Lite-On IT Corp. and Subsidiaries. Consolidated Financial Statements for the Years Ended December 31, 2008 and 2007 and Independent Auditors Report

Transcription

1 Lite-On IT Corp. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2008 and 2007 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders Lite-On IT Corp. We have audited the accompanying consolidated balance sheets of Lite-On IT Corp. ( Parent Company ) and its subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in shareholders equity, and cash flows for the years 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. However, as stated in Note 2 to the consolidated financial statements, we did not audit the financial statements of these subsidiaries as of and for the years ended December 31, 2008 and The total assets of these subsidiaries were 10.72% (NT$3,903,525 thousand) and 12.90% (NT$5,310,539 thousand) of the consolidated assets as of December 31, 2008 and 2007, respectively, and their net sales were 32.39% (NT$18,290,487 thousand) and 18.66% (NT$10,420,661 thousand) of consolidated net sales in 2008 and 2007, respectively. The financial statements of these subsidiaries were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the subsidiaries amounts included herein, 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. As stated in Note 3 to the consolidated financial statements, the Accounting Research and Development Foundation issued Interpretation , which requires to recognize as compensation expenses bonuses paid to employees and directors beginning January 1, These bonuses were previously recorded as appropriations from earnings

3 In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lite-On IT Corp. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. February 12, 2009 Notice to Readers The accompanying consolidated 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 consolidated financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and consolidated financial statements shall prevail

4 LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS' EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash (Note 4) $ 10,211, $ 9,084, Financial liabilities at fair value through profit or loss - Financial assets at fair value through profit or loss - current current (Notes 2 and 5) $ 14,814 - $ 3,215 - (Notes 2 and 5) 47,006-21,579 - Accounts payable (Note 21) 9,494, ,522, Accounts receivable, net (Notes 2, 6 and 21) 6,586, ,263, Income tax payable (Notes 2 and 17) 1,483, ,308,874 3 Other receivables (Note 21) 612, ,014 1 Accrued expenses 3,873, ,176,997 8 Inventories (Notes 2 and 7) 4,920, ,195, Other payables (Note 21) 809, ,658,012 4 Noncurrent assets classified as held for sale (Notes 2 and 8) ,600 - Accrued warranty liabilities (Note 2) 679, ,421 1 Deferred income tax assets - current (Notes 2 and 17) 366, ,829 1 Other current liabilities 335, ,701 1 Other current assets 280, ,127 1 Total current liabilities 16,690, ,767, Total current assets 23,024, ,927, OTHER LIABILITIES LONG-TERM INVESTMENTS Accrued pension cost (Notes 2 and 14) 84, ,983 - Available-for-sale financial assets - noncurrent (Notes 2 and 9) 83, ,072 1 Guarantee deposits received 11,485-27,636 - Financial assets carried at cost - noncurrent (Notes 2 and 10) 5,345-11,385 - Deferred income tax liabilities - noncurrent (Notes 2 and 17) ,383 1 Investments accounted for by the equity method (Notes 2 and 11) 15,790-8,329 - Total other liabilities 95, ,002 1 Total long-term investments 104, ,786 1 Total liabilities 16,786, ,017, PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 12) Buildings 2,754, ,614,754 6 SHAREHOLDERS' EQUITY Tooling equipment 426, ,608 1 Parent Company's common stock with par value of NT$10.00; Computer equipment 192, ,932 1 authorized - 1,500,000 thousand shares; issued and outstanding - Machinery and equipment 2,940, ,712, ,138 thousand shares in 2008 and 859,139 thousand shares in Transportation equipment 19,748-21, ,741, ,591, Furniture and fixtures 104,783-99,814 - Capital surplus Other equipment 445, ,517 1 Additional paid-in capital from share issuance in excess of par Total cost 6,884, ,440, value 4,780, ,780, Less: Accumulated depreciation 2,138, ,577,020 4 Long-term investments 12,157-12,157 - Accumulated impairment 108, Total capital surplus 4,793, ,793, Construction-in-progress and prepayments for equipment 478, ,065 - Retained earnings Legal reserve 2,462, ,292,498 5 Net property, plant and equipment 5,116, ,072, Unappropriated earnings 3,292, ,663,981 9 Total retained earnings 5,754, ,956, INTANGIBLE ASSETS (Notes 2 and 13) Other equity Patent use rights 2,134, ,358,893 6 Cumulative translation adjustments 332, ,146 1 Land use rights 29,575-44,610 - Unrealized gain (loss) on financial instruments (112,244 ) (1 ) 88,919 - Goodwill 3,272, ,267,428 8 Total other equity 219, ,065 1 Treasury stock - 7,200 thousand shares (138,026 ) Total intangible assets 5,436, ,670, Total Parent Company shareholders' equity 19,370, ,749, OTHER ASSETS Refundable deposits (Note 23) 881, ,162 2 MINORITY INTEREST 259, ,491 1 Deferred charges (Note 2) 1,510, ,172 2 Deferred income tax assets - noncurrent (Notes 2 and 17) 205, Total shareholders' equity 19,630, ,133, Restricted assets - noncurrent (Note 22) 137, ,072 1 Total other assets 2,735, ,928,406 5 TOTAL $ 36,417, $ 41,151, TOTAL $ 36,417, $ 41,151, The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 12, 2009) - 3 -

5 LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % GROSS SALES $ 57,514, $ 57,644, LESS: SALES RETURNS 682, ,043,392 2 SALES ALLOWANCES 361, ,055 1 NET SALES (Notes 2 and 21) 56,471, ,843, COST OF SALES (Notes 18 and 21) 46,975, ,658, GROSS PROFIT 9,495, ,185, OPERATING EXPENSES (Notes 18 and 21) Selling 4,880, ,671,477 8 General and administrative 1,532, ,388,536 3 Research and development 2,044, ,800,178 3 Total operating expenses 8,457, ,860, OPERATING INCOME 1,037, ,325,519 2 NONOPERATING INCOME AND GAINS Interest income 353, ,529 1 Investment income recognized under the equity method (Notes 2 and 11) 6, Dividend income 4,796-5,305 - Gain on disposal of property, plant and equipment 3, Gain on sale of investments 102, Exchange gain, net (Note 2) 490, ,016 1 Rental income 27,321-11,856 - Income from scrap sales 62,221-70,807 - Reversal of provision for loss on inventories (Note 2) ,807 - Valuation gain on financial assets, net (Notes 2 and 5) 547, ,966 - Miscellaneous income 280, ,550 - Total nonoperating income and gains 1,878, ,005,836 2 NONOPERATING EXPENSES AND LOSSES Interest expense ,653 - Investment loss recognized under the equity method, net (Notes 2 and 11) Loss on disposal of property, plant and equipment 7,962-2,863 - (Continued) - 4 -

6 LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % Provision for loss on inventories (Note 2) $ 96,180 - $ - - Impairment loss (Notes 2, 8, 10 and 24) 114,895-49,202 - Valuation loss on financial liability, net (Notes 2 and 5) 747, ,163 - Miscellaneous expenses (Note 24) 583, ,037 - Total nonoperating expenses and losses 1,550, ,969 - CONSOLIDATED INCOME BEFORE INCOME TAX 1,366, ,032,386 4 INCOME TAX (Notes 2 and 17) 79, ,673 1 CONSOLIDATED NET INCOME $ 1,286,233 2 $ 1,757,713 3 ATTRIBUTABLE TO: Shareholders of Parent Company $ 1,331,918 2 $ 1,699,028 3 Minority interest (45,685 ) - 58,685 - $ 1,286,233 2 $ 1,757,713 3 Before Income Tax After Before Income Income Tax Tax After Income Tax EARNINGS PER SHARE (Note 19) Basic $ 1.31 $ 1.53 $ 2.23 $ 2.06 Diluted $ 1.29 $ 1.51 $ 2.23 $ 2.06 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 12, 2009) (Concluded) - 5 -

7 LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) Capital Surplus (Notes 2 and 15) Others Adjustment Items Additional Unrealized Gain Paid-in Capital (Loss) on Capital Stock (Note 15) from Share Equity in Capital Cumulative Financial Issued and Advance Issuance in Surplus Reported Retained Earnings (Note 15) Translation Instruments Total Outstanding Receipts for Excess of by Equity-method Unappropriated Adjustments (Notes 2 Treasury Stock Minority Interest Shareholders Common Stock Common Stock Par Value Investees Legal Reserve Special Reserve Earnings (Note 2) and 15) (Notes 2 and 16) (Note 2) Equity BALANCE, JANUARY 1, 2007 $ 7,365,320 $ 4,275,531 $ 1,723,364 $ 12,157 $ 2,223,877 $ 106,106 $ 2,644,916 $ 29,305 $ 120,863 $ - $ - $ 18,501,439 Conversion of advance receipts for common stock into common stock and capital surplus 1,100,566 (4,275,531 ) 3,174, Cancellation of common stock and capital surplus resulting from private placement of securities (1,100,566 ) - (3,174,965 ) (4,275,531 ) Appropriation of the 2006 earnings Legal reserve ,621 - (68,621 ) Special reserve (106,106 ) 106, Cash dividends (575,680 ) (575,680 ) Stock dividends 59, (59,261 ) Remuneration to directors* (10,762 ) (10,762 ) Bonus to employees - cash* (14,355 ) (14,355 ) Bonus to employees - stock* 57, (57,390 ) Effect of addition of one subsidiary to the consolidated entities , ,438 Issuance of common stock for cash 1,109,420-3,057, ,166,982 Consolidated net income in ,699, ,685 1,757,713 Change in unrealized loss on financial instruments (31,944 ) - - (31,944 ) Change in translation adjustments , , ,209 BALANCE, DECEMBER 31, ,591,391-4,780,926 12,157 2,292,498-3,663, ,146 88, ,491 20,133,509 Appropriation of the 2007 earnings Legal reserve ,903 - (169,903 ) Cash dividends (1,314,483 ) (1,314,483 ) Stock dividends 42, (42,958 ) Remuneration to directors* (23,007 ) (23,007 ) Bonus to employees - cash* (46,354 ) (46,354 ) Bonus to employees - stock* 107, (107,030 ) Changes in unrealized loss on available-for-sale financial assets (201,163 ) - - (201,163 ) Consolidated net income in ,331, (45,685 ) 1,286,233 Cash dividend received from subsidiary (58,450 ) (58,450 ) Change in translation adjustments , (20,838 ) (7,832 ) Acquisition of treasury stock - 7,200 thousand shares (138,026 ) - (138,026 ) BALANCE, DECEMBER 31, 2008 $ 8,741,379 $ - $ 4,780,926 $ 12,157 $ 2,462,401 $ - $ 3,292,164 $ 332,152 $ (112,244 ) $ (138,026 ) $ 259,518 $ 19,630,427 *Please see Note 21-b The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 12, 2009) - 6 -

8 LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income $ 1,286,233 $ 1,757,713 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 658, ,951 Amortization 665, ,134 Allowance for loss on doubtful accounts 16,116 29,498 Provision (reversal of provision) for loss on inventories 96,180 (105,807 ) Impairment loss on fixed assets and financial assets carried at cost - noncurrent 114,895 49,202 Investment loss (gain) recognized under the equity method, net (6,976 ) 51 Gain on disposal of investments, net (102,049 ) - Loss on disposal of property, plant and equipment, net 4,031 2,863 Loss on disposal of deferred charges, net - 2,249 Deferred income tax (406,760 ) 5,564 Gain on disposal of intangible assets - land use rights (3,186 ) - Net changes in operating assets and liabilities Financial assets held for trading (25,427 ) (17,920 ) Financial liabilities held for trading 11,599 (10,285 ) Accounts receivable 3,661,134 4,320,732 Other receivables (38,194 ) 27,173 Inventories 2,177,867 (1,136,491 ) Other current assets 49, ,302 Accounts payable (4,027,570 ) (4,745,590 ) Accrued expenses 696,619 (428,039 ) Income tax payable 174,374 41,392 Other payables (808,970 ) 842,466 Accrued warranty liabilities (9,421 ) 137,723 Other current liabilities (73,966 ) 128,528 Accrued pension cost (20,523 ) (6,336 ) Other liabilities - (430 ) Net cash provided by operating activities 4,089,885 2,194,643 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds of the return of capital on an investment classified under available-for-sale financial assets - 6,919 Proceeds of the disposal of available-for-sale financial assets 342,785 - Cash paid for acquisition of subsidiaries - (156,968 ) Acquisition of property, plant, and equipment (705,789 ) (993,448 ) Proceeds of the disposal of property, plant, and equipment 127, ,211 Proceeds of the disposal of deferred charges - 13,246 Acquisition of intangible assets - (4,275,531 ) Increase in refundable deposits (9,300 ) (843,627 ) Increase in deferred charges (1,082,022 ) (611,166 ) (Continued) - 7 -

9 LITE-ON IT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) Decrease (increase) in restricted assets $ 52,262 $ (118,487 ) Proceeds from sale of noncurrent assets held for sale 177,600 - Proceeds from sale of land use rights 19,936 - Net cash used in investing activities (1,076,941 ) (6,864,851 ) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in guarantee deposits received (16,151 ) 26,528 Increase in minority interest - 306,438 Cash dividends, remuneration to directors and bonus to employees (1,474,161 ) (646,235 ) Issuance of common stock for cash - 4,166,982 Cash paid for acquisition of treasury stock (138,026 ) - Net cash provided by (used in) financing activities (1,628,338 ) 3,853,713 EFFECT OF EXCHANGE RATE CHANGES (257,122 ) 96,708 NET INCREASE (DECREASE) IN CASH 1,127,484 (719,787 ) CASH, BEGINNING OF YEAR 9,084,234 9,804,021 CASH, END OF YEAR $ 10,211,718 $ 9,084,234 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid (excluding capitalized interest) $ - $ 22,653 Income tax paid $ 312,226 $ 203,351 CASH PAID FOR ACQUISITION OF PROPERTY, PLANT, AND EQUIPMENT Acquisition of property, plant, and equipment $ 698,042 $ 812,822 Unpaid balance, beginning of year 162, ,576 Unpaid balance, end of year (155,203 ) (162,950 ) Cash paid $ 705,789 $ 993,448 CASH PAID FOR DIVIDENDS, BONUS TO EMPLOYEES, AND REMUNERATION TO DIRECTORS Amount declared $ 1,442,294 $ 600,797 Unpaid balance, beginning of year 57, ,601 Unpaid balance, end of year (25,296 ) (57,163 ) Cash paid $ 1,474,161 $ 646,235 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche audit report dated February 12, 2009) (Concluded) - 8 -

10 LITE-ON IT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Lite-On IT Corp. (the Parent Company ) was incorporated in March 1999 under the Company Law of the Republic of China. The Parent Company was spun off from Lite-On Technology Corp. (LTC) to continue the operations of LTC s CD-ROM division. LTC owned 43.54% and 44.07% of the Parent Company s outstanding shares as of December 31, 2008 and 2007, respectively. T The core business of the Parent Company consists of information storage, equipment processing, electronic set manufacturing and stationary machine wholesaling. The Parent Company s shares began to be traded on the GreTai Securities Market (an over-the-counter securities exchange) in July 2001, and then became listed on the Taiwan Stock Exchange in November As of December 31, 2008 and 2007, the Parent Company and its subsidiaries (hereinafter referred to collectively as the Group ) had 8,169 and 10,790 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (ROC). Under these guidelines and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts; allowance for loss on inventories; depreciation of property; plant and equipment; amortization of intangible assets and deferred charges; accrued warranty liabilities; pension cost; loss on pending litigations; remuneration to director and bonus to employees; etc. Actual results may differ from these estimates. For readers convenience, the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the ROC. If inconsistencies arise between the English version and the Chinese version or if differences arise in the interpretations between the two versions, the Chinese version of the financial statement shall prevail. Significant accounting policies are summarized as follows: Basis for Consolidation The consolidated financial statements should include all of the Parent Company s direct and indirect investees in which the Parent Company has controlling interest or has voting rights of over 50%. Thus, the consolidated entities in 2008 and 2007 included the Parent Company and all of its subsidiaries. For subsidiaries acquired during the reporting period, their revenues and expenses generated after the acquisition date were consolidated. All significant intercompany accounts and transactions have been eliminated upon consolidation. The organization of the consolidated entities as well as their intercompany relationships and percentage of ownership as of December 31, 2008 and 2007 are shown in Table 12 (attached). The names, locations and other information of investees are shown in Table 7 (attached)

11 The consolidated financial statements for 2008 and 2007 of Philips & Lite-On Digital Solutions Netherlands B.V. (former name: Philips & Lite-On Digital Solutions Europe B.V.) and Philips & Lite-On Digital Solutions USA Inc., Lite-On Information Technology B.V. and Lite-On Information Technology GmbH, as well as the financial statements for 2008 of Philips & Lite-On Digital Solutions Germany GmbH. and 2007 of Lite-On Sales & Distribution Inc., Lite-On Americas Inc., Lite On (USA) International Inc. were audited by other auditors. Under certain guidelines, the financial statements for 2008 and 2007 of APMCQ Automotive Playback Modules Portugal, Unipessoal LDA, Automotive Playback Modules Services Austria GmbH and Philips & Lite-On Digital Solutions Korea Ltd., JVC Lite-On IT Manufacturing and Sale, Limited, as well as the financial statements for 2008 of Lite On (USA) International Inc. and Lite-On IT Trading (Guangzhou) Ltd. were unaudited because each of their capital stock was lower than NT$30,000 thousand and their revenues were individually lower than NT$50,000 thousand. The Parent Company believes that, had these investees financial statements been audited, any adjustments would have had no material effect on the Parent Company s financial statements. A minority interest in 51% of the shares of Philips & Lite-On Digital Solutions Corporation as of December 31, 2008 and 2007 was included in shareholders equity. Foreign-currency accounts of foreign subsidiaries were translated into New Taiwan dollars as follows: assets and liabilities - at the current rate; shareholders equity - at historical rates; and income and expense accounts - at the average exchange rate during the year. The net translation adjustment was reported as a separate component of shareholders equity. Current and Noncurrent Assets and Liabilities Current assets include cash and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. All other assets such as property, plant and equipment and intangible assets are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent. Financial Assets and Liabilities at Fair Value through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (FVTPL) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Parent Company recognizes a financial asset or a financial liability on its balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Company has lost control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired. Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. At each balance sheet date subsequent to issue of initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. Cash dividends received subsequently (including those received in the year of investment) are recognized as income for the year. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in profit or loss. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability

12 Fair values of financial assets and financial liabilities at the balance sheet date are determined as follows: Financial assets and financial liabilities without quoted prices in an active market - at values determined using valuation techniques. Revenue Recognition, Trade Receivables and Allowance for Doubtful Accounts Revenue from sales of goods is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Company and the customers for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest. An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts receivable. The Company assesses the probability of collections of accounts receivable by examining the aging analysis of the outstanding receivables, credit assessment and economic environments, etc. Inventories Inventories including raw materials, supplies, work in process, semi-finished goods, finished goods and merchandise. Inventories are recorded at weighted-average cost. Market value means replacement cost for raw materials, supplies and semi-finished goods and net realizable value for finished goods, work in process and merchandise. Besides assessing the potential impact of technology change for stock obsolescence, the inventories at the balance sheet date are also evaluated for estimated excess quantities and obsolescence based on a demand forecast. Estimated losses on scrap and slow-moving items are recognized as an allowance for inventory obsolescence. Noncurrent Assets Held for Sale Noncurrent assets held for sale is a noncurrent asset or an asset included within a disposal group classified as held for sale, that is available for immediate sale in its present condition subject to usual customary terms and is highly probable to be completed within one year. If the fair value of an asset is less than its carrying amount, the carrying amount of the assets is reduced to its fair value amount. As impairment loss is charged to earnings. If an impairment less subsequently reverse, the carrying amount of the assets is increased accordingly, but the increased carrying amount may not exceed the carrying amount than would have been determined had no impairment loss been recognized for the asset in prior years. Available-for-sale Financial Assets Available-for-sale financial assets are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are remeasured at fair value, with changes in fair value recognized in equity until the financial assets are disposed of, at which time, the cumulative gain or loss previously recognized in equity is included in profit or loss for the year. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis

13 Fair values of financial assets at the balance sheet date are determined as follows: Publicly traded stocks - at closing prices; open-end mutual funds - at net asset values. The recognition, derecognition and the fair value bases of available-for-sale financial assets are similar to those of financial assets at FVTPL. Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are not recognized as investment income but are recorded as an increase in the number of shares. The total number of shares subsequent to the increase is used for recalculation of cost per share. An impairment loss is recognized when there is objective evidence that the financial asset is impaired. Any subsequent decrease in impairment loss for an equity instrument classified as available-for-sale is recognized directly in equity. If the fair value of a debt instrument classified as available-for-sale subsequently increases as a result of an event which occurred after the impairment loss was recognized, the decrease in impairment loss is reversed to profit. Financial Assets Carried at Cost Investments in equity instruments with no quoted prices in an active market and with fair values that cannot be reliably measured, such as non-publicly traded stocks and stocks traded in the Emerging Stock Market, are measured at their original cost. The accounting treatment for dividends on financial assets carried at cost is similar to that for dividends on available-for-sale financial assets. An impairment loss is recognized when there is objective evidence that the asset is impaired. A reversal of this impairment loss is disallowed. Investments Accounted for by the Equity Method Investments in which the Company holds 20 percent or more of the investees voting shares or exercises significant influence over the investees operating and financial policy decisions are accounted for by the equity method. Stock investments accounted for by the equity method are initially carried at cost and subsequently adjusted for the Company s proportionate share in the investees earnings or losses and changes in capital surplus. Cash dividends received are recognized as a reduction of the carrying value of the investments. Investment income (or loss) is recognized whenever the investees recognize income (or loss). Effective January 1, 2006, pursuant to the revised Statement of Financial Accounting Standard ( SFAS ) No. 5, Long-term Investments Accounted for by Equity Method, the acquisition cost is analyzed, and the acquisition cost in excess of the Company s share of the fair value of the identifiable net assets acquired is recognized as goodwill. Such goodwill is not amortized but instead is tested for impairment annually or whenever there are indications that the investments are impaired. The excess of the Company s share of the fair value of the net identifiable assets acquired over the cost of acquisition is used to reduce the fair value of each of the noncurrent assets acquired (except for financial assets other than investments accounted for by the equity method, noncurrent assets held for sale, deferred income tax assets, prepaid pension or other postretirement benefit) in proportion to the respective fair values of the noncurrent assets, with any excess recognized as an extraordinary gain. Stock dividends received are recorded only as an increase in the number of shares held but not recognized as investment income. Cost or carrying value per share is recomputed based on total shares held after stock dividends are received. For all stock investments, costs of investments sold are determined using the weighted-average method

14 Property, Plant and Equipment Property, plant, and equipment are stated at cost less accumulated depreciation. Major additions and improvements to property, plant and equipment are capitalized, while costs, of repairs and maintenance are expensed currently. Depreciation is provided on a straight-line basis over estimated useful lives as follows: buildings - 5 to 55 years; machinery and equipment - 3 to 10 years; tooling equipment - 1 to 5 years; computer equipment - 3 to 5 years; transportation equipment - 5 years; furniture and fixtures - 3 to 5 years; and miscellaneous equipment - 3 to 6 years. Property, plant and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. The related cost and accumulated depreciation of an item of property, plant and equipment are derecognized from the balance sheet upon its disposal. Any gain or loss on disposal of the asset is included in nonoperating income and gains or expenses and losses in the year of disposal. Intangible Assets Intangible assets consist of patents and goodwill, which are recognized at cost. Patents are depreciated using the straight-line method over 12 years. Goodwill is no longer amortized and is assessed for impairment annually. Land Use Rights Land use rights are amortized over 50 years. Deferred Charges Deferred charges, which primarily consist of computer software costs, costs of next-generation optical disk technology, royalty fees, and office and factory refurbishment expenses, are amortized using the straight-line method over 3 to 8 years. Product Warranty Reserve Estimation of related cost is based on historical experience about product service and warranty period. Impairment of Assets If the recoverable amount of an asset (mainly property, plant and equipment; intangible assets; deferred charges; and investments accounted for by the equity method) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is charged to earnings unless the asset is carried at a revalued amount, in which case the impairment loss is treated as a deduction to the unrealized revaluation increment. If an impairment loss subsequently reverses, the carrying amount of the asset is increased accordingly, but the increased carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss on goodwill is disallowed. Pensions Pension cost under a defined benefit plan is determined by actuarial valuations. Contributions made under a defined contribution plan are recognized as pension cost during the year in which employees render services

15 Prior service costs resulting from the amendment of the defined benefit pension plan amendment should be amortized using the straight-line method over the average service years from the amendment date until the benefits become vested. When the benefits are vested right after plan amendment, the prior service costs are immediately recognized as expenses. Curtailment or settlement gains or losses of the defined benefit plan are recognized as part of the net pension cost for the year. Subsidiaries that have few employees and operate as holding companies have no pension plans and thus have no pension fund contributions and do not recognize related expenses. Other subsidiaries contribute to pension funds in accordance with the laws or rules of their local governments and recognize these contributions as expenses. Stock-based Compensation Employee stock options granted between January 1, 2004 and December 31, 2007 are accounted for under the interpretations issued by the Accounting Research and Development Foundation. To valuate these plans, the Parent Company uses the intrinsic value method, under which compensation cost is recognized on a straight-line basis over the vesting year. Treasury Stock Upon disposal of the treasury stock, the sales proceeds in excess of the cost are accounted for as capital surplus - treasury stock. If the sales proceeds are less than the cost, the difference is accounted for as a reduction of the remaining balance of capital surplus - treasury stock. If the remaining balance of capital surplus - treasury stock is insufficient to cover the difference, the remainder is recorded as a reduction of retained earnings. If treasury stock is retired, the treasury stock account should be credited, and the capital surplus - premium and the capital stock accounts should be debited proportionately at the share ratio of the retired stock. If the carrying value of the retired stock exceeds the sum of both the par value of the retired stock and the capital surplus - premium, the difference is accounted for as a reduction of capital surplus - treasury stock, and any remaining difference is debited to retained earnings. If the sum of the par value and capital surplus - premium exceeds the carrying value of the retired stock, the excess is accounted for as an increase in capital surplus - treasury stock. Income Tax The Group applies inter-year allocations for its income tax, whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused loss carryforward and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. Tax credits for research and development expenditures and personnel training expenditures can be deducted from the current year s tax provision. Adjustments of prior years tax liabilities are added to or deducted from the current year s tax provision. According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings

16 Foreign Currencies Non-derivative foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange differences arising from settlement of foreign-currency assets and liabilities are recognized in profit or loss. At the balance sheet date, foreign-currency monetary assets and liabilities are revalued using prevailing exchange rates and the exchange differences are recognized in profit or loss. At the balance sheet date, foreign-currency nonmonetary assets (such as equity instruments) and liabilities that are measured at fair value are revalued using prevailing exchange rates, with the exchange differences treated as follows: a. Recognized under shareholders equity if the changes in fair value are recognized under shareholders equity; b. Recognized as gain or loss if the changes in fair value is recognized as gain or loss. Foreign-currency nonmonetary assets and liabilities that are carried at cost continue to be stated at exchange rates at trade dates. If the functional currency of an equity-method investee is a foreign currency, translation adjustments will result from the translation of the investee s financial statements into the reporting currency of the Company. Such adjustments are accumulated and reported as a separate component of shareholders equity. Reclassifications Certain accounts in the consolidated financial statements as of and for the year ended December 31, 2007 have been reclassified to conform to the presentation of the financial statements as of and for the year ended December 31, CHANGE IN ACCOUNTING PRINCIPLES In March 2007, the Accounting Research and Development Foundation issued Interpretation , which requires companies to recognize bonuses paid to employees and directors as compensation expenses beginning January 1, These bonuses were previously recorded as appropriations from earnings. This accounting change resulted in decreases of NT$141,332 thousand in consolidated net income and of NT$0.16 in after income tax basic earnings per share for CASH December 31 Cash on hand $ 1,045 $ 1,124 Checking accounts 1,359,892 1,071,446 Demand deposits 1,446,659 2,233,574 Time deposits 7,404,122 5,778,090 $ 10,211,718 $ 9,084,234 Time deposit interest rates were from 0.11% to 4.80% in 2008 and from 1.71% to 3.33% in

17 Overseas deposits of the Parent Company as of December 31, 2008 and 2007 were as follows: December 31 Netherlands - Amsterdam (US$183 thousand in 2008 and US$494 thousand in 2007, respectively) $ 6,043 $ 16,014 Netherlands - Amsterdam (EUR129 thousand in 2008 and EUR1,447 thousand in 2007, respectively) 5,966 69,091 USA - New York (US$118 thousand in 2008 and US$108 thousand in 2007, respectively) 3,876 3,493 USA - San Francisco (US$105 thousand in 2008 and US$243 thousand in 2007, respectively) 3,438 7,899 Singapore (US$14 thousand in 2008 and US$13 thousand in 2007, respectively) $ 19,770 $ 96, FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial instruments classified as held for trading were as follows: Financial assets held for trading December 31 Currency swap contracts $ 42,209 $ - Forward exchange contracts 4, Cross-currency swap contracts - 21,405 Financial liabilities held for trading $ 47,006 $ 21,579 Currency swap contracts $ 13,425 $ 495 Forward exchange contracts 1,389 - Cross-currency swap contracts - 2,720 $ 14,814 $ 3,215 The Parent Company entered into derivative contracts during the years ended December 31, 2008 and 2007 to manage exposures due to exchange rate and interest rate fluctuations. The financial risk management objective of the Parent Company is to minimize risks due to changes in fair value or cash flows

18 Outstanding forward exchange contracts as of December 31, 2008 and 2007 were as follows: December 31, 2008 Currency Maturity Date Contract Amount (in Thousands) Currency swap contracts US$/NT$ US$ 165,000/ NT$ 5,445,670 Sell US$/NT$ US$ 18,000/ NT$ 595,752 EUR/NT$ EUR 7,000/ US$ 9,822 December 31, 2007 Currency swap contracts US$/NT$ US$ 15,000/ NT$ 486,150 Sell US$/NT$ US$ 3,000/ NT$ 97,503 The Parent Company had no outstanding cross-currency swap contracts as of December 31, Outstanding cross-currency swap contracts as of December 31, 2007 were as follows: Contract Amount (in Thousands) Maturity Date Interest Rates for Payments Made Interest Rates for Payments Received December 31, 2007 US$130, to %-5.25% 1.56%-2.02% Net gains on financial assets held for trading for the years ended December 31, 2008 and 2007 were NT$547,998 thousand and NT$90,966 thousand, respectively. Net losses on financial liabilities held for trading for the years ended December 31, 2008 and 2007 were NT$747,890 thousand and NT$122,163 thousand, respectively. 6. ACCOUNTS RECEIVABLE December 31 Accounts receivable $ 6,857,216 $ 10,425,817 Less: Allowance for doubtful accounts 44,090 67,996 Allowances for sales discounts 227,088 94,533 Movements of allowances for doubtful accounts were as follows: $ 6,586,038 $ 10,263,288 Accounts Receivable Year Ended December 31 Balance, beginning of year $ 67,996 $ 130,296 Add: Provision for doubtful accounts 16,116 29,498 Deduct: Amounts written off 40,022 91,798 Balance, end of year $ 44,090 $ 67,

19 According to the contract, the Group does not take the risk of non-collectibility of the accounts receivables covered by the related agreements. Factored accounts receivable were as follows: 2008 In Thousands of Dollars Financial Institution Amount Expense Collection Rate Credit Line Philips & Lite-On Digital Solutions Corp. Yuanta Bank US$ 2,766 US$ 5 US$ 2,659 Note US$ 3,000 Ta Chong Bank US$ 29,067 US$ 58 US$ 29,067 US$ 9, US$ 31,833 US$ 63 US$ 31,726 US$ 12,000 The Parent Company Far Eastern International Bank US$ 8,661 US$ 22 US$ 8,661 Note US$ 24,000 SinoPac Bank US$ 3,117 US$ 17 US$ 2,832 US$ 5,500 Fuhwa Bank US$ 3,451 US$ 5 US$ 3,451 US$ 10,500 US$ 15,229 US$ 44 US$ 14,944 US$ 40,000 Philips & Lite-On Digital Solutions Corp. Far Eastern International Bank US$ 14,961 US$ 27 US$ 12,958 Note US$ 24,000 SinoPac Bank US$ 1,611 US$ 4 US$ 858 US$ 5,600 Taishin Bank US$ 4,164 US$ 10 US$ 4,164 US$ 5,000 Ta Chong Bank US$ 4,035 US$ 8 US$ 1,255 US$ 9,000 Fuhwa Bank US$ 10,924 US$ 33 US$ 9,987 US$ 9,500 Note: Based on the rate upon advance payment. US$ 35,695 US$ 82 US$ 29,222 US$ 53,100 The above credit line may be used on a revolving basis. submitted by the Group. No application for advance payment had been

20 7. INVENTORIES December 31 Merchandise $ 2,327,741 $ 3,863,151 Finished goods 790, ,879 Semi-finished goods 144,798 42,691 Work in process 101, ,798 Raw materials 1,515,297 1,920,879 Goods in transit 805,268 1,378,818 5,685,222 7,830,216 Allowance for loss (537,668 ) (694,665 ) Unrealized intercompany loss (profit) (226,563 ) 59,487 $ 4,920,991 $ 7,195, NONCURRENT ASSETS CLASSIFIED AS HELD FOR SALE The Parent Company intended to dispose of an idle factory in Hsin Chu in It is currently looking for a buyer of this factory, which was previously used by the Optical Disk Devices Department. As a result of this disposal plan, the Parent Company reclassified the factory from property, plant, and equipment into a noncurrent asset classified as held for sale as of December 31, 2007 and recognized a factory impairment loss of NT$24,525 thousand. The idle factory was sold in May AVAILABLE-FOR-SALE FINANCIAL ASSETS - NONCURRENT December 31 Domestic quoted stocks $ 80,405 $ 196,173 Overseas quoted stocks 3,296 5,808 Mutual funds - 330,091 $ 83,701 $ 532, FINANCIAL ASSETS CARRIED AT COST - NONCURRENT December 31 Domestic unquoted common stocks $ 5,345 $ 11,385 The above equity investments, which had no quoted prices in an active market and of which fair values could not be reliably measured, were carried at cost

21 Impairment losses on financial assets carried at cost in 2008 and 2007 were as follows: Investee Progressive Optoelectronics Technology Co., Ltd. $ 6,040 $ 10,625 StarBex International Inc. - 14,052 $ 6,040 $ 24, INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD December 31 Share- Shareholding holding Amount % Amount % Unquoted company JVC Lite-On IT Manufacturing and Sales, Limited $ 15, $ 8, Investment income (loss) recognized under the equity method in 2008 and 2007 were as follows: December 31 JVC Lite-On IT Manufacturing and Sales, Limited $ 6,976 $ (51 ) The financial statements of the above equity-method investee were unaudited. The Parent Company believes that, had the investee s financial statements been audited, any adjustments would have had no material effect on the Group s financial statements. 12. PROPERTY, PLANT AND EQUIPMENT December 31 Accumulated depreciation Buildings $ 488,941 $ 330,732 Machinery and equipment 882, ,103 Tooling equipment 228, ,365 Computer equipment 113,910 86,502 Transportation equipment 12,102 10,877 Furniture and fixtures 41,137 29,180 Other equipment 370, ,261 $ 2,138,552 $ 1,577,020 The equipment of Automotive Playback Modules Hungary Electronical Mechanical Manufacturing and Trading Limited Liability Company, a subsidiary of Lite-On Information Technology B.V., became impaired. Thus, the Group recognized an impairment loss of NT$108,855 thousand (EUR2,350 thousand) in

22 13. INTANGIBLE ASSETS On April 10, 2006, the Parent Company and Qisda Corporation ( Qisda, formerly BenQ Corporation) signed a contract under which the Parent Company would obtain Qisda s optical storage device subcontract and manufacturing business and related authorization on product manufacturing, technology, patent use, etc. for NT$1,226,855 thousand plus 13% equity in the Parent Company. This acquisition was in line with the Parent Company s long-term strategic partnership with Qisda to expand production scale and increase market share. However, under decisions reached at the board of directors meeting on August 27, 2007 and the shareholders meeting on November 15, 2007, the Parent Company would make a payment wholly in cash and would thus revise the agreement on the method for and schedule of payment to Qisda. The revised agreement stipulated that the Parent Company should pay for the acquisitions in cash only. The intangible assets acquired from Qisda consisted of patent use rights and goodwill amounting to NT$2,695,878 thousand and NT$2,806,508 thousand, respectively. As of December 31, 2008 and 2007, the amortization of patent use rights had amounted to NT$561,641 and NT$336,985 thousand. Goodwill refers to three subsidiaries: One is Philips & Lite-On Digital Solutions Germany GmbH, which became a subsidiary of Philips & Lite-On Digital Solutions Corporation in March After the acquisition cost was allocated to the assets acquired and liabilities assumed on the basis of their fair values on the acquisition date, the acquisition cost in excess of the fair value of the identifiable net assets acquired was recognized as goodwill amounting to NT$346,988 thousand. The other goodwill refers to Philips & Lite-On Digital Solutions Germany GmbH and Philips & Lite-On Digital Solutions Korea Ltd. and amounted to NT$110,587 thousand (EUR2,388 thousand) and NT$8,520 thousand (KRW324,191 thousand), respectively. From January 1, 2006, based on the revised Statement of Financial Accounting Standards 5 - Long-term Investments under the Equity Method, goodwill should no longer be amortized but should be tested for impairment at regular intervals every year. For this test, the recoverable amount should be evaluated by the value in use of the tangible and intangible assets and the projected cash flows during the period of the expected use of these tangible and intangible assets. Factors to be considered in assessing value in use are past operating performance, future profit situation under normal operation, operating strategies, industrial development of Optical Disk, market prospects, etc. Net cash input and the residual value of the assets should be estimated, and the value in use of these assets should be discounted by the weighted average cost of capital. There is no impairment because the carried value of assets is under the value in use. 14. PENSION PLAN The pension plan under the Labor Pension Act (LPA) is a defined contribution plan. Based on the LPA, the Parent Company and Philips & Lite-On Digital Solutions Corporation make monthly contributions to employees individual pension accounts at 6% of monthly salaries and wages. Related pension costs were NT$40,556 thousand for 2008 and NT$36,022 thousand for Based on the defined benefit plan under the Labor Standards Law (LSL), pension benefits are calculated on the basis of the length of service and average monthly salaries of the six months before retirement. The Parent Company and Philips & Lite-On Digital Solutions Corporation contribute amounts equal to 3% of total monthly salaries and wages to pension funds administered by their respective pension fund monitoring committees. The pension funds are deposited in the Bank of Taiwan (the Central Trust of China merged with the Bank of Taiwan in 2007, with the Bank of Taiwan as the survivor entity) in the committees names