Powerchip Semiconductor Corporation Financial Statements for the Six Months Ended June 30, 2008 and 2007 and Independent Auditors Report
INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders Powerchip Semiconductor Corporation We have audited the accompanying balance sheets of Powerchip Semiconductor Corporation as of June 30, 2008 and 2007, and the related statements of income, changes in shareholders equity and cash flows for the six months then ended. These financial statements are the responsibility of the Corporation s management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as discussed in the following paragraph, we conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As stated in Note 11 to the financial statements, we did not audit the financial statements as of and for the six months ended June 30, 2008 and 2007 of equity-method investees. The carrying values of the related investments as of June 30, 2008 and 2007 were NT$39,431,333 thousand and NT$28,079,445 thousand, respectively, and the related net investment loss for the six months ended June 30, 2008 and 2007 were NT$1,082,428 thousand and NT$155,874 thousand, respectively. These investment amounts, as well as related information disclosed in Note 31 to the financial statements, were based on the investees unaudited financial statements for the same reporting periods as those of the Corporation. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had the financial statements of investees referred to in the preceding paragraph been audited, the financial statements referred to above present fairly, in all material respects, the financial position of Powerchip Semiconductor Corporation as of June 30, 2008 and 2007, and the results of its operations and its cash flows for the six months then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. On April 1, 2008, Powerchip Semiconductor Corporation spun off the business, assets and liabilities of the 8-inch Fab to establish a subsidiary, Maxchip Electronics Corp. The statements of income mentioned in the first paragraph include the operation results before the spin-off and disclose the related pro forma information as if the spin-off had been consummated on January 1, 2007. - 1 -
As disclosed in Note 3 to the accompanying financial statements, effective January 1, 2008, Powerchip Semiconductor Corporation adopted the recently released Statements of Financial Accounting Standards No. 39, Accounting for Share-based Payment and the interpretation 2007-052 issued by the Accounting Research and Development Foundation of the Republic of China, Accounting for Bonuses to Employees, Directors and Supervisors that requires companies to recognize bonuses paid to employees, directors and supervisors as compensation expenses rather than as appropriations of earnings. We have also reviewed the consolidated financial statements of Powerchip Semiconductor Corporation as of and for the six months ended June 30, 2008 and 2007, and have issued a qualified review report on such financial statements. July 24, 2008 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. - 2 -
POWERCHIP SEMICONDUCTOR CORPORATION BALANCE SHEETS JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Notes 2, 4 and 30) $ 15,833,178 7 $ 38,059,542 16 Short-term bank loans (Note 15) $ 8,235,835 4 $ 950,000 - Financial assets at fair value through profit or loss - current (Notes 2 Financial liabilities at fair value through profit or loss - current and 5) 3,076,913 2 8,703,187 4 (Notes 2, 5 and 17) 116,502-1,574,989 1 Available-for-sale financial assets - current (Notes 2 and 6) 32,563-506,202 - Accounts payable (Note 27) Held-to-maturity financial assets - current (Notes 2 and 9) 160,000-14,000 - Related parties 7,733,425 4 2,177,278 1 Accounts receivable, net (Notes 2 and 27) Third parties 6,298,627 3 6,879,094 3 Related parties 4,671,905 2 7,541,285 3 Income tax payable (Notes 2 and 23) - - 116,945 - Third parties 1,701,724 1 2,144,850 1 Accrued expenses (Notes 2, 16 and 27) 6,840,468 3 4,247,995 2 Other receivables (Notes 7 and 27) 890,308-558,609 - Cash dividend and bonus payable (Note 20) - - 11,800,243 5 Inventories, net (Notes 2, 8 and 27) 7,734,564 4 9,288,966 4 Payables on equipment (Note 30) 5,850,158 3 23,351,569 10 Prepaid expenses 209,911-234,679 - Advanced receipts (Note 27) 117,887 - - - Deferred income tax assets - current (Notes 2 and 23) 2,005,366 1 3,206,504 2 Convertible bonds payable (Notes 2 and 17) 4,791,379 2 9,841,200 4 Restricted deposits (Notes 4 and 28) 791,075-787,545 - Current portion of long-term loans (Notes 18 and 28) 17,221,614 8 9,533,333 4 Other current assets (Note 27) 31,234-235,147 - Other current liabilities (Notes 17 and 27) 5,132,166 2 471,567 - Total current assets 37,138,741 17 71,280,516 30 Total current liabilities 62,338,061 29 70,944,213 30 INVESTMENTS LONG-TERM LIABILITIES, NET OF CURRENT PORTION Held-to-maturity financial assets - noncurrent (Notes 2 and 9) 25,000-185,000 - Convertible bonds payable (Notes 2 and 17) 8,624,208 4 13,435,986 6 Hedging derivative assets - noncurrent (Notes 2 and 12) 5,151 - - - Long-term loans (Notes 18 and 28) 56,643,746 27 36,469,333 15 Financial assets carried at cost - noncurrent (Notes 2 and 10) 1,129,000 1 949,359 - Deferred income (Notes 27 and 29) 110,000-150,000 - Equity-method investments (Notes 2 and 11) 39,431,333 18 28,079,445 12 Total long-term liabilities 65,377,954 31 50,055,319 21 Total investments 40,590,484 19 29,213,804 12 OTHER LIABILITIES PROPERTIES (Notes 2, 13, 28 and 30) Accrued pension costs (Notes 2 and 19) 18,136-32,794 - Cost Guarantee deposits (Note 29) 125,573-136,492 - Buildings 8,228,714 4 10,133,394 4 Deferred income tax liabilities - noncurrent (Notes 2 and 23) - - 53,988 - Machinery and equipment 184,416,441 86 187,642,714 79 Research and development equipment 1,848,968 1 654,423 - Total other liabilities 143,709-223,274 - Facility equipment 18,218,864 8 21,966,870 9 Transportation equipment 15,289-18,509 - Total liabilities 127,859,724 60 121,222,806 51 Office equipment 471,962-518,557 - Miscellaneous equipment 1,343,398 1 1,423,281 1 SHAREHOLDERS EQUITY (Notes 2, 20 and 21) 214,543,636 100 222,357,748 93 Capital stock Accumulated depreciation (92,076,371 ) (43 ) (95,147,754 ) (40 ) Common stock - NT$10 par value 122,467,265 57 127,209,994 53 Authorized - 10,000,000 thousand shares in 2008 and 9,000,000 thousand Construction in progress and advance payments 3,539,601 2 8,485,400 4 shares in 2007 Issued and outstanding - 7,847,688 thousand shares in 2008 and Net properties 126,006,866 59 135,695,394 57 6,963,047 thousand shares in 2007 78,476,876 37 69,630,469 29 Stock dividend and bonus for distribution - - 7,866,828 3 OTHER ASSETS Capital surplus Assets leased to others, net (Notes 2 and 30) 5,035-28,484 - Additional paid-in capital 20,290,363 10 20,451,771 8 Refundable deposits 54,327-58,370 - Conversion of bonds 4,731,739 2 4,281,684 2 Deferred charges, net (Notes 2, 14 and 30) 5,039,023 3 2,896,918 1 Treasury stock transactions 6,208 - - - Deferred income tax assets - noncurrent (Notes 2, 23 and 30) 4,812,864 2 - - Long-term investments 416,055-401,972 - Spare parts, net (Note 27) 318,978-439,349 - Retained earnings Others 86,986-45,338 - Legal reserve 276,100-5,507,310 2 Special reserve 3,164-3,164 - Total other assets 10,317,213 5 3,468,459 1 Unappropriated earnings (accumulated deficits) (17,025,868 ) (8 ) 10,846,418 5 Others Unrealized gain (loss) on financial assets (Notes 11, 20 and 26) (95,730 ) - 550,680 - Net loss not recognized as pension cost (29 ) - - - Cumulative translation adjustments (136,707 ) - (39,384 ) - Treasury stock (at cost) - 41,670 thousand shares in 2008 and 58,058 thousand shares in 2007 (Note 22) (748,591 ) (1 ) (1,065,545 ) - Total shareholders equity 86,193,580 40 118,435,367 49 TOTAL $ 214,053,304 100 $ 239,658,173 100 TOTAL $ 214,053,304 100 $ 239,658,173 100 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated July 24, 2008) - 3 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except (Loss) Earnings Per Share) Amount % Amount % GROSS SALES $ 32,970,855 $ 51,606,491 SALES RETURNS AND ALLOWANCES 689,832 5,437,242 NET SALES (Notes 2 and 27) 32,281,023 100 46,169,249 100 COST OF SALES (Notes 24 and 27) 46,681,635 144 40,104,604 87 GROSS (LOSS) PROFIT BEFORE UNREALIZED INTERCOMPANY GROSS PROFIT (14,400,612 ) (44 ) 6,064,645 13 REALIZED INTERCOMPANY PROFIT (Note 2) 291-24,924 - GROSS (LOSS) PROFIT (14,400,321 ) (44 ) 6,089,569 13 OPERATING EXPENSES (Notes 24 and 27) Selling 183,326 1 124,230 - General and administrative 815,268 2 1,189,018 3 Research and development 1,804,593 6 1,439,464 3 Total operating expenses 2,803,187 9 2,752,712 6 OPERATING (LOSS) INCOME (17,203,508 ) (53 ) 3,336,857 7 NONOPERATING INCOME AND GAINS Reversal of allowance for losses on inventories and spare parts (Note 2) 942,031 3 - - Foreign exchange gain, net (Note 2) 369,898 1 157,948 - Interest income (Notes 2 and 26) 169,701 1 421,177 1 Valuation gain on financial liabilities, net (Notes 2 and 5) 99,910-437,717 1 Income from scraped wafers sales (Note 27) 48,890-47,164 - Gain on disposal of properties (Note 2) 45,495-1,760 - Service Income (Note 27) 37,427 - - - Indemnity income (Note 27) 29,861-19,601 - Valuation gain on financial assets, net (Notes 2 and 5) - - 1,615,070 4 Gain on disposal of investments, net (Notes 2 and 5) - - 105,069 - Rebate of ECB/GDR management fee - - 29,637 - Others (Note 27) 104,792 1 67,564 - Total nonoperating income and gains 1,848,005 6 2,902,707 6 (Continued) - 4 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except (Loss) Earnings Per Share) Amount % Amount % NONOPERATING EXPENSES AND LOSSES Interest expense (Notes 2, 13, 15, 17, 18 and 26) $ 1,500,884 5 $ 613,889 1 Equity in losses of equity-method investees, net (Notes 2 and 11) 1,082,428 3 155,874 - Valuation loss on financial assets, net (Notes 2 and 5) 563,957 2 - - Loss of the early redemption of convertible bonds (Note 2) 484,570 2 - - Loss on purchase contracts (Notes 2 and 29) 106,658 - - - Impairment loss on financial assets (Note 2, 10 and 11) 33,150-82,868 - Loss on disposal of investments, net (Notes 2 and 5) 15,359 - - - Loss on disposal of properties and other assets (Note 2) 3,613-116,020 - Provision for loss on inventories and spare parts (Note 2) - - 2,500,204 6 Others 14,253-31,669 - Total nonoperating expenses and losses 3,804,872 12 3,500,524 7 (LOSS) INCOME BEFORE INCOME TAX (19,160,375 ) (59 ) 2,739,040 6 INCOME TAX BENEFIT (Notes 2 and 23) 2,143,377 6 949,708 2 NET (LOSS) INCOME $ (17,016,998 ) (53 ) $ 3,688,748 8 Before Income Tax After Before Income Income Tax Tax After Income Tax (LOSS) EARNINGS PER SHARE (Note 25) Basic $ (2.46 ) $ (2.18 ) $ 0.36 $ 0.48 Diluted $ (2.46 ) $ (2.18 ) $ 0.27 $ 0.37 (Continued) - 5 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except (Loss) Earnings Per Share) a. The pro forma net (loss) income and (loss) earnings per share after income tax on the assumption that the shares of the Corporation held by its subsidiaries as an investment are not treated as treasury stock are shown as follows: NET (LOSS) INCOME ($17,016,998) $3,688,748 Before Income Tax After Before Income Income Tax Tax After Income Tax (LOSS) EARNINGS PER SHARE Basic $ (2.46 ) $ (2.18 ) $ 0.36 $ 0.48 Diluted $ (2.46 ) $ (2.18 ) $ 0.27 $ 0.37 b. SUPPLEMENTAL DISCLOSURES OF SPIN-OFF (Notes 1, 2, and 30) The pro forma information is based on the assumption that Powerchip Semiconductor Corporation spun off the business, assets and liabilities of its 8-inch Fab to establish a subsidiary, Maxchip Electronics Corporation on January 1, 2007 (Notes 1, 2 and 30): NET SALES $ 31,195,152 $ 44,060,748 COST OF SALES 45,310,165 37,179,673 GROSS (LOSS) PROFIT (14,115,013 ) 6,881,075 OPERATING EXPENSES 2,628,101 2,373,878 OPERATING (LOSS) INCOME (16,743,114 ) 4,507,197 NON-OPERATING INCOME AND GAINS 1,848,005 2,902,707 NON-OPERATING EXPENSES AND LOSSES 4,265,266 4,670,864 (LOSS) INCOME BEFORE INCOME TAX (19,160,375 ) 2,739,040 INCOME TAX BENEFIT 2,143,377 949,708 NET (LOSS) INCOME $ (17,016,998 ) $ 3,688,748 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated July 24, 2008) (Concluded) - 6 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Per Share Data) Retained Earnings Unappropriated Stock Dividends and Bonus Retained Others (Notes 2, 11, 20 and 26) Common Stock Issued for Distribution Capital Surplus (Notes 2 and 20) Earnings Unrealized Net Loss not Cumulative Total Shares Shares Additional Conversion of Treasury Stock Long-term (Accumulated Gain (Loss) on Recognized as Translation Treasury Stock Shareholders (Thousands) Amount (Thousands) Amount Paid-in Capital Bonds Transactions Investments Total Legal Reserve Special Reserve Deficits) Total Financial Assets Pension Cost Adjustments (Notes 2 and 22) Equity BALANCE, JANUARY 1, 2008 7,822,917 $ 78,229,166 - $ - $ 20,389,680 $ 4,731,739 $ 6,208 $ 405,528 $ 25,533,155 $ 5,507,310 $ 3,164 $ (5,231,210 ) $ 279,264 $ 224,505 $ (1,971 ) $ (29,483 ) $ (748,591 ) $ 103,486,045 Issuance of shares upon exercise of employee stock options 24,771 247,710 - - (99,317 ) - - - (99,317 ) - - - - - - - - 148,393 Transfer of paid-in capital in excess of par value to offset deficit - - - - - - - - - (5,231,210 ) - 5,231,210 - - - - - - Adjustment for changes in shareholders equities of equity-method investees - - - - - - - 10,527 10,527 - - (8,870 ) (8,870) (322,289) 1,942 (107,224) - (425,914) Change in unrealized loss on available-for-sale financial assets - - - - - - - - - - - - - (4,847 ) - - - (4,847 ) Change in unrealized gain on cash flow hedging financial instruments - - - - - - - - - - - - - 6,901 - - - 6,901 Net loss for the six months ended June 30, 2008 - - - - - - - - - - - (17,016,998 ) (17,016,998 ) - - - - (17,016,998 ) BALANCE, JUNE 30, 2008 7,847,688 $ 78,476,876 - $ - $ 20,290,363 $ 4,731,739 $ 6,208 $ 416,055 $ 25,444,365 $ 276,100 $ 3,164 $ (17,025,868 ) $ (16,746,604 ) $ (95,730 ) $ (29 ) $ (136,707 ) $ (748,591 ) $ 86,193,580 BALANCE, JANUARY 1, 2007 6,909,088 $ 69,090,882 - $ - $ 20,506,052 $ 4,068,632 $ 3,629 $ 19,307 $ 24,597,620 $ 2,774,552 $ 31,566 $ 30,312,562 $ 33,118,680 $ 705,332 $ - $ (30,652 ) $ (1,637,064 ) $ 125,844,798 Appropriation of prior year s earnings Legal reserve - - - - - - - - - 2,732,758 - (2,732,758 ) - - - - - - Special reserve - - - - - - - - - - (28,402) 28,402 - - - - - - Employees' profit sharing - in cash - - - - - - - - - - - (1,477,394 ) (1,477,394) - - - - (1,477,394) Employees' profit sharing - in stock - - 98,493 984,929 - - - - - - - (984,929 ) (984,929) - - - - - Cash dividends - 14.8% - - - - - - - - - - - (10,322,849 ) (10,322,849) - - - - (10,322,849) Stock dividends - 9.9% - - 688,190 6,881,899 - - - - - - - (6,881,899 ) (6,881,899) - - - - - Remuneration to directors and supervisors - - - - - - - - - - - (738,697 ) (738,697) - - - - (738,697) Conversion of bonds into capital stock 22,763 227,627 - - - 213,052 - - 213,052 - - - - - - - - 440,679 Issuance of shares upon exercise of employee stock options 31,196 311,960 - - (54,281 ) - - - (54,281 ) - - - - - - - - 257,679 Sales of treasury stock - 30,481 thousand shares at average of NT$17.30 per share - - - - - - (3,629) - (3,629) - - (40,548 ) (40,548) - - - 571,519 527,342 Adjustment for changes in shareholders equities of equity-method investees - - - - - - - 382,665 382,665 - - (4,220 ) (4,220) (117,809) - (8,732) - 251,904 Change in unrealized loss on available-for-sale financial assets - - - - - - - - - - - - - (36,843 ) - - - (36,843 ) Net income for the six months ended June 30, 2007 - - - - - - - - - - - 3,688,748 3,688,748 - - - - 3,688,748 BALANCE, JUNE 30, 2007 6,963,047 $ 69,630,469 786,683 $ 7,866,828 $ 20,451,771 $ 4,281,684 $ - $ 401,972 $ 25,135,427 $ 5,507,310 $ 3,164 $ 10,846,418 $ 16,356,892 $ 550,680 $ - $ (39,384 ) $ (1,065,545 ) $ 118,435,367 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated July 24, 2008) - 7 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (17,016,998 ) $ 3,688,748 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 16,701,043 14,888,961 Amortization 879,114 805,378 Realized intercompany profit (291 ) (24,924 ) Valuation loss (gain) on financial assets 1,516,986 (1,598,675 ) Valuation gain on financial liabilities (829,982 ) (517,166 ) Foreign exchange gain on financial assets - (1,416 ) Provision (reversal of allowance) for doubtful accounts 27,921 (56,315 ) (Reversal of allowance) provision for sales discount (515,000 ) 140,000 (Reversal of allowance) provision for loss on inventories and spare parts (942,031 ) 2,500,204 Impairment loss on financial assets 33,150 82,868 Equity in losses of equity-method investees, net 1,082,428 155,874 Cash dividends from equity-method investees 10,599 13,682 Cash dividends from financial assets carried at cost - 7,200 Loss (gain) on disposal of investments, net 15,359 (105,069 ) (Gain) loss on disposal of properties and other assets, net (41,882 ) 114,260 Deferred income tax benefit (2,143,377 ) (1,103,210 ) Foreign exchange gain from long-term loans (2,048 ) - Foreign exchange (gain) loss on convertible bonds payable (869,126 ) 56,586 Amortization of discount on convertible bonds payable 169,262 167,748 Loss of the early redemption of convertible bonds 484,570 - Deferred income 117,887 200,000 Realized deferred income (20,000 ) (10,000 ) Loss on purchase contracts 106,658 - Net changes in operating assets and liabilities Held-for-trading financial assets 623,223 (893,046 ) Accounts receivable (1,983,602 ) 3,148,763 Other receivables (343,831 ) 117,155 Inventories 749,816 (591,557 ) Prepaid expenses 92,587 42,804 Other current assets (25,862 ) (230,404 ) Accounts payable 3,857,608 1,168,346 Income tax payable - (1,517,241 ) Accrued expenses 391,705 (349,408 ) Other current liabilities 23,503 64,516 Accrued pension costs 16 659 Net cash provided by operating activities 2,149,405 20,365,321 (Continued) - 8 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of: Financial assets carried at cost $ (69,457 ) $ (270,955 ) Equity-method investments (2,078,931 ) (3,609,801 ) Properties (14,908,571 ) (31,151,295 ) Deferred charges (1,071,583 ) (515,211 ) Proceeds from the disposal of: Available-for-sale financial assets 135,893 41,478 Financial assets carried at cost 3,263 33,548 Equity-method investments - 246,795 Properties and other assets 56,204 2,261 (Increase) decrease in restricted deposits (20,461 ) 3,954 Decrease (increase) in refundable deposits 171 (27,646 ) Decrease in spare parts 85,644 22,576 Increase in other assets (39,484 ) (11,014 ) Net cash used in investing activities (17,907,312 ) (35,235,310 ) CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term bank loans 8,235,835 950,000 Proceeds from: Long-term loans 12,951,360 15,561,000 Exercise of employee stock options 148,393 257,679 Sales of treasury stock - 720,134 Repayments of long-term loans (5,100,885 ) (4,043,334 ) Redemption of convertible bonds (4,306,110 ) - (Decrease) increase in guarantee deposits (9,737 ) 131,476 Remuneration to directors and supervisors - (738,697 ) Net cash provided by financing activities 11,918,856 12,838,258 NET DECREASE IN CASH AND CASH EQUIVALENTS (3,839,051 ) (2,031,731 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,672,229 40,091,273 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,833,178 $ 38,059,542 (Continued) - 9 -
POWERCHIP SEMICONDUCTOR CORPORATION STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid (excluding amounts capitalized of $74,334 thousand in 2008 and $137,234 thousand in 2007) $ 1,299,175 $ 421,420 Income tax paid $ 19,873 $ 1,645,000 NONCASH INVESTING AND FINANCING ACTIVITIES Current portion of long-term liabilities $ 17,221,614 $ 9,533,333 Transfer of financial assets carried at cost to available-for-sale financial assets $ - $ 71,524 Transfer of equity-method investments to financial assets carried at cost $ - $ 245,986 Merger of the equity-method investees $ - $ 119,932 Reclassification of properties into deferred charges $ - $ 122 Reclassification of deferred charges into properties $ - $ 580 Cash dividend payable $ - $ 10,322,849 Employee cash bonus payable $ - $ 1,477,394 Conversion of bonds $ - $ 440,679 INVESTING AND FINANCING ACTIVITIES AFFECTING BOTH CASH AND NONCASH ITEMS Acquisition of properties $ (9,143,323 ) $ (33,050,815 ) Payable, beginning of period (12,741,361 ) (21,452,049 ) Payable, end of period 5,850,158 23,351,569 Payable transferred to Maxhip Electronics Corporation due to the spin-off of 8-inch Fab 1,125,955 - Cash paid $ (14,908,571 ) $ (31,151,295 ) Acquisition of deferred charges $ (24,853 ) $ (515,211 ) Decrease in payable on technical know-how (1,046,730 ) - Cash paid $ (1,071,583 ) $ (515,211 ) Sales of treasury stock $ - $ 527,342 Advance receipt from disposal of treasury stock, beginning of period (classified under other current liabilities) - (14,008 ) Advance receipt from disposal of treasury stock, end of period (classified under other current liabilities) - 206,800 $ - $ 720,134 (Continued) - 10 -
SUPPLEMENTARY DISCLOSURE OF SPIN-OFF: a. In the share acquisition of Rexchip Electronics Corp., with May 10, 2007 as the record date, Powerchip Semiconductor Corp. received one share for every NT$ 16.00 in exchanged assets, for a total of 1,000,000 thousand shares. The book value of the exchanged assets were as follows: Assets Properties, net $ 12,817,346 Deferred charges, net 122,070 Total assets 12,939,416 Acquisition of equity-method investment - 1,000,000 thousand shares (16,000,000 ) Cash Paid $ (3,060,584 ) b. On April 1, 2008, Powerchip Semiconductor Corp. spun off its 8-inch Fab to establish a subsidiary, Maxchip Electronics Corp. The assets and liabilities of the Fab spun off were as follows: Assets Proprieties, net $ 6,896,022 Assets leased to others, net 19,792 Deferred charges, net 22,138 Deferred income tax assets, noncurrent 388,881 Payables on equipment (1,125,955 ) Other current liabilities (35 ) Deferred income tax liabilities, noncurrent (225,751 ) Net Assets 6,065,092 Acquisition of equity-method investments - 500,000 thousand shares (7,500,000 ) Cash Paid $ (1,434,098 ) The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated July 24, 2008) (Concluded) - 11 -
POWERCHIP SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Powerchip Semiconductor Corporation (the Corporation ) was incorporated on December 20, 1994. Its common shares have been traded on the Taiwan GreTai Securities Market (formerly the Over-the-Counter Securities Exchange) since March 23, 1998. The Corporation also issued Global Depositary Shares (GDS), which are listed on the Luxembourg Stock Exchange, accepted for quotation on the International Order Book of the London Stock Exchange and eligible for trading as private offerings, resale and trading through automated inter-market trading linkages of the NASDAQ Stock Market, Inc. The Corporation s business activities mainly include research and development, manufacturing (including on subcontracting), testing, assembling and selling various integrated circuit products. As of June 30, 2008 and 2007, the Corporation had 4,761 and 7,211 employees, respectively. To reorganize its structure and enhance its competitiveness and performance, the Corporation signed a joint venture agreement with Elpida Memory Inc. to invest Rexchip Electronics Corp. ( Rexchip ). Under Article 28 of the Business Mergers and Acquisitions Law, the Corporation exchanged its 12-inch fab building and facilities for the newly issued shares of Rexchip. In this share acquisition, with May 10, 2007 as the record date, the Corporation received one share for every NT$16.00 in exchanged assets, for a total of 1,000,000 thousand shares. Also, the Corporation spun off its 8-inch fab to establish a subsidiary, Maxchip Electronics Corp. ( Maxchip ) on April 1, 2008, in accordance with the Business Mergers and Acquisitions Law. The carrying value of the 8-inch fab was $7,500,000 thousand. The Corporation exchanged 8-inch fab for 500,000 thousand of Maxchip s newly issued shares at NT$15.00 per share. The Corporation, which wholly owns Maxchip accounted for the investment at the carrying value of the net assets on the spin-off date. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the Republic of China (ROC). Under these guidelines and principles, the Corporation should make certain estimates and assumptions on the amounts of allowance for doubtful accounts; allowance for sales discounts, allowance for loss on inventories and spare parts, depreciation of properties, amortization of deferred charges, pension expenses, loss on purchase contracts, contingent liabilities and default fine. 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. - 12 -
The Corporation s significant accounting policies are summarized as follows: Current/Noncurrent Assets and Liabilities Current assets are cash (unrestricted) and cash equivalents, assets primarily for the purpose of being traded and other assets to be converted to cash, consumed or sold within one year from the balance sheet date. Current liabilities are those to be settled within one year from the balance sheet date and those primarily for the purpose of being traded. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. Cash Equivalents Bonds purchased under resell agreements and with maturities of three months or less from the date of purchase are classified as cash equivalents. Their carrying amount approximates fair value. Financial Assets/Liabilities at Fair Value Through Profit or Loss Financial instruments at fair value through profit or loss have two categories: (1) held for trading and (2) designated on initial recognition as at fair value through profit or loss. When the Corporation enters into financial instrument agreements, the financial assets or liabilities are recognized; and the financial assets or liabilities are derecognized when the agreements become invalid. These financial instruments, except derivatives, are initially recognized at fair value plus transaction costs that are directly attributable to the instrument acquisition; others are initially recognized at fair value with transaction cost expenses as incurred. When fair value is subsequently measured, the changes in fair value are recognized as earnings. Cash dividends are recognized as income upon declaration by an investee s shareholders under a resolution. The differences between the carrying value and the consideration received shall be recognized in profit or loss. A regular way purchase or sale of financial assets is recognized and derecognized using trade date accounting. Derivatives that do not meet the criteria for hedge accounting are treated as financial assets or liabilities held for trading. When the fair value is a positive amount, the derivative is treated as a financial asset; when the fair value is a negative amount, the derivative is treated as a financial liability. The fair values of listed stock and close-end mutual funds are the closing price as of the balance sheet date; open-end mutual funds are based on their net asset value at the balance sheet date. For those instruments without quoted market prices in an active market, the fair value is based on valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. Hybrid instruments are designated at fair value through profit or loss. Available-for-sale Financial Assets Investments classified as available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributed to investment acquisition. When subsequently measured at fair value, the changes in fair value are reported as a separate component of shareholders equity. The accumulated gains or losses are recognized when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is recognized and derecognized using trade date accounting. The accounting for fair value and financial asset de-recognition is the same as that for financial instruments at fair value through profit or loss. - 13 -
Cash dividends are recognized as investment income upon resolution of the shareholders of an investee but are accounted for as reductions of the original investment cost if these dividends are declared on the earnings of the investees attributable to periods before the purchase of the investments. Stock dividends received are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated on the basis of the new number of shares after the receipt of stock dividends. If there is objective evidence that a financial asset (equity security) is impaired as of the balance sheet date, a loss is recognized. If the impairment loss decreases, the impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders equity. Allowance for Doubtful Accounts Allowance for doubtful accounts is provided on the basis of the aging of receivables and periodic review of the collectability of receivables. Factoring of Accounts Receivable The following three conditions must be met to recognize factoring of accounts receivable: a. The accounts receivable was legally separable from the Corporation and its creditors. b. The transferees have obtained the right to pledge or exchange accounts receivable, which are either the transferred accounts receivable or beneficial interest in the transferred assets. c. The transferor does not maintain effective control, through an agreement to repurchase or redeem the transferred accounts receivable before their maturities, over the transferred accounts receivable. Upon sale of the accounts receivable, the difference between the proceeds and the carrying amount of the accounts receivable is recognized as a loss and recorded as non-operating expenses. Inventories Inventories are stated at the lower of aggregate costs or market value. Materials and supplies are recorded at actual cost; finished goods and work in process are recorded at standard cost and adjusted to the approximate weighted-average cost at the end of each period. Market value is the net realizable value of finished goods and work in process and replacement value of raw materials and supplies. Estimated losses on scrap and slow-moving items are recognized and included in the allowance for losses. Held-to-maturity Financial Assets Debt securities for which the Corporation has a positive intent and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at the amortized cost using the straight-line method. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributed to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is recognized and derecognized using trade date accounting. If there is objective evidence of financial asset impairment, a loss is recognized. If the impairment loss decreases and the decrease is clearly attributable to an event that occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. However, the increased carrying amount of an asset due to reversal of impairment loss should not exceed the carrying amount that would have been determined (the amortized cost) had no impairment loss been recognized for the asset. - 14 -
Financial Assets Carried At Cost Investments without quoted market prices in an active market and whose fair value cannot be reliably measured, such as nonpublicly traded stocks, are carried at their original cost. The accounting treatment for cash and stock dividend arising from financial assets carried at cost is the same as that for available-for-sale financial assets. If there is objective evidence of financial asset impairment, a loss is recognized. This impairment loss is irreversible. Equity-method Investments Stock investments in which the Corporation exercises significant influence on investees operating and financial decisions are accounted for by the equity method. The difference between the investment cost and the Corporation s equity in the investee s net assets on the acquisition date was previously amortized using the straight-line method over 5 years. However, based on the revised Statement of Financial Accounting Standards ( SFAS ) No. 5 - Long-term Investment under Equity Method, effective January 1, 2006, investment premium, representing goodwill based on analysis of the acquisition cost, is no longer required to be amortized. In addition, goodwill should be assessed for impairment annually or whenever an event or circumstances would result in the goodwill reduction. Further, the unamortized differences on investments, acquired before January 1, 2006 are treated in the same way as goodwill. Stock dividends received are recorded as an increase in the number of shares held on the ex-dividend date and do not affect investment income or the carrying amount of the investment. Cash dividends are accounted for as a reduction of carrying value of the investment. If an investee is identified as significantly impaired, the carrying amount of the investment in excess of its recoverable amount is recognized as impairment loss. For those investees over which the Corporation exercises significant influence on their operating and financial decisions, the assessment of impairment is based on carrying value. For those investees over which the Corporation holds a controlling interest, the assessment of impairment is based on an estimation of the value in use of the cash-generating units of the consolidated investees. If an investee issues additional shares and the Corporation subscribes for these shares at a percentage different from its current equity in the investee, the resulting difference in the Corporation s equity in the investee s net assets is recorded as an adjustment to capital surplus as well as to the Equity-method Investments accounts. Any decrease in the Corporation s equity in the investee s net assets is debited to capital surplus. If capital surplus from long-term investments is not enough for debiting purposes, the debit is made against unappropriated retained earnings. The carrying amount may also be adjusted at the Corporation s interest in the investee if there are changes in the investee s equity, other than capital stocks and retained earnings. If the Corporation s equity in the investee s net income or net loss of an equity-method investee equals to or exceeds the investment carrying value, plus advances to the investee the recognized investment losses, except the Corporation committee to provide further financial support for the investee or the losses of the investee are temporary, should be limited to the extent that makes the investment carrying value and advances equal to zero. Gains or losses on sales by the Corporation to equity-method investees that are not majority owned are deferred in proportion to the Corporation s equity interest in the investees at period-end. However, the entire amounts of the gains or losses on the Corporation s sales to subsidiaries are deferred. Gains or losses on sales generated from equity-method investees to the Corporation are deferred in proportion to the Corporation s equivalent equity interest in the investees. - 15 -
Gains or losses from sales among all equity-method investees are deferred in proportion to the product of the Corporation s equity in one investee multiplied by its equity in the other investee. All of the above deferred gains and losses are realized upon the sale of the related products to third parties. Spin-off The Corporation spun off some of its assets, liabilities and operations to a subsidiary and then acquired all of the subsidiary s newly issued shares. The cost of share acquisition is the book value of the spun-off assets (if there is impairment loss, net of impairment loss) minus the related spun-off liabilities with no exchange gain or loss recognized. Properties and Assets Leased to Others Properties and assets leased to others are stated at cost less accumulated depreciation. Major additions, renewals, betterments and interest expense incurred during the construction period are capitalized, while maintenance and repairs are expensed currently. Depreciation is calculated using the straight-line method over service lives which are initially estimated as follows: buildings, 3 to 20 years; machinery and equipment, 2 to 5 years; research and development equipment, 2 to 5 years; facility equipment, 3 to 15 years; transportation equipment, 5 years; office equipment, 3 to 5 years; miscellaneous equipment, 2 to 5 years; and assets leased to others, 10 to 20 years. Properties and assets leased to others still in use beyond their initially estimated service lives are further depreciated over the newly estimated service lives. If significant asset impairment is determined, the carrying amount of an asset in excess of its recoverable amount is recognized as a loss. If the recoverable amount increases, the impairment loss reversal is recognized as a gain. However, the increased carrying amount of an asset due to impairment loss reversal should not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. Upon sale or other disposal of properties and assets leased to others, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to current income. Deferred Charges The Corporation started to recognize as expenses those research and development expenditures and developments costs that do not meet the criteria for capitalization as these expenses are incurred. Issuance costs of convertible bonds, except those of bonds issued on or after January 1, 2006, are amortized from the issuance date to the expiration date of the redemption period. For those bonds issued on or after January 1, 2006, issuance costs are allocated to all components, under their relative fair value, pursuant to the recently released Statements of Financial Accounting Standard. Deferred charges are amortized using the straight-line method over the following periods: technical know-how, contract period; computer software system - 2 to 5 years; test-run costs and patents - 5 years; and others - 2 to 5 years. If significant asset impairment is determined, the carrying amount of an asset in excess of its recoverable amount is recognized as a loss. If the recoverable amount increases, the impairment loss reversal is recognized as a gain. However, the increased carrying amount of an asset due to impairment loss reversal should not exceed the carrying amount that would have been determined (net of amortization) had no impairment loss been recognized for the assets in prior years. - 16 -
Convertible Bonds The Corporation records total proceeds from the issuance of convertible bonds, issued before December 31, 2005, solely as a liability. In addition, the capital stock account is credited with the par value of the Corporation s common shares into which bonds are converted. The carrying values of the bonds and other assets and liabilities related to those convertible bonds as of the conversion date in excess of the amounts credited to the capital stock account are credited to the capital surplus account. When the bondholder exercises the put option, the difference between the payment and the book value of the bonds and other assets and liabilities related to these convertible bonds is credited or charged to current income. For convertible bonds issued on or after January 1, 2006, the carrying values of host contract are recorded in total proceeds from the issuance less the (1) fair values of embedded derivatives and (2) issuance costs allocated to bond payable under the initially relative recognized amount. When the fair value of the bonds is subsequently measured at amortized cost using the effective rate method, the related interest expense or redemption gain is recognized as losses or earnings. When the bondholder exercises the conversion option before bond maturity, the adjusted carrying value of the debt components (bonds and embedded derivatives are included) is credited to a capital stock accounts. The carrying value of bonds is accounted for by the interest method until the day before the conversion date, and that of embedded derivatives is the fair value of the day before the conversion date. When the bondholder exercises the put option before bond maturity, the adjusted carrying value of the debt components (bonds and embedded derivatives are included) is recorded as gain or loss. The carrying value of bonds is accounted for by the interest method until the day before the put date, and the difference between the price and the book value is recognized as losses or gains. Employee Stock Options Employee stock options that were modified or granted in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Corporation adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with the Statement of Financial Accounting Standards No. 39, Accounting for Share-based Payment. Compensation cost determined using fair value method is also recognized in earnings over the employees requisite service period. Treasury Stock The reacquisition of issued stock is accounted for by the cost method. Under this method, the reacquisition cost is debited to the treasury stock account. Treasury stock is shown as a deduction to arrive at shareholders equity. If treasury shares are reissued at a price in excess of the acquisition cost, the excess is credited to paid-in capital from treasury stock. If the treasury shares are reissued at less than acquisition cost, the deficiency is treated first as a reduction of any paid-in capital related to previous reissuances. If the balance in paid-in capital from treasury stock is insufficient to absorb the deficiency, the remainder is recorded as a reduction of retained earnings. When the treasury shares are retired, the capital stock and paid-in capital based on the existing equity are debited. If the treasury shares are retired at a price lower than its par value and paid-in capital, the deficiency is credited to paid-in capital from treasury stock. If the treasury shares are retired at a price in excess of its par value and paid-in capital, the excess is debited to paid-in capital from treasury stock. If the balance in paid-in capital from treasury stock is insufficient to absorb the deficiency, the remainder is recorded as a reduction of retained earnings. The Corporation accounts for its stock held by its subsidiaries as treasury stock. The recorded cost of these treasury shares is based on the carrying value of the investments as shown in the subsidiaries book as of January 1, 2002 or the date after January 1, 2002, when the investees become the Corporation s subsidiaries. - 17 -
Cash dividends received by subsidiaries from the Corporation are recorded under capital surplus - treasury stock transactions. Revenue Recognition and Allowance for Sales Discounts Sales are recognized when titles to products are transferred to customers, primarily upon shipment, since the major part of the earnings process is completed and revenue is realized or realizable. The Corporation does not recognize sales on transactions involving the delivery of materials to subcontractors since the ownership over the materials is not transferred. Allowance for sales discounts is estimated on the basis of any known factors that would affect the allowance and are deducted from sales in the period the products are sold. Sales are determined using the fair value agreed on by the Corporation and its customers. Since the receivables from sales are collectible within one year and sales transactions are frequent, the fair value of receivables is equivalent to the nominal amount of cash to be received. Capitalized and Other Expenditures Expenditures of $60 thousand or more that will benefit periods of more than two years are capitalized. Other expenditures are recorded as expenses or losses. Pension Costs For employees under defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees individual pension accounts during service periods. For employees under defined benefit pension plans, pension costs are recorded based on actuarial calculations. Income Tax The Corporation applies inter-period allocation for its income tax, as follows: Deferred income tax assets and liabilities are recognized for the tax effects of temporary difference, unused tax credits and operating loss carryforwards. Valuation allowance is provided for deferred income tax assets that are not certain to be realized. A deferred income tax asset or liability is classified as current or noncurrent according to the classification of the related asset or liability for financial reporting. But if a deferred income tax asset or liability cannot be related to an asset or liability in the financial statements, it is classified as current or noncurrent on the basis of the expected reversal date of the temporary difference. Tax credits for certain purchases of machinery, equipment and technology, research and development expenditures, personnel training and investments in important technology-based enterprise are recognized by the flow-through method. Adjustments of prior years accrued tax are added to or deducted from the current year s tax expense. Income taxes (10%) on undistributed earnings generated since January 1, 1998 are recorded as expenses in the year when the shareholders resolve to retain the earnings. - 18 -