EX-99.3 3 w68064exv99w3.txt AUDITED BALANCE SHEET OF UNITIVE SEMICONDUCTOR TAIWAN CORPORATION AS OF DECEMBER 31, 2003 EXHIBIT 99.3 UNITIVE SEMICONDUCTOR TAIWAN CORP. FINANCIAL STATEMENTS DECEMBER 31, 2003 (WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THEREON) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Unitive Semiconductor Taiwan Corp.: We have audited the accompanying balance sheet of Unitive Semiconductor Taiwan Corp. (the Company) as of December 31, 2003, and the related statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the Republic of China generally accepted auditing standards and the Republic of China Guidelines for Certified Public Accountants' Examinations and Reports on Financial Statements. Those 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Unitive Semiconductor Taiwan Corp. as of December 31, 2003, and the results of its operations and its cash flows for the year then ended, in conformity with the Regulations Governing Financial Reporting for Issuers of Stock Certificates and Republic of China generally accepted accounting principles. Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 17 to the financial statements. /s/ KPMG February 4, 2004, except as to Note 16, which is as of July 9, 2004. UNITIVE SEMICONDUCTOR TAIWAN CORP. BALANCE SHEET DECEMBER 31, 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR PAR VALUE)
AMOUNT ASSETS CURRENT ASSETS: Cash and cash equivalents $ 32,450 Short-term investments (note 3) 47,452 Notes receivable 2,738 Accounts receivable, net 27,092 Accounts receivable - related parties (note 11) 5,146 Other monetary assets - current 651 Inventories, net (note 4) 10,376 Prepaid expenses and other current assets 6,357 Restricted assets (note 12) 12,700 ----------- TOTAL CURRENT ASSETS 144,962 ----------- PROPERTY, PLANT AND EQUIPMENT (NOTES 5, 12 AND 13): Land 113,069 Land improvements 3,081 Buildings 346,795 Machinery and equipment 682,586 Computer equipment 7,095 Transportation equipment 2,898 Furniture and fixtures 6,138 Leased assets 32,000 Other equipment 6,265 ----------- 1,199,927 Less: accumulated depreciation (380,990) Advances for purchases of machinery and equipment 90,542 ----------- NET PROPERTY, PLANT AND EQUIPMENT 909,479 ----------- INTANGIBLE ASSETS: Patents (note 11) 53,200 Computer software 2,392 ----------- TOTAL INTANGIBLE ASSETS 55,592 ----------- OTHER ASSETS: Deferred tax assets (note 9) 181,509 Other 1,940 ----------- TOTAL OTHER ASSETS 183,449 ----------- TOTAL ASSETS $ 1,293,482 ===========
See accompanying notes to financial statements. UNITIVE SEMICONDUCTOR TAIWAN CORP. BALANCE SHEET (CONTINUED) DECEMBER 31, 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)
AMOUNT LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debts (notes 6 and 12) $ 106,504 Notes payable (note 11) 18,374 Accounts payable (note 11) 14,346 Other notes payable 4,852 Accrued expenses and other current liabilities (note 11) 35,633 Current portion of long-term debt (notes 7 and 12) 135,350 ----------- TOTAL CURRENT LIABILITIES 315,059 ----------- LONG-TERM LIABILITIES: Long-term debts (notes 7 and 12) 283,296 Obligations under capital lease 862 ----------- 284,158 ----------- OTHER LIABILITIES: Accrued pension liabilities (note 8) 7,707 ----------- TOTAL LIABILITIES 606,924 ----------- STOCKHOLDERS' EQUITY (NOTE 10): Common stock of $10 par value, authorized 140,000,000 shares in 2003; issued 130,000,000 shares in 2003 1,300,000 Additional paid-in capital 60,000 Accumulated deficit (673,442) ----------- TOTAL STOCKHOLDERS' EQUITY 686,558 ----------- COMMITMENTS (NOTES 11 AND 13) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,293,482 ===========
See accompanying notes to financial statements. UNITIVE SEMICONDUCTOR TAIWAN CORP. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)
AMOUNT SALES (NOTE 11) $ 99,394 LESS: SALES RETURNS AND ALLOWANCES 947 ---------- NET SALES 98,447 COST OF SALES (NOTES 8 AND 11) 294,793 ---------- GROSS LOSS (196,346) ---------- OPERATING EXPENSES (NOTES 8 AND 11) Selling expenses 29,703 Administrative expenses 56,463 Research and development expenses 57,310 ---------- 143,476 ---------- OPERATING LOSS (339,822) ---------- NON-OPERATING INCOME: Interest income 321 Gain on disposal of short-term investments 5,632 Foreign exchange gain, net 693 Other income 5,819 ---------- 12,465 ---------- NON-OPERATING EXPENSE: Interest expense, net of capitalized interest expense of $1,715 and $233 in 2003, respectively (note 5) 24,409 Loss on disposal of fixed assets 1,907 Inventory loss 7,713 Other expense 110 ---------- 34,139 ---------- LOSS BEFORE INCOME TAX (361,496) INCOME TAX BENEFIT (NOTE 9) 66,072 ---------- NET LOSS $ (295,424) ========== EARNINGS PER SHARE (NOTE 15) Basic $ (2.27) ========== AVERAGE NUMBER OF SHARES (`000 SHARES) (NOTE 15) Basic 130,000 ==========
See accompanying notes to financial statements. UNITIVE SEMICONDUCTOR TAIWAN CORP. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)
NUMBER OF ADDITIONAL SHARES (`000 COMMON PAID-IN ACCUMULATED SHARES) STOCK CAPITAL DEFICIT TOTAL BALANCE AS OF DECEMBER 31, 2002 130,000 $ 1,300,000 60,000 (378,018) 981,982 Net loss for 2003 - - - (295,424) (295,424) ------- ----------- ------ -------- -------- BALANCE AS OF DECEMBER 31, 2003 130,000 $ 1,300,000 60,000 (673,442) 686,558 ======= =========== ====== ======== ========
See accompanying notes to financial statements. UNITIVE SEMICONDUCTOR TAIWAN CORP. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2003 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)
AMOUNT CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (295,424) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 148,061 Amortization 13,413 Inventory loss 7,713 Gain on disposal of short-term investments (5,632) Loss on disposal of fixed assets 1,907 Income tax benefit (66,072) Decrease in notes receivable and accounts receivable 2,001 Income tax benefit (30) Increase in inventories (1,264) Decrease in prepaid expenses and other current assets 2,413 Decrease in notes payable and accounts payable (2,190) Increase in accrued expenses and other current liabilities 4,592 Increase in accrued pension liabilities 2,916 ---------- NET CASH USED IN OPERATING ACTIVITIES (187,596) ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in short-term investments (196,000) Disposal of short-term investments 673,477 Acquisitions of property, plant and equipment (186,526) Increase in intangible assets (1,386) Increase in other assets (1,036) ---------- NET CASH PROVIDED BY INVESTING ACTIVITIES 288,529 ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in restricted assets 5,800 Decrease in short-term debts (30,957) Increase in long-term debts 21,000 Repayment of long-term debts (132,054) Issuance of new common shares - ---------- NET CASH USED IN BY FINANCING ACTIVITIES (136,211) ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (35,278) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 67,728 ----------
See accompanying notes to financial statements. CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,450 ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 24,905 ========== Cash paid for income tax $ 30 ========== SUPPLEMENTAL DISCLOSURES OF INVESTING AND FINANCING ACTIVITIES: Acquisitions of property, plant and equipment $ 164,360 Net increase in equipment payable 22,166 ---------- $ 186,526 ========== Current portion of long-term debt $ 135,350 ==========
See accompanying notes to financial statements. UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 (ALL AMOUNTS EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, UNLESS OTHERWISE SPECIFIED) (1) ORGANIZATION AND OPERATIONS Unitive Semiconductor Taiwan Corp. (the Company) was incorporated on June 30, 1999, as a company limited by shares under the laws of the Republic of China and approved as a Foreign Investment Approved Company in accordance with the Statute for Investment by Foreign Nationals. The Company's approved foreign capital investment and related earnings are eligible for repatriation. The Company is a bumping house that focuses on providing solder bumping and gold bumping services in the wafer level that advanced packing industries. With the solder bumping technology, the Company bumps wafers using electro-plated solder to connect I/O pads and substrate for flip chip assembly. The Company is capable of providing both 8 inch and 12 inch with best solder bumping services and also cooperates with world-class assembly houses to provide turnkey solutions to its customers. The Company also develops its own gold bumping technology to serve mainly in the field of LCD/PDP driver IC's packaging. The Company with its high quality gold bumping references is the main partner of the worldwide major players in this field. To achieve the goal of world-leading production and permanent operation, the Company focuses on providing the solder bumping and gold bumping service to worldwide IDMs, fables IC design houses, foundry fabs and assembly houses. The Company continuously improves its bumping process and enhances production capability through research and innovation to satisfy its customers. As of December 31, 2003, the number of the Company's employees was 151. The Company has incurred losses during each year since its inception, and continues to incur significant costs related to the development of its business. As a result, as of December 31, 2003, the Company has an accumulated deficit of $673,442 and negative working capital of $170,097. Management believes that the Company will be able to meet its obligations as they come due in the near term using operating cash flows, proceeds from existing loan commitments, and other capital provided from third parties. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Company 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 Company prepares the accompanying financial statements in conformity with ROC generally accepted accounting principles. The preparation of the financial statements is based on historical cost. (Continued) 2 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS A summary of significant accounting policies used in preparing such financial statements is as below. 1) Foreign currency transactions The Company maintains its books in New Taiwan dollars. Foreign currency transactions, except for forward contracts, are recorded at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are revalued at the exchange rate prevailing on the balance sheet date. The resulting exchange gains or losses are recorded as non-operating income or expense. Forward contracts to hedge an exposed foreign currency position are recorded at the spot exchange rates prevailing on the contract date. The premiums or discounts on forward contracts resulting from the difference between the spot rate and forward rate are amortized over the terms of the contracts. Forward contracts are revaluated and adjusted to the spot exchange rate on the balance sheet date. The resulting exchange gains or losses are recorded as non-operating income or expenses. At the settlement date, the resulting exchange differences are recorded as exchange gains or losses. 2) Cash equivalents Cash equivalents represent all highly liquid short-term debt instruments, such as commercial paper, negotiable certificates of deposit, and bank acceptances purchased with the original maturity of three months or less, and other highly liquid investments with insignificant interest rate risk. 3) Short-term investments Short-term investments are the receipt of trust funds invested in the bond market and are stated at the lower of cost or market value. Market value is determined based on the net value of the fund at the balance sheet date, and any unrealized loss is charged to current year's operation. Cost is determined based on the weighted-average method. 4) Inventories Inventories are stated at the lower of cost or market value. Cost is determined by using the monthly weighted-average method. Market value is determined by net realizable value. 5) Property, plant and equipment Property, plant and equipment are stated at acquisition cost. Interest cost incurred in connection with the acquisition of property and equipment is capitalized as part of the cost of the related assets. Gain or loss on disposal of property, plant, and equipment is recorded as non-operating income or expenses. (Continued) 3 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS Except for land, depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives of property, plant, and equipment are as follows: Land improvements 3 years Buildings 3 ~ 25 years Machinery and equipment 3 ~ 5 years Computer equipment 5 years Transportation equipment 3 ~ 5 years Furniture and fixtures 3 years Leased assets 5 years Other equipment 3 years
6) Intangible assets Computer software and patents are stated at acquisition cost. Amortization is provided for by using the straight-line method over the estimated useful lives of the assets. 7) Retirement plan In March 2001, the Company established an employee retirement plan providing for lump-sum retirement benefits to all full-time employees who meet retirement requirements. The pension payment is calculated based on the number of service years. In accordance with the ROC Labor Standards Law, the Company has made monthly deposits equal to an approved percentage of employees' total salaries in the Central Trust of China since March 2001. Actual benefits paid are made out of the fund. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 18, "Accounting for Pensions". The end of each fiscal year is used as the measurement date for the actuarial assessment. A minimum pension liability is recognized when the accumulated benefit obligation exceeds the fair value of plan assets. In accordance with SFAS No. 18, the Company recognizes net pension cost every year. 8) Recognition of revenue Revenue is recognized after the completion of production processes and shipment. (Continued) 4 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS 9) Income tax The Company's income tax is estimated based on the accounting income. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities, and are measured by applying the effective tax rates for the taxable years in which those temporary differences are expected to reverse. Deferred tax liabilities are recognized for the future tax consequences attributable to taxable temporary differences, and deferred tax assets are recognized for the future tax consequences attributable to deductible temporary difference, loss carryforwards, and investment tax credits, with the measurement of deferred tax assets being reduced by estimated amounts of tax benefits not likely to be realized, based on, among other considerations, forecasts of future taxable income. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related liabilities or assets for financial reporting. Deferred tax assets and liabilities that are not related to a liability or asset for financial reporting are classified according to the expected reversal date of the temporary differences. The 10% income tax surtax on unappropriated earnings is recorded as expense on the date the stockholders resolve the distribution of earnings. (3) SHORT-TERM INVESTMENTS As of December 31, 2003, the details of investments were as follows:
AMOUNT Bond fund $ 47,452 =========
The bond fund acquired by the Company was of low risk and provided the fixed return. As of December 31, 2003, the bond fund was stated at cost and the related market price was $48,414. (4) INVENTORIES As of December 31, 2003, the details of inventories were as follows:
AMOUNT Raw materials $ 4,639 Supplies 6,122 Work in process 5,389 Finished goods 3,360 --------- 19,510 Less: provision for inventory loss 9,134 --------- $ 10,376 =========
(Continued) 5 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS The insurance coverage on inventories as of December 31, 2003, was $60,000. (5) PROPERTY, PLANT AND EQUIPMENT The capitalized interest expense for purchasing machinery and equipment amounted to $1,715 in 2003. The annual interest rate for the capitalized interest expense ranged from 1.75% to 8.00% for 2003. As of December 31, 2003, the insurance coverage for property, plant and equipment was $1,173,000. (6) SHORT-TERM DEBTS As of December 31, 2003, the details of short-term debts were as follows:
AMOUNT Unsecured short-term debts $ 50,000 Usance letters of credit 56,504 --------- $ 106,504 =========
The annual interest rate for the unsecured short-term debts ranged from 1.85% to 2.54% for 2003. The annual interest rate for the usance letters of credit ranged from 0.69% to 8.00% for 2003. All the short-term debts mentioned are due in one year. As of December 31, 2003, unused lines of credit amounted to approximately $168,030. (Continued) \ 6 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS (7) LONG-TERM DEBTS As of December 31, 2003, the details of long-term debts were as follows:
PERIOD OF INTEREST BANK DESCRIPTION LOAN PAYMENT PERIOD RATE AMOUNT Hua Nan Secured by 2000.12.28~ Repayment of principal is in 16 5.715%~ $ 180,920 Commercial machinery 2005.12.28 quarterly installments. The 5.865% Bank Company repaid principal amounting to $23,415 and $12,000 in January and March 2002, respectively. The remaining principal after March 2002 is payable in 15 quarterly installments. Hua Nan Secured by 2000.11.3~ Repayment of principal is in 32 3.70%~ 131,240 Commercial land and 2010.11.3 quarterly installments 4.775% Bank buildings beginning from February 2003. Hua Nan Secured by 2000.11.3~ Repayment of principal is in 24 3.70%~ 86,640 Commercial buildings 2007.11.3 quarterly installments 4.775% Bank beginning from February 2002. Hua Nan Secured by 2003.03.12~ Repayment of principal is in 16 4.00%~ 11,000 Commercial machinery 2008.03.12 quarterly installments 4.185% Bank beginning from April 2004. Shanghai Credit 2003.06.05~ Repayment of principal and 4.5% 8,846 Commercial debts 2007.06.05 interest is in 48 monthly Bank installments beginning from July 2003. ---------- 418,646 Less: current portion of long-term debts 135,350 ---------- $ 283,296 ==========
The Company's long-term debt balances due for the five years following December 31, 2003, are as follows:
YEAR AMOUNT 2004 $ 135,350 2005 136,147 2006 45,802 2007 44,460 2008 and thereafter 56,887 ------------ $ 418,646 ============
(Continued) 7 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS 8) PENSION The Company has made monthly deposits equal to 2% of employees' total salaries in the Central Trust of China since March 2001. As of December 31, 2003, the reconciliation between funded status and accrued pension liabilities was as follows:
AMOUNT Benefit obligation: Vested benefit obligation $ 1,800 Non-vested benefit obligation 6,234 ----------- Accumulated benefit obligation 8,034 Additional benefits based on future salaries 5,430 ----------- Projected benefit obligation 13,464 Fair value of plan assets (4,463) ----------- Underfunded status 9,001 Unrecognized net transition obligation (3,542) Unrecognized pension gain 2,248 ----------- Accrued pension liabilities recognized on the balance sheet $ 7,707 =========== Amount of vested benefit $ 1,800 ===========
The components of net pension cost for 2003 were as follows:
AMOUNT Service cost $ 4,072 Interest cost 465 Actual return on plan assets (48) Net amortization 70 --------- Net pension cost $ 4,559 =========
In 2003, the actuarial assumptions were as follows:
Discount rate 3.50% Rate of increase in future compensation 3.00% Expected long-term rate of return on plan assets 3.50%
(Continued) 8 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS (9) INCOME TAX The Company's income tax is subject to a maximum income tax rate of 25%. The current statutory tax rate is 25%. For the year ended December 31, 2003, the components of income tax benefit were as follows:
AMOUNT Current income tax $ - Deferred tax benefit 66,072 ----------- Income tax benefit $ 66,072 ===========
For the years ended December 31, 2003, the differences between "expected" income tax at the statutory income tax rate, and effective income tax benefit as reported in the accompanying financial statements, were as follows:
AMOUNT Expected income tax benefit $ 90,374 Gain on disposal of investments 1,408 Investment tax credits and R&D expense tax credits 74,083 Change in estimate of prior years' deferred tax assets 4,475 Others (336) Valuation allowance for deferred tax assets (103,932) ------------ Actual income tax benefit $ 66,072 ============
For the year ended December 31, 2003, the components of the Company's deferred income tax benefits were as follows:
AMOUNT Deferred tax benefits (exclusive of the effects of other components below) $ 68,001 Increase in beginning-of-the-year balance of the valuation allowance for deferred tax assets (1,929) ----------- Total deferred tax benefits $ 66,072 ===========
(Continued) 9 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS The deferred tax assets as of December 31, 2003, were as follows:
AMOUNT Current: Deferred tax assets $ 2,284 Less: valuation allowance (2,284) ------------ Net deferred tax assets $ - ============ Noncurrent: Deferred tax assets $ 456,464 Less: valuation allowance (274,803) ------------ Net deferred tax assets 181,661 Deferred tax liabilities (152) ------------ Net noncurrent deferred tax assets $ 181,509 ============ Total deferred tax assets $ 458,748 ============ Total deferred tax liabilities $ 152 ============ Total valuation allowance for deferred tax assets $ 277,087 ============
The components of deferred tax assets as of December 31, 2003, were as follows:
AMOUNT Deferred tax assets: Loss carryforwards $ 265,207 Investment tax credits and R&D expense tax credits 188,880 Inventories 2,284 Accrued employee benefits 450 Accrued pension liabilities 1,927 ------------ 458,748 Less: valuation allowance for deferred tax assets (277,087) ------------ Net deferred tax assets $ 181,661 ============ Deferred tax liabilities: Unrealized foreign exchange gain 152 ============
(Continued) 10 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS In accordance with the ROC Income Tax Law, the Company's losses for tax purposes, as assessed by the tax authorities, can be carried forward to offset any future taxable income for a period of five years. As of December 31, 2003, the Company's total loss carryforward amounts and their expiry dates were as follows:
YEAR OF LOSS AMOUNT YEAR OF EXPIRATION 1999 $ 23,510 2004 2000 176,576 2005 2001 278,257 2006 2002 224,324 2007 2003 358,162 2008 -------------- $ 1,060,829 ==============
Pursuant to the ROC Statute for Upgrading Industries, the Company's unused investment tax credit for the purchase of automation equipment and R&D expense tax credit as of December 31, 2003, were as follows:
YEAR OF LOSS AMOUNT YEAR OF EXPIRATION 2000 $ 7,054 2004 2001 5,669 2005 2002 102,074 2006 2003 74,083 2007 ------------ $ 188,880 ============
The ROC income tax authorities have assessed the Company's income tax returns for all years through 1999. In assessing the realizability of deferred tax assets, the management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $1,834,384 prior to the expiration of the net operating loss carryforward in 2008 and investment tax credits in 2007. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize $1,108,348 of benefits of these deductible differences at December 31, 2003. (Continued) 11 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS (10) STOCKHOLDERS' EQUITY 1) Capital surplus The ROC Company Law prescribes that capital surplus should be used to offset an accumulated deficit before utilizing realized capital surplus to increase issued share capital. The realized capital surplus includes the amount in excess of the par value of common stock issued and any amounts donated to the Company. The amount to be capitalized cannot exceed the specific percentage of capital surplus every year. 2) Legal reserve The ROC Company Law stipulates that companies must retain 10% of their annual net earnings, as defined in the Law, until such retention equals the amount of authorized share capital. The legal reserve shall be used exclusively to offset deficits and is prohibited from being distributed as cash dividends. However, the legal reserve may be transferred to capital upon approval of the stockholders when it has been accumulated to a level equal to at least one-half of the issued share capital, and then only one-half of such reserve may be transferred. 3) Distribution of earnings The Company's articles of incorporation stipulate that not less than 1% of annual earnings, net of income tax, accumulated deficit, and legal reserve appropriation are to be distributed as employee bonuses, and the remaining portion may be distributed according to a stockholders' meeting resolution. 4) Imputation credit account and imputation tax credit ratio As of December 31, 2003, the Company's total imputation credit account was $0. Due to the loss from operations for the year ended December 31, 2003, the imputation tax credit ratio of the Company was zero for 2003. (11) TRANSACTIONS WITH RELATED PARTIES 1) Name and relationship of related parties
NAME RELATIONSHIP WITH THE COMPANY Unitive International Limited (UIL) The Company's major shareholder Wah Lee Industrial Corp. (Wah Lee) The Company's chairman is the same as Wah Lee's. Unitive Electronics Inc. (UEI) An affiliated company of UIL
(Continued) 12 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS 2) Nature of transactions 1. Sales
% OF THE COMPANY'S AMOUNT NET SALES UEI $ 10,142 10 =========== ==
As of December 31, 2003, the balance of accounts receivable resulting from the above transactions was as follows:
AMOUNT % UEI $ 5,146 16 ========= ==
The sales prices and terms were not significantly different between sales to related parties and other customers. 2. Purchases
% OF THE COMPANY'S NET AMOUNT SALES UEI $ 396 - Wah Lee 512 1 ------- -- $ 908 1 ======= ==
As of December 31, 2003, the balance of accounts payable resulting from the transactions was as follows:
AMOUNT % Accounts payable: Wah Lee $ 54 - ======= ===
The purchase prices and terms were not significantly different between purchases from related parties and other firms. (Continued) 13 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS 3. Others The Company entered into a patent and technical support agreement with UIL, recorded under intangible assets and amortized over 10 years on a straight-line basis. The resulting amortization expenses from the above-mentioned transaction were $9,600 in 2003, and were accounted for under cost of sales. Furthermore in accordance with the contract, the Company should quarterly pay a further 2.5% of total sales over USD10,000,000 to UIL as royalties. In 2002, the Company entered into a global marketing and R&D system contract with UEI. Under this contract, the Company should pay a fixed percentage of the Company's sales as commission expense. The commission paid pursuant to this contract amounted to $9,657, and was booked as an operating expense in 2003. As of December 31, 2003, commission payment to UEI resulting from the above transaction was paid. On October 2002, the Company entered into a service agreement with UEI and a third party. Under this agreement, UEI will assist the Company in acquisition of demonstration equipment wafer bumping line from the third party, and provide support services to the Company with respect to the implementation of such bumping line. According to the predetermined payment schedule, the Company shall pay UEI the following nonrefundable fees:
PAYMENT DATE (FIRST OF TWO PAYMENTS) AMOUNT Contract date Nil USD 75,000 Delivery date of equipment January 31, 2003 USD 175,000 Date of successful start of production May 14, 2003 USD 100,000
In 2003, the Company had incurred net service expense of $9,543 (USD 275,000), which was booked as operating expense. As of December 31, 2003, the service expense resulting from the above transaction was paid. According to the above agreement, the Company will be responsible for taxes and duties on the equipment, while the third party will carry its own property insurance until the equipment is purchased by the Company. In addition, expiring on September 30, 2004, the Company has an option to purchase the equipment from the third party. As of December 31, 2003, the above-mentioned equipment had been imported. The Company had sold raw materials and overpaid the commission to UEI as of December 31, 2003; the resulting amount of $1,108 was recorded under prepaid expenses and other current assets. (Continued) 14 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS As of December 31, 2003, the Company had consigned the manufacturing process to UEI on behalf of its client; the resulting amount of $4,686 was recorded under accrued expense and other current liabilities. (12) PLEDGED ASSETS As of December 31, 2003, the details and net book value of pledged assets were as follows:
PLEDGED ASSETS PLEDGED FOR BOOK VALUE Time deposits Short-term debts $ 12,700 Property, plant and equipment Long-term debts 609,702 ------------- Total $ 622,402 =============
(13) COMMITMENTS 1) As of December 31, 2003, the Company had outstanding letters of credit totaling approximately $37,262. The outstanding amounts of letters of credit were mainly used for acquisition of equipment. 2) The Company entered into foreign currency forward contracts to hedge exchange rate risk arisen from fluctuation in foreign currency debts. As of December 31, 2003, the Company did not have any unsettled foreign currency forward contracts. The period of the aforementioned contracts ranged from September 2, 2002, to March 25, 2003. The effects of net forward contract receivable (payable) and its fair value on the financial statements were not significant. (14) OTHER A summary of employment, depreciation and amortization expenses categorized by cost of goods sold and operating expenses is as follows:
FUNCTION COST OF OPERATING ACCOUNT GOODS SOLD EXPENSES TOTAL Employment expenses: Salaries 65,843 45,731 111,574 Labor and health insurance 4,390 2,169 6,559 Pension 2,664 1,895 4,559 Other employment expense 3,024 1,445 4,469 Depreciation expense 136,937 11,124 148,061 Depletion expense - - - Amortization expense 10,965 2,448 13,413
(Continued) 15 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS (15) EARNINGS PER SHARE
Numerator Basic: Net Profit $ (295,424) ============ Denominator/1000 shares Basic: Weighted average shares 130,000 ============
The Company issued only common stocks in 2003, and therefore had simple capital structure. Under ROC SFAS No. 24 "Earnings per Share", if the Company's capital structure is simple, only basic earnings per share need to be presented and basic earnings per share is computed using the weighted average number of shares outstanding during the period. (16) SUBSEQUENT EVENT Amkor Technology, Inc. (Amkor) has agreed to acquire 60 percent of the capital stock of the Company pursuant to a Stock Purchase Agreement dated as of June 3, 2004, by and among Amkor, the Company, and certain stockholders of the Company, as amended by a letter agreement dated July 9, 2004. The consideration payable under the agreement consists of a cash payment of approximately $19.4 million at closing, the assumption of approximately $16.3 million of debt at closing, the payment of approximately $450,000 in other costs and a variable contingent cash payment to be paid, if at all, based on the achievement of certain performance goals. In addition, Amkor has a call option to acquire the remaining approximate 40.0% of the Company at any time over the subsequent 18-month period. Amkor is required to exercise the call option if the Company achieves certain goals within such 18-month period. The Company will operate as subsidiaries of Amkor. (Continued) 16 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS (17) DIFFERENCES BETWEEN ROC GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Company's financial statements are prepared in accordance with accounting principles generally accepted in ROC (ROC GAAP), which differ in certain significant respects from accounting principles generally accepted in US (US GAAP). The principal differences between ROC GAAP and US GAAP are presented below together with explanations of certain adjustments that affect the net loss and total shareholders' equity as of and for the year ended December 31, 2003. RECONCILIATION OF NET LOSS: Net loss reported under ROC GAAP $ (295,424) US GAAP adjustments: Unrealized gain on marketable securities 962 Deferred income tax expense on unrealized gain on marketable securities (240) Deferred income tax expense - change in valuation allowance on deferred tax assets (65,832) ------------ Net loss under US GAAP $ (360,534) ============ PRESENTATION OF COMPREHENSIVE LOSS UNDER US GAAP Other comprehensive loss: Foreign currency translation adjustment $ - Additional minimum liability - Net gains (losses) on cash flow hedges - Net unrealized holding gains (losses) - ------------ Other comprehensive income (loss) - ------------ Comprehensive loss $ (360,534) ============ RECONCILIATION OF STOCKHOLDERS' EQUITY Total stockholders' equity reported under ROC GAAP $ 686,558 US GAAP adjustments: Short-term investments 962 Deferred income tax assets (181,509) ------------ Total stockholders' equity under US GAAP $ 506,011 ============
(Continued) 17 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS 1) Short-term investments Under ROC GAAP, investment in marketable securities is stated at the lower of cost or market method. Any unrealized holding loss is reported as non-operating losses on the statement of income. When the market price restores in the subsequent period, the unrealized holding gain is to be recognized to the extent not exceeding the unrealized holding loss recognized previously. Under US GAAP, the investment in marketable securities would be classified as trading, available-for-sale, and hold-to-maturity. The unrealized gains or losses resulting from holding trading securities are reported as non-operating gains or losses on the statement of income and from holding available-for-sale are reported as other comprehensive income. The investment in marketable securities held by the Company is classified as trading and carried at aggregate fair value with unrealized gains and losses reported as non-operating gains and losses on the statement of income. During the\ year period ended December 31, 2003, due to the increase in market price for the marketable securities held by the Company, the Company had $962 of unrealized holding gains, giving rise to an adjustment between ROC GAAP and US GAAP. This also results in additional deferred income tax expense of $240 under US GAAP. 2) Deferred tax assets Under ROC GAAP, a valuation allowance in provided on deferred tax assets when they are not certain to be realized based on the available projection of future taxable income. However, the criteria by which the need for a valuation allowance is determined is less stringent as compared to US GAAP. Under US GAAP, cumulative losses in recent years are a significant piece of negative evidence, which is difficult to overcome with projections of future taxable income for the purpose of determining the valuation allowance. The Company suffered losses in 2002 and 2003. As a result, the Company did not use the projection of future taxable income in determining its net deferred tax asset valuation allowance as of December 31, 2002 or 2003 in accordance with US GAAP, giving rise to a total adjustment of $181,509 between ROC GAAP and US GAAP for deferred tax assets, and $65,832 for deferred income tax expense. 3) Derivative instruments Under US GAAP, derivative instruments (forward contracts) are marked to market through earnings, unless they qualify as hedges. Under no circumstances are premiums and discounts to be amortized over the life of the contract as indicated by the policy. Under ROC GAAP, derivative instruments (forward contracts) are reported at the unamortized balance. The premiums and discounts are to be amortized over the life of the contract as indicated by the policy. (Continued) 18 UNITIVE SEMICONDUCTOR TAIWAN CORP. NOTES TO FINANCIAL STATEMENTS As of December 31, 2003, the fair value for the derivative instruments (forward contracts) approximated to the unamortized balance. Further, during the year ended December 31, 2003, the net effect of amortization of premiums and discounts was insignificant. Therefore, no GAAP adjustment between ROC GAAP and US GAAP was incorporated into above reconciliation schedule. 4) Provision for inventory losses Provisions to write down inventory to estimated net realizable value are reported as a component of non-operating expense in the statement of operations under ROC GAAP. Such provisions are required to be reported as a component of cost of sales under US GAAP. Consequently, cost of sales, gross loss, and operating loss would be increased by $7,713 for the year ended December 31, 2003 under US GAAP. This adjustment would have no impact on net loss reported under US GAAP. 5) Long-lived assets Under US GAAP, gain or loss on sale of long-lived assets reported as operating income or loss. However, under ROC GAAP it is reported as non-operating income or loss. Consequently, cost of sales, gross loss, and operating loss would be increased by $1,907 for the year ended December 31, 2003 under US GAAP. This adjustment would have no impact on net loss reported under US GAAP.