Powerchip Semiconductor Corporation and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2009 and 2008 and Independent Auditors Report
REPRESENTATION LETTER The entities included in the combined financial statements of Powerchip Semiconductor Corporation as of and for the year ended December 31, 2009, which were prepared in conformity with the Criteria Governing the Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises, are the same as the entities included in the consolidated financial statements prepared in conformity with the revised R.O.C. Statement of Financial Accounting Standards No. 7 Consolidated Financial Statements. In addition, the information required to be disclosed in the combined financial statements is included in the consolidated financial statements. Consequently, Powerchip Semiconductor Corporation and subsidiaries need not separately prepare combined financial statements. Very truly yours, POWERCHIP SEMICONDUCTOR CORPORATION By FRANK HUANG Chairman March 31, 2010-1 -
INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders Powerchip Semiconductor Corporation We have audited the accompanying consolidated balance sheets of Powerchip Semiconductor Corporation and subsidiaries (the Group ) as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in shareholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Group s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. As mentioned in Note 2 to the consolidated financial statements, we did not audit the financial statements of certain subsidiaries as of and for the years ended December 31, 2009 and 2008, which reflected total assets of 5.82% (NT$7,762,784 thousand) and 4.37% (NT$7,551,250 thousand) of consolidated assets as of December 31, 2009 and 2008, respectively. These statements also reflected these subsidiaries net sales of 0% (NT$0 thousand) and 0.11% (NT$61,252 thousand) of the consolidated net sales, respectively, for the years ended December 31, 2009 and 2008, respectively. Also, as mentioned in Note 11 to the consolidated financial statements, we did not audit the financial statements of certain equity-method investees. These investments were 2.58% (NT$3,443,997 thousand) and 1.99% (NT$3,437,292 thousand) of consolidated assets as of December 31, 2009 and 2008, respectively, and the net investment losses were 1.01% (NT$210,892 thousand) and 1.59% (NT$902,577 thousand) of consolidated loss before income tax for the years ended December 31, 2009 and 2008, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these subsidiaries and investees, is based solely on the report 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. - 2 -
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 consolidated financial position of Powerchip Semiconductor Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. As stated in Note 1 to the consolidated financial statements, Powerchip Semiconductor Corporation had recurring operating losses and a negative working capital position due to global economic recession. However, the market price of the products has been increasing since the third quarter of 2009. Management s plans concerning these matters are also described in Note 1 to the consolidated financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. As disclosed in Note 3 to the consolidated financial statements, on January 1, 2009, Powerchip Semiconductor Corporation and subsidiaries adopted the newly amended Statement of Financial Accounting Standards No. 10 - Inventories. March 31, 2010 Notice to Readers The accompanying consolidated financial statements are intended only to present the consolidated 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 consolidated financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying consolidated 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 consolidated financial statements shall prevail. - 3 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES BALANCE SHEETS DECEMBER 31, 2009 AND 2008 (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 18) $ 2,596,649 2 $ 8,088,015 5 Short-term loans (Notes 16, 28 and 29) $ 10,417,011 8 $ 12,361,993 7 Financial assets at fair value through profit and loss - current (Notes 2, 5 Financial liabilities at fair value through profit and loss - current (Notes 2, 5 and 27) 4,546-629,182 - and 18) 207,978-317,712 - Available-for-sale financial assets - current (Notes 2, 6, 10, 11, 21 and 27) 2,113,952 2 587,325 - Notes and accounts payable (Note 28) Held-to-maturity financial assets - current (Notes 2 and 9) 75,000-140,000 - Related parties 4,083,803 3 7,081,441 4 Accounts receivable, net (Notes 2, 7 and 28) Third parties 2,509,498 2 5,726,743 4 Related parties 555,635-2,071,109 1 Income tax payable (Notes 2 and 24) 429-92 - Third parties 996,492 1 567,030 1 Accrued expenses (Notes 2, 17 and 28) 6,894,258 5 6,476,604 4 Other receivables (Note 28) 360,786-361,081 - Payables for equipment 3,105,122 2 5,759,839 3 Inventories (Notes 2, 3, 8 and 28) 6,731,227 5 3,900,098 2 Receipts in advance (Note 28) 449,402 1 - - Prepaid expenses 142,394-297,902 - Current portion of bonds payable (Notes 2, 18 and 28) 8,057,983 6 7,336,951 4 Deferred income tax assets - current (Notes 2 and 24) 94,539-82,082 - Current portion of long-term loans (Notes 19 and 29) 20,691,532 16 21,530,001 13 Restricted deposits (Notes 4, 18 and 29) 1,018,147 1 954,010 1 Guarantee deposits - current (Notes 28 and 30) 109,005 - - - Other current assets 12,162-7,693 - Other current liabilities (Notes 20, 28 and 30) 213,770-1,873,934 1 Total current assets 14,701,529 11 17,685,527 10 Total current liabilities 56,739,791 43 68,465,310 40 INVESTMENTS LONG-TERM LIABILITIES Equity-method investments (Notes 2, 11, 16, 28 and 29) 19,334,281 15 23,794,961 14 Bonds payable, net of current portion (Notes 2, 18 and 28) 656,591 1 8,703,782 5 Financial assets carried at cost - noncurrent (Notes 2, 10 and 11) 1,668,520 1 1,870,603 1 Long-term loans, net of current portion (Notes 19 and 29) 47,108,642 35 50,623,817 29 Held-to-maturity financial assets - noncurrent (Notes 2 and 9) - - 75,000 - Hedging derivative liabilities - noncurrent (Notes 2, 12, 21 and 27) 16,736-26,097 - Deferred revenue - noncurrent (Notes 28 and 30) 50,000-90,000 - Total investments 21,002,801 16 25,740,564 15 Total long-term liabilities 47,831,969 36 59,443,696 34 PROPERTIES (Notes 2, 13, 28 and 29) Cost OTHER LIABILITIES Buildings 10,228,506 8 10,982,309 6 Accrued pension costs (Notes 2 and 20) 86,231-31,558 - Machinery and equipment 217,913,151 163 218,420,449 127 Guarantee deposits - noncurrent, net of current portion (Notes 28 and 30) 135,056-142,093 - Research and development equipment 2,963,124 2 3,173,878 2 Facility equipment 25,679,388 19 25,617,842 15 Total other liabilities 221,287-173,651 - Transportation equipment 18,130-17,080 - Office equipment 567,771 1 583,087 - Total liabilities 104,793,047 79 128,082,657 74 Leasehold improvements 3,103-8,723 - Miscellaneous equipment 1,571,779 1 1,756,558 1 EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT 258,944,952 194 260,559,926 151 (Notes 2, 21 and 22) Accumulated depreciation (173,974,858) (130) (143,544,709) (83) Capital stock, NT$10.00 par value 84,970,094 64 117,015,217 68 Authorized - 10,000,000 thousand shares Construction-in-process and prepayments for equipment 3,207,217 2 2,578,472 1 Issued and outstanding - 8,783,071 thousand shares in 2009 and 7,813,650 thousand shares in 2008 87,830,708 66 78,136,496 45 Net properties 88,177,311 66 119,593,689 69 Capital surplus Additional paid-in capital from share issuance in excess of par - - 20,184,895 12 INTANGIBLE ASSETS Conversion of bonds - - 4,713,647 3 Deferred pension cost (Notes 2 and 20) 36,709-2,515 - Treasury stock transactions - - 120,956 - Long-term investments 447,802-448,020 - OTHER ASSETS Retained earnings Assets leased to others, net (Note 2) 3,347-113,662 - Legal reserve - - 276,100 - Refundable deposits 54,438-74,619 - Special reserve - - 3,164 - Deferred charges, net (Notes 2, 14 and 28) 4,234,653 3 4,271,270 3 Accumulated deficit (59,588,918) (45) (57,563,389) (33) Deferred income tax assets - noncurrent (Notes 2 and 24) 4,023,464 3 3,967,208 2 Others Spare parts, net (Note 28) 249,963-282,052 - Unrealized gain (loss) on financial assets (Notes 11 and 27) 1,131,623 1 (546,929) - Other assets - building (Notes 2, 9 and 15) 127,997-158,611 - Net loss not recognized as pension cost (1,745) - (6,051) - Others (Note 28) 855,820 1 855,040 1 Cumulative translation adjustments (2,328) - 13,875 - Treasury stock (at cost) - 114,613 thousand shares (Note 23) (1,163,906) (1) (1,163,906) (1) Total other assets 9,549,682 7 9,722,462 6 Total equity attributable to shareholders of the parent 28,653,236 21 44,616,878 26 MINORITY INTEREST IN SUBSIDIARIES (Note 2) 21,749-45,222 - Total shareholders equity 28,674,985 21 44,662,100 26 TOTAL $ 133,468,032 100 $ 172,744,757 100 TOTAL $ 133,468,032 100 $ 172,744,757 100 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 31, 2010) - 4 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars, Except Consolidated Loss Per Share) Amount % Amount % GROSS SALES $ 36,051,683 $ 57,110,035 SALES RETURNS AND ALLOWANCES (Note 2) 182,508 2,446,816 NET SALES (Notes 2, 28 and 32) 35,869,175 100 54,663,219 100 COST OF SALES (Notes 3, 8, 25 and 28) 49,530,364 138 96,115,388 176 GROSS LOSS (13,661,189) (38) (41,452,169) (76) (UNREALIZED) REALIZED INTERCOMPANY GROSS PROFIT (Note 2) (17,838) - 291 - REALIZED GROSS LOSS (13,679,027) (38) (41,451,878) (76) OPERATING EXPENSES (Notes 25 and 28) Selling 158,891-288,633 - General and administrative 1,971,880 6 2,505,715 5 Research and development 3,090,593 9 3,286,358 6 Total operating expenses 5,221,364 15 6,080,706 11 OPERATING LOSS (18,900,391) (53) (47,532,584) (87) NONOPERATING INCOME AND GAINS Valuation gain on financial assets, net (Notes 2 and 5) 957,791 3 - - Foreign exchange gain, net (Note 2) 782,556 2 - - Gain on disposal of investments, net (Notes 2 and 28) 494,756 2 - - Dividend income (Note 2) 76,105-173,303 1 Gain on disposal of properties (Notes 2 and 28) 72,221-55,043 - Rental income (Note 28) 47,325-32,589 - Income from wafer foundry (Note 28) 47,011-62,856 - Interest income (Note 27) 23,758-297,369 1 Service income (Note 28) 11,087-172,727 - Indemnity income (Note 28) 2,332-54,488 - Gain on disposal of land (Notes 2 and 28) - - 56,538 - Others (Note 28) 291,840 1 133,034 - Total nonoperating income and gains 2,806,782 8 1,037,947 2 (Continued) - 5 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars, Except Consolidated Loss Per Share) Amount % Amount % NONOPERATING EXPENSES AND LOSSES Interest expense (Notes 13, 16, 18, 19, 27 and 28) $ 2,258,330 6 $ 3,090,334 6 Equity in losses of equity-method investees, net (Notes 2 and 11) 1,403,050 4 3,712,389 7 Valuation loss on financial liabilities, net (Notes 2 and 5) 795,231 2 268,356 - Impairment loss (Notes 2, 10, 13 and 15) 69,793-125,209 - Provision for loss on spare parts 38,347-41,251 - Loss on disposal of properties (Notes 2 and 28) 31,715-5,220 - Foreign exchange loss, net (Note 2) - - 1,749,637 3 Loss on early redemption of convertible bonds (Note 2) - - 398,876 1 Valuation loss on financial assets, net (Notes 2 and 5) - - 390,188 1 Loss on disposal of investments, net (Notes 2 and 28) - - 273,210 1 Others 109,944 1 170,087 - Total nonoperating expenses and losses 4,706,410 13 10,224,757 19 LOSS BEFORE INCOME TAX (20,800,019) (58) (56,719,394) (104) INCOME TAX BENEFIT (EXPENSE) (Notes 2 and 24) 65,133 - (811,082) (1) NET LOSS $ (20,734,886) (58) $ (57,530,476) (105) ATTRIBUTABLE TO: Shareholders of the parent $ (20,712,755) (58) $ (57,531,725) (105) Minority interest (22,131) - 1,249 - $ (20,734,886) (58) $ (57,530,476) (105) Before Income Tax After Before Income Income Tax Tax After Income Tax CONSOLIDATED LOSS PER SHARE (NEW TAIWAN DOLLARS; Note 26) Basic and diluted $ (2.53) $ (2.52) $ (7.31) $ (7.42) The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 31, 2010) (Concluded) - 6 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars, Except Per Share Data) Equity Attributable to Shareholders of the Parent Capital Surplus (Notes 2, 21 and 22) Additional Others (Notes 2, 11, 21 and 27) Paid-in Capital Unrealized Minority Common Stock from shares Retained Earnings Gains (Loss) Net Loss not Cumulative Treasury Interest in Total Shares Issuance in Conversion of Treasury Long-term Accumulated on Recognized as Translation Stock Subsidiaries Shareholders (Thousands) Amount Excess of Par Bonds Stock Investments Total Legal Reserve Special Reserve Deficit Total Financial Assets Pension Cost Adjustments (Notes 2 and 23) Total (Note 2) 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 $ 35,355 $ 103,521,400 Transfer of legal reserve to offset deficit - - - - - - - (5,231,210 ) - 5,231,210 - - - - - - - - Conversion of bonds into capital stock 705 7,050-4,263 - - 4,263 - - - - - - - - 11,313-11,313 Issuance of shares upon exercise of employee stock options 27,085 270,850 (109,057 ) - - - (109,057 ) - - - - - - - - 161,793-161,793 Acquisition of treasury stock - 110,000 thousand shares at average of NT$7.17 per share - - - - - - - - - - - - - - (789,220) (789,220) - (789,220) Retirement of treasury stock - 37,057 thousand shares (37,057 ) (370,570 ) (95,728 ) (22,355 ) 114,748 - (3,335 ) - - - - - - - 373,905 - - - Adjustment for changes in shareholders' equities of equity-method investees - - - - - 42,492 42,492 - - (31,664) (31,664) (503,293) (4,080) 66,573 - (429,972) 8,779 (421,193) Realized exchange losses on equity-method investees - - - - - - - - - - - - - 320-320 - 320 Adjustment for changes in cumulative translation adjustments due to disposal of long-term investments - - - - - - - - - - - - - (23,535 ) - (23,535) - (23,535) Valuation loss on available-for-sale financial assets - - - - - - - - - - - (243,794 ) - - - (243,794 ) (25 ) (243,819 ) Valuation loss on derivative financial liabilities for hedging - - - - - - - - - - - (24,347 ) - - - (24,347 ) - (24,347 ) Effect of changes in consolidated entities - - - - - - - - - - - - - - - - (136 ) (136 ) Net loss in 2008 - - - - - - - - - (57,531,725 ) (57,531,725 ) - - - - (57,531,725 ) 1,249 (57,530,476 ) BALANCE, DECEMBER 31, 2008 7,813,650 78,136,496 20,184,895 4,713,647 120,956 448,020 25,467,518 276,100 3,164 (57,563,389 ) (57,284,125 ) (546,929 ) (6,051 ) 13,875 (1,163,906 ) 44,616,878 45,222 44,662,100 Offset of deficit against capital surplus, legal reserve and special reserve - - (20,184,895) (4,713,647) (120,956) - (25,019,498) (276,100) (3,164 ) 25,298,762 25,019,498 - - - - - - - Issuance of shares upon exercise of employee stock options 13,795 137,950 - - - - - - - (66,216 ) (66,216 ) - - - - 71,734-71,734 Conversion of bonds into capital stock 955,626 9,556,262 - - - - - - - (6,544,843 ) (6,544,843 ) - - - - 3,011,419-3,011,419 Adjustment for changes in shareholders' equities of equity-method investees - - - - - (218 ) (218 ) - - (477 ) (477 ) 167,386 4,306 (16,203 ) - 154,794 (1,410) 153,384 Valuation gain on available-for-sale financial assets - - - - - - - - - - - 1,501,805 - - - 1,501,805 68 1,501,873 Valuation gain on derivative financial liabilities for hedging - - - - - - - - - - - 9,361 - - - 9,361-9,361 Net loss in 2009 - - - - - - - - - (20,712,755 ) (20,712,755 ) - - - - (20,712,755 ) (22,131 ) (20,734,886 ) BALANCE, DECEMBER 31, 2009 8,783,071 $ 87,830,708 $ - $ - $ - $ 447,802 $ 447,802 $ - $ - $ (59,588,918 ) $ (59,588,918 ) $1,131,623 $ (1,745 ) $ (2,328 ) $ (1,163,906 ) $ 28,653,236 $ 21,749 $ 28,674,985 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 31, 2010) - 7 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net loss attributable to shareholders of the parent $ (20,712,755) $ (57,531,725) Net (loss) income attributable to minority interest (22,131) 1,249 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 32,632,667 34,597,257 Amortization 2,108,164 1,854,897 Unrealized (realized) gross profit from affiliates 17,838 (291) Valuation loss on financial assets 624,636 1,921,925 Valuation gain on financial liabilities (109,734) (628,772) Reversal of allowance for doubtful accounts (12,858) (14,968) Provision (reversal of allowance) for sales discounts 48,268 (634,428) (Reversal of allowance) provision for loss on inventories and spare parts (8,591,682) 4,924,610 Equity in losses of equity-method investees, net 1,403,050 3,712,389 Cash dividends from equity-method investees 79,589 324,904 Realized exchange losses on equity-method investee - 320 Impairment loss 69,793 125,209 (Gain) loss on disposal of investments, net (494,756) 273,210 Gain on disposal of properties, net (40,506) (49,823) Gain on disposal of land - (56,538) Deferred income tax expense (68,713) 788,589 (Reversal of allowance) provision for loss on purchase contracts (1,653,103) 1,572,792 Foreign exchange gain on bonds payable (127,804) (87,843) (Gain) loss on issuance costs of the early redemption of bonds payable, net (7,918) 398,876 Amortization of discount on bonds payable 55,059 194,438 Foreign exchange (gain) loss on long-term loans (25,704) 108,808 Realized deferred revenue (40,000) (40,000) Net changes in operating assets and liabilities Held-for-trading financial assets - 3,762,324 Accounts receivable 1,050,602 1,917,490 Other receivables 295 221,004 Inventories 5,798,900 (61,780) Prepaid expenses 155,508 10,107 Other current assets (4,469) (1,295) Notes and accounts payable (5,775,255) 2,170,499 Income tax payable 337 - Accrued expenses 382,962 513,554 Receipts in advance 449,402 - Other current liabilities (24,899) 85,042 Accrued pension costs 21,455 9,594 Net cash provided by operating activities 7,186,238 381,624 (Continued) - 8 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of: Available-for-sale financial assets $ 1,269,739 $ 754,031 Held-to-maturity financial assets 140,000 46,000 Financial assets carried at cost 37,333 10,203 Equity-method investments 1,240,856 428,010 Properties 480,636 67,080 Land - 301,846 Deferred charges 16,019 - Acquisition of: Available-for-sale financial assets (60,000) - Financial assets carried at cost (41,937) (288,674) Equity-method investments (514,386) (1,699,630) Properties (5,915,626) (20,236,331) Deferred charges (2,036,540) (1,724,110) Proceeds from return of capital by investees of financial assets carried at cost 1,917 33,283 Proceeds from liquidation of investment 2,748 - Proceeds from return of capital by equity-method investees - 98,536 Increase in restricted deposits (64,137) (183,396) Increase in other assets (780) (326,129) (Increase) decrease in spare parts (6,258) 100,263 (Decrease) increase in refundable deposits 19,756 (12,728) Net cash used in investing activities (5,430,660) (22,631,746) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Issuance of corporate bonds - 2,150,000 Long-term loans - 18,469,960 Exercise of employee stock options 71,734 161,793 (Decrease) increase in short-term loans (371,300) 12,361,993 Redemption of corporate bonds (3,994,232) (9,327,616) Repayments of long-term loans (3,052,480) (12,634,653) Increase in guarantee deposits 102,046 5,964 Acquisition of treasury stock - (789,220) Decrease in minority interest in subsidiaries - (47) Net cash (used in) provided by financing activities (7,244,232) 10,398,174 EFFECT OF CHANGE IN EXCHANGE RATE ON CASH AND CASH EQUIVALENTS (2,712) 17,777 (Continued) - 9 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars) NET DECREASE IN CASH AND CASH EQUIVALENTS $ (5,491,366) $ (11,834,171) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,088,015 19,922,186 CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,596,649 $ 8,088,015 SUPPLEMENTAL INFORMATION Income tax paid $ 3,747 $ 40,480 Interest paid (excluding amounts capitalized of $10,127 thousand in 2009 and $128,756 thousand in 2008) $ 2,004,495 $ 2,826,532 Noncash investing and financing activities Transfer of financial assets carried at fair value through profit or loss to available-for-sale financial assets $ - $ 1,140,254 Transfer of held -to-maturity financial asset to other assets - building $ - $ 155,000 Offset of short-term loans against accounts receivable $ 993,520 $ - Offset of payable on technical know-how against accounts receivable $ 1,526,265 $ - Transfer of interests receivable to other assets - building $ - $ 4,225 Merger of equity-method investees $ 21,986 $ 89,013 Transfer of equity-method investments to available-for-sale financial assets $ 127,108 $ - Transfer of equity-method investments to financial assets carried at cost $ 274,573 $ - Transfer of financial assets carried at cost to equity-method investments $ 34,501 $ - Transfer of financial assets carried at cost to available-for-sale financial assets $ 396,541 $ 4,178 Transfer of available-for-sale financial assets to financial assets carried at cost $ 2,134 $ - Reclassification of properties into assets leased to others $ - $ 111,580 Offset short-term loans and interest payable against the proceeds from the disposal of equity-method investments $ 1,848,000 $ - Offset long-term loans against the proceeds from the disposal of properties $ 1,277,000 $ - Repayment of bonds payable through short-term loans $ 200,000 $ - Reclassification of assets leased to others into properties $ 104,806 $ - Redemption of bonds payable through short-term loans $ 39,845 $ - Current portion of long-term loans $ 20,691,532 $ 21,530,001 Conversion of bonds $ 3,011,419 $ 11,313 (Continued) - 10 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars) INVESTING ACTIVITIES AFFECTING BOTH CASH AND NONCASH ITEMS Acquisition of properties $ (2,821,281) $ (13,694,437) Payable, beginning of year (5,759,839) (12,741,361) Notes payable, beginning of year (439,628) - Notes payable, end of year - 439,628 Payable, end of year 3,105,122 5,759,839 Cash paid $ (5,915,626) $ (20,236,331) Acquisition of deferred charges $ (2,105,705) $ (168,160) Increase (decrease) in payable on technical know-how 69,165 (1,555,950) Cash paid $ (2,036,540) $ (1,724,110) The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated March 31, 2010) (Concluded) - 11 -
POWERCHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2009 AND 2008 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATION Powerchip Semiconductor Corporation (PSC) 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. PSC 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, reselling and trading through automated inter-market trading linkages of the NASDAQ Stock Market, Inc. PSC s business activities mainly include research and development, manufacturing (including on subcontracting), testing, assembling and reselling various integrated circuit products. As of December 31, 2009 and 2008, PSC and subsidiaries had 5,632 and 6,408 employees, respectively. PSC spun off its 8-inch fab to establish a subsidiary, Maxchip Electronics Corp. ( Maxchip ) on April 1, 2008, in accordance with the Law of Business Mergers and Acquisitions. The carrying value of the 8-inch fab was $7,500,000 thousand. PSC exchanged 8-inch fab for 500,000 thousand of Maxchip s newly issued shares at NT$15.00 per share. PSC, which wholly owns Maxchip, accounted for the investment at the carrying value of the net assets on the spin-off date. PSC was having recurring operating losses and was in a negative working capital position due to global economic recession. However, the market price of the products has been increasing since the third quarter of 2009. To further improve its operating conditions, PSC has taken the flowing measures: a. Fund raising: PSC is proceeding with the issuance of up to 1,200 million shares of capital stock and is negotiating for loans from suppliers/customers to meet its working capital needs and strengthen its financial structure. b. Suspension of factory expansion: PSC plans to suspend the construction of its fourth 12-inch factory (P4) to reduce fund outflow. c. Enhancement of manufacturing process efficiency and cost reduction: Ongoing is PSC s promotion of its 65nm technology while transforming the manufacturing process from 65nm technology to 60nm technology for a 15% cost reduction. Also, PSC plans to develop a 45nm technology for an added 20% cost reduction. d. Asset disposal: PSC will dispose of its noncore investments to improve its financial structure and strengthen and develop further its main business. e. Negotiating payment terms with suppliers: As DRAM prices significantly go up and the PSC s revenue increases. PSC is having net increases in cash inflow from operating activities. The debts owing to suppliers repaid by installment payment have been paid more than 95% as of March 31, 2010. Thus, PSC is negotiating with the suppliers to resumes its credit line to recover its operation. f. Renegotiation of collection terms with customers: PSC is requesting its customers to pay in advance or do cash transaction to support its operation. - 12 -
The Group s management believes that its operating conditions and financial position will improve and its operating costs will decrease with the adoption of the above plans. Thus, the financial statements for the year ended of December 31, 2009 do not include any adjustments that might result from the outcome of this uncertainty. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China ( ROC ). Under these guidelines and principles, PSC and the subsidiaries 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, assets leased to others and other assets - building, amortization of deferred charges, pension expenses, impairment losses, contingent liabilities and default fine. Actual results could differ from these estimates. For the convenience of readers, the accompanying consolidated 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 consolidated financial statements shall prevail. The Group s significant accounting policies are summarized as follows: Consolidation The consolidated financial statements as of and for the years ended December 31, 2009 and 2008 include the accounts of PSC and all its direct and indirect subsidiaries as well as others investees over which the Group has controlling interests. All significant intercompany balances and transactions have been eliminated in the consolidation. The consolidated entities as of December 31, 2009 and 2008 were as follows: Subsidiaries of PSC included Quantum Vision Corp. ( Quantum ); Li-Hsin Investment Corp. ( Li-Hsin ); Smart Art Corp. ( Smart Art ); Rui-Wang Investment Corp. ( Rui-Wang ); Global Powertec Co., Ltd. ( Global Powertec ); Vantel Corp. ( Vantel, subsidiary of Global Powertec); Maxchip Electronics Corp. ( Maxchip ); Fu-Shuo Investment Corp. ( Fu-Shuo, subsidiary of Maxchip); Sprout International Limited ( Sprout, subsidiary of Maxchip); and Paramax Corp. ( Paramax, which was not included in the consolidated financial statements in 2009 because of its merger with Li-Hsin Investment Corp., in September 2008, with Li-Hsin as the survivor entity) % of Ownership as of December 31 Investor Investee Remark PSC Quantum 99.99 99.99 - Li-Hsin 99.96 99.96 - Global Powertec 100.00 100.00 - Maxchip 100.00 100.00 Established as PSC s spun-off in April 2008. Rui-Wang 100.00 100.00 - (Continued) - 13 -
% of Ownership as of December 31 Investor Investee Remark Smart Art 44.61 44.61 The Group wholly owned Smart Art, i.e., PSC held 44.61% of Smart Art and Li-Hsin and Quantum jointly held 55.39%. Global Powertec Vantel 64.97 64.97 - Maxchip Fu-Shuo 100.00 100.00 - Sprout 100.00 - Established in the first quarter of 2009 (Concluded) Maxchip is engaged in research and development, manufacturing (including subcontracting), testing, assembling and reselling various integrated circuit products. Vantel is engaged in the research and development, designing, manufacturing and selling various integrated circuit products; Quantum, Li-Hsin, Rui-Wang, Global Powertec, Fu-Shuo, Sprout and Paramax are engaged in investing activities; while Smart Art is engaged in the reselling of art work. The following diagram shows the relationship and ownership percentages between PSC and its subsidiaries as of December 31, 2009: PSC 100% 100% 99.99% 44.61% 99.96% 100% Global Powertec Rui-Wang Quantum Li-Hsin Maxchip 64.97% 20.28% 35.11% 100% 100% Vantel Smart Art Fu-Shuo Sprout PSC together with its subsidiaries are hereinafter referred to collectively as the Group. Minority interest in subsidiaries is presented under minority interest in subsidiaries in the consolidated financial statements. 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. - 14 -
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 Group 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. 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. 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. 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 Group and its creditors. - 15 -
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 value of the accounts receivable is recognized as a loss and recorded as non-operating expenses. Inventories Inventories consist of raw materials, supplies, work-in-process, finished goods and merchandise. Before January 1, 2009, inventories were stated at the lower of aggregate cost or market value. Market value referred to the replacement cost of raw materials and supplies and the net realizable value of merchandise, finished goods and work in process. As stated in Note 3 to the financial statements, effective January 1, 2009, inventories are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at weighted-average cost except PSC s and Maxchip s inventories are recorded at standard cost and adjusted to the approximate weighted-average cost on the balance sheet date. Held-to-maturity Financial Assets Held-to-maturity financial assets 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. 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 Group exercises significant influence on investees operating and financial decisions are accounted for by the equity method. - 16 -
The difference between the investment cost and the Group 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 Investments 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. The Group evaluates whether there are indications of impairment on the investments on the financial statement date. If there is objective evidence that an investee is 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 Group exercises significant influence on their operating and financial decisions, the assessment of impairment is based on individual carrying value. For those investees over which the Group 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 entity. If an investee issues additional shares and the Group subscribes for these shares at a percentage different from its current equity in the investee, the resulting difference in the Group s equity in the investee s net assets is recorded as an adjustment to capital surplus as well as to the equity-method investment accounts. Any decrease in the Group 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 Group s interest in the investee if there are changes in the investee s equity, other than capital stocks and retained earnings. If the Group 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 Group 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 Group to equity-method investees that are not majority owned are deferred in proportion to the Group s equity interest in the investees at year-end. Gains or losses on sales generated from equity-method investees to the Group are deferred in proportion to the Group s equivalent equity interest in the investees. Gains or losses from sales among all equity-method investees are deferred in proportion to the product of the Group 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. Properties, Assets Leased to Others and Other Assets - Building Properties, assets leased to others and other asset - building 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. - 17 -
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, 2 to 10 years; leasehold improvement, 3 to 15 years; miscellaneous equipment, 2 to 5 years; and assets leased to others, 10 to 20 years; and other asset - building, 10 years. Properties, assets leased to others and other asset - building 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 loss. If the recoverable amount increases, the impairment loss reversal is recognizes 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 year. Upon sale or other disposal of properties, assets leased to others and other asset - building, 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 Expenditure on research activities and those related development activities that do not meet the criteria for capitalization is recognized as an expense when 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; 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 loss. If the recoverable amount increases, the impairment loss reversal is recognizes 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 asset in prior year. 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. Convertible Bonds The Group 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 Group 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. - 18 -
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 gains or losses. 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 gains 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. 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 Group 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 Statement of Financial Accounting Standards (SFAS) No. 39 - 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 reissuance. 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. PSC 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 PSC s subsidiaries. Cash dividends received by subsidiaries from PSC are recorded under capital surplus - treasury stock transactions. - 19 -