Walsin Technology Corporation and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2005 and 2004 and Independent Auditors Report
INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders Walsin Technology Corporation We have audited the accompanying consolidated balance sheets of Walsin Technology Corporation and subsidiaries (collectively, the Company ) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended (all expressed in New Taiwan dollars). These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. The accompanying consolidated financial statements included assets of Eagle Advanced Ceramics Corporation ( EACC ) and POE International Co., Ltd. ( POEI ) that amounted to $430,433 thousand and $157,066 thousand constituting 2.07% and 0.89% of the consolidated total assets as of December 31, 2005 and 2004, respectively, and income before income tax of $21,980 thousand and $9,497 thousand constituting 17.20% and 2.42% of the consolidated income before income tax for the years then ended, respectively. Also included were long-term investments in equity-method investees that amounted to $876,684 thousand constituting 4.95% of the consolidated total assets as of December 31, 2004, and equity in earnings of investees of $43,874 thousand constituting 11.17% of the consolidated income before income tax for the year then ended. The financial statements of EACC and POEI and the equity-method investees were audited by other independent auditors and our opinion, insofar as it relates to these amounts included for EACC and POEI and the equitymethod investees, is based solely on the reports of the other auditors. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of China. As discussed in Note 3 to the consolidated financial statements, effective December 31, 2004 and January 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 35, Accounting for Asset Impairment. - 1 -
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2005, the Company adopted SFAS No. 7 Consolidated Financial Statements, and included all controlled investees in the consolidated financial statements. In 2004, the accounts of investees in which over 50% of ownership interest are held by the Company are included in the consolidated financial statements. February 6, 2006 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. Also, as stated in Note 2 to the financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English. - 2 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars) ASSETS Amount % Amount % CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) $ 1,404,083 7 $ 1,339,382 8 Short-term investments (Notes 2 and 5) 1,513,213 7 1,229,000 7 Notes receivable (Notes 2 and 6) 332,366 2 136,523 1 Accounts receivable (Notes 2 and 6) 3,761,336 18 2,318,415 13 Accounts receivable from related parties (Notes 2, 6 and 22) 6,881-263,074 1 Other financial assets, current 113,229-240,757 1 Inventories (Notes 2 and 7) 2,953,086 14 2,581,597 15 Other current assets 382,422 2 255,002 1 Total current assets 10,466,616 50 8,363,750 47 LONG-TERM INVESTMENTS (Notes 2 and 8) Long-term equity investments at equity method 332,755 2 1,169,720 7 Long-term equity investments at cost method 823,443 4 306,957 2 Total long-term equity investments 1,156,198 6 1,476,677 9 Long-term bond investments 30,000 - - - Total long-term investments 1,186,198 6 1,476,677 9 OTHER FINANCIAL ASSETS, NONCURRENT 51,187-43,759 - PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 9) Cost Land 214,927 1 39,354 - Buildings and improvements 2,643,856 13 1,625,720 9 Machinery equipment 8,761,759 42 6,690,374 38 Transportation equipment 53,567-41,776 - Leasehold improvements 229,382 1 182,237 1 Other equipment 1,407,039 7 1,213,490 7 13,310,530 64 9,792,951 55 Less accumulated depreciation (5,315,919) (25) (3,129,369) (18) Less accumulated impairment (154,444) (1) - - Construction in progress and prepayments 507,020 2 589,141 4 Property, plant and equipment, net 8,347,187 40 7,252,723 41 INTANGIBLE ASSETS Landrights (Note 2) 90,905 1 37,202 - OTHER ASSETS (Notes 2 and 10) Idle assets 191,625 1 126,847 1 Deferred charges 88,782-64,213 - Deferred tax assets, noncurrent 384,809 2 340,512 2 Others 13,585-137 - Total other assets 678,801 3 531,709 3 TOTAL $ 20,820,894 100 $ 17,705,820 100 LIABILITIES AND STOCKHOLDERS EQUITY Amount % Amount % CURRENT LIABILITIES Short-term bank borrowings (Note 11) $ 1,752,190 8 $ 1,932,218 11 Short-term obligations (Note 12) 229,842 1 779,318 4 Notes payable 92,743 1 148,339 1 Accounts payable 1,171,098 6 1,288,356 7 Accounts payable to related parties (Note 22) - - 157,691 1 Income tax payable (Notes 2 and 20) 30,823-8,565 - Other payables 1,531,025 7 1,353,066 8 Current portion of convertible notes payable (Note 13) 1,131,133 6 - - Current portion of long-tern debt (Note 14) 197,080 1 - - Other current liabilities 88,142-68,620 - Total current liabilities 6,224,076 30 5,736,173 32 LONG-TERM LIABILITIES Convertible notes payable (Note 13) - - 1,097,945 6 Long-term debt (Note 14) 788,319 4 957,331 6 Total long-term liabilities 788,319 4 2,055,276 12 RESERVE FOR LAND VALUE INCREMENT TAX 17,341-3,580 - OTHER LIABILITIES Deposits received 25,039-2,976 - Other liabilities 99,505-70,602 - Total other liabilities 124,544-73,578 - Total liabilities 7,154,280 34 7,868,607 44 STOCKHOLDERS EQUITY Common stock (Note 16) 5,152,988 25 3,921,034 22 Capital surplus Additional paid-in capital 5,057,877 24 4,971,444 28 Property, plant and equipment revaluation increment 3,021-3,021 - Gain on disposal of property, plant and equipment 270,307 1 270,307 2 Capital surplus from business combination 1,487,077 7 239,304 1 Retained earnings (Note 17) Legal reserve 79,344-37,642 - Special reserve 208,097 1 - - Unappropriated earnings 734,448 4 419,926 3 Unrealized loss on market value decline of long-term equity investments (Note 2) (1,918) - (27,300) - Cumulative translation adjustments (Note 2) (76,644) - (180,797) (1) Treasury stock (Note 18) (10,516) - - - Total stockholders equity 12,904,081 62 9,654,581 55 Minority interests 762,533 4 182,632 1 TOTAL $ 20,820,894 100 $ 17,705,820 100 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 6, 2006) - 3 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % NET SALES $ 10,651,201 100 $ 7,955,693 100 COSTS OF SALES 8,768,501 82 6,499,804 82 UNREALIZED INTERCOMPANY PROFIT - - (8,227) - GROSS PROFIT 1,882,700 18 1,447,662 18 OPERATING EXPENSES Selling expenses 503,997 5 391,172 5 General and administrative expenses 476,483 5 347,995 4 Research and development expenses 253,037 2 222,966 3 Total operating expenses 1,233,517 12 962,133 12 INCOME FROM OPERATIONS 649,183 6 485,529 6 NON-OPERATING INCOME Interest income 16,630-10,391 - Equity in net earnings of investees (Notes 2 and 8) 8,665-50,575 1 Investment income (Notes 2 and 21) 13,369 - - - Gain on disposal of property, plant and equipment 1,959 - - - Gain on disposal of investments 59,578 1 40,452 1 Foreign exchange gain, net 137,807 1 13,685 - Others 213,839 2 116,467 1 Total non-operating income 451,847 4 231,570 3 NON-OPERATING EXPENSES Interest expense 123,467 1 55,752 1 Investment loss (Notes 2 and 21) - - 43,435 - Loss from disposal of property, plant and equipment 84,401 1 3,712 - Shortage in physical inventory 3,965-2,850 - Loss from inventory devaluation and disposal 198,234 2 76,747 1 Loss from idle assets devaluation - - 90,923 1 Impairment loss 354,176 3 - - Others 208,982 2 50,900 1 Total non-operating expenses 973,225 9 324,319 4 INCOME BEFORE INCOME TAX 127,805 1 392,780 5 (PROVISION) CREDIT FOR INCOME TAX (Notes 2 and 20) (5,416) - 14,837 - TOTAL CONSOLIDATED INCOME $ 122,389 1 $ 407,617 5 ATTRIBUTED TO PARENT COMPANY STOCKHOLDERS $ 734,525 7 $ 417,019 5 ATTRIBUTED TO SUBSIDIARIES MINORITY INTERESTS (612,136) (6) (9,402) - $ 122,389 1 $ 407,617 5 (Continued) - 4 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Before Income Tax After Before Income Income Tax Tax After Income Tax BASIC EARNINGS PER SHARE BEFORE DISTRIBUTION TO MINORITY INTERESTS (Notes 2 and 16) $ 0.29 $ 0.28 $ 1.02 $ 1.06 BASIC EARNINGS PER SHARE ATTRIBUTED TO PARENT COMPANY STOCKHOLDERS) (Notes 2 and 16) $ 1.67 $ 1.09 DILUTED EARNINGS PER SHARE BEFORE DISTRIBUTION TO MINORITY INTERESTS (Notes 2 and 16) $ 0.26 $ 0.25 $ 0.91 $ 0.94 DILUTED EARNINGS PER SHARE (ATTRIBUTED TO PARENT COMPANY STOCKHOLDERS) (Notes 2 and 16) $ 1.52 $ 0.97 Pro forma amounts, assuming common shares of the Company held by subsidiaries were not treated as treasury stock. Before Income Tax 2005 After Income Tax TOTAL CONSOLIDATED INCOME $ 127,805 $ 122,389 ATTRIBUTED TO PARENT COMPANY STOCKHOLDERS $ 734,525 ATTRIBUTED TO SUBSIDIARIES MINORITY INTERESTS (612,136) $ 122,389 BASIC EARNINGS PER SHARE BEFORE DISTRIBUTION TO MINORITY INTERESTS (Notes 2 and 16) $ 0.29 $ 0.28 BASIC EARNINGS PER SHARE (ATTRIBUTED TO PARENT COMPANY STOCKHOLDERS) (Notes 2 and 16) $ 1.67 DILUTED EARNINGS PER SHARE BEFORE DISTRIBUTION TO MINORITY INTERESTS (Notes 2 and 16) $ 0.26 $ 0.25 DILUTED EARNINGS PER SHARE (ATTRIBUTED TO PARENT COMPANY STOCKHOLDERS) (Notes 2 and 16) $ 1.51 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 6, 2006) (Concluded) - 5 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars) Unrealized Capital Surplus Retained Earnings Loss on Property, Gain on Capital Market Value Plant and Disposal of Surplus Decline of Additional Equipment Property, from Long-Term Cumulative Common Paid-in Revaluation Plant and Business Legal Special Unappropriated Equity Translation Treasury Minority Stock Capital Increment Equipment Combination Reserve Reserve Earnings Investments Adjustments Stock Interest Total BALANCE, JANUARY 1, 2004 $ 3,535,589 $ 4,851,698 $ 3,021 $ 270,307 $ - $ 20,530 $ - $ 175,889 $ - $ 30,927 $ - $ 194,754 $ 9,082,715 Appropriations and distributions Transfer to legal reserve - - - - - 17,112 - (17,112) - - - - - Cash bonuses to directors and supervisors - - - - - - - (3,117) - - - - (3,117) Stock bonuses to employees 7,793 - - - - - - (7,793) - - - - - Stock dividends 72,480 - - - - - - (72,480) - - - - - Cash dividends - - - - - - - (72,480) - - - - (72,480) Convertible notes converted into common stock 62,587 119,746 - - - - - - - - - - 182,333 Issuance of shares for the merger 242,585 - - - 239,304 - - - - (1,111) - - 480,778 Unrealized loss on market value decline of longterm equity investments - - - - - - - - (27,300) - - - (27,300) Cumulative translation adjustments on long-term equity investments - - - - - - - - - (210,613) - - (210,613) Minority interest - - - - - - - - - - - (2,720) (2,720) Total consolidated income for 2004 - - - - - - - 417,019 - - - (9,402) 407,617 BALANCE, DECEMBER 31, 2004 3,921,034 4,971,444 3,021 270,307 239,304 37,642-419,926 (27,300) (180,797) - 182,632 9,837,213 Appropriations and distributions Transfer to legal reserve - - - - - 41,702 - (41,702) - - - - - Transfer to special reserve - - - - - - 208,097 (208,097) - - - - - Cash bonuses to directors and supervisors - - - - - - - (3,402) - - - - (3,402) Stock bonuses to employees 8,506 - - - - - - (8,506) - - - - - Stock dividends 79,106 - - - - - - (79,106) - - - - - Cash dividends - - - - - - - (79,106) - - - - (79,106) Convertible notes converted into common stock (Note 13) 27,257 35,182 - - - - - - - - - - 62,439 Employee stock warrant converted into common stock (Note 17) 6,420 4,751 - - - - - - - - - - 11,171 Issuance of shares for the merger (Note 16) 1,035,665 - - - 1,247,773 - - - 993 934 - - 2,285,365 Unrealized loss on market value decline of longterm equity investments (Note 8) - - - - - - - - 24,389 - - (1,644) 22,745 Effect on change in percentage of ownership interest of equity-method investee - - - - - - - (84) - - - - (84) Cumulative translation adjustments on long-term equity investments - - - - - - - - - 103,219 - (20,977) 82,242 Increase in common shares held by subsidiaries (Note 18) - - - - - - - - - - (10,516) (9,009) (19,525) Issuance of shares to exchange stock (Note 16) 75,000 46,500 - - - - - - - - - - 121,500 Effect of the first time consolidation of subsidiaries - - - - - - - - - - - 578,760 578,760 Minority interest - - - - - - - - - - - 644,907 644,907 Total consolidated income for 2005 - - - - - - - 734,525 - - - (612,136) 122,389 BALANCE, DECEMBER 31, 2005 $ 5,152,988 $ 5,057,877 $ 3,021 $ 270,307 $ 1,487,077 $ 79,344 $ 208,097 $ 734,448 $ (1,918) $ (76,644) $ (10,516) $ 762,533 $ 13,666,614 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 6, 2006) - 6 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Total consolidated income $ 122,389 $ 407,617 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,568,799 1,119,336 Unrealized intercompany profit - 8,227 Recovery from devaluation in marketable securities (7,340) (17,030) Provision for inventory devaluation and loss from disposal of inventory 198,234 76,747 Provision for goodwill devaluation - 27,125 Impairment loss 354,176 - Net gain from disposal of long-term equity investments - (7,494) Equity in net gains of unconsolidated affiliates (8,665) (50,575) Liquidation loss of long-term equity investments 7,532 - Permanent decline in value and impairment loss of longterm equity investments - 41,287 Net loss from disposal of property, plant and equipment 82,442 3,712 Cash dividends from equity-accounted investees 4,560 6,304 Provision for idle assets devaluation loss - 90,923 Net changes in operating assets and liabilities Short-term investments for trading purposes (292,414) 288,915 Notes receivable (159,024) 8,055 Accounts receivable (1,442,921) (154,971) Accounts receivable from related parties 262,106 (214,939) Other financial assets, current 808,731 (31,972) Inventories (525,474) (696,352) Other current assets (123,214) 43,987 Net receivable on forward exchange contracts 3,464 (2,869) Deferred tax assets, noncurrent (44,297) (38,779) Other financial assets, noncurrent (1,889) (926) Other assets (13,448) - Notes payable (59,289) 53,380 Accounts payable (143,902) 592,746 Accounts payable to related parties (157,691) 311,121 Income tax payable 22,258 6,551 Other payables 374,223 (237,096) Other current liabilities (7,474) (130,134) Other liabilities 13,783 (9,721) Exchange rate adjustment of convertible notes payable and long-term debt 63,182 (70,450) Accrued pension cost 7,966 12,835 Net cash provided by operating activities 906,803 1,435,560 (Continued) - 7 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in pledged certificates of deposit $ (3,844) $ 79 Proceeds from disposal of long-term equity investments - 78,051 Payments for long-term equity investments (369,665) (23,170) Proceeds from disposal of property, plant and equipment 108,161 84,846 Acquisition of property, plant and equipment (3,127,373) (2,525,641) Increase in landrights (54,324) - Increase in refundable deposits (1,582) (20,572) Increase in deferred charges (56,284) (41,023) Net cash used in investing activities (3,504,911) (2,447,430) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term bank borrowings (434,145) (307,252) Decrease in short-term obligations (556,932) (184,186) (Decrease) increase in long-term debt (17,029) 663,575 Increase in convertible notes 83,772 - Increase (decrease) in minority interest 644,907 (2,720) Increase in deposits received 22,063 2,976 Employee stock warrant converted into common stock 11,171 - Payments for bonuses to directors and supervisors (3,402) (3,117) Payments for cash dividends (79,106) (72,480) Net cash provided by merger with Eden Technology Corp. - 11,850 Net cash provided by merger with Pan Overseas Electronic Corporation 1,118,993 - Issuance of shares to exchange stock 121,500 - Net cash provided by financing activities 911,792 108,646 EFFECT OF THE FIRST TIME CONSOLIDATION OF SUBSIDIARIES 1,670,795 - EFFECT OF EXCHANGE RATE CHANGES ON CASH 80,222 (186,909) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 64,701 (1,090,133) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,339,382 2,429,515 CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,404,083 $ 1,339,382 (Continued) - 8 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars) SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Transfer of property, plant and equipment to idle assets $ 33,887 $ 173,084 Convertible notes payable converted into common stock $ 62,439 $ 182,333 Transfer of current portion of convertible notes $ 1,047,915 $ - Transfer of current portion of long-term debt $ 197,080 $ - Increase in common shares held by subsidiaries $ (10,516) $ - Effect of change in percentage of ownership interest of equity method investees $ (638) $ - Unrealized loss on market value decline of long-term equity investments $ 22,745 $ (27,300) Translation adjustments on long-term equity investments $ 2,020 $ (23,704) SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid during the year Interest $ 130,107 $ 54,087 Income tax $ 14,370 $ 257 Cash paid during the year for acquisition of property, plant and equipment Property, plant and equipment acquired $ 2,823,115 $ 3,019,720 Add payable for purchases of property, plant and equipment at beginning of year 626,296 132,217 Less payable for purchases of property, plant and equipment at end of year (322,038) (626,296) Cash paid during the year for acquisition of property, plant and equipment $ 3,127,373 $ 2,525,641 Net cash provided by merger with Eden Technology Corp. Increase in capital stock $ - $ 242,585 Increase in capital surplus - 239,304 Decrease in cumulative translation adjustments - (1,111) Increase in current liabilities - 80,989 Increase in long-term liabilities - 43,840 Decrease in other liabilities - (8,671) Increase in current assets - (290,254) Decrease in long-term equity investments - 207,017 Increase in property, plant and equipment - (444,354) Increase in other assets - (57,495) $ - $ 11,850 (Continued) - 9 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars) Net cash provided by mergers with Pan Overseas Electronic Corp. Increase in capital stock $ 1,035,665 $ - Increase in capital surplus 1,247,773 - Increase in cumulative translation adjustments 934 - Recovery from unrealized loss on market value decline of long-term equity investments 993 - Increase in current liabilities 426,900 - Increase in long-term liabilities 13,761 - Increase in other liabilities 16,388 - Increase in current assets (816,689) - Increase in short-term investments (3,984) - Decrease in long-term equity investments 95,442 - Increase in property, plant and equipment (279,652) - Increase in other assets (618,538) - $ 1,118,993 $ - The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 6, 2006) (Concluded) - 10 -
WALSIN TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. GENERAL Walsin Technology Corporation ( WTC ) was incorporated in the Republic of China (the ROC ) on July 29, 1970 to design, develop and manufacture semiconductors. In 1992, WTC changed its major operation to the manufacture of electronic ceramics, including multilayer ceramic capacitors ( MLCC ) and positive temperature coefficient resistors ( PTCR ). In 1995, WTC established a branch in Kaohsiung to research, develop, produce and sell new products. WTC s common stock began to be traded in Taiwan s over-thecounter market on November 21, 1997. Later, WTC s stock ceased to be OTC traded and became listed on the Taiwan Stock Exchange on September 17, 2001. Walsin Lihwa Corporation had a 19.49% ownership interest in WTC as of December 31, 2005. WTC s merger with Eden Technology Corp. ( Eden ) took effect on August 1, 2004, with WTC as survivor entity; thus, WTC assumed all of Eden s rights and obligations on that date. The merger was approved by the Fair Trade Commission, Taiwan Stock Exchange Corporation, Securities and Futures Bureau ( SFB ), and Ministry of Economic Affairs of the ROC. WTC recognized the fair value of assets and liabilities of Eden on August 1, 2004. WTC issued stocks to exchange for the shares of the acquired company, except for shares held by WTC. Long-term stock investments in Eden were eliminated, and the resulting difference was recognized as capital surplus - merger. Assets Cash $ 11,850 Receivables 647,289 Inventories 110,982 Other current assets 21,827 Long-term equity investments 25,985 Property, plant and equipment, net 445,074 Other assets 57,495 Liabilities Current liabilities (559,834) Long-term liabilities (43,840) Other liabilities (3,048) Net assets acquired 713,780 Elimination of long-term equity investments in Eden Technology Corp. (231,891) Shares issued by WTC (242,585) Capital surplus - merger $ 239,304 In order to lower operating costs, promote competitiveness, and expand operating scale, WTC s stockholders approved the merger with Pan Overseas Electronic Corporation ( POE ) on June 23, 2005, with WTC as the surviving entity. The merger took effect on September 1, 2005, and WTC thus assumed all rights and obligations of POE on that date. The merger was approved by the Fair Trade Commission, Taiwan Stock Exchange Corporation, Securities - 11 -
and Futures Bureau, and Ministry of Economic Affairs of the Republic of China. WTC recognized the fair value of assets and liabilities of POE on September 1, 2005. WTC issued stocks to exchange for the shares of POE, except for shares held by WTC. Long-term stock investments in POE were eliminated, and the resulting difference was recognized as capital surplus - merger. Assets Cash $ 1,118,993 Short-term investments 3,984 Receivables 559,467 Inventories 53,483 Other current assets 844,158 Long-term equity investments 705,115 Property, plant and equipment, net 251,554 Other assets 167,220 Liabilities Current liabilities (587,793) Other liabilities (33,096) Net assets acquired 3,083,085 Elimination of long-term equity investments in Pan Overseas Electronic Corporation (799,647) Shares issued by WTC (1,035,665) Capital surplus - merger $ 1,247,773 Pro forma net sales, net income and earnings per share of WTC on the assumption that the merger with POE was completed on January 1, 2004 are as follows: Net sales $ 7,288,789 $ 7,489,209 Income before income tax $ 172,188 $ 403,281 Net income $ 203,101 $ 439,868 Basic earnings per share Based on weighted-average number of shares outstanding of 507,858 thousand shares and 489,642 thousand shares in 2005 and 2004 $ 0.40 $ 0.90 Gallatown Developments Limited ( Gallatown ) was formed in the Cayman Islands as an investment holding company. Eagle Advanced Ceramics Corporation ( EACC ) was engaged in selling of electronic components. Eden Technology Corporation (SAMOA) ( ETC ) was formed in Western Samoa as an investment holding company. - 12 -
POE International Co., Ltd. ( POEI ) was engaged in selling of electronic components. Pan Overseas (B.V.I.) Investment ( POE-BVI ) was formed in the British Virgin Islands as an investment holding company. Prosperity Dielectrics Co., Ltd. ( PDC ) is engaged in manufacturing and selling of electric capacitors, resistors and semiconductor chip, and its stock is listed on the GreTai Securities Market ( GTSM ). On September 5, 2005, WTC had signed a stock exchange agreement with Taiwan Cement Corporation ( TCC ). WTC issued 7.5 million common shares to exchange 12 million common shares of PDC held by TCC on October 7, 2005. The agreement was approved by the Securities and Futures Bureau. Besides the 12 million common shares of PDC obtained from the stock exchange agreement, WTC also purchased 53 million common shares from market which resulted in 53.86% ownership interest in PDC as of December 31, 2005. Philip Technology Corporation ( PTC ) was formed in the British Virgin Islands and engaged in importing and exporting of passive components. PTC had liquidated in December 2005. Principles of Consolidation The consolidated entities (collectively, the Company ) are summarized as follows: Name of Investor Name of Subsidiary Ownership Interest Principal Activity WTC Gallatown 100.00% Investment holding WTC EACC 100.00% Selling of electronic components WTC ETC 100.00% Investment holding WTC POEI 100.00% Selling of electronic components WTC POE-BVI 100.00% Investment holding WTC PDC 53.86% Selling of electric capacitors, resistors and semiconductor chip Gallatown Gallatown Gallatown Gallatown Gallatown Gallatown Walsin Technology Corporation (HK) Limited [ WTC (HK) ] Walsin Technology Corporation (Malaysia) Sdn. Bhd. ( WTCM ) Walsin Electronics (S) Pte. Ltd. ( WES ) Walsin Technology Corporation U.S.A. ( WTCA ) Walsin Technology Corporation (Japan) Limited ( WTCJ ) Suzhou Walsin Technology Electronics Co., Ltd. ( SZ ) 100.00% Selling of electronic components 100.00% Selling passive electronic components. 100.00% Selling passive electronic components. 100.00% Selling passive electronic components. 100.00% Research Centre 100.00% Manufacturing and selling passive electronic components Gallatown Gallatown Dongguan Walsin Technology Electronics Co., Ltd. ( DG ) Walsin Electronics (Shenzhen) Corporation Limited 100.00% Manufacturing and selling passive electronic components 100.00% Selling passive electronic components. - 13 -
Name of Investor Name of Subsidiary Ownership Interest Principal Activity Gallatown Walsin Passive Component (HK) Limited ( WPC ) 100.00% Selling passive electronic components. Gallatown Eden International Corporation (HK) Limited 100.00% Selling passive electronic components. Gallatown Walsin Technology Electronics (Malaysia) Sdn. 100.00% Selling passive electronic components Bhd. Gallatown Eastern Electronic Ltd. ( EE ) 92.08% Investment holding Gallatown Nitsuko Electronics Corporation ( NTK ) 70.00% Manufacturing and selling of film capacitors, noise filters. ETC Eden Technology Co., Limited (Shen Zhen) 100.00% Manufacturing and selling of electronic parts ETC Eden Technology Co., Limited (Kun Shan) ( Eden-KS ) 100.00% Manufacturing and selling of electronic parts POE-BVI Fine Bright Technology 100.00% Investment holding Limited ( FB ) POE-BVI Pan Overseas Electronic Co., Limited (Guang Zhou) 41.01% Manufacturing and selling passive electronic POE-BVI Pan Overseas Electronic Co., Limited (Kun Shan) ( POE- KS ) Pan Overseas Electronic Co., Limited (Shanghai) Pan Overseas Electronic Co., Limited (Guang Zhou) components 100.00% Manufacturing and selling passive electronic components POE-BVI 100.00% Selling passive electronic components. FB 58.99% Manufacturing and selling passive electronic components PDC Prosperity Co., Ltd. 100.00% Manufacturing and selling of electronic parts 100.00% Investment holding PDC PDC Prime Holdings Limited ( PDC Holdings ) PDC Holdings PDC Trading Ltd. 100.00% Selling of electronic parts PDC Holdings PDC Success Investment Ltd. 100.00% Investment holding PDC Holdings PDC Technology Ltd. 100.00% Investment holding PDC Holdings PDC Top Investments Ltd. 100.00% Investment holding PDC Success Investment Ltd. PDC Technology Ltd. PDC Top Investment Ltd. PDC (Suzhou) Co., Ltd. 100.00% Manufacturing and selling of electronic parts PDC Trading (Shen Zhen) Co., Ltd. PDC Electronics (Shen Zhan) Co., Ltd. 100.00% Selling of electronic parts 100.00% Manufacturing and selling of electronic parts For the year ended December 31, 2005, the Company had 7,163 employees. All significant intercompany balances and transactions have been eliminated upon consolidation. WTC and its subsidiaries adopted SFAS No. 7 Consolidated Financial Statements, and included all controlled investees in the consolidated financial statements in 2005. In 2004, the accounts of investees which are more than 50% directly or indirectly owned by the parent company are included in the consolidated financial statements. (a) The information of subsidiaries not included in the consolidated financial statements in 2005: None. (b) The difference of the fiscal year between parent company and subsidiaries: None. - 14 -
(c) Special risks of business operation for subsidiaries overseas: None. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF MEASUREMENT Basis of Presentation The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (ROC). In preparing financial statements in conformity with these guidelines and principles, the Company is required to make certain estimates and assumptions that could affect the amounts of allowance for doubtful accounts, allowance for inventory devaluation, property depreciation, pension, and warranty. Actual results could differ from these estimates. For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. However, the accompanying financial statements do not include English translation of the additional footnote disclosures that are not required under generally accepted accounting principles but are required by the Securities and Futures Bureau (SFB, formerly the Securities and Futures Commission before July 1, 2004) for their oversight purposes. WTC and subsidiaries significant accounting policies are summarized as follows: Current/Noncurrent Assets and Liabilities Assets consisting of unrestricted cash and cash equivalents and other assets to be converted into cash, sold, or consumed in 12 months or in the normal operating cycle are classified as current. Liabilities to be liquidated in 12 months or in the normal operating cycle are classified as current. All other assets and liabilities are classified as noncurrent. Mergers Mergers are accounted for under the Statement of Financial Accounting Standards No. 25, Business Combination - Accounting Treatment under the Purchase Method. When the market value of equity securities issued from merger cannot stand for the fair value of the acquired companies net assets, the fair value of the acquired net assets should be evaluated. After deducting the par value of equity securities issued (including related costs) from merger from the fair value of net assets acquired, the net amount is included in capital surplus. Cash and Cash Equivalents Cash includes cash on hand and unrestricted bank deposits. Cash equivalents consist of time deposits and commercial paper, which can be readily converted into cash without significant penalty or have a value that will not be significantly affected by interest rate fluctuations. Short-Term Investments Short-term investments are available-for-sale securities stated at the lower of aggregate cost or market. The cost of short-term investments sold is determined based on the weightedaverage method. - 15 -
Stock dividends received are not recognized as income, they are instead reflected as an increase in the number of shares held. Allowance for Doubtful Accounts Allowance for doubtful accounts is provided on the basis of management s evaluation of the collectibility of and past loss experience on receivables and pertinent factors. Inventories Inventories are stated at the lower of cost or market, with cost being determined using the weighted average method. Market values of raw materials and supplies are determined at replacement costs and those of finished goods or work-in-process are determined at their net realizable values. Long-Term Equity Investments Investments in corporations in which the Company s ownership interest is 20% or more are accounted for by the equity method. The difference between the underlying equity in an investee s net assets and the cost of the investment as of acquisition date is amortized on a straight-line basis over five years. An allowance is recognized to reflect an other than temporary decline in value, with the related provision for losses charged to current income. All other long-term equity investments are valued at cost, except for investments in listed companies, which are stated at the lower of aggregate cost or market value. Unrealized loss on long-term equity investments is reflected as a separate component of stockholders equity. WTC s common shares held by its subsidiaries are accounted for as the Company s treasury stock. Property, Plant and Equipment, and Idle Assets Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures that would increase the value or extend the useful lives of property, plant and equipment are capitalized. Interest incurred during asset construction period is capitalized until the asset is substantially completed and ready for its intended use. Depreciation is calculated using the straight-line method over the following estimated service lives prescribed by government authorities: Buildings and improvements Machinery and equipment Transportation equipment Other equipment Leasehold improvements 3 to 55 years 3 to 12 years 3 to 6 years 1 to 15 years Lower of six years or the contract term Property, plant and equipment (including idle assets) that are not used in operations are classified as other assets at the lower of net realizable value or book value. Reduction of book value to net realizable value is reported as nonoperating loss. - 16 -
Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to nonoperating income. Impairment loss is recognized immediately when the recoverable value of property, plant and equipment significantly falls below carrying value. If the loss is reversed, the increase in carrying amount of the asset is recognized, but the increased carrying amount should not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset. A reversal of an impairment loss is immediately recognized as gain. If revalued property, plant and equipment show impairment loss, this loss should be recognized as a reduction of capital surplus - property, plant and equipment revaluation increment. A reversal of an impairment loss on a revalued asset is recognized as an addition to the revaluation increment. However, to the extent that an impairment loss on the same revalued asset was previously recognized as gain or loss, a reversal of that impairment loss is also recognized as gain or loss. Intangible Assets Goodwill is amortized on the straight-line basis over 5 years. Landrights is amortized on the straight-line basis over 50 years. Impairment loss is recognized immediately for any significant decline in the value of intangible asset. If the loss is reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount should not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is immediately recognized as gain. However, impairment loss of goodwill can t be reversed. Deferred Charges Deferred charges, except the issue costs of convertible notes, which are amortized over their maturity periods, are amortized on a straight-line basis over three to five years. Convertible Notes The convertible notes issued by WTC and PDC carry put rights. That is, each holder has the right, at the holder s option and on specified dates, to request the Company to repurchase all or any portion of these notes. The interest payable at redemption, which is the amount of the agreed put price in excess of the face value of the notes, will be recognized as a liability under the interest method from the note issue date to the expiry date of the put rights, and according to the put date classified into current or long-term liabilities. When the holders exercise their conversion right, the unamortized issuing costs, accrued interest, accrued interest compensation and face value of convertible notes will be written off. The common stock exchange certificate (capital stock) should be valued at the carrying amount net of the amounts written off, and this net amount in excess of the par value of the common stock exchange certificate is recognized as capital surplus. - 17 -
Employee Pension Fund WTC and PDC have a defined benefit pension plans covering all employees. The benefits to be paid under the plans are based primarily on an employee s years of service and average compensation for the six months prior to retirement. Under the ROC Labor Standards Law, this plan is funded by contributions of amounts equal to 2% or 3% of employee salaries and wages, and the pension fund is deposited in the Central Trust of China. WTC and PDC adopted Statement of Financial Accounting Standards No. 18, Accounting for Pensions, issued by the Accounting Research and Development Foundation of the ROC, which requires the recognition of net periodic pension cost based on actuarial assumptions. As of December 31, 2005, the fund balance was $232,193 thousand. The Labor Pension Act (the Act ) provides for a new defined contribution plan, effective July 1, 2005. Employees subject to the Labor Standards Law before the enforcement of the Act and still work for WTC, PDC, EACC and POEI after the enforcement of this Act may choose to remain to be subject to the pension mechanism under the Labor Standards Law. If they choose to be subject to the pension mechanism under the Act, their service years accumulated before the enforcement of this Act will be retained. Under the Act, the rate of an employer s monthly contribution to the Labor Pension Fund should be at least 6% of the employee s monthly wages. The subsidiaries in PRC and NTK (in Japan) have a defined contribution plan and recognize net periodic pension costs at monthly contribution in compliance with local laws. Treasury Stock The Company adopted Statement of Financial Accounting Standards No. 30 Accounting for Treasury Stocks, which requires the Company to treat intercompany stockholdings as treasury stock. Foreign-currency Transactions Foreign-currency transactions are recorded in New Taiwan dollars at exchange rates in effect on the transaction date. Gains or losses caused by applying prevailing exchange rates when foreign-currency receivables and payables are settled, are credited or charged to nonoperating income. Assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing on the balance sheet date, and any resulting gains or losses are credited or charged to non-operating income. Cumulative Translation Adjustments Long-term equity investments accounted for by the cost method and denominated in foreign currencies are restated in New Taiwan dollars at the balance-sheet-date exchange rates. The related translation adjustments are reported as a separate component of stockholders equity. Under the equity method, an investee s assets and liabilities denominated in foreign currencies are translated at the balance sheet date exchange rates. Stockholders equity accounts should be translated at the historical rate, except for the beginning balance of the retained earnings, which is carried at the translated amount of the last period. Dividends are translated at the spot rate on the declaration date. Income statement accounts are translated at the current rate or weighted-average rate of the current period. - 18 -
Income Tax The Company adopted Statement of Financial Accounting Standards No. 22, Accounting for Income Taxes, which requires the asset and liability approach to financial accounting and tax reporting. Deferred income tax assets and liabilities are computed annually on the basis of the differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established for deferred tax assets that are not certain to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. WTC and PDC recognized tax benefit from the purchase of equipment and technology, research and development expenditure, and employee training by the flow-through method. Under the Amended Income Tax Law of ROC, undistributed earnings of WTC, PDC, EACC and POEI generated since 1998 are subject to 10% additional income tax, which will be shown as income tax expense in the following year when the stockholders decide to retain these earnings. In accordance with the tax legislations applicable to foreign investment enterprises, DG and SZ are entitled to exemption from PRC income tax for two years commencing from the first profit-making year of operations, after offsetting all unexpired tax losses carryforward from the previous years, and thereafter, entitled to a 50% relief from the PRC income tax reduced tax rate of 12% for the next three years. Earnings Per Share Basic earnings per common share are calculated by dividing net earnings attributable to common stock by the weighted average number of common shares outstanding. On a diluted basis, both net earnings and shares outstanding are adjusted to assume the conversion of convertible notes from the date of issue, and the treasury stock method to calculate the potential dilutive common stocks of employee stock warrants. However, if the convertible notes and employee stock warrants contains an anti-dilutive effect, they will be excluded from EPS calculation. Derivative Financial Instruments Forward exchange contracts, which are used to hedge net foreign-currency asset or liability position are recorded on the transaction dates. Assets and liabilities denominated in foreign currencies are translated at the exchange rates on the balance sheet date, and any resulting gains or losses are credited or charged to nonoperating income. Discounts or premiums (the differences between the forward rates and the spot rates on the date of purchase multiplied by the foreign-currency amounts) are amortized to income over the duration of the contracts. If forward exchange contracts are used to hedge identifiable foreign-currency sales/purchase commitments and the contracts have settlement dates ahead of the actual sales/purchase date, any exchange gain should be deferred to the actual selling/purchase date. However, any exchange loss incurred should not be deferred. If the principal amounts of forward foreign currency exchange contracts exceed the recognizable foreign currency commitments, any excess is reflected directly to current income. Receivable or payable on forward exchange contracts are included in the balance sheet as net receivable or payable. The premiums received or paid on currency option contracts are deferred and recognized as revenue or expense at the expiry of contracts. - 19 -
Nonderivative Financial Instruments The recognition and valuation of nonderivative financial assets and liabilities are in accordance with the above accounting policies and generally accepted accounting principles. Revenue Recognition Sales are recognized when titles to the products and the risks of the ownership are transferred to customers, primarily upon shipment. 3. REASONS AND EFFECTS OF ACCOUNTING CHANGES The Company adopted Statement of Financial Accounting Standards (SFAS) No. 7, Consolidated Financial Statements, and included all controlled investees (including POE, a 25.19% owned investee of WTC which was merged by WTC and according to the merger agreement, was the extinguished company after September 1, 2005) in the consolidated financial statements. Effective December 31, 2004,WTC and its subsidiaries (which are more than 50% directly and indirectly owned by WTC)adopted Statement of Financial Accounting Standards (SFAS) No. 35, Accounting for Asset Impairment. Thus, WTC s decreased its intangible assets by $27,125 thousand, and recognized investment loss of $27,125 thousand in 2004. Effective January 1, 2005, POE adopted Statement of Financial Accounting Standards (SFAS) No. 35, Accounting for Asset Impairment. As a result, asset impairment loss of to $314,327 thousand was recognized for the year ended December 31, 2005. Since this asset impairment loss of POE had been considered as the parent company WTC recognized its equity in gains of POE for the year ended December 31, 2004, the loss had no significant effect on the equity of the parent company s stockholders for the year ended December 31, 2005. 4. CASH AND CASH EQUIVALENTS Cash and cash equivalents as of December 31, 2005 and 2004 are summarized as follows: Cash on hand $ 3,384 $ 595 Savings deposits 39,244 59,792 Checking deposits 14,570 1,386 Foreign currency deposits 1,093,369 900,549 Time certificates of deposits 93,516 118,258 Commercial paper and banker s acceptance 160,000 258,802 $ 1,404,083 $ 1,339,382 Certificates of deposit amounting to $22,082 thousand and $19,420 thousand as of December 31, 2005 and 2004, respectively, had been pledged to secure materials purchase orders and to meet the requirements for the hiring of foreign labor. All of the above amounts were accounted for as other financial assets, noncurrent. Time certificates of deposit amounting to $3,572 thousand and $2,390 thousand as of December 31, 2005 and 2004, respectively, had been pledged to secure short-term borrowings and rental of buildings. The amounts were accounted for as other financial assets, current. - 20 -
5. SHORT-TERM INVESTMENTS The carrying values and market values of short-term investments as of December 31, 2005 and 2004 are summarized as follows: Carrying Value Market Carrying Value Value Market Value Marketable securities traded on Taiwan Stock Exchange $ 20,644 $ 21,862 $ 13,594 $ 13,142 Marketable securities traded overseas 7,687 12,707 20,635 12,283 Open-end bond funds 1,291,587 1,293,953 1,005,000 1,008,270 Open-end stock funds 50,000 51,416 60,000 61,259 Open-end offshore funds 143,295 143,295 134,046 134,046 1,513,213 1,523,233 1,233,275 1,229,000 Less allowance for decline in market value - - (4,275) - $ 1,513,213 $ 1,523,233 $ 1,229,000 $ 1,229,000 The market value of marketable securities is determined at their average daily closing prices in December. The market values of open-end bond funds, open-end stock funds and open-end offshore funds were determined at their published fair value per unit at the end of December. Marketable securities are valued at the lower of aggregate cost or market value. No investment valuation allowance had been provided as of December 31, 2005. Thus, the recovery from devaluation of $4,275 thousand was accounted for as investment income in 2005 (see Note 21). 6. NOTES AND ACCOUNTS RECEIVABLE Notes and accounts receivable as of December 31, 2005 and 2004 are summarized as follows: Third-parties Notes receivable $ 340,430 $ 136,523 Less allowance for doubtful accounts (8,064) - 332,366 136,523 Accounts receivable 3,892,772 2,384,850 Less allowance for doubtful accounts (131,436) (66,435) 3,761,336 2,318,415 $ 4,093,702 $ 2,454,938-21 -