Gamania Digital Entertainment Co., Ltd. Financial
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GAMANIA DIGITAL ENTERTAINMENT CO., LTD. FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS JUNE 30, 2006 AND 2005 These English financial statements were translated from the financial statements originally prepared in Chinese. Report of Independent Accountants (06) R.F014.06000091 To the Board of Directors and Stockholders of Gamania Digital Entertainment Co., Ltd. We have audited the accompanying balance sheets of Gamania Digital Entertainment Co., Ltd. as of June 30, 2006 and 2005, and the related statements of income, of changes in stockholders’ equity and of cash flows for the six-month periods 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 did not audit the financial statements of certain investees accounted for under the equity method. These long-term investments amounted to $462,747 thousand and $318,086 thousand as of June 30, 2006 and 2005, respectively, and their related investment loss and income were $23,666 thousand and $12,755 thousand for the six- month periods then ended, respectively. The financial statements of these companies were audited by other auditors whose reports have been furnished to us, and our opinion expressed herein, insofar as it relates to long-term investments in these companies, is based solely on the reports of the other auditors. Except as explained in the following paragraph, we conducted our audits in accordance with the “Rules Governing Examination of Financial Statements by Certified Public Accountants” and generally accepted auditing standards 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 provide a reasonable basis for our opinion. As discussed in Note 4(7), the financial statements include certain long-term investments accounted for under the equity method amounting to $297,182 thousand as of June 30, 2005, and their related investment loss was $26,917 thousand for the six- month period then ended. These amounts and the related information disclosed in Note 11 were based on the investees’ unaudited financial statements. ~ 2 ~ In our opinion, based on our audits and the reports of the other auditors, except for the effect of such adjustments, if any, as might have been determined to be necessary had the financial statements of these investee companies been audited by independent accountants as explained in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Gamania Digital Entertainment Co., Ltd. as of June 30, 2006 and 2005, and the results of its operations and its cash flows for the six-month periods then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers” and generally accepted accounting principles in the Republic of China. As discussed in Note 3, 4(9) and 4(10), effective in the fourth quarter of 2004, the Company adopted R.O.C. Statement of Financial Accounting Standards No. 35, ”Accounting for Assets Impairment”. As a result of the adoption of SFAS No. 35, total assets and stockholders’ equity decreased by $321,770 thousand as of June 30, 2005. The adoption had no significant effect on net income for the six-month period ended June 30, 2006. We have also audited the consolidated financial statements of Gamania Digital Entertainment Co., Ltd. and subsidiaries for the six-month periods then ended June 30, 2006 and 2005. Our report on these consolidated financial statements which was based on our audit or review and the reports of the other auditors expressed an unqualified audit opinion and a qualified review report, respectively. August 14, 2006 The accompanying financial statements are not intended to present the financial position and results of operations and cash flows of the Company in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices utilized in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying financial statements and report of the independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice. ~ 3 ~ GAMANIA DIGITAL ENTERTAINMENT CO., LTD. BALANCE SHEETS JUNE 30, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) 2006 2005 2006 2005 ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Current Assets Current Liabilities Cash and cash equivalents (Note 4(1)) $ 594,961 $ 814,897 Notes payable – third parties $ 72,571 $ 66,603 Notes receivable – third parties – net (Note 4(2)) 39,499 52,170 Notes payable – related parties (Note 5(2)) 115,214 153,606 Notes receivable – related parties – net (Note 5(2)) 8,010 1,709 Accounts payable – third parties 106,758 48,800 Accounts receivable – third parties – net (Note 4(3)) 665,535 432,920 Accounts payable – related parties (Note 5(2)) 2,846 - Accounts receivable – related parties – net (Note 5(2)) 174 4,761 Income tax payable (Note 4(12)) 27,194 16,381 Other receivables – third parties – net (Note 4(4)) 151,294 245,078 Accrued expenses 70,291 74,107 Other receivables – related parties (Note 5(2)) 46,883 77,881 Other payables – related parties (Note 5(2)) 86,532 100,706 Other financial assets – current (Note 6) 30,043 694 Other payables – third parties 32,961 40,128 Inventories – net (Note 4(5)) 27,777 16,607 Unearned revenue collected in advance 27,133 85,978 Prepaid expenses 5,803 13,279 Current portion of long-term loans (Notes 4(11) 53,769 28,769 Deferred income tax assets – current (Note 4(12)) 42,694 37,292 Other current liabilities 6,954 4,830 1,612,673 1,697,288 602,223 619,908 Long-term Investments Long-term Liability Financial assets carried at cost – non-current (Note 4(6)) 12,551 19,346 Long – term loans (Note 4(11)) 286,750 315,519 Long-term investments – accounted for under the equity 286,750 315,519 method (Note 4(7)) 495,555 685,365 Prepayments for long-term investments (Note 4(7)) 61,246 - 569,352 704,711 Other Liabilities Accrued pension liabilities (Note 4(13)) 4,434 4,740 Property, Plant and Equipment (Notes 4(8) and 6) Guarantee deposits 42 36 Cost 4,476 4,776 Land 147,751 147,751 Total Liabilities 893,449 940,203 Buildings 151,961 145,833 Machinery and equipment 672,685 622,392 Transportation equipment 1,700 1,700 Stockholders' Equity Office equipment 59,030 81,927 Common stock (Notes 1 and 4(14)) 1,468,787 1,529,177 Leasehold improvements 42,195 75,138 Capital reserve (Note 4(15)) Other equipment 3,556 4,950 Paid-in capital in excess of par 736,166 1,047,916 Cost 1,078,878 1,079,691 Treasury stock (Note 4(19)) - 20,145 Less: Accumulated depreciation ( 495,845) ( 405,342) Gain on disposal of property, plant and equipment 221 221 Construction in progress and prepayments for equipment - 6,173 Retained earnings 583,033 680,522 (Accumulated deficit) Retained earnings (Note 4(17)) ( 56,322) 23,018 Cumulative translation adjustments 22,175 15,259 Other Assets Treasury stock (Note 4(19)) ( 155,765)( 315,784) Refundable deposits 6,306 5,082 Total Stockholders' Equity 2,015,262 2,319,952 Deferred charges (Notes 4(10)) 122,288 111,910 Commitments and Contingent Liabilities (Notes 5 and 7) Deferred income tax assets – non-current (Note 4(12)) 15,059 60,642 143,653 177,634 TOTAL ASSETS $ 2,908,711 $ 3,260,155 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,908,711 $ 3,260,155 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated August 14, 2006. ~ 4 ~ GAMANIA DIGITAL ENTERTAINMENT CO., LTD. STATEMENTS OF INCOME FOR THE SIX-MONTH PERIODS ENDED JUNE 30, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) 2006 2005 Operating revenues Sales revenue (Note 5(2)) $ 1,361,580 $ 830,631 Sales returns ( 32,693) ( 34,644) Sales allowances ( 22,517)( 19,041) Net sales revenue 1,306,370 776,946 Service revenue (Note 5(2)) 55,189 76,133 Operating revenues 1,361,559 853,079 Operating costs Cost of goods sold (Notes 4(21) and 5(2)) ( 723,028)( 416,670) Gross profit 638,531 436,409 Operating expenses (Notes 4(21) and 5(2)) Selling expenses ( 133,647) ( 89,618) General and administrative expenses ( 188,908) ( 200,361) Research and development expenses ( 43,064)( 37,297) Total operating expenses ( 365,619)( 327,276) Operating income 272,912 109,133 Non-operating income Interest income 1,865 142 Gain on sale of investments 2,281 5,176 Gain on physical count of inventories 11 - Foreign exchange gain 466 267 Rental income (Note 5(2)) 12,007 14,483 Gain from price recovery of inventories 3,853 - Miscellaneous income (Note 5(2)) 1,474 2,095 Total non-operating income 21,957 22,163 Non-operating expenses Interest expense ( 5,657) ( 4,925) Investment loss accounted for under equity method (Note 4(7)) ( 93,846) ( 44,000) Other investment loss (Note 4(6)) - ( 7,500) Loss on disposal of property, plant and equipment ( 8) ( 352) Miscellaneous losses ( 6,373)( 9,218) Total non–operating expenses ( 105,884)( 65,995) Income before income tax 188,985 65,301 Income tax expense (Note 4(12)) ( 51,912)( 37,727) Net income $ 137,073 $ 27,574 2006 2005 Before income tax After income tax Before income tax After income tax Basic earnings per share (in dollars) (Note 4(18)) Net Income $ 1.33 $ 0.96 $ 0.44 $ 0.19 The accompanying notes are an integral part of these financial statements.