 19,383 (27,833) (Continued)
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposal of short-term marketable securities 801 1,038 Withdrawal of short-term financial instruments 283,753 - Withdrawal of long-term financial instruments 41,155 8,310 Proceeds from disposal of available-for-sale securities 95,989 33,616 Proceeds from disposal of held-to-maturity securities 2,049 86,975 Collection of short-term loans 204,709 153,176 Collection of long-term loans 4,268 3,213 Proceeds from disposal of property, plant and equipment 686,543 111,036 Acquisition of short-term financial instruments (673,591) (82,341) Acquisition of long-term financial instruments (6,242) (6,203) Acquisition of short-term marketable securities - (1,169) Acquisition of available-for-sale securities (204,491) (655,788) Acquisition of held-to-maturity securities (49,464) (4,502) Acquisition of equity method investments (248,933) (163,337) Acquisition of a subsidiary (75,000) - Extension of short-term loans (490,400) (305,310) Extension of long-term loans (54,509) (126,177) Acquisition of property, plant and equipment (191,050) (134,021) Acquisition of intangible assets (46,832) (58,902) Others, net 65,135 54,689 Net cash used in investing activities (656,110) (1,085,697) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debentures 289,633 382,411 Issuance of bonds with stock warrants 3,991 145,624 Issuance of exchangeable bonds 50,964 - Issuance of convertible bonds 1,151 227,005 Proceeds from short-term borrowings 823,160 1,085,609 Proceeds from long-term borrowings 223,374 126,622 Proceeds from stock issuance 33,379 58,052 Proceeds from disposal of treasury stock - 40,356 Cash inflows from the transactions between consolidated companies and minorities 11,650 13,930 Repayment of short-term borrowings (529,368) (267,106) Repayment of current maturities of long-term borrowings (302,583) (324,003) Repayment of debentures (53,989) (15,796) Repayment of long-term borrowings (22,428) (26,184) Payment of dividends (27,697) (25,119) Purchase of treasury stock (43,130) - Cash outflows from the transactions between consolidated companies and minorities (139,580) - Others, net (19,459) (14,700) Net cash provided by financing activities 299,068 1,406,701 (Continued)
TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 EFFECT OF CHANGES IN CONSOLIDATED SUBSIDIARIES 91,231 (55,096) EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,334 13,201 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (242,095) 251,356 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 467,191 215,835 CASH AND CASH EQUIVALENTS, END OF YEAR 225,097 467,191 See accompanying notes to consolidated financial statements.
- 2 - TAIHAN ELECTRIC WIRE CO., LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 1. GENERAL INFORMATION: The Company Taihan Electric Wire Co., Ltd. (the Company ) was incorporated in 1955 under the laws of the Republic of Korea to engage in manufacturing, processing and selling electric wires, cables and related products. In December 1968, the Company offered its shares for public ownership and all shares were listed on the Korea Stock Exchange. On April 19, 2002, the Company split its common share by two-for-one, thereby, decreasing the par value per share from 5,000 to 2,500. As of December 31, 2008 and 2007, the shareholders of the Company are as follows: Shareholder Number of shares 2008 2007 Percentage of Number of ownership (%) shares Percentage of ownership (%) Sam Yang Metal Co., Ltd. 13,000,010 26.5 13,000,010 26.5 Seul, Yoon Suk 7,979,432 16.3 7,979,432 16.3 Seul, Yoon Sung 2,849,821 5.8 2,849,821 5.8 Yang, Kyue Ae 1,156,340 2.4 1,156,340 2.4 Others 22,388,448 45.6 23,388,448 47.6 47,374,051 96.6 48,374,051 98.6 Treasury stock 1,685,931 3.4 685,931 1.4 49,059,982 100.0 49,059,982 100.0
- 3 - Consolidated Subsidiaries Consolidated subsidiaries as of December 31, 2008 and 2007 are as follows: Percentage of ownership (%) Number of shares 2008 2007 2008 2007 Taihan Bulk Terminal Co., Ltd. (*1) - 100.00-928,000 Malesela T.E.C. Ltd. (*2) 49.00 49.00 10,569 10,569 Skytel Co., Ltd. 34.03 39.97 - - Taihan Reach Ltd. 51.00 51.00 - - Muju Resort Inc. 74.50 74.50 12,200,537 12,200,537 Trybrands Inc. (*3) 38.36-3,188,013 - KTC Co., Ltd. 49.75 49.75 199,000 199,000 TMC Co., Ltd. 42.86 42.86 135,000 135,000 Korea Rental Corporation 68.47 68.47 2,359,400 2,359,400 Taihan Techren Co., Ltd. 100.00 100.00 200,000 66,660 TSC Co., Ltd. 70.00 70.00 19,600,000 19,600,000 Standard Telecom Congo 51.00 51.00 4,080,000 4,080,000 Taihan Global Holdings Ltd. 100.00 100.00 140,548,504 50,000,000 Taihan Luxemburg Investment Ltd. 100.00 100.00 1,000,000 150 Silkroad Telecom Ltd. 100.00-1,800,000 - Taihan ST Co., Ltd. 80.10 80.10 3,204,000 3,204,000 Daimyung TMS Co., Ltd. 100.00 100.00 250,080 250,080 Jilin Try Textile Co., Ltd. 100.00 100.00 - - TEC Construction Co., Ltd. (formerly Myungji Construction Co., Ltd.) 44.07 90.00 11,900,000 9,900,000 TEC&R Co., Ltd. (*3) 67.50-5,400,000 - Muju Enterprises City Co., Ltd. (*4) 96.07 96.07 8,800,000 8,800,000 Namkwang E&C (*5) 41.28-8,921,404 - Aldex Co., Ltd. (*6) 51.37-56,421,706 - SJD Co., Ltd. (*7) 42.00 - - - Onse Telecom Co., Ltd. (*7) 52.65-75,947,474 - Aldex Canada Enterprises Ltd. (*7) 100.00 - - - Taihan Global Canada Investments Ltd. (*4) 100.00 100.00 8,700,000 7,000,000 TEC&Co Co., Ltd. (*3) 36.52 38.36 6,010,506 7,948,520 (*1) Taihan Bulk Terminal Co., Ltd. was excluded from the scope of consolidated subsidiaries due to the disposal of its shares. (*2) The fiscal year for Malesela T.E.C. Ltd. ends on June 30. In preparing the consolidated financial statements, the unaudited financial statements as of and for the year ended December 31, 2008 were used. (*3) TEC&Co Co., Ltd., the surviving company, spun off its clothing business unit to establish a new company, Trybrands Co., Ltd. on April 30, 2008. In addition, TEC&Co Co., Ltd. dropped its development of real estate business unit to establish a new company, TEC&R Co., Ltd. on April 30, 2008. (*4) Muju Enterprises City Co., Ltd. and Taihan Global Canada Investments Ltd. were added to the scope of consolidated subsidiaries since its total assets were more than the required level of 7,000 million for consolidation with substantial control as of the prior year end. (*5) Namkwang Engineering and Construction Co., Ltd. ( Namkwang E&C ) was added to the scope of consolidated subsidiaries because the sum of equity ratio after adding the Company and its subsidiaries is more than 30% and the Company and its subsidiaries are the largest shareholders. (*6) Aldex Co., Ltd. was added to the scope of consolidated subsidiaries because the Company had substantial control over Aldex Co., Ltd. (*7) Onse Telecom Co., Ltd., Aldex Canada Enterprises Ltd. and SJD Co., Ltd. were added to the scope of consolidated subsidiaries because they were subsidiaries of Aldex Co., Ltd.
- 4 - The major business of consolidated subsidiaries and their relationship with the Company are summarized as follows: Company Major business Relationship Malesela T.E.C. Ltd. Manufacturing and marketing of cable Supplier of products and merchandise Skytel Co., Ltd. Telecommunication service No relationship Taihan Reach Ltd. Rent service of communication Supplier and purchaser of of products and merchandise Muju Resort Inc. Leisure sports and resort Lessor Trybrands Inc. Manufacturing and marketing No relationship fiber clothes KTC Co., Ltd. Manufacturing and marketing of cable Supplier and purchaser of products and merchandise TMC Co., Ltd. Manufacturing cable and fiber cable Supplier and purchaser of products and merchandise Korea Rental Corporation Rent and marketing of meters Lessor and office automations Taihan Techren Co., Ltd. Photovoltaic development Lessor TSC Co., Ltd. Manufacturing and marketing of cable Supplier of products and merchandise Standard Telecom Congo Wire communication Supplier of products and merchandise Taihan Global Holdings Ltd. Trading and investment Supplier of products and merchandise and purchaser of raw materials Silkroad Telecom Ltd. Telecommunication service No relationship Taihan Luxemburg Investment Ltd. Investment Purchaser of raw materials Taihan ST Co., Ltd. Manufacturing, rolling and extruding of other nonferrous metal Supplier and purchaser of products and merchandise Daimyung TMS Co., Ltd. Manufacturing and tooling of metal No relationship Jilin Try Textile Co., Ltd. Spinning and manufacturing of textile No relationship TEC Construction Co., Ltd. Construction Lessor and construction contract TEC&R Co., Ltd. Development of real estate and consulting Lessor Muju Enterprise City Co., Ltd. Leisure and sports No relationship Namkwang E&C Construction No relationship Aldex Co., Ltd. Manufacturing of aluminum ingot, Loans pellet and mini pellet SJD Co., Ltd. Manufacturing of electronic devices and No relationship construction materials Onse Telecom Co., Ltd. Telecommunication service Loans Aldex Canada Enterprises Ltd. Development of real estate No relationship Taihan Global Canada Investments Ltd. Hotel business No relationship TEC&Co Co., Ltd. Manufacturing, wholesaling and home-network system Lessor
- 5 - A summary of condensed financial information of the Company and its subsidiaries included in the accompanying consolidated financial statements as of and for the years ended December 31, 2008 and 2007 is as follows: 2008 Company Total assets Shareholders equity Sales Net income (loss) Taihan Electric Wire Co., Ltd. 3,394,483 878,415 2,444,536 70,770 Malesela T.E.C. Ltd. (*1) 59,923 41,075 120,883 4,757 Skytel Co., Ltd. 51,781 48,017 40,046 14,937 Taihan Reach Ltd. 19,787 9,737 6,718 1,615 Muju Resort Inc. 745,560 236,167 76,682 (9,676) T.E.C & Co Co., Ltd. 101,264 88,862 5,926 (33,955) Trybrands Inc. 116,616 68,587 90,031 3,133 KTC Co., Ltd. 125,425 34,447 220,830 1,741 TMC Co., Ltd. 113,470 34,758 212,811 13,568 Korea Rental Corporation 181,400 67,825 103,188 (753) Taihan Techren Co., Ltd. 6,621 5,960 33,993 52 TSC Co., Ltd. 39,809 30,329 19,037 (3,339) Standard Telecom Congo 32,667 (12,080) 5,630 (4,795) Taihan Global Holdings Ltd. (*2) 1,162,025 638,424 499,023 (209,585) Taihan ST Co., Ltd. 190,288 90,673 274,517 4,787 TEC Construction Co., Ltd. 263,914 34,905 174,212 (49,074) Jilin Try Textile Co., Ltd. 51,681 15,500 38,424 1,463 Daimyung TMS.Co., Ltd. 32,901 (13,693) 57,798 (1,171) TEC&R Co., Ltd 75,685 44,623 343 (413) Muju Enterprise City Co., Ltd. 64,267 46,518-1,283 Namkwang E&C 1,075,768 184,087 669,875 (7,155) Aldex Co., Ltd. 163,536 87,378 121,569 (48,611) SJD Co., Ltd. 15,538 8,167 26,236 (2,027) Onse Telecom Corporation 297,205 50,350 385,750 (44,888) Aldex Canada Enterprises Ltd. 14,617 5,683 44 (2,170) Taihan Global Canada Investments, Ltd. 53,553 8,132 20,114 (1,179) 8,449,784 2,732,846 5,648,216 (300,685) Consolidation adjustments (1,623,102) (1,287,010) (913,560) 300,915 6,826,682 1,445,836 4,734,656 230 (*1) Unaudited financial statements were used in preparing consolidated financial statements due to the different fiscal year. (*2) The financial information of Taihan Global Holdings Ltd., which has 100% ownership of Taihan Luxemburg Investment Ltd. and Silkroad Telecom Ltd., is based on the consolidated financial statements.
- 6-2007 Company Total assets Shareholders equity Sales Net income (loss) Taihan Electric Wire Co., Ltd. 2,981,272 1,071,751 2,078,618 77,625 Taihan Bulk Terminal Co., Ltd. 38,118 36,903 9,301 2,857 Malesela T.E.C. Ltd. (*1) 59,139 33,810 137,387 6,823 Skytel Co., Ltd. 32,934 29,277 24,932 9,782 Taihan Reach Ltd. 15,073 8,122 6,577 (758) Muju Resort Inc. 632,786 147,024 68,918 (17,341) Trybrands Inc. (*2) 512,523 175,491 377,351 53,170 KTC Co., Ltd. 67,663 19,375 156,562 1,752 TMC Co., Ltd. 76,813 22,555 141,179 9,422 Korea Rental Corporation 159,719 68,578 91,950 6,503 Taihan Techren Co., Ltd. 7,468 1,923 8,069 (799) TSC Co., Ltd. 32,122 27,580 12,819 623 Standard Telecom Congo (*1) 25,230 (5,043) 2,881 (4,063) Taihan Global Holdings Ltd. (*2) 463,059 371,370 56 4,838 Taihan ST Co., Ltd. (*2) 234,165 85,810 296,201 15,886 5,338,084 2,094,526 3,412,801 166,320 Consolidation adjustments (812,665) (777,902) (282,082) (46,049) 4,525,419 1,316,624 3,130,719 120,271 (*1) Unaudited financial statements were used in preparing consolidated financial statements. (*2) The financial information of Trybrands Inc., a direct subsidiary, is based on the consolidated financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company prepared its consolidated financial statements in conformity with Statements of Korea Accounting Standards ( SKASs ) No. 25 Consolidated Financial Statements. The significant accounting policies followed by the Company in the preparation of its consolidated financial statements are summarized below. Basis of Financial Statement Presentation The Company maintains its official accounting records in and prepares 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 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 and its subsidiaries financial position, results of operations, changes in shareholders equity or cash flows, is not presented in the accompanying consolidated financial statements. The Company prepared its consolidated financial statements as of December 31, 2008 in accordance with Financial Accounting Standards and Statements of Korea Accounting Standards ( SKASs ) in the Republic of Korea, and adopted SKAS No. 1 through No. 25 (except for No.14). The significant accounting policies applied by the Company in preparation of its consolidated financial statements for the year ended December 31, 2008 are identical to those for the year ended December 31, 2007, except for current amendments in SKASs.
- 7 - Principles of Consolidation (1) Elimination of Investment and Capital Accounts Investments and equity accounts of subsidiaries were eliminated at the dates the Company obtained substantial control of the subsidiaries. (2) Amortization of Goodwill and Negative Goodwill The difference between the cost of acquisition and the book value of the subsidiary is amortized using the straight-line method within five years from the year the acquisition occurred or reversed over the remaining weighted average useful life of the identifiable acquired depreciable assets for negative goodwill using the straight-line method. (3) Elimination of Intercompany Unrealized Income Profits and losses on inter-company sales of products, property or other assets are eliminated in the consolidated financial statements based on the gross profit or loss recognized. Unrealized gains and losses arising from sales by a controlling company to its subsidiary (downstream sales) are eliminated entirely and charged (credited) to controlling interest, and unrealized gains and losses arising from sales by a subsidiary to its controlling company or from transactions among subsidiaries (upstream sales) are eliminated entirely and allocated to controlling interest and minority interest. Unrealized income included as a result of intercompany transactions are as follows: 2008 2007 Tangible Convertible Tangible Convertible assets bonds Inventories Total assets bonds Total Malesela T.E.C, Ltd. (350) - - (350) (731) - (731) KTC Co., Ltd. (2,357) - - (2,357) (3,000) - (3,000) Standard Telecom Congo (1,603) - - (1,603) (1,927) - (1,927) Taihan ST Co., Ltd. (45,364) - - (45,364) (46,765) - (46,765) TMC Co., Ltd. - (304) - (304) - (304) (304) Taihan Techren Co., Ltd. - - - - - (315) (315) Jilin Try Textile Co., Ltd. (112) - (322) (434) - - - TEC&R Co., Ltd (4,901) - - (4,901) - - - Total (54,687) (304) (322) (55,313) (52,423) (619) (53,042) (4) Adjustment of Different Accounting Policy Differences in accounting policy between the Company and consolidated subsidiaries are adjusted in preparing the consolidated financial statements. (5) Translation of Foreign Currency Financial Statements Accounts and records of the overseas subsidiaries are maintained in foreign currencies. For presentation in the accompanying consolidated financial statements, the financial statements of the overseas subsidiaries have been translated to at exchange rates as of the balance sheet date for the balance sheet accounts and average exchange rate for income statement accounts. Resulting differences are accounted for as gain (loss) on overseas operation translation in accumulated other comprehensive income (loss) account within shareholders equity.
- 8 - Recent Changes in Korean Accounting Standards Korea Financial Accounting Standards, SKAS, Interpretation on Korea Financial Accounting Standards, Opinion on Application of Accounting Standards and Opinion on Financial Reporting Practice (collectively referred to as KFAS and others ) that were issued or amended by the Korea Accounting Institute and the Financial Supervisory Service for the year ended December 31, 2008 and adopted by the Company are summarized below. (1) SKAS No. 5 Property, Plant and Equipment The Company and its certain subsidiaries adopted the amendment to the SKAS No. 5 Property, Plant and Equipment, which permits certain items of its lands and buildings to be revalued after acquisition date, applying the revaluation models permitted under SKAS No. 5. As a result of this adoption, the book value of the lands & buildings as of December 31, 2008 increased by 138,612 million, the Company accounted for the amount of gain on revaluation as Gain on revaluation of property, plant and equipment in accumulated other comprehensive income ( 108,608 million) and the amount of loss on revaluation as Loss on revaluation of property, plants and equipment in non-operating expenses ( 491 million). (2) SKAS No. 53-70 Accounting for Derivatives According to the Interpretation for SKAS No. 53-70 Accounting for Derivatives (newly amended on December 30, 2008), the Company designated the foreign currency denominated borrowings as a hedging instrument to the exposure of fluctuating expected future cash flows produced by a foreign currency risk and accordingly, the effective portion of the gain or loss on the derivatives instruments, which incurred from July 1, 2008 to December 31, 2008, was recorded as loss on valuation of derivatives included in accumulated other comprehensive loss. In addition, such adoption of the above Interpretation for SKAS increased net income for the year ended December 31, 2008 by 21,934 million. Revenue Recognition Revenue is the gross inflow of economic benefits arising in the ordinary course of the Company s activities and is measured at the fair value of the consideration received or receivable for the sale of goods and services in the said ordinary course of the Company s activities. Revenue is shown as net of value-added tax, sales discounts and sales returns. The Company recognizes revenue when the amount of revenue can be reliably measured, and it is probable that future economic benefits will flow into the Company. Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of goods are transferred to the buyer. Revenue from the rendering of services is recognized under the percentage-ofcompletion method, under which revenue is generally recognized based on the costs incurred to date as a percentage of the total estimated costs to be incurred. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts and based on management s estimate of the collectibility of the receivables and prior years collection experience. Inventories The quantities of inventories are determined using the perpetual method and periodic inventory count, while the costs of inventories are determined using the weighted-average method, except for materials in-transit which is stated at cost, determined using the specific identification method. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expense. Replacement cost is used for the estimate of net realizable value of raw materials. If, however, the circumstances which caused the valuation loss cease to exist, the valuation loss is reversed up to the original carrying amount before valuation. The reversal of valuation loss is deducted from cost of sales.
- 9 - Investments in Securities (Excluding Equity Method Investments) Costs of securities are determined using the weighted-average method. Investments in equity securities or debt securities are classified into trading, available-for-sale and held-to-maturity securities, depending on the acquisition and holding purpose. Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity method of accounting. Trading securities are classified as current assets; available-for-sale securities and held-to-maturity securities are classified as non-current assets, unless they mature or are certain to be disposed of within one year, which are then classified as current assets. Held-to-maturity securities are carried at amortized cost while available-for-sale and trading securities are recorded at fair value. However, non-marketable securities, classified as available-for-sale securities, are carried at cost when the fair values are not readily determinable. Gains and losses related to trading securities are recognized in the income statement, while unrealized gains and losses of available-for-sale securities are recognized under other comprehensive income (loss). Realized gains and losses of available-for-sale securities are recognized in the income statement. Equity Method Investments Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting. 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; (iii) increase (decrease) in equity of associates in accumulated other comprehensive income (loss) for other changes in shareholders 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 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 investments. 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 5 years on a straight line method while 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 are 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 investments. Upon acquisition of the equity method investments, 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.
- 10 - 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 balance sheet date, is considered unrealized gain (loss) and adjusted to equity method investments. When there is objective evidence that the equity method investments is impaired and the recoverable amount is lower than the carrying amount of the equity method investments, an impairment loss is recognized as loss on impairment of equity method investments included in non-operating expense and the unamortized investment difference is first reduced. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss is recognized as income up to the previously recorded impairment loss. The book value of the equity method investments after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss would not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed. Property, Plant and Equipment Property, plant and equipment are stated at cost (acquisition cost or manufacturing cost plus expenditures directly related to preparing the assets ready for use). However, certain assets, for which the revaluation method in accordance with the Korean Assets Revaluation Act or revaluation model in accordance with the amendment to SKAS No. 5 is elected, are recorded at revalued amounts. The Company presents the amount of gain on revaluation performed in accordance with the Korean Assets Revaluation Act on the other capital surplus. The Company accounts for the amount of gain on revaluation performed in accordance with the amendment to SKAS No. 5 as Gain on revaluation of property, plant and equipment in accumulated other comprehensive income or Loss on revaluation of property, plants and equipment in non-operating expenses. Property, plant and equipment are stated net of accumulated depreciation calculated based on the following depreciation method and estimated useful lives: Buildings Structures Machinery and equipment Vehicles Others Rental assets Estimated useful lives 6-60 years 5-48 years 2-40 years 2-10 years 2-20 years 3-10 years Expenditures incurred after the acquisition or completion of assets are capitalized if they enhance the value of the related assets over their recently appraised value or extend the useful life of the related assets. Routine maintenance and repairs are charged to expense as incurred. 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: 1) The lease transfers ownership of the asset to the lessee by the end of the lease term; 2) The lessee has the option to purchase the asset at a bargain price and it is certain that the option will be exercised; 3) The lease term is for the major part (75% or more) of the economic life of the asset even if title is not transferred; 4) 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 5) The leased assets are of such a specialized nature that only the Company can use them without major modifications.
- 11 - 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 the 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 lease is 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. Government Grants Government grants received, which are to be repaid, are recorded as liability, and while grants without obligation to be repaid are offset against cost of assets purchased with such grants. Grants received for a specific purpose are offset against the specific expense for which it was granted, and other grants are recorded as a gain for the period. Intangible Assets Intangible assets are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated based on using the straight-line method over the estimated useful lives. Development costs, which are individually identifiable and directly related to a new technology or to new products that carry probable future benefits, are capitalized as intangible assets. Amortization of development cost begins at the commencement of the commercial production of the related products or use of the related technology. Goodwill Development cost Industry property rights Others Estimated useful life 5 years 5 years 5-10 years 4-20 years Impairment of Assets When the book value of an asset is significantly greater than its recoverable value due to obsolescence, physical damage or an abrupt decline in the market value of the asset, the said decline in value is deducted from the book value to agree with recoverable amount and is recognized as an asset impairment loss for the period. When the recoverable value subsequently exceeds the book value, the impairment amount is recognized as gain for the period to the extent that the revised book value does not exceed the book value that would have been recorded without the impairment. Derivatives All derivative instruments are accounted for at their fair value according to the rights and obligations associated with the derivative contracts. The resulting changes in fair value of derivative instruments are recognized either under the income statement or shareholders equity, depending on whether the derivative instruments qualify as a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument purchased with the purpose of hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment that is attributable to a particular risk. The resulting changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized under the shareholders equity as accumulated other comprehensive income (loss).