ACBEL POLYTECH INC. AND SUBSIDIARIES Consolidated Financial Statements June 30, 2006 and 2005 (With Auditors' Report Thereon)

Transcription

1 Consolidated Financial Statements June 30, 2006 and 2005 (With Auditors' Report Thereon)

2 Review Report of Independent Auditors The Board of Directors Acbel Polytech Inc.: We have reviewed the accompanying consolidated balance sheets of Acbel Polytech Inc. as of June 30, 2006 and 2005, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the six-month periods then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to issue a review report on these financial statements based on our review. Except as mentioned in the third paragraph, we conducted our review in accordance with the guidelines of ROC Statement on Auditing Standards No. 36, Reviewing Financial Statements. Those guidelines require that we plan and perform the review consisting principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the Republic of China and with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. We did not review the consolidated financial statements of some subsidiaries, which reflect total assets amounting to NT$915,677,000 and NT$1,140,577,000, constituting 7% and 9%, respectively, and total liabilities amounting to NT$347,621,000 and NT$452,317,000, constituting 5% and 8%, respectively, of the consolidated totals as of June 30, 2006 and 2005, and reflect total sales amounting to NT$165,819,000 and NT$178,659,000, both constituting 3%, and total net income (loss) amounting to NT$(4,851,000) and NT$15,157,000, constituting (1%) and 6%, respectively, of the consolidated totals for the six-month periods ended June 30, 2006 and 2005, based on the subsidiaries financial statements without review procedures conducted by independent auditors. Based on our review, we are not aware of any modifications that should be made, in any material respects, to the financial statements referred to in the first paragraph in order for them to be in conformity with accounting principles generally accepted in the Republic of China, except for the effect of such adjustments, if any, as might have been determined to be necessary had the consolidated financial statements as stated in the third paragraph been reviewed. August 14, 2006 The accompanying consolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China.

3 Consolidated Statements of Income (Unaudited) Six-month periods ended June 30, 2006 and 2005 (expressed in thousands of New Taiwan dollars, except net income per share) Amount % Amount % Gross sales (note 16) $ 6,109, ,140, Less: sales returns and allowances 142, ,444 1 Net sales 5,967, ,095, Cost of sales (notes 16 and 19) 4,948, ,122, Gross profit 1,019, , Operating expenses (note 19): Selling expenses 358, ,352 4 Administrative expenses 380, ,408 6 Research and development expenses 338, , ,077, , Operating income (loss) (58,053) (1) 137,121 2 Non-operating income and revenue: Interest income 36, ,571 - Gain on sale of investments 8,673-44,275 1 Gain on foreign currency exchange, net 32, ,731 1 (notes 3, 5 and 15) Other 10,212-35, , ,993 3 Non-operating expenses and losses: Impairment loss (note 8) ,695 - Provision for inventory obsolescence 453, Loss on valuation of financial assets 14, (notes 3, 5 and 15) - Other 5,271-14, , ,684 - Continuing operations income (loss) before tax (443,150) (7) 287,430 5 Income tax expense (note 14) 4,573-26,926 1 Continuing operations income (loss) (447,723) (7) 260,504 4 Cumulative effect of changes in accounting principle (net of income tax expense of $0) (note 3) 6, Net income (loss) $ (440,856) (7) 260,504 4 Distributed to: Net income (loss) before minority interest income (439,867) (7) 260,840 6 Minority interest in net loss of subsidiaries (989) - (336) - Net income (loss) $ (440,856) (7) 260,504 6 Before income tax After income tax Before income tax After income tax Basic net income per share (note 13) Net income (loss) $ (0.95) (0.96) Cumulative effect of changes in accounting principle Net income (loss) $ (0.94) (0.95) Diluted net income (loss) per share $ (0.94) (0.95) Based on a resolution at the annual stockholders meeting held on June 21, 2006, the Company increased its common stock through the issuance of stock dividends by transferring retained earnings and employee bonuses. The pro forma basic net income per share calculated by adjusting dividends declared retroactively, under the assumption that the stock dividends were issued on June 30, 2006, is as follows: Basic net income (loss) per share calculated by adjusting dividends declared retroactively Continuing operations income (loss) $ (0.92) (0.93) Cumulative effect of changes in accounting principle Net income (loss) $ (0.91) (0.92) Diluted net income (loss) per share calculated by adjusting dividends declared retroactively Continuing operations income (loss) $ (0.92) (0.93) Cumulative effect of changes in accounting principle Net income (loss) $ (0.91) (0.92)

4 Consolidated Statements of Cash Flows (Unaudited) Six-month periods ended June 30, 2006 and 2005 (expressed in thousands of New Taiwan dollars) Cash flows from operating activities: Net income (loss) $ (440,856) 260,504 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 178, ,387 Increase (decrease) in allowance for inventory valuation and 453,788 (293) obsolescence losses Changes in financial assets at fair value through profit or loss 59,225 (565,679) current Decrease in notes and accounts receivable 333, ,750 Decrease (increase) in inventories (988,857) 370 Decrease (increase) in other financial assets current 27,367 (4,648) Increase in prepaid expenses and other current assets (3,099) (76,847) Increase (decrease) in notes and accounts payable 666,069 (226,531) Decrease in accrued expenses and other current liabilities (20,334) (140,404) Other (21,471) 27,502 Cash provided by (used in) operating activities 244,493 (397,889) Cash flows from investing activities: Additions to property, plant and equipment (157,014) (275,597) Increase in deferred expenses and other (52,378) (52,751) Cash used in investing activities (209,392) (328,348) Cash flows from financing activities: Transfer of treasury stock to employees - 283,000 Decrease in short-term loans (181,511) (147,815) Directors and supervisors remuneration - (26,132) Cash provided by (used in) financing activities (181,511) 109,053 Effect of some subsidiaries consolidated for the first time - 647,356 Foreign currency translation adjustments (10,955) (26,320) Net increase (decrease) in cash and cash in bank (157,365) 3,852 Cash and cash in bank at beginning of year 2,424,723 1,912,746 Cash and cash in bank at end of year $ 2,267,358 1,916,598 Supplementary disclosures of cash flow information: Cash paid during the period for: Interest $ 2,405 5,726 Income taxes $ 61,711 20,775 Supplementary disclosure of investing and financing activities not affecting current cash flows: Cash dividends payable, employees bonuses, and directors and supervisors remuneration $ 291, ,992 Convertible bonds payable transferred to common stock and capital surplus $ - 184,207

5 June 30, 2006 and 2005 (expressed in thousands of New Taiwan dollars unless otherwise specified) (1) Organization Acbel Polytech Inc. (the Company, originally named "Leadtorn Industrial Inc.") was incorporated as a company limited by shares in July The Company acquired the "API Division" of Vidar SMS Co., Ltd. in September 1996, and changed its name to Acbel Polytech Inc. The business activities of the Company are the research and development, manufacture and sale of power supplies. The Company s common shares were listed on the Taiwan Stock Exchange (TSE). The Company established Acbel Polytech Holding Inc. (Acbel-BVI) as an overseas holding company. The main activity of Acbel-BVI is investing in Mainland China companies as production centers of the Company through Acbel Polytech (Singapore) Pte Ltd. (Acbel-SGP). As of June 30, 2006, the Company owned 100% of Acbel-BVI s authorized common stock, amounting to US$61,400,000. Acbel Telecom Inc. (ATI) was incorporated on December 10, The major business activity of ATI is the manufacture and sale of electronic components. As of June 30, 2006, ATI s outstanding common stock amounted to $250,000, and the Company owned 95% of ATI s shares. ATI has 100% ownership of Astoria Networks Inc. (Astoria). The main activity of Astoria is research of communication materials. The Company established Acbel Polytech International Inc. (Acbel Polytech I.I.) as an overseas holding company. The main activity of Acbel Polytech I.I. is investing in Mainland China companies through Power Station Holdings Ltd. (Power Station). (The Company owned 55% indirectly.) The main activity of Power Station s subsidiaries is the manufacture of hardware. As of June 30, 2006, the Company owned 100% of Acbel Polytech I.I. s outstanding common stock, amounting to US$6,600,000. The Company established Dream Galaxy Ltd. (Dream Galaxy) as an overseas holding company. The main activity of Dream Galaxy is investing. As of June 30, 2006, the Company owned 100% of Dream Galaxy s outstanding common stock. As of June 30, 2006 and 2005, the number of employees hired by the Group was approximately 7,106 and 6,930, respectively. (2) Summary of Significant Accounting Policies The accompanying consolidated financial statements are prepared in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles and practices generally accepted in the Republic of China. The consolidated financial statements of the Company and subsidiaries have been prepared in the local currency and in Chinese. These financial statements have been translated into English. The translated information is consistent with the Chinese language financial statements from which it is derived. The significant accounting policies and measurement basis adopted in preparing the accompanying consolidated financial statements are summarized as follows:

6 2 (a) Reporting entities of the consolidated financial statements and basis of consolidation As of June 30, 2006 and 2005, the details of the subsidiaries included in the consolidated financial statements and the Company s direct and indirect percentage of ownership were as summarized below: Name of company which holds securities Name of subsidiary Major operations Percentage of ownership The Company Acbel-BVI Investment % " ATI Manufacture and sale of electronic components 95.00% " Acbel Polytech I.I. Investment % " Dream Galaxy Investment % Acbel-BVI Acbel-SGP Investment % " Acbel Polytech (Malaysia) Consultation on power % Sdn. Bhd. (Acbel-Malaysia) supplies and research " Acbel (USA) Polytech Inc. Consultation on power % (Acbe-USA) supplies " Acbel Polytech (UK) Co., Ltd. Consultation on power % (Acbel-UK) supplies " Acbel Polytech Philippines Manufacture of power % Inc. (Acbel-PHI) supplies " CK Holding Inc. (CK) Investment 40.00% " CSA Holding Inc. (CSA) Investment 40.00% Acbel-SGP Acbel Electronic (Dong Guan) Manufacture of power % Co., Ltd. (API-PRC) supplies " Actel Electronic (Dong Guan) Manufacture of power % Inc. (Actel-Dong Guan) supplies CK CSA Investment 60.00% ATI Astoria Networks Inc. Research on % (Astoria) communication materials Acbel Polytech I.I. Power Station Holding Ltd. Investment 55.00% (Power Station) Power Station Target Gain Corporation Investment % (Target Gain) " Shanghai Sino Hardware Manufacture of hardware % Electronics (Wujiang) Co., Ltd. (SINO) Dream Galaxy Power Ocean Investment Enterprises Ltd. (Power Ocean) Investment %

7 3 The consolidated financial statements include the Company and all companies mentioned above (jointly called the Group). All significant inter-company transactions and unrealized gains or losses from such transactions have been eliminated in the consolidated financial statements. The Company adopted amended ROC Statement of Financial Accounting Standards No. 5 (SFAS 5) Long-Term Investment in Equity Securities commencing from January 1, The difference between investment cost and net equity (the difference) attributed to depreciable, depleted, or amortizable assets is amortized over the estimated remaining economic years. The difference attributed to the carrying amount in excess of or lowers than the fair value of assets is written off entirely when the difference disappears. The excess cost of investment over the fair value of identifiable net assets is recognized as goodwill. The difference attributed to the fair value of identifiable net assets in excess of the cost of investment causes a proportional decrease in the carrying amount of non-current assets. When the carrying amount of non-current assets is decreased to zero, the remaining difference is through extraordinary gain or loss. The differences between investment cost and net equity in the previous investments that cannot be attributed to any reason and were originally amortized over five years are no longer amortized starting from January 1, (b) Foreign currency transactions and translation The functional currency of each group company is its respective local currency. Non-derivative foreign currency transactions are recorded at the exchange rates prevailing at the transaction date. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated using the exchange rates on that date. The resulting unrealized exchange income (loss) from such translations is reflected in the accompanying consolidated statements of income. According to amended Statement of Financial Accounting Standards (SFAS) No. 14 Accounting for Foreign Currency Transactions and Translation of Foreign Financial Statements, commencing from January 1, 2006, non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the exchange rate ruling at the balance sheet date. If the non-monetary assets or liabilities are measured at fair value through profit and loss, the resulting unrealized exchange income (loss) from such translations is reflected in the accompanying consolidated statements of income. If the non-monetary assets or liabilities are measured at fair value through stockholders equity, the resulting unrealized exchange income (loss) from such translations is recorded as a separate component of stockholders equity. For long-term equity investments in foreign subsidiaries and investees, which are accounted for by the equity method, their foreign currency financial statements have to be translated into the Group s reporting currency. Translation adjustments resulting from the translation of foreign currency financial statements into the Group s reporting currency are accounted for as translation adjustment, which is a separate component of stockholders equity.

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9 5 (c) Accounting estimation The preparation of consolidated financial statements in conformity with the aforementioned guidelines and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management s estimates. (d) Distinction between current and non-current assets and liabilities Current assets are unrestricted cash and cash equivalents and other assets to be realized in cash, sold, or consumed (prepaid items) within 12 months of the balance sheet date. Current liabilities are obligations to be paid or settled within 12 months of the balance sheet date. All other assets or liabilities are classified as non-current. (e) Asset impairment Effective January 1, 2005, the Group adopted ROC SFAS 35 Accounting for Asset Impairment. In accordance with SFAS 35, the Group assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) other than goodwill may have been impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. The Group recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount. An impairment loss recognized in prior periods is reversed for assets other than goodwill if there is any indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods. (f) Financial assets The Group adopted SFAS No. 34 Accounting for Financial Instruments commencing from January 1, Financial assets are classified into three accounts: financial assets measured at fair value through profit or loss; available-for-sale financial assets; and financial assets carried at cost. The Group adopted transaction-date accounting for financial instrument transactions. At the initial recognition, financial instruments are measured at fair value. Except for the tradingpurpose financial instruments, the original cost of other financial instruments should include the cost of acquisition or issuance. The financial instruments the Group held or issued are classified into the following accounts in accordance with the purpose of holding or issuing after the original recognition:

10 6 1. Financial assets measured at fair value through profit or loss: The main purposes of the financial instruments are selling or repurchasing in the short term. The derivative instruments held by the company are classified in this category except if they are designated and effective hedging instruments. 2. Financial assets carried at cost: Equity investments which cannot be evaluated at fair value are booked at original cost. If there is evidence of impairment, impairment loss should be recognized, and the impairment amount cannot be reversed. The investments of the Group as of June 30, 2005, are accounted for at acquisition cost and are evaluated at the lower of cost or market value. The market value used for publicly listed stocks is the average closing price of the last month of the period. The market value of open-end mutual funds is based on the net asset value of the mutual funds at the balance sheet date. In accordance with explanatory letter #94-16 issued by the ROC Accounting Research and Development Foundation and SFAS 34, certain accounts mentioned above as of June 30, 2005, have been reclassified to conform with the 2006 presentation. (g) Derivative financial instruments and hedges The derivative financial instruments held by the Group are for hedging the risk of changes in foreign currency exchange rates and interest rates resulting from operational, financial and investment activities. Under the Group s policy, the purpose of the derivative financial instruments is hedging. The derivatives are recognized as financial instruments held for trading when they do not meet the criteria for hedge accounting. When each of the three types of hedges- fair value hedge, cash flow hedge and hedge of a net investment in a foreign operation -meets all the criteria for hedge accounting, the offsetting effects on gain or loss of changes in the fair value of the hedging instrument and the hedged item are recognized. (h) Allowance for doubtful accounts Allowance for doubtful accounts is provided according to the collectibility of each account. The amount is determined by considering the past collection experience, customers credit, an aging analysis, and the Company s internal controls on credit policy. (i) Inventories Inventories are stated at the lower of cost or market value. Market value for raw materials and work in process is based on replacement cost. The market value of finished goods is based on net realizable value.

11 7 (j) Property, plant and equipment, and rental assets The expenditures for obtaining land usage rights, including charges for land usage rights and related expenses, are capitalized and amortized as rental expenses by using the interest method over the contract period of 50 years. Property, plant and equipment are stated at cost. Excluding land, depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful lives of the respective assets. If the property, plant and equipment have reached the end of their estimated useful lives but are still in use, the Company will estimate the remaining useful lives and residual value, and depreciate the remaining costs using the same method. Gain (loss) on disposal of property, plant and equipment is recorded as non-operating income (loss). Property, plant and equipment leased to other parties through operating lease arrangements are classified as rental assets. Depreciation related to rental assets is accounted for as a reduction of rental income. The useful lives of respective assets are summarized as follows: 1. Buildings: 30~55 years 2. Improvement to buildings: 2~10 years 3. Machinery and test equipment: 3~10 years 4. Other equipment: 3~8 years (k) Deferred expenses Costs of computer software and mold equipment are amortized using the straight-line method over three and two years, respectively. Charges for royalties are deferred and amortized over the contract periods or the useful lives. (l) Convertible bonds payable According to ROC Statement of Financial Accounting Standards No. 36 (SFAS 36) Disclosure and Presentation of Financial Instruments, convertible bonds with a put option issued by the Company before December 31, 2005, should comply with the previous SFAS 21. A derivative embedded in a non-derivative host debt instrument should not be separated into the equity component of the instrument. Costs incurred for the issuance of redeemable convertible bonds are amortized by using the straight-line method during the period between the issuance date and the last redeemable date. The unamortized amount is recognized as a deferred expense.

12 8 The number of common shares that are to be issued is calculated based on the number of convertible bonds and the conversion price at the time of the conversion. The excess of convertible bonds payable over the par value of the common stock, recognized interest premium, and deferred issuance costs is transferred to capital surplus upon conversion. Except for a suspended period of conversion, bondholders may opt to have the bonds converted into common stock of the Company. (m) Retirement plan The Group has established an employee noncontributory pension plan covering all regular employees. According to the Company s and ATI s retirement plan, payments of employee retirement benefits are based on the years of service and the average salary for the six months before the employee s retirement. Each employee will earn two months salary for the first 15 years of service and one month s salary for each service year after the sixteenth year. The total number of months each employee can earn is limited to 45 months. The Company and ATI have made monthly cash contributions of 2.5% and 2%, respectively, of salaries and wages incurred to a pension fund maintained with the Central Trust of China. Payment of employee retirement benefits will be paid by the pension fund first and then by the Company if the fund is insufficient. The Company has its pension plan actuarially valued on the balance sheet date and recognizes the net periodic pension costs. As a result, the excess of the accumulated benefit obligation over the fair value of plan assets is recognized as pension obligation on the balance sheet. ATI makes monthly cash contributions of 5% salaries and wages and recognizes such amounts as accrued pension liability, which was recorded as pension expense in the accompanying statement of income. Under the Labor Pension Act, which came into force on July 1, 2005, a defined contribution pension plan should be implemented for all new employees and for any employees employed before that date who choose the new plan. For the employees who are under the defined contribution pension plan, the Company has made a monthly cash contribution of 6% of salaries and wages to employees individual pension fund accounts at the Bureau of Labor Insurance based on the Labor Pension Act, and the contribution was recorded as pension expenses in the accompanying statement of income. Acbel-PHI has its pension plan actuarially valued on the year-end date and recognizes net periodic pension cost, including service costs and amortization of net unrecognized transition costs over the average remaining service period of employees (17 years). According to PRC government regulations, API-PRC, Actel-Dong Guan, and SINO, under their defined contribution pension plans, have made monthly cash contributions, based on the statutory percentage of salaries and wages, to a pension fund and recognized it as current expense. The employees of other subsidiaries are few, and related pension costs are recognized as current expense in the accompanying financial statements of the subsidiaries.

13 9 (n) Treasury stock Pursuant to ROC Statement of Financial Accounting Standards (SFAS) No. 30, Accounting for Treasury Stock, the Company accounts for the cost of purchasing its outstanding stock as treasury stock. A gain on the sale of treasury stock is credited to capital surplus treasury stock. Losses are charged to capital surplus, but only to the extent of available net gains from previous sales or retirements of the same class of stock; otherwise, losses are charged to retained earnings. The cost of treasury stock is computed using the weighted-average method. When treasury stock is retired, the weighted-average cost of the retired treasury stock is written off to offset the par value and the paid-in capital in excess of par value in proportion. If the weighted-average cost written off exceeds the sum of the par value and the paid-in capital in excess of par value, the difference is charged to capital surplus treasury stock arising from the same class of stock or to retained earnings, and if vice versa, the difference is credited to capital surplus treasury stock. (o) Revenue recognition Revenue derived from product sales is recognized when products are shipped and the significant risks and rewards are transferred to the buyer. (p) Income tax Income tax is calculated based on accounting income. The amount of deferred tax liabilities or assets is calculated by applying the provisions of enacted tax law to determine the amount of tax payable or refundable, currently or in future years. The tax effects of taxable temporary differences are recorded as deferred tax liabilities. The tax effects of deductible temporary differences and tax credits are recognized as deferred tax assets. An allowance is provided on deferred tax assets that may not be realized in the future. Deferred tax assets or liabilities are classified as current or noncurrent based on the classification of the asset or liability that resulted in the deferred item or, on certain transactions not directly related to an asset or liability, the timing of recognition of the deferred item for income tax purposes. The Company s investment tax credits are accounted for using the flow-through method. Therefore, deferred income tax assets resulting from investment tax credits are recognized in the year in which the credit arises. The 10% surtax on undistributed earnings of the Company and its subsidiaries in ROC is recorded as current income tax expense after the resolution to appropriate retained earnings is approved in a stockholders meeting.

14 10 The Group s income tax returns are calculated and filed based on the Company s and each subsidiary s local tax law. The Group s income tax expenses are the aggregation of all consolidated entities income tax expenses. (q) Net income (loss) per share Net income (loss) per share is computed based on the weighted-average number of common shares outstanding during the year. Net income (loss) per share for prior years is retroactively adjusted to reflect the effect of stock dividends issued by transferring capital surplus, retained earnings, and employees bonuses in the current year. The convertible bonds issued by the Company are potential common shares. Basic net income (loss) per share will be disclosed if there is no dilution effect. Otherwise, both basic and diluted net income (loss) per share shall be disclosed. For the purpose of calculating diluted net income (loss) per share, the potential common shares should be deemed to have been converted into common stock at the beginning of the period, and the effect on the net income (loss) attributable to additional common shares outstanding should be considered accordingly. (3) Change in Accounting Policy and Its Influence (a) Starting from January 1, 2006, the Group adopted the newly revised SFAS 34 and SFAS 36. The effects on net loss and loss per share for the six-month period ended June 30, 2006, are summarized as follows: Nature of changes in accounting policy Decrease in net loss Decrease in loss per share (NTD) Accounting for financial instruments $ 16, Starting from January 1, 2006, the Group adopted SFAS 34, and all financial assets and financial liabilities should be remeasured at fair value or at amortized cost at the beginning of the financial year. After the reclassification and remeasurement of financial assets, the cumulative effect of changes in accounting policy amounted to a gain of $6,867 for the six-month period ended June 30, According to SFAS No. 34 and No. 36, the accounting for financial instruments is recorded in accordance with the new policy. The changes are stated in notes 5 and 15. Such changes in accounting policy did not have a material effect on the Group s consolidated financial statements for the six-month period ended June 30, (b) The Group has applied ROC SFAS No. 35 starting from January 1, Actel-Dong Guan recognized an impairment loss amounting to $14,695 in the accompanying consolidated statement of income, which has no significant influence on the consolidated financial statements for the six-

15 11 month period ended June 30, Consolidated net income and basic net income per share decreased $14,695 and $0.03, respectively, for the six-month period ended June 30, Please see note 8. (4) Cash and Cash in Bank June 30, 2006 June 30, 2005 Cash on hand $ 3,267 1,308 Checking accounts and demand deposits 1,239, ,174 Time deposits 1,024,130 1,427,116 $ 2,267,358 1,916,598 (5) Financial Instruments (a) Non-derivative financial instruments The non-derivative financial instruments held by the Group as of June 30, 2006 and 2005, were as follows: June 30, 2006 June 30, 2005 Financial assets at fair value through profit or loss: Financial assets measured at fair value: Listed stocks-synnex Technology Corporation $ - 403,516 Financial assets held for trading: Security investment 87,100 - Open-end mutual funds 2,676,970 3,580,738 Credit linked notes 16,196 63,240 $ 2,780,266 4,047,494 Financial assets carried at cost-current (recorded as other financial assets-current): Security investment: Globaltop Partner I Venture Capital Corp. (GPIV) $ 60,000 - Financial assets carried at cost-non-current: GPIV $ - 60,000 G.T.P. Partner I Corp. (G.T.P.) - 37,944 Kinpo Group Management Consultant Company 1,000 - (KGMCC) $ 1,000 97,944 The Group s investments in GPIV, G.T.P. and KGMCC had no publicly traded price, and their fair values were difficult to determine. Therefore, the investments were stated at cost. Since GPIV

16 12 and G.T.P. consider that they are unable to adjust to the changes in the business environment, the board meetings decided to close them on February 9, G.T.P. completed the liquidation and returned the original investment on June 27, 2006; GPIV was liquidated and returned the original investment on July 12, Based on this fact, the Group recorded GPIV s book value of $60,000 as current financial assets carried at cost as of June 30, The consolidated financial statements as of June 30, 2005, are reclassified in accordance with SFAS 34. As of June 30, 2005, investments originally accounted for under the cost or lower-ofcost-or-market method amounting to $3,984,254 (including closed-end mutual funds amounting to $50,000 recorded as other financial assets-current originally) were reclassified as financial assets at fair value through profit or loss and financial assets held for trading amounting to $403,516 and $3,580,738, respectively. (b) Derivative financial instruments and hedge accounting 1. Derivative financial instruments: As of June 30, 2006 and 2005, the details of the derivative financial instruments were as follows (in thousands of New Taiwan and US dollars): (i) The Company and API-PRC June 30, 2006 June 30, 2005 Book value Nominal amount Book value Nominal amount Derivative financial assets: USD forward foreign exchange $ 22,832 USD 30, contracts bought USD forward foreign exchange $ 3,590 USD 15, contracts sold USD options contracts $ ,764 USD 164,500 Derivative financial liabilities: USD forward foreign exchange $ 2,508 USD 15, contracts bought USD forward foreign exchange contracts sold $ 24,508 USD 42,000 35,685 USD 85,000 The above derivative financial instruments were accounted for under hedge derivative financial assets-current (recorded as other financial assets-current) and hedge derivative financial liabilities-current (recorded as other current liabilities), respectively. To hedge the exchange rates, the Company and API-PRC signed foreign currency forward contracts and foreign options contracts with several banks for the six-month periods ended June 30, 2006 and The nominal amount of derivative contracts was US$102,000,000 and US$249,500,000 as of June 30, 2006 and 2005, respectively. For

17 13 the six-month period ended June 30, 2005, the discount or premium on a forward foreign exchange contract was amortized, and the unrealized losses amounted to $24,074. The realized gain resulting from changes in fair value of options contracts was $44,764 for the six-month period ended June 30, (ii) Acbel-BVI June 30, 2006 June 30, 2005 Book Value Nominal amount Book Value Nominal amount Derivative financial assets: USD forward foreign exchange contracts bought $ 4,177 USD 12,000 6,585 USD 11,000 The above forward foreign exchange contracts purpose was for trading, and they were accounted for under financial assets at fair value through gain and loss-current. 2. Hedge accounting The derivative financial instruments held by the Company are for a hedge of foreign currency exchange rates, which is a fair value hedge. The foreign currency exchange loss resulting from changes in fair value of forward foreign currency exchange contracts was $594, recorded as loss on foreign currency exchange for the six-month period ended in June 30, As of June 30, 2006, the derivative financial instruments held by the Company for fair value hedge were as follows: Hedged item Derivative financial instrument Fair Value of Assets (Liabilities) Foreign accounts receivable Foreign currency forward contracts $ (20,918) Foreign accounts payable Foreign currency forward contracts 20,324 (6) Notes and Accounts Receivable Third Parties June 30, 2006 June 30, 2005 Notes receivable $ 20,947 42,609 Accounts receivable 2,584,612 2,055,212 2,605,559 2,097,821 Less: allowance for doubtful accounts (11,061) (17,136) $ 2,594,498 2,080,685

18 14 (7) Inventories June 30, 2006 June 30, 2005 Raw materials $ 968, ,795 Work-in-process 99,231 67,723 Finished goods 1,526, ,405 Inventories in transit 23,090 50,313 2,617,160 1,333,236 Less: allowance for inventory loss (547,229) (86,628) $ 2,069,931 1,246,608 As of June 30, 2006 and 2005, the insurance coverage on inventories amounted to $2,647,410 and $2,019,000, respectively. (8) Property, Plant and Equipment, and Rental Assets (a) Land usage rights of the Group were as follows: Name of company Expenditures for obtaining land usage rights Contract period API-PRC $12,023 (RMB3,006,000) January 1, 1998~December 31, 2047 (50 years) " 67,189 (RMB16,797,000) September 1, 1998~August 31, 2048 (50 years) SINO 5,884 (RMB1,540,000) June 1, 2000~May 31, 2050 (50 years) API-PRC has related annual administrative expense of RMB5 per M 2 based on the area of land used, with a 10% increment every five years. SINO has related annual administrative expense amounting to RMB40,000 (RMB0.3 per M 2 ) based on the area of land used. (b) The Group applied ROC SFAS No. 35, Accounting for Asset Impairment, and used the carrying amount of the asset as the recoverable amount to test for impairment. An impairment loss amounting to $14,695, resulting from the excess of the book value of property, plant and equipment over the recoverable amount, is recognized in the accompanying statement of income for the six-month period ended June 30, The main assets suffering an impairment loss were machinery. (c) SINO signed commitments to purchase a building for a contract price of $185,742 (RMB45,859,000). As of June 30, 2006, the installments paid amounted to $49,864, recorded as construction. The building construction will be completed in the fourth quarter of year (d) No property, plant and equipment or rented assets were provided as collateral for bank loans. As of June 30, 2006 and 2005, property, plant and equipment, and rental assets were insured for

19 15 $2,584,000 and $1,583,000, respectively. (9) Short-term Loans June 30, 2006 June 30, 2005 Usance letters of credit $ - 30,165 Commercial paper payable, net - 149,861 Credit loans 22, ,854 $ 22, ,880 Unused short-term credit lines $ 6,548,000 4,283,430 For the six-month periods ended June 30, 2006 and 2005, annual interest rates on short-term loans were from 1.36% to 5.33% and from 1.20% to 6.14%, respectively. (10) Bonds Payable June 30, 2006 June 30, 2005 Overseas unsecured convertible bonds: Aggregate principal amount (US$60,000,000) $ 2,022,600 2,022,600 Accumulated converted amount (US$5,900,000) (198,889) (198,889) Foreign currency exchange gain (72,494) (113,069) $ 1,751,217 1,710,642 (a) The Company issued the first overseas unsecured zero coupon convertible bonds, which were listed on the Luxembourg Stock Exchange and classified as an item under long-term liabilities, with a face value of US$60,000,000 on October 27, Because the bondholders had the right to require the Company to repurchase the bonds on October 27, 2006, the convertible bonds were classified as an item under current liabilities in the fourth quarter of year However, it does not mean the Company will repurchase all the bonds within one year. (b) The significant terms of the convertible bonds are as follows: 1. Interest rate: 0%. 2. Duration: five years (October 27, 2004, to October 27, 2009). 3. Redemption at the option of the Company: The Company may redeem the bonds under the following circumstances: (1) On or after October 27, 2006: If (i) the closing price (translated into US dollars at the prevailing rate) of the Company s common shares on the TSE for a period of 20 consecutive trading days before redemption has been at least 130% of the conversion price

20 16 (11) Pensions (translated into US dollars at fixed rate) in effect on each such trading day, the Company may redeem all or parts of bonds at face value or (ii) in the event that at least 90% of the principal amount of the bonds originally outstanding has been redeemed, repurchased or converted, the Company may redeem all bonds at face value; (2) In the event of certain changes relating to tax laws in the ROC, the Company has the right to redeem all the outstanding convertible bonds at face value. 4. Repurchase at the option of bondholders: The bondholders have the right to request the Company to repurchase the bonds at face value on October 27, 2006 and 2007, or in the event that the Company s shares cease to be listed on or admitted to the Taiwan Stock Exchange. 5. Terms of conversion: (1) Bondholders may opt to have the bonds converted into common stock of the Company from November 26, 2004, to September 27, 2009; (2) Conversion price: The initial conversion price was NT$30.6 per share of common stock; the conversion price is adjusted to NT$26.5 per share of common stock; and (3) The conversion price is translated into New Taiwan dollars at the fixed rate of NT$ = US$1. (a) The Company Six-month period ended June 30, 2006 Six-month period ended June 30, 2005 Net pension cost Applied for defined benefit pension plan $ 7,442 14,351 Applied for defined contribution pension plan $ 13,395 - Pension fund deposits in Central Trust of China $ 120, ,455 Accrued pension liability $ 128, ,218 Vested benefit $ 65,636 60,626 As of June 30, 2006 and 2005, the Company had accrued additional pension liability amounting to $34,689 and $29,693, respectively, unrecognized net transition obligation amounting to $5,793 and $6,518, respectively, had been recognized as intangible asset deferred pension cost, and the excess of additional pension liability over unrecognized transition obligation amounting to

21 17 $28,896 and $23,175, respectively, had been accounted for under net loss not recognized as pension cost, a reduction of stockholders equity. (b) The subsidiaries included in consolidated financial statements The actual payments of pension expenses for the six-month period ended June 30, 2005, were as follows: Six-month period ended June 30, 2006 Six-month period ended June 30, 2005 ATI and its subsidiaries $ Acbel-BVI and its subsidiaries $ 7,284 7,820 Acbel Polytech I.I. and its subsidiaries $ 92 - (12) Stockholders Equity (a) Common stock Based on the resolution of the annual stockholders meeting held on May 25, 2005, the Company declared cash dividends amounting to $803,992 and increased its capital through the issuance of stock dividends by transferring retained earnings and capital surplus amounting to $281,397 and $120,599, respectively, and employees bonuses amounting to $65,324. The newly issued shares totaled 46,732 thousand shares. The registration procedure related to this issuance has been completed. Based on the resolution of the annual stockholders meeting held on June 21, 2006, the Company declared cash dividends amounting to $279,150 and increased its capital through the issuance of stock dividends by transferring retained earnings and employees bonuses amounting to $93,051 and $17,774, respectively. The new shares to be issued would be 11,083 thousand shares. The share issuance was authorized by the Taiwan Securities and Futures Bureau (SFB) on July 12, 2006, and the Company expects the effective date of shares issued to be August 23, A portion of the overseas convertible bonds were converted into common stock amounting to $65,235 in the six-month period ended June 30, The registration procedure related to this conversion has been completed. As of June 30, 2006 and 2005, the authorized common stock was $6,200,000 at par value of 10 New Taiwan dollars per share. (b) Treasury stock During the third quarter of 2004, pursuant to the Securities and Exchange Law, the Company purchased 10,000 thousand shares of treasury stock for the purpose of transferring to employees at

22 18 a total cost of $282,821. As of June 30, 2005, all the treasury stock had been transferred to employees. Pursuant to the Securities and Exchange Law, the number of shares of treasury stock cannot exceed 10% of the number of shares issued. The total purchase cost of treasury stock cannot exceed the sum of retained earnings, paid-in capital in excess of par value, and realized capital surplus. The shares bought back with the intent of transferring to employees must be transferred within three years from the date of buyback. Otherwise, the shares shall be deemed as not issued by the Company, and cancelled. In addition, treasury stock cannot be pledged for debts, and treasury stock does not carry any shareholder rights until it is disposed of or transferred to employees. (c) Capital surplus Pursuant to the ROC Company Law, capital reserve can only be used to offset a deficit or to increase share capital. A cash dividend cannot be declared out of capital reserve. According to the Securities and Exchange Law, capital increases effected by transferring additional paid-in capital in excess of par value should not exceed 10% of total common stock outstanding. In addition, a capital increase by transferring paid-in capital in excess of par value can occur only once, commencing in the following year. Due to the conversion of overseas unsecured convertible bonds for the six-month period ended June 30, 2005, the excess of convertible bonds payable over the par value of common stock and deferred issuance costs amounting to $118,972 were transferred to capital surplus. (d) Special reserve According to the Company s articles of incorporation, unrealized foreign currency exchange gains accounted for under Statement of Financial Accounting Standards No. 14 must be set aside as a special reserve before appropriation. The special reserve shall be transferred to retained earnings upon realization. (e) Legal reserve and limitation on distribution of retained earnings Based on the Company s articles of incorporation, 10% of annual net income after offsetting prior years deficits is to be set aside as a legal reserve, and of the remaining balance, 2% is distributed as remuneration to the directors and supervisors, and 5% as bonus to employees including subsidiary employees. The remaining balance can be distributed as dividends to stockholders after any special reserves are appropriated. Based on the Company s current dividend policy, part of the distributable earnings may first be distributed after considering the factors of financing and operations. If the Company s cash flows from operating activities were a net inflow for the year ended and no capital expenditure is planned for the next year, the remaining balance may be distributed as cash dividends to stockholders in an amount not lower than 50%. However, the Company may opt to revise the distribution

23 19 proportion of cash dividends if significant capital expenditure is required and the cash is insufficient. According to Securities and Futures Bureau (SFB) regulations, when there is a negative amount in stockholders equity (excluding the amount of treasury stock) during the year, an amount equal to the negative amount must be appropriated as special reserve from retained earnings before distribution. The special reserve will be available for dividend distribution only after the related stockholders equity reduction has been reversed. (13) Net Income (Loss) per Share (a) Net income (loss) per share for the six-month periods ended June 30, 2006 and 2005, was computed as follows. All net income per share amounts are expressed in dollars: Before income tax After income Before tax income tax After income tax Basic net income (loss) per share: Continuing operations income (loss) $ (442,161) (446,734) 287, ,840 Cumulative effect of changes in accounting principle 6,867 6, Net income (loss) $ (435,294) (439,867) 287, ,840 Weighted-average number of shares outstanding, before retroactive adjustments (thousands) 465, , , ,033 Basic net income (loss) per share: Continuing operations income (loss) $ (0.95) (0.96) Cumulative effect of changes in accounting principle Net income (loss) $ (0.94) (0.95) Diluted net income per share: Net income (loss) $ (435,294) (439,867) 287, ,840 Dilutive effects of potential common stock: 0% overseas unsecured convertible bonds payable - - (8,560) (6,420) Net income for calculation of diluted net income per share $ (435,294) (439,867) 279, ,420 Weighted-average number of shares outstanding (thousands) 465, , , ,033 0% overseas unsecured convertible bonds payable ,536 62,536 Weighted-average number of shares outstanding for calculation of diluted net income per share (thousands) 465, , , ,569 Diluted net income (loss) per share before retroactive adjustments $ (0.94) (0.95)

24 20 (b) Based on a resolution at the annual stockholders meeting held on June 21, 2006, the Company increased its common stock through the issuance of stock dividends by transferring retained earnings and employee bonuses. The pro forma information, under the assumption that the stock dividends were issued on June 30, 2006, is as follows: Six-month period ended June 30, 2006 Before After income income tax tax Six-month period ended June 30, 2005 Before After income income tax tax Weighted-average number of shares outstanding, after retroactive adjustment (thousands) 476, , , ,944 Net income (loss) per share before retroactive adjustments: Continuing operations income (loss) $ (0.92) (0.93) Cumulative effect of changes in accounting principle Net income (loss) $ (0.91) (0.92) Weighted-average number of shares outstanding, before retroactive adjustments (thousands) 476, , , ,969 Diluted net income (loss) per share after retroactive adjustments: Continuing operations income (loss) $ (0.92) (0.93) Cumulative effect of changes in accounting principle Net income (loss) $ (0.91) (0.92) (14) Income Tax (a) The purchase of machinery through proceeds from common stock issuance met the prescribed criteria under the Statute for Upgrading Industries in the following years: Year Tax exemption products Tax exemption chosen Tax exemption period 2002 Power supply products Tax exemption on the Company s corporate income taxes for five years 2003 Uninterruptible power supply products Tax exemption on the Company s corporate income taxes for five years January 1, 2003~ December 31, 2007 Tax exemption is not applied until the Company completes its investment plan