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Shinkong Synthetic Fibers Corporation Financial Statements for the Years Ended December 31, 2004 and 2003 and Independent Auditors’ Report INDEPENDENT AUDITORS’ REPORT The Board of Directors and Stockholders Shinkong Synthetic Fibers Corporation We have audited the accompanying balance sheets of Shinkong Synthetic Fibers Corporation (the “Corporation”) as of December 31, 2004 and 2003, and the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The accompanying financial statements included investments accounted for by the equity method based on financial statements audited by other auditors. Such investments amounted to NT$268,834 thousand and NT$249,862 thousand that constituted both 1% of total assets as of December 31, 2004 and 2003, respectively. The related equity in earnings of the investees amounted to NT$18,972 thousand and NT$2,367 thousand that constituted 4% and 1% of income before tax as of December 31, 2004 and 2003, respectively. Our opinion, insofar as it relates to the amounts included for such investees, is based solely on the reports of the other auditors. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2004 and 2003, and the results of its operations and its 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 discussed in Note 3 to the financial statements, the Corporation has adopted the provisions of Statement of Financial Accounting Standards No. 35 “Accounting for Impairment of Assets” since December 31, 2004. The Corporation had prepared the 2004 and 2003 consolidated financial statements and we had issued the auditors’ report with modified unqualified opinion and unqualified opinion on the 2004 and 2003 consolidated financial statements, respectively. -1- Our audits also comprehended the translation of New Taiwan dollar amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. The translation of the financial statement amounts into United States dollars has been made solely for the convenience of readers outside the Republic of China. April 16, 2005 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors’ report and financial statements shall prevail. Also, as stated in Note 2 to the financial statements, the additional footnote disclosures that are not required under generally accepted accounting principles were not translated into English. -2- SHINKONG SYNTHETIC FIBERS CORPORATION BALANCE SHEETS DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars and United States Dollars) 2004 ASSETS CURRENT ASSETS Cash (Notes 4, 24 and 28) Marketable securities (Notes 2, 5 and 28) Notes receivable, net (Notes 2, 6 and 28) Accounts receivable, net (Notes 2, 6, 24 and 28) Other receivables (Notes 24 and 28) Other financial assets (Note 28) Inventories (Notes 2 and 7) Prepayments Other current assets (Notes 22 and 28) Total current assets LONG-TERM INVESTMENTS Equity investments at equity method (Notes 2, 3, 8, 24, 27 and 28) Equity investments at cost method (Notes 2, 8, 24, 25 and 28) Long-term real estate investments (Notes 2 and 9) Long-term investments, net PROPERTY, PLANT AND EQUIPMENT Cost (Notes 2, 3, 10, 24, 25 and 27) Land Buildings and improvements Machinery equipment Transportation equipment Furniture and fixtures Other equipment Revaluation increment Less accumulated depreciation Less accumulated impairment Construction in process Prepayments on purchase of equipment Property, plant and equipment, net OTHER ASSETS (Notes 2, 11, 22, 24 and 25) TOTAL $ NT$ 626,611 191,053 298,722 2,061,054 337,315 3,232,118 217,911 153,790 7,118,574 US$ $ 19,761 6,025 9,420 64,997 10,637 101,927 6,872 4,850 224,489 $ NT$ 642,515 174,946 405,094 2,175,825 340,645 30,000 2,379,008 217,733 80,726 6,446,492 2003 US$ $ 20,262 5,517 12,775 68,616 10,743 946 75,024 6,866 2,546 203,295 2004 NT$ $ 905,107 270 1,113,538 92,366 3,103,846 557,421 5,772,548 3,603,846 3,603,846 59,274 1,992,805 11,428,473 US$ $ 28,543 9 35,116 2,913 97,882 17,579 182,042 113,650 113,650 1,869 62,845 360,406 417,957 4,056 16,179 4,943 443,135 NT$ $ 1,376,278 852 997,890 929,132 1,053,846 578,104 4,936,102 1,400,100 6,007,692 7,407,792 59,274 1,185,965 13,589,133 13,253,409 358,915 210,603 (544,294) (349,207) 158,447 (287,012) 12,800,861 2003 US$ $ 43,402 27 31,469 29,301 33,234 18,231 155,664 44,153 189,457 233,610 1,869 37,400 428,543 417,957 11,319 6,642 (17,165) (11,013) 4,997 (9,051) 403,686 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Short-term borrowings (Notes 12, 24 and 28) Notes payable (Note 28) Accounts payable (Notes 24 and 28) Advances from customers Current portion of long-term liabilities (Notes 14, 15 and 28) Other current liabilities (Notes 2, 13 and 28) Total current liabilities LONG-TERM LIABILITIES Bonds payable (Notes 2, 14 and 28) Long-term debt (Notes 15, 24 and 28) Total long-term liabilities RESERVE FOR LAND VALUE INCREMENT TAX (Note 10) OTHER LIABILITIES (Note 16) Total liabilities 4,734,148 4,290,142 533,845 9,558,135 149,295 135,293 16,835 301,423 3,153,257 5,674,508 1,262,015 10,089,780 99,440 178,950 39,799 318,189 2,125,002 3,160,084 17,293,995 71,878 109,109 149,405 386,827 23,296,300 (15,122,245) (249,522) 280,813 50,465 8,255,811 547,770 $ 25,480,290 67,014 99,656 545,380 2,267 3,441 4,712 12,199 734,669 (476,892) (7,869) 8,856 1,591 260,355 17,274 $ 803,541 2,302,109 3,058,921 17,339,328 65,547 114,480 144,150 386,827 23,411,362 (14,939,436) 813,278 31,091 9,316,295 537,427 $ 26,389,994 72,599 96,466 546,810 2,067 3,610 4,546 12,199 738,297 (471,127) 25,647 980 293,797 16,948 $ 832,229 STOCKHOLDERS’ EQUITY Capital stock (Note 17) 13,253,409 Capital surplus (Note 18) 128,610 Retained earnings (Note 19) Legal reserve Unappropriated earnings (accumulated deficit) 513,040 Net unrealized loss on long-term equity investments Cumulative translation adjustments (Note 2) 156,758 Treasury stock (Note 21) Total stockholders’ equity 14,051,817 TOTAL $ 25,480,290 $ 803,541 $ 26,389,994 $ 832,229 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated April 16, 2005) -3- SHINKONG SYNTHETIC FIBERS CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars and United States Dollars, Except Earnings Per Share) 2004 NT$ NET SALES (Notes 2 and 24) COST OF SALES (Notes 20 and 24) GROSS PROFIT OPERATING EXPENSES (Notes 2, 20 and 24) (LOSS) INCOME FROM OPERATIONS NON-OPERATING INCOME (Notes 2, 24 and 28) Dividends income Net gain on sale of property, plant and equipment Net gain on sale of investments Rent income Revenue from sale of scraps Gain on market price recovery of short-term investments Other Total non-operating income NON-OPERATING EXPENSES (Notes 2 and 24) Interest expense Loss on investment Loss on sale of property, plant and equipment Loss on impairment of property, plant and equipment Loss on foreign exchange Loss on market price decline and obsolete and slowmoving inventories Other Total non-operating expenses INCOME BEFORE INCOME TAX CREDIT FOR INCOME TAX (Notes 2 and 22) NET INCOME $ 2004 Before Income Tax After Income Tax Before Income Tax 2003 US$ $ 629,178 598,247 30,931 31,553 (622) 6,728 34,499 1,186 1,670 3,834 47,917 9,336 8,112 567 7,869 1,735 2,134 3,993 33,746 13,549 2,630 $ 16,179 $ NT$ $ 18,075,185 16,618,417 1,456,768 1,068,484 388,284 127,287 18,247 191,999 33,308 36,968 35,588 35,068 478,465 390,955 142,339 17,717 30,751 52,469 634,231 232,518 72,770 305,288 2003 After Income Tax US$ $ 570,015 524,075 45,940 33,695 12,245 4,014 575 6,055 1,050 1,166 1,122 1,106 15,088 12,329 4,489 559 970 1,655 20,002 7,331 2,295 $ 9,626 $ 19,951,254 18,970,420 980,834 1,000,538 (19,704) 213,336 1,093,957 37,599 52,965 121,570 1,519,427 296,043 257,219 17,969 249,522 55,021 67,670 126,622 1,070,066 429,657 83,383 513,040 NT$ US$ NT$ US$ NT$ US$ NT$ US$ BASIC EARNINGS PER SHARE (Note 23) $ 0.33 $ 0.010 $ 0.40 $0.0126 $ 0.18 $ 0.005 $ 0.24 $ 0.008 (Continued) -4- SHINKONG SYNTHETIC FIBERS CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars and United States Dollars, Except Earnings Per Share) 2004 NT$ PRO-FORMA INFORMATION IF THE INVESTMENTS OF SUBSIDIARIES TO THE CORPORATION WERE NOT REPORTED AS TREASURY STOCK Income before income tax Income after income tax US$ NT$ 2003 US$ $ $ 2004 533,043 616,426 $ 16,810 $ 19,439 $ $ 232,518 305,288 2003 $ $ 7,331 9,627 Before Income Tax After Income Tax Before Income Tax After Income Tax NT$ US$ NT$ US$ NT$ US$ NT$ US$ BASIC EARNINGS PER SHARE $ 0.40 $ 0.013 $ 0.47 $0.0145 $ 0.17 $ 0.005 $ 0.23 $ 0.006 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated April 16, 2005) (Concluded) -5- SHINKONG SYNTHETIC FIBERS CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars and United States Dollars) Net Unrealized Loss on Long-Term Equity Investments NT$ Capital Stock NT$ Capital Surplus NT$ Retained Earnings Unappropriated Earnings Legal (Accumulated Reserve Deficit) NT$ NT$ Cumulative Translation Adjustments NT$ Treasury Stock NT$ Total NT$ BALANCE, JANUARY 1, 2003 Reverse of net unrealized loss on long-term equity investments Translation adjustments on long-term equity investments Treasury stock Net income in 2003 Adjustments from stockholding change on equity method investees BALANCE, DECEMBER 31, 2003 Capital surplus transferred to retained earnings Reverse of net unrealized loss on long-term equity investments Translation adjustments on long-term equity investments Treasury stock Net income in 2004 BALANCE, DECEMBER 31, 2004 $ 13,253,409 13,253,409 $ 13,253,409 US$ $ 360,179 (1,264) 358,915 (333,691) 103,386 $ 128,610 US$ $ 210,603 210,603 (210,603) $ US$ $ (849,582) 305,288 (544,294) 544,294 513,040 $ 513,040 US$ $ (1,477,542) 1,128,335 (349,207) 349,207 $ US$ $ 198,877 (40,430) 158,447 (1,689) $ 156,758 US$ $ (290,494) 3,482 (287,012) 287,012 $ US$ $ 11,405,450 1,128,335 (40,430) 3,482 305,288 (1,264) 12,800,861 349,207 (1,689) 390,398 513,040 $ 14,051,817 US$ - - - BALANCE, JANUARY 1, 2003 Reverse of net unrealized loss on long-term equity investments Translation adjustments on long-term equity investments Treasury stock Net income in 2003 Adjustments from stockholding change on equity method investees BALANCE, DECEMBER 31, 2003 Capital surplus transferred to retained earnings Reverse of net unrealized loss on long-term equity investments Translation adjustments on long-term equity investments Treasury stock Net income in 2004 BALANCE, DECEMBER 31, 2004 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated April 16, 2005) $ 417,957 417,957 - $ 11,359 (40) 11,319 (10,523) 3,260 $ 4,056 $ 6,642 6,642 (6,642) - $ (26,792) 9,627 (17,165) 17,165 16,179 $ (46,596) 35,583 (11,013) 11,013 - $ 6,272 (1,276) 4,996 (53) - $ (9,161) 110 (9,051) 9,051 - $ 359,681 35,583 (1,276) 110 9,627 (40) 403,685 11,013 (53) 12,311 16,179 $ 417,957 $ - $ 16,179 $ - $ 4,943 $ - $ 443,135 -6- SHINKONG SYNTHETIC FIBERS CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars and United States Dollars) 2004 NT$ CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities Losses on doubtful accounts Depreciation and amortization Loss on impairment of property, plant and equipment Provision (recovery from) for valuation loss on marketable securities Loss from price decline of inventory Net gain on sale of investments Net (gain) loss on sales of property, plant and equipment Equity in net losses of affiliates accounted for by the equity method Deferred tax benefit Loss from price decline of investment (Disbursement) pension expense Net changes in operating assets and liabilities Notes and accounts receivable Other receivables Inventories Prepayments Notes and accounts payable Advances from customers Other current liabilities Other liabilities Other Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in marketable securities Decrease in restricted cash and time deposits Acquisitions of long-term investments Return of long-term investments Proceeds from sale of long-term investments Decrease (increase) in advance receipts from sale of real estate Proceeds from sales of property, plant and equipment Acquisition of property, plant and equipment Other Net cash provided by investing activities US$ NT$ 2003 US$ $ 513,040 $ 16,179 $ 305,288 $ 9,627 14,396 965,686 249,522 7,338 67,670 (1,093,957) 17,969 257,219 (83,375) 27,665 (3,084) 206,747 (120,398) (920,780) (20,152) 115,066 (27,796) 18,661 (12,767) 178,670 454 30,454 7,869 232 2,134 (34,499) 567 8,112 (2,629) 872 (97) 6,520 (3,797) (29,038) (636) 3,629 (877) 589 (403) 5,635 37,186 1,031,069 (35,588) 30,751 (191,999) (18,247) 142,339 (72,705) 80,423 (559,117) (104,541) (166,001) (92,519) 148,280 14,300 43,949 (37,004) (6,363) 549,501 1,173 32,516 (1,122) 970 (6,055) (575) 4,489 (2,293) 2,536 (17,632) (3,297) (5,235) (2,918) 4,676 451 1,386 (1,167) (201) 17,329 (19,632) 55,889 (1,310,130) 18,389 4,479,175 (808,970) 58,324 (359,008) (85,321) 2,028,716 (619) 1,763 (41,316) 580 141,254 (25,511) 1,839 (11,322) (2,691) 63,977 31,242 32,000 (1,182,409) 26,400 1,663,118 687,846 109,241 (507,345) (8,691) 851,402 985 1,009 (37,288) 833 52,448 21,692 3,445 (15,999) (274) 26,851 (Continued) -7- SHINKONG SYNTHETIC FIBERS CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars and United States Dollars) 2004 NT$ CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in short-term borrowings Increase (decrease) in long-term debt Redemption of bonds payable Other Net cash used in financing activities NET (DECREASE) INCREASE IN CASH CASH, BEGINNING OF YEAR CASH, END OF YEAR $ US$ NT$ 2003 US$ $ (471,171) $ (14,859) $ (2,068,835) $ (65,242) (1,453,946) (45,851) 1,493,538 47,100 (300,100) (9,464) (600,000) (18,921) 1,927 61 2,934 93 (2,223,290) (15,904) 642,515 626,611 (70,113) (501) 20,262 $ 19,761 $ (1,172,363) 228,540 413,975 642,515 (36,970) 7,210 13,055 $ 20,265 SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid during the year for interest (excluding interest capitalized) $ SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES Transfer of current portion of long-term liabilities to current liabilities 317,343 $ 10,008 $ 396,817 $ 12,514 $ 3,103,846 $ 97,882 $ 1,053,846 $ 33,234 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated April 16, 2005) (Concluded) -8- SHINKONG SYNTHETIC FIBERS CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Shinkong Synthetic Fibers Corporation (the “Corporation”) was established in the Republic of China (ROC) in 1967 with an initial capital of NT$22,500 thousand. As of December 31, 2004, the Corporation’s outstanding capital stock has been increased to NT$13,253,409 thousand. The Corporation is engaged in the manufacturing and sale of polyester polymer, polyester staple fiber, polyester textured yarn, polyester chip, pre-oriented yarn, polyester flat yarn, polyethylene terephthalate resins used in PET bottles and polyester base film. The Corporation also produces and sells engineering plastics. As of December 31, 2004, the number of the Corporation’s employees was 1,846. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. In preparing financial statements in conformity with these guidelines and principles, the Corporation is required to make certain estimates and assumptions that could affect the amounts of allowance for doubtful accounts, allowance for inventory devaluation, property depreciation, impairment of property, plant and equipment, pension, loss on litigation, long-term construction and warranty liabilities. Actual results could differ from these estimates. For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. However, the accompanying financial statements do not include English translation of the additional footnote disclosures that are not required under generally accepted accounting principles but are required by the Securities and Futures Bureau (SFB, formerly the “Securities and Futures Commission” before July 1, 2004) for their oversight purposes. The Corporation significant accounting policies are summarized as follows: Classification of Current and Noncurrent Assets and Liabilities Current assets include unrestricted cash or cash equivalents and assets expected to be consumed within one year or one operating cycle. Property, plant and equipment, intangible assets and other assets excluded from current assets are classified as noncurrent assets. Current liabilities are liabilities to be paid within one year. Noncurrent liabilities are liabilities that cannot be classified as current liabilities. -9- Marketable Securities Marketable securities are stated at the lower of aggregate cost or market value. The cost of marketable securities sold is determined on the weighted average method. Stock dividends received are not recognized as income but are reflected as an increase in the number of shares held. Allowance for Doubtful Accounts Allowance for doubtful accounts is estimated based on aging analysis and past experience on collectibility of accounts. Inventories Inventories are stated at the lower of cost or market (replacement cost or net realizable value) with cost being determined by the weighted average method. Long-Term Investments Investments in companies in which the Corporation’s ownership interest is 20% or more are accounted for by using the equity method of accounting. Purchased goodwill is amortized over five years. All other noncurrent equity investments are valued at cost or the lower of cost or market. Unrealized loss on long-term equity investments, if any, is reflected as a separate component of stockholders’ equity. Effective from January 1, 2002, common shares of the Corporation held by subsidiaries are treated as treasury stock in compliance with the new provisions of Statement of Financial Accounting Standards. Long-Term Real Estate Investments Investments in real estate are stated at cost (including all expenditures for acquisition) less accumulated depreciation. Interest costs incurred during and in connection with the construction of investments in real estate are capitalized. Property, Plant and Equipment Property, plant and equipment are stated at cost or cost plus revaluation increment less accumulated depreciation. Appreciation of assets is determined according to the related regulations of the ROC. A reserve for land value increment tax is provided for the appreciation of land value and the net revaluation increment is credited to capital surplus. The recoverable amount of an asset should be estimated whenever there is an indication that the asset may be impaired and an impairment loss should be recognized (an asset is impaired) whenever the carrying amount of an asset exceeds its recoverable amount. Such loss should be recognized in the income statement for assets carried at cost and treated as a revaluation decrease for assets carried at revalued amount. Recoverable amount is measured as the higher of net selling price and value in use. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts. Gain or loss on disposal of property, plant and equipment is credited to or charged against current income. - 10 - Depreciation is provided using straight-line method and fixed-percentage-on-decliningbalance method based on the following estimated useful lives of the related assets: Buildings and improvements Machinery and equipment Transportation equipment Miscellaneous equipment 35 to 45 years 9 to 16 years 6 to 7 years 8 to 10 years Interest costs incurred during and in connection with the construction of property are capitalized. Pension Fund The Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 18, “Accounting for Pensions,” issued by the Accounting Research and Development Foundation of the ROC, which requires an actuarial approach in measuring employee retirement benefits. Foreign Currency Transactions Transactions negotiated in foreign currencies are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses, caused by different foreign exchange rates applied when foreign currency receivables and payables are settled, are credited or charged to income. Balance sheet date balances of assets and liabilities denominated in foreign currencies are translated at the balance sheet date exchange rates, and resulting gains or losses are credited or charged to income. Translation adjustments on longterm equity investments in foreign currency, if any, are reported as a separate component of stockholders’ equity. Revenue Revenue is recognized when it is realized or realizable and earned. allowance are recorded as deductions of sales in the same period. Sales return and Sales are determined using the fair value agreed to by the Corporation and customer. Since the receivables from sales are collectible within one year and such transactions are frequent, the fair value of receivables is equivalent to the nominal amount of cash to be received. Income Tax The Corporation adopted the provisions of SFAS No. 22, “Accounting for Income Tax,” which require asset and liability approach to financial accounting and reporting for income tax. Deferred income tax assets and liabilities are computed at balance sheet date for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowance is provided when necessary to reduce deferred income tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Adjustment of prior years’ income tax is added to (or deducted from) current income tax expense in the year the adjustment is made. - 11 - Translation of New Taiwan (NT) Dollar Financial Statements into United States (US) Dollar The Corporation maintains its accounts and expresses its financial statements in NT dollars. For convenience only, US dollar amounts presented in the accompanying financial statements have been translated from NT dollars, using the average rate of exchange published by Bank of Taiwan of NT$31.71 to US$1.00 on December 31, 2004. The convenience translations should not be constructed as representations that the NT dollar amounts have been, could have been or could in the future be, converted into US dollars at this or any other exchange rate. Derivative Financial Instruments Gain or loss on non-trading-purpose derivative financial instrument is recognized in current period under the accrual basis of accounting. Gain or loss on trading-purpose derivative financial instrument is recognized in current period based on the market price at year-end. Non-Derivative Financial Instruments The estimating of the value of non-derivative financial assets and liabilities and the recording of gains or losses are based on the above accounting policies. 3. THE REASON AND EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE According to the provision of Statement of Financial Accounting Standards (“SFAS”) No.35, “Accounting for Asset Impairment,” the long-term investments has decreased by NT$99,663 thousand, property, plant and equipment has decreased by NT$249,522 thousand at December 31, 2004. The equity in loss of investee companies was NT$99,663 thousand and the impairment loss was NT$249,522 thousand for the year ended December 31, 2004. 4. CASH Cash at December 31, 2004 and 2003 consists of the following: 2004 2003 Cash on hand Demand deposits Savings deposits $ 2,055 208,963 415,593 $ 3,793 82,623 556,099 $ 626,611 $ 642,515 5. MARKETABLE SECURITIES Marketable securities at December 31, 2004 and 2003 consist of the following: 2004 2003 Marketable equity securities Mutual funds Less allowance for decline in market value $ 172,979 130,348 (112,274) $ 191,053 $ 172,979 106,903 (104,936) $ 174,946 - 12 - 6. NOTES AND ACCOUNTS RECEIVABLE Notes and accounts receivable at December 31, 2004 and 2003 consist of the following: 2004 2003 Notes receivable from customers Less allowance for doubtful accounts $ 310,719 (11,997) $ 298,722 $ 421,752 (16,658) $ 405,094 $ 1,869,421 390,493 (61,948) (22,141) $ 2,175,825 Accounts receivable from customers Accounts receivable from affiliated companies Less allowance for doubtful accounts Less allowance for sales return and discount $ 1,637,647 513,701 (70,857) (19,437) $ 2,061,054 7. INVENTORIES Inventories at December 31, 2004 and 2003 consist of the following: 2004 2003 Finished goods Work-in-process Raw materials Supplies Scraps Inventories in transit Less allowance for obsolete and slow-moving items $ 1,723,053 440,866 549,428 648,220 2,561 766 (132,776) $ 3,232,118 $ 1,096,256 351,047 349,582 643,716 2,561 952 (65,106) $ 2,379,008 As of December 31, 2004, insurance coverage for inventories amounted to NT$2,387,000 thousand. 8. LONG-TERM INVESTMENTS Long-term investments at December 31, 2004 and 2003 consist of the following: 2004 Ownership Percentage 2003 Ownership Percentage Carrying Value Carrying Value At equity method Pan Asian Plastics Corp. Hsin Hsing Investment Co., Ltd. Chun Hui Investment Co., Ltd. Mei Chia Investment Co., Ltd. Fan Long Investment Co., Ltd. Shinkong Engineering Co., Ltd. Taiwan Recycling Co. $ 226,115 98,461 343,890 371,726 342,435 199,215 28,076 - 13 - 27.34 100.00 99.98 99.98 99.98 100.00 34.88 $ 191,340 35,235 108,756 104,178 85,425 187,131 33,109 27.34 99.99 100.00 100.00 100.00 100.00 34.88 Carrying Value 2004 Ownership Percentage Carrying Value 2003 Ownership Percentage Shinpont Industry Inc. Shingong Environmental Protection Technology Co., Ltd. You Bright Optronics Co. Maxima Pacific Ltd. SSFC Investment Ltd. UBright Optronics Co. Shinkong Polyester Film Co., Ltd. 268,834 656,547 38,550 479,662 1,418,378 12,259 250,000 4,734,148 49.99 100.00 68.00 100.00 100.00 48.00 100.00 249,862 660,055 70,080 398,688 1,017,139 12,259 3,153,257 49.99 100.00 58.40 100.00 100.00 48.00 - At cost method Century Development Co. Global Development Investment Co. Overseas Investment Development Corp. TKS Venture Capital Co., Ltd. Universal Venture Fund Co., Ltd. Taishin Venture Capital Investment Co., Ltd. Global Securities Finance Corp. Fubon Securities Finance Co., Ltd. Industrial Bank of Taiwan Co., Ltd. Shinkong Investment Trust Co., Ltd. First International Telecom Corp. Shinkong Chao Feng Co., Ltd. PC Home Ventures Fund Corp. Certillon Venture Capital Corp. New Century Information Communications Tech Co., Ltd. Infotel Inc. Shinkong Mitsukoshi Co., Ltd. Li Te Investment Co., Ltd. Ruishi Investment Co., Ltd. Great Taipei Broadband Co., Ltd. Univacco Technology Inc. Taiwan Broadband Investment Co., Ltd. Huiya Co., Ltd. Taiwan Cement Co. Shinkong Spinning Co., Ltd. Taipei Business Bank Shinkong Financial Holding Co., Ltd. The Great Taipei Gas Co. Taishin Financial Holding Co., Ltd. Cathay Financial Holding Co., Ltd. Teli Zhongshin Beneficial Securities Budworth Investment Co. Kister Aerospace Co. 58,000 56,000 40,000 119,215 25,000 750 34,699 30,448 300,000 209,500 46,605 50,000 13,600 30,000 216,000 3,330 149,055 25,000 45,000 43,380 530,706 249,548 1,257,415 623,709 12 1,842 50,000 49,328 - 3.52 4.65 4.44 14.90 1.49 0.08 0.53 0.79 1.30 19.13 0.54 2.22 3.03 2.50 Preferred Stock 6.66 1.97 1.67 3.95 0.08 9.40 0.34 2.45 3.88 5.00 Preferred Stock 58,000 56,000 40,000 119,215 25,000 1,000 34,699 47,956 300,000 209,500 46,605 50,000 13,600 30,000 216,000 3,330 149,055 65,636 119,852 25,000 45,000 29,928 73,195 43,380 530,706 249,548 1,184,666 623,709 1,168,804 1,842 49,328 27,665 3.52 4.65 4.44 14.90 1.49 0.08 0.53 0.79 1.30 19.95 0.54 2.22 1.03 2.50 Preferred Stock 6.66 2.01 2.67 1.59 1.67 4.28 5.13 5.43 0.08 9.40 0.34 4.85 3.88 2.43 5.00 Preferred Stock - 14 - Carrying Value 2004 Ownership Percentage Carrying Value 2003 Ownership Percentage Prepayments for long-term investments in stocks Less allowance for decline in market value 32,000 4,290,142 $ 9,024,290 40,830 (4,541) 5,674,508 $ 8,827,765 Equity in earnings (losses) of investee companies recorded in 2004 and 2003 is summarized as follows: Investee 2004 2003 Pan Asian Plastics Corp. Hsin Hsing Investment Co., Ltd. Chun Hui Investment Co., Ltd. Mei Chia Investment Co., Ltd. Fan Long Investment Co., Ltd. Shinkong Engineering Co., Ltd. Taiwan Recycling Co. Shinpont Industry Inc. Shingong Environmental Protection Technology Co., Ltd. Maxima Pacific Ltd. SSFC Investment Ltd. You Bright Optronics Co. $ 34,816 13,220 (27,721) 31,980 20,613 12,084 (5,033) 18,972 (3,509) (138,894) (181,840) (31,907) $ (257,219) $ 42,499 3,014 58,056 49,207 36,834 5,765 (3,274) (2,367) (2,168) (303,570) (26,335) $ (142,339) Investments in shares of stocks where the Corporation has direct and indirect equity ownership of at least 50% are consolidated in the Corporation’s financial statements, except when total revenues and total assets of individual subsidiary is below 10% of that of the Corporation, and the total revenues and total assets of all subsidiaries are below 30% of that of the Corporation. See Note 25 for long-term investments pledged to secure bank borrowings. 9. LONG-TERM REAL ESTATE INVESTMENTS 2004 2003 Land and buildings in Pei Tao Land in Shi Lin Land use rights in Taipei Land in Ba Dei $ 71,988 247,783 214,074 $ 533,845 $ 71,988 247,783 942,244 - $ 1,262,015 - 15 - 10. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2004 and 2003 consist of the following: 2004 Cost or Cost Plus Revaluation Accumulated Accumulated Increment Depreciation Impairment Land Buildings and improvements Machinery and equipment Transportation equipment Furniture and fixtures Instruments and spare-parts Construction in progress Prepayments on purchase of equipment $ 2,449,974 $ - $ 3,216,666 (1,381,199) 17,293,995 (13,467,034) 73,158 (45,781) 109,559 (96,958) 152,948 (131,273) 280,813 50,465 2003 Carrying Value Carrying Value - $ 2,449,974 $ 2,627,081 1,835,467 1,832,954 (249,522) 3,577,439 3,947,493 27,377 27,432 12,601 16,545 21,675 20,421 280,813 813,278 50,465 31,091 $ 23,627,578 $(15,122,245) $ (249,522) $ 8,255,811 $ 9,316,295 Composition of revaluation increment is as follows: Reclassifications and Disposal in the Past Years Increment Value at December 31, 2004 Fixed Other Assets Assets Original Increment Land Buildings Machinery and equipment Transportation equipment Furniture and fixtures Instruments and spare-parts Miscellaneous equipment $ 403,691 200,901 1,181,371 663 1,360 3,543 5,424 $ 1,796,953 $ 68,412 142,904 1,181,371 213 80 5,424 $ 324,972 56,582 450 1,280 3,543 $ 386,827 $ 10,307 1,415 $ 11,722 $ 1,398,404 The Corporation’s land was revalued on July 1, 1981. The revaluation increment was NT$403,691 thousand, of which NT$70,982 thousand was accounted as reserve for land value increment tax and the remainder, NT$332,709 thousand, was accounted as capital surplus. The Corporation’s depreciable assets were revalued on December 31, 1974 and 1980. The revaluation increment amounted to NT$1,393,262 thousand and was also accounted as capital surplus. As of December 31, 2004, insurance coverage for property, plant and equipment (excluding land) amounted to NT$6,186,361 thousand. See Note 25 for property, plant and equipment pledged to secure bank borrowings. Interest capitalization for the years ended December 31, 2004 and 2003 amounted to NT$17,884 thousand and NT$40,493 thousand and the average interest rate of 2004 and 2003 was 2.50% and 3.50%, respectively. - 16 - Impairment loss is as follows: 2004 Recognized in Income Statement Recognized in Stockholders’ Equity Impairment loss - machinery and equipment $ 249,522 $ - The impairment loss of $249,522 thousand was recognized by appraiser as the recoverable amount from the Company’s Machinery and Equipment in Chung-Li was estimated to be less than carrying amount. 11. OTHER ASSETS Other assets at December 31, 2004 and 2003 consist of the following: 2004 2003 Refundable deposits Deferred charges Overdue accounts Less allowance for uncollectible accounts Income producing properties Less accumulated depreciation Deferred tax asset (see Note 22) Deferred debits - losses on inter-affiliate accounts Others $ 29,707 25,610 120,126 (120,126) 187,922 (121,508) 344,437 78,002 3,600 $ 547,770 $ 29,621 25,805 109,979 (109,979) 187,922 (115,893) 360,215 17,043 32,714 $ 537,427 Other assets of NT$43,268 thousand were pledged to secure bank borrowings at December 31, 2004. (See Note 25) 12. SHORT-TERM BORROWINGS Short-term borrowings at December 31, 2004 and 2003 consist of the following: 2004 2003 Unsecured loans Secured loans Commercial paper $ 260,000 110,000 535,107 $ 905,107 $ 720,000 50,000 606,278 $ 1,376,278 0.68%~2.15% Interest rates range 1.00%~1.365% - 17 - 13. OTHER CURRENT LIABILITIES Other current liabilities at December 31, 2004 and 2003 consist of the following: 2004 2003 Salaries and bonuses Interest Purchase of equipment Utilities Insurance premiums Other $ 179,761 36,833 96,153 50,497 15,895 178,282 $ 557,421 $ 124,836 46,961 82,981 45,857 15,501 261,968 $ 578,104 14. BONDS PAYABLE Bonds payable at December 31, 2004 and 2003 consist of the following: 2004 2003 Secured bonds Convertible bonds $ 1,100,000 1,100,000 (1,100,000) $ - $ 1,400,000 100 1,400,100 $ 1,400,100 Less current portion of bonds payable On July 7, 2000, the Corporation issued NT$2,000,000 thousand of secured bonds, maturing at face value on July 7, 2005 with interest at 5.49% payable annually. Principal of NT$2,000,000 thousand is payable upon maturity. However, the Corporation has redeemed NT$900,000 thousand of secured bonds ahead of maturity during 2004. 15. LONG-TERM DEBT Long-term debt at December 31, 2004 and 2003 consist of the following: 2004 2003 Industrial Bank of Taiwan (Syndication Loan) Taiwan Bank (Syndication Loan) Tai Shin International Commercial Bank Industrial Bank of Taiwan $ 1,107,692 4,000,000 500,000 5,607,692 (2,003,846) $ 3,603,846 2.35%~3.0589% $ 1,661,538 4,700,000 500,000 200,000 7,061,538 (1,053,846) $ 6,007,692 3.20%~4.6644% Less current portion of long-term debt Long-term debt Interest rates range - 18 - Maturity distribution of long-term debt at December 31, 2004 is as follows: Year Amount 2005 2006 2007 $ 2,003,846 1,053,846 2,550,000 $ 5,607,692 16. RETIREMENT BENEFITS The Corporation has a defined benefit pension plan covering all full-time employees. Provision for retirement benefits is at amounts equal to 6% of gross salaries and wages as prescribed by the Labor Standards Law of the ROC. The Corporation makes monthly contributions to a retirement fund, which is administered by the Corporation’s Employee Retirement Plan Committee’s (the “Committee”) and is deposited in the Central Trust of China under the Committee’s name. As of December 31, 2004 and 2003, the fund balances of the pension plan were NT$33,817 thousand and NT$23,251 thousand, respectively. The Corporation adopted Statement of Financial Accounting Standards No. 18, “Accounting for Pensions,” issued by the Accounting Research and Development Foundation of the ROC, which requires an actuarial approach in measuring employee retirement benefits. The following table shows the plan status as of December 31, 2004 and 2003: 2004 2003 Actuarial present value of benefit obligation Vested benefits Nonvested benefits Accumulated benefits obligation Additional benefits at future salaries Projected benefit obligation Plan assets at fair value Funded status Unrecognized net transition obligation Unrecognized net loss Accrued pension cost Vested benefits Actuarial assumptions Discount rate Rate of compensation increase Expected rate of return on plan assets Net pension cost consists of the following Service cost Interest cost Expected return on plan assets Amortization of net transition obligation Amortization of net gain $ 396,431 519,509 915,940 209,096 1,125,036 (33,817) 1,091,219 (510,935) 473,611 $ 1,053,895 $ 493,551 3.50% 2.00% 3.50% $ 43,675 35,560 (1,605) 63,867 - $ 410,100 496,398 906,498 187,655 1,094,153 (27,059) 1,067,094 (574,801) 554,028 $ 1,046,321 $ 532,872 3.25% 2.00% 3.25% $ 42,781 38,001 (314) 63,867 (1,174) $ 141,497 $ 143,161 - 19 - The Labor Pension Act (the “Act”), which provides for a defined contribution plan for portable pension, will take effect on July 1, 2005. The Corporation’s employees can choose to continue to be subject to the current Labor Standards Law of ROC, or to be subject to the Act, with their service years accumulated before July 1, 2005 to be retained. Under the Act, the employer should contribute monthly amounts equal to at least 6% of gross salaries and wages. 17. CAPITAL STOCK At December 31, 2004, the Corporation’s authorized capital is $18,900,000 thousand with 1,890,000,000 common shares, having a par value of $10 each. Number of shares issued at December 31, 2004 was 1,325,340,925 at Taiwan Stock Exchange Corporation. Components of issued capital stock as of December 31, 2004 are as follows: Initial capital contribution in cash Subsequent capital contribution in cash Retained earnings transferred to capital stock Capital surplus transferred to capital stock Bonds converted into common stock Write-off of treasury stock $ 22,500 5,524,300 2,330,954 5,007,871 420,784 (53,000) $ 13,253,409 18. CAPITAL SURPLUS Capital surplus at December 31, 2004 and 2003 comprised of the following: 2004 2003 Revaluation increment on land $ 332,028 Revaluation increment on depreciable assets 1,393,262 Capital paid in excess of par value 2,516,000 Gain on sale of property, plant and equipment 992,537 Reserve for redemption of bonds converted into common stock 727,131 Treasury stock transactions 130,499 Increase in capital surplus reported by equity method investees 2,623 Compensation due to directors and supervisors transferred to capital surplus 12,945 6,107,025 Less Amount appropriated to offset operating losses in prior periods Appropriation for stock dividends $ (970,544) (5,007,871) 128,610 $ 332,028 1,393,262 2,516,000 992,537 727,131 27,113 2,623 12,945 6,003,639 (636,853) (5,007,871) $ 358,915 - 20 - 19. RETAINED EARNINGS In accordance with the Company Law of ROC and the Corporation’s Articles of Incorporation, 10% of the Corporation’s annual earnings, after paying income tax and offsetting deficit, if any, shall be appropriated as legal reserve. The remainder shall then be distributed in the following order: a. 84% as dividends to stockholders, b. 5% as bonuses to directors and supervisors, and c. 1% as bonuses to employees upon the approval of the Board of Directors As of April 16, 2005, the board of directors have not resolved the appropriation of earnings of 2004. 20. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES Personnel, depreciation and amortization expenses for the years ended December 31, 2004 and 2003 were as follows: 2004 Operating Expense $ 188,960 9,288 26,882 3,690 7,505 2003 Operating Expense $ 163,072 9,381 24,340 7,610 8,678 - Cost of Sales Personnel expense Salary $ 848,395 Labor and health insurance 69,687 Pension expense 109,794 Other 26,036 Depreciation 933,425 Amortization expense 2,670 Total $ 1,037,355 78,975 136,676 29,726 940,930 2,670 Cost of Sales $ 788,166 66,925 113,197 41,000 998,261 789 Total $ 951,238 76,306 137,537 48,610 1,006,939 789 21. TREASURY STOCK Proceeds from the sale of treasury stock (58,477 shares) for the year ended December 31, 2004 were NT$390,398 thousand. 22. INCOME TAX Income tax for the years ended December 31, 2004 and 2003 is computed as follows: 2004 2003 Income before income tax Permanent differences Temporary differences Tax income Discounts from the loss of previous five years Taxable income Tax rate Credit for income tax before adjustment - 21 - $ 429,657 (1,222,839) 649,299 (143,883) 25% - $ 232,518 (542,557) 505,558 195,519 (195,519) 25% - 2004 2003 10% additional income tax levied on undistributed earnings Tax credits on investments Overestimated income tax of previous years Net change in deferred tax Credit for income tax $ 26,120 (26,120) (8) (83,375) (83,383) (65) (72,705) $ (72,770) Deferred tax asset and liability at December 31, 2004 and 2003 consist of the following: 2004 2003 Current Unrealized exchange loss Loss on decline in value of inventory Provision for bad debt Time difference for sales discounts Discount from the loss of previous five years and investment Others Less allowance Deferred tax liability $ 1,186 33,194 14,558 4,859 276,661 123 (173,035) (3,756) $ 1,128 16,276 14,841 5,535 75,285 123 (57,908) (643) $ 153,790 Noncurrent Provision for bad debt Timing difference for impairment loss Timing difference for amortization expenses Timing difference for pension expenses Timing difference for foreign investment gain Timing difference for intercompany profit Discount from the loss of previous five years and investment Others Less allowance Deferred tax liability $ 29,731 62,381 1,729 257,282 242,049 9,268 121,109 6,916 (182,426) (203,602) $ 344,437 $ 54,637 $ 27,220 1,768 261,344 161,866 33,968 398,493 123 (296,504) (228,063) $ 360,215 Pursuant to the Amended Income Tax Law of ROC, the Corporation’s accumulated losses as of December 31, 2003 consisted of losses in 1998. The above information about the appropriations of the board of directors and shareholder approval is available at Market Observation System website. The Imputation Credit (“IC”) on the undistributed earnings as of December 31, 2003 amounted to NT$155,609 thousand. The income tax returns of the Corporation through 2001 have been examined and approved by the tax authority. - 22 - 23. BASIC EARNINGS PER SHARE Earnings per share for the years ended December 31, 2004 and 2003 were computed by dividing net income by the weighted average number of outstanding shares of 1,286,362,937 and 1,266,863,943, respectively. Amount Undistributed earnings 1997 and prior 1998 and after $ 513,040 $ 513,040 The balance of the imputation credit account The expected creditable ratio for distribution of earnings after 1998 $ 155,609 30.33% 24. RELATED PARTY TRANSACTIONS The name and relationship of related parties are as follows: Name Relationship Pan Asian Plastics Corp. Shinkong Engineering Co., Ltd. SSFC Investment Ltd. Shingong Environmental Protection Technology Co., Ltd. You Bright Optronics Co. Shinpont Industry Inc. Shinkong Life Insurance Co., Ltd. Tai Shin International Bank Taisin Venture Capital Co., Ltd. Thai Shinkong Industry Co., Ltd. Dayspring Ltd. Hangjhou Huanchun Chemical Fiber Co., Ltd. Hangjhou Shinkong Industry Co., Ltd. An investee under equity method Same as above Same as above Same as above Same as above Same as above Member of the immediate family of the Corporation’s chairman Same as above Same as above Indirect subsidiary Same as above Same as above Same as above Major related party transactions for the years ended December 31, 2004 and 2003 and the resulting balances as at those dates are summarized as follows: Purchases Purchases from related parties for the years ended December 31, 2004 and 2003 are as follows: 2004 2003 Thai Shinkong Industry Co., Ltd. $ 2,553,076 $ 2,627,156 - 23 - Sales Sales to related parties for the years ended December 31, 2004 and 2003 are as follows: 2004 2003 Pan Asian Plastics Corp. Hangjhou Huanchun Chemical Fiber Co., Ltd. Others $ 575,911 492,398 48,018 $ 1,116,327 $ 487,474 251,840 7,794 $ 747,108 The Corporation’s management has made a determination that these were arm’s length transactions with collection period of 30 days. However, the collection period for the Pan Asian Plastics Corp. transactions is 90 days. Manufacturing Expense Manufacturing expense from related parties for the years ended December 31, 2004 and 2003 is as follows: 2004 2003 Shinkong Engineering Co., Ltd. Bank Deposits $ 176,188 $ 207,188 As of December 31, 2004 and 2003, the Corporation’s deposits in Tai Shin International Bank, an affiliate, are as follows: 2004 Interest Rate % Highest Balance Ending Balance Interest Revenue Demand deposits Saving deposits $ 490,957 563,532 $ 30,846 151,148 0.15 2003 Interest Rate % $ 769 Highest Balance Ending Balance Interest Revenue Demand deposits Saving deposits $ 568,170 1,504,457 $ 26,424 209,404 0.45 $ 790 As of December 31, 2004 and 2003, NT$26,088 thousand of the above demand deposits are classified as other current assets. - 24 - Bank Borrowings As of December 31, 2004 and 2003, the Corporation’s borrowings in Tai Shin International Bank, an affiliate, are as follows: Highest Balance Ending Balance 2004 Interest Rate % Interest Expense Secured loans Long-term loans $ 320,000 500,000 Highest Balance $ 110,000 500,000 Ending Balance 1.3 2.35 2003 Interest Rate % $ 627 1,095 Interest Expense Unsecured loans Secured loans Long-term loans Endorsement and Guarantees $ 160,000 570,000 968,000 $ 50,000 500,000 1.50~1.68 2.35 $ 1,072 4,010 5,725 As of December 31, 2004 and 2003, the Corporation has endorsed and guaranteed the borrowings of affiliates as follows: Endorsement and Guarantees Limit Endorsement and Guarantees Amount Thai Shinkong Industry Co., Ltd. Pan Asian Plastics Corp. You Bright Optronics Co. Other $ 2,500,000 600,000 500,000 1,900,000 $ 5,500,000 $ 2,372,700 260,000 150,000 738,900 $ 3,521,600 Receivables (Non-Interest Bearing) December 31 2004 2003 Accounts receivable Hangjhou Huanchun Chemical Fiber Co., Ltd. Pan Asian Plastics Corp. Shinpont Industry Inc. $ 302,992 198,774 8,848 $ 510,614 $ 163,342 219,357 7,794 $ 390,493 Other receivables SSFC Investment Ltd. Hangjhou Shinkong Industry Co., Ltd. You Bright Optronics Co. Pan Asian Plastics Corp. Shinpont Industry Inc. $ 90,561 29,170 20,677 18,836 10,829 $ 170,073 $ 138,979 56,410 11,317 $ 206,706 - 25 - Accounts Payable Accounts payable to related parties as of December 31, 2004 and 2003 are as follows: 2004 2003 Thai Shinkong Industry Co., Ltd. Expenses Payable $ 73,766 $ 58,225 Expenses payable to related parties as of December 31, 2004 and 2003 are as follows: 2004 2003 Thai Shinkong Industry Co., Ltd. Operating Leases $ 34,650 $ 37,335 The Corporation leases land, premises and equipment to Pan Asian Plastics Corp. and Shinpont Industry Inc. under operating lease agreement which is renewed annually. As of December 31, 2004 and 2003, rental income from such leases is as follows: 2004 2003 Pan Asian Plastics Corp. Shinpont Industry Inc. $ 21,787 9,918 $ 31,705 $ 21,787 $ 21,787 The Corporation leases its office space from Shinkong Life Insurance Co., Ltd. under an operating lease agreement which is renewed annually. Rental expense under such lease was NT$13,483 thousand and NT$15,718 thousand in 2004 and 2003, respectively. Other Property Transactions In 2004, the Corporation invested the machine of Hangjhou Shinkong Industry Co., Ltd. at the book value of NT$274,146 thousand and sold it to Hangjhou Huanchun Chemical Fiber Co., Ltd. at NT$208,675 thousand and NT$65,471 thousand of the total loss was classified as deferred debit. In April 2003, the Corporation purchased the stock of Tai Shin Leasing Co., Ltd. at the cost of NT$93,000 thousand from Tai Shin International Bank then the corporation sold it to Pan Asian Plastics Corp. at the same cost in June. The Corporation classified the stock as longterm investments. In 2003, the Corporation sold the stock of Taishin Venture Capital Co., Ltd. to Taisin Venture Capital Co., Ltd. The gain on sale of the stock was NT$1,338 thousand. In 2003, the Corporation sold a machine at NT$106,102 thousand which book value was NT$66,516 thousand. The gain on sale of the machine was NT$39,586 thousand and NT$19,789 thousand of the total gain was classified as deferred credit. - 26 - 25. PLEDGED ASSETS The carrying values of assets pledged to secure short-term borrowings and long-term debt at December 31, 2004 are as follows: Asset Amount Long-term investments Property, plant and equipment Other assets $ 1,599,023 6,824,214 46,868 $ 8,470,105 26. COMMITMENTS AND CONTINGENCIES Guarantee of Indebtedness of Others As of December 31, 2004, the Corporation has guaranteed borrowings of NT$3,521,600 thousand by its affiliates. Letters of Credit Outstanding letters of credit not reflected in the accompanying financial statements at December 31, 2004 amounted to NT$278,661 thousand. Rental and Construction Commitments As of December 31, 2004, the Corporation had commitments to pay NT$13,770 thousand and NT$769,098 thousand under various operating lease agreements and construction agreements, respectively. 27. SUBSEQUENT EVENT On of January 11, 2005, the Corporation transferred land and buildings with carrying amount of NT$466,095 thousand to exchange with Shinkong Engineering Co., Ltd.’s common stock totaling 18,644 thousand shares, having a par value $25 each according to a resolution by board of directors. - 27 - 28. FINANCIAL INSTRUMENTS Derivative Financial Instruments Non-Trading-Purpose Derivative Financial Instruments The Corporation’s management objective and strategy for derivative instruments Type Objective Strategy Forward exchange To hedge foreign currency exposure of recognized assets or liabilities To hedge foreign currency exposure of recognized assets or liabilities To hedge the risk of changes in rates. Currency option contract Interest rate swaps Derivative financial instruments, which have strong negative correlation with the changes of underlying assets and liabilities fair value, are employed to be a hedge and evaluated periodically. Derivative financial instruments, which have strong negative correlation with the changes of underlying assets and liabilities fair value, are employed to be a hedge and evaluated periodically. To reduce the effect of changes in interest rates on future earnings by exchanging the floating rates of the hedged items with effective rates 3.40%~3.65%. Contract Amount and Credit Risk 2004 Contract Amount Written Forward Interest rate swaps Foreign currency option contract -put Foreign currency option contract call US$ 41,000 NT$ 500,000 US$ 29,000 US$ 29,000 Fair Value Credit Risk Contract Amount US$ 21,000 NT$ 1,000,000 US$ 21,000 NT$ 1,000,000 2003 Fair Value Credit Risk - NT$ (31,193) $ NT$ (4,060) NT$ (8,849) $ NT$ 5,460 NT$ (5,586) $ NT$ (30,173) NT$ (5,586) $ NT$ (30,173) $ 5,460 Credit risk refers to counter-parties default on contracts. The Corporation and subsidiaries transact only with financial institutions with good credit ratings. Thus, no material credit risk from the above contracts is anticipated. Market Risk Market risk refer to adverse changes in exchange and interest rates. The Corporation uses forward exchange contracts and interest rate swap contracts to hedge the effect of foreign currency fluctuation on its net foreign-currency accounts and anticipated transactions. Gain or loss arising from exchange rate or interest rate fluctuations will be mostly offset by these hedge instruments. Thus, the potential market risk is insignificant. - 28 - Liquidity Risk, Cash Flow Risk and Uncertainty of Amount and Term of Future Cash Demand Forward contract, foreign currency option contract - put and foreign currency option contract call outstanding at December 31, 2004 is as follows: Contract Date Cash Inflows (Thousand) Payment (Thousand) Written forward 2005.01.06~2005.06.03 Foreign currency option contract Put 2005.01.01~2005.07.01 Call 2005.01.14~2005.07.01 $ 1,340,170 US$ 29,000 US$ 29,000 US$ 41,000 US$ 937,387 US$ 937,387 The Corporation uses interest rate swap contracts, in which the notional amounts are used solely as a basis for calculating the amounts receivable and payable under the contracts. Thus, the notional amounts do not represent actual cash inflows or outflows; thus, no significant cash demand is expected. Reporting of Derivative Instruments in the Financial Statements As of December 31, 2004 and 2003, the receivable and payable derived from foreign exchange contracts are summarized below: 2004 2003 Forward exchange receivable Less forward exchange payable Receivable (payable) on forward exchange contracts, net $ 1,428,168 (1,396,975) $ 31,193 $ 701,729 (707,315) $ (5,586) The Corporation classifies the gain or loss as a result of interest rate swap contracts as “interest income” or “interest expenses”. The loss for the year ended December 31, 2004 amounted to NT$26,993 thousand. There is no principal but only accrued interests recorded about interest rate swap in the accounting records. The Corporation classifies the gain or loss as a result of foreign currency option contract as “other income”. The gain for the year ended December 31, 2004 amounted to NT$11,136 thousand. Trading-Purpose Derivative Financial Instruments The Corporation’s management objective and strategy for derivative instruments. Type Objective Strategy Forward exchange trading - - 29 - Contract Amount and Credit Risk 2004 Contract Amount Maturity Date Forward exchange US$3,000 thousand 2005.07 The Corporation and subsidiaries transact only with financial institutions with good credit ratings. It’s anticipated that financial institutions don’t default, thus credit risks are believed to be low. Market Risk Outstanding forward exchange contracts as of December 31, 2004, are controlled according to “Derivative Financial Instrument Processing”. Liquidity Risk, Cash Flow Risk and Uncertainty of Amount and Term of Future Cash Demand The Corporation has sufficient working capital to meet cash inflows and outflows resulting from engaged derivative transactions and therefore does not have funding risk; and since the exchange rates of engaged derivative financial instruments contracts are determined and, therefore, no material cash flow risk is expected. The Corporation classifies the gain or loss as a result of engaging in nontrading-based derivate transactions as exchange gain or exchange loss. The net gain or loss on derivative transactions is shown below: Amount Description $104 Non-Derivative Financial Instruments Net exchange loss The following methods and assumptions were used to estimate the fair value of each class of non-derivative financial instruments for which it is practicable to estimate that value: The carrying amount approximated the fair value because of the short maturities of such instruments, including cash and cash equivalents, short-term investments, notes and accounts receivable, other current financial assets, notes and accounts payable, short-term borrowings and other current financial liabilities. Long-term investments are measured based on quoted market prices for these instruments. If the securities do not have market prices, fair value is measured based on available financial or other information. The fair value of long-term liabilities, including current portion, are estimated based on rates that the Corporation obtained which are comparable to rates offered by banks for long-term debts with same terms and maturities. - 30 - 29. INFORMATION BY INDUSTRY Information by industry of the Corporation for the years ended December 31, 2004 and 2003 consist of the following: 2004 Fiber Business Sales Cost of sales and operating expenses Income (loss) from operations by segments Assets Notes and accounts receivable Inventories Property, plant and equipment Others Plastic Business Others Total $ 8,779,137 $ 10,524,922 $ (9,203,465) (9,920,117) $ (424,328) $ 604,805 $ 647,195 $ 19,951,254 (847,376) (19,970,958) (200,181) $ (19,704) $ 785,864 $ 1,573,912 $ - $ 2,359,776 1,237,274 1,113,017 881,827 3,232,118 3,509,519 2,512,158 2,234,134 8,255,811 54,115 57,547 11,520,923 11,632,585 $ 5,586,772 $ 5,256,634 $ 14,636,884 $ 25,480,290 2003 Fiber Business Sales Cost of sales and operating expenses Income (loss) from operations by segments Assets Notes and accounts receivable Inventories Property, plant and equipment Others Plastic Business Others Total $ 7,566,985 $ 10,479,418 $ (7,625,621) (9,953,093) $ (58,636) $ 526,325 $ 28,782 $ 18,075,185 (108,187) (17,686,901) (79,405) $ 388,284 $ 769,426 $ 1,729,757 $ 81,736 $ 2,580,919 1,189,313 829,291 360,404 2,379,008 3,735,562 2,629,868 2,950,865 9,316,295 73,396 75,353 11,965,023 12,113,772 $ 5,767,697 $ 5,264,269 $ 15,358,028 $ 26,389,994 Major products: Filament Yarn, Nylon Yarn, PET Chip, Textured Yarn, Chip, Staple Fiber. The Corporation is mainly engaged in the manufacturing and trading of fiber and plastic products. The above-listed sales means revenues from the clients without sales and transfer transactions between segments. The revenues and expenses of segments excluded nonoperating income and expenses. - 31 -
