GAMANIA DIGITAL ENTERTAINMENT CO., LTD. FINANCIAL STATEMENTS and REPORT of INDEPENDENT ACCOUNTANTS MARCH 31, 2006 and 2005 These
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GAMANIA DIGITAL ENTERTAINMENT CO., LTD. FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS MARCH 31, 2006 AND 2005 These English financial statements were translated from the financial statements originally prepared in Chinese Report of Independent Accountants (05) R.F014.5026 To the Board of Directors and Stockholders of Gamania Digital Entertainment Co., Ltd. We have reviewed the accompanying balance sheets of Gamania Digital Entertainment Co., Ltd. as of March 31, 2006 and 2005, and the related statements of income and of cash flows for the three-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 reviews. Except as explained in the following paragraph, our review was made in accordance with the Generally Accepted Auditing Standards NO.36,“Review of Financial Statements” in the Republic of China. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards in the Republic of China, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. The financial statements included certain long-term investments, accounted for under the equity method, stated at $494,730,000 and $694,906,000 as of March 31, 2006 and 2005, respectively, and the related investment loss of $61,778,000 and $11,270,000 for the three-month periods then ended, respectively, as described in Note 4(8). These amounts and the related disclosure in Note 11, were based on the their respective financial statements, which were not reviewed by independent accountants. ～ 1 ～ Based on our review, except for the effects on the financial statements of such adjustments and disclosure information of investee companies, if any, as might have been determined to be necessary had the financial statements of the investee companies been reviewed as explained in the preceding paragraph, we are not aware of any material modifications that should be made to the accompanying financial statements referred above in order for the them to be in conformity with the “Rules Governing Preparation of the Financial Statements of Securities Issuers” and generally accepted accounting principles in the Republic of China. As discussed in Note 3, 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 change in the method of accounting, total assets and stockholders’ equity were decreased by $321,770,000, as of March 31, 2005, and the change had no significant effect on net income for the three-month period ended March 31, 2006. April 21, 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. ～ 2 ～ GAMANIA DIGITAL ENTERTAINMENT CO., LTD. BALANCE SHEETS MARCH 31, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) 2006 2005 2006 2005 (Review Only) (Review Only) (Review Only) (Review Only) ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Current Assets Current Liabilities Cash and cash equivalents (Note 4(1)) $ 370,210 $ 80,084 Short-term loans (Note 4(12)) $ 30,000 $ 30,000 Financial assets at fair value through profit or loss – Notes payable-third parties 64,025 68,532 current (Note 4(2)) 280,943 868,700 Notes payable – related parties (Note 5) 140,366 61,737 Financial assets carried at cost – current (Note 4(3)) 9,851 - Accounts payable 92,111 46,047 Notes receivables – third parties – net (Note 4(4)) 59,067 54,223 Income tax payable (Note 4(19)) 31,289 35,191 Notes receivables – related parties – net (Note 5) 560 1,710 Accrued expenses 69,790 72,557 Accounts receivables – third parties – net (Note 4(5)) 697,373 510,870 Other payables – related parties (Note 5) 74,495 164,895 Accounts receivables – related parties – net (Note 5) 1,106 - Other payables – third parties 24,210 16,762 Other receivables – third parties (Note 4(6)) 173,198 154,362 Unearned revenue collected in advance 108,631 75,469 Other receivables – related parties (Note 5) 46,037 40,674 Current portion of long-term liabilities (Notes 4(13) 53,769 52,801 Other financial assets – current (Note 6) 30,000 - Other current liabilities 14,901 5,388 Inventories (Note 4(7)) 20,342 12,986 703,587 629,379 Prepaid expenses 4,878 14,212 Deferred income tax assets – current (Note 4(19)) 29,897 36,488 Long-term Liability 1,723,482 1,774,309 Long – term loans (Note 4(13)) 287,692 341,461 287,692 341,461 Long-term Investments Financial assets carried at cost – non-current (Note 4(3)) 2,700 26,846 Other Liability Long-term investments – accounted for under the equity method (Note 4(8)) 494,730 694,906 Accrued pension liabilities (Note 4(14)) 4,217 3,851 497,430 721,752 Guarantee deposits 42 34 4,259 3,885 Property, Plant and Equipment (Notes 4(9) and 6) Total Liabilities 995,538 974,725 Cost Land 147,751 147,751 Buildings 151,962 145,828 Stockholders' Equity Machinery and equipment 665,021 533,407 Common stock (Note 1 and 4(15)) 1,468,787 1,529,177 Transportation equipment 1,700 1,700 Capital reserve (Note 4(16)) Computer and communication equipment 69,304 94,759 Paid-in capital in excess of par 1,003,484 1,339,117 Leasehold improvement 43,919 80,975 Treasury stock (Note 4(21)) - 20,145 Other equipment 3,740 5,349 Gain on disposal of property, plant and equipment 221 221 Cost and appraisal increment 1,083,397 1,009,769 Retained earnings Less: Accumulated depreciation ( 471,875)( 393,431) Legal reserve (Note 4(17)) - 103,066 611,522 616,338 Accumulated deficit (Note 4(18)) ( 402,743) ( 370,711) Cumulative translation adjustments 24,658 18,613 Other Assets Treasury stock (Note 4(21)) ( 94,275) ( 302,140) Refundable deposits 6,244 6,802 Total Stockholders' Equity 2,000,132 2,337,488 Deferred charges (Notes 4(11) and 7) 125,302 120,058 Commitments and Contingent Liabilities (Notes 5 and 7) Deferred income tax assets – non-current (Note 4(19)) 31,690 72,954 163,236 199,814 TOTAL LIABILITIES AND STOCKHOLDERS' TOTAL ASSETS $ 2,995,670 $ 3,312,213 EQUITY $ 2,995,670 $ 3,312,213 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated April 21, 2006. ～ 3 ～ GAMANIA DIGITAL ENTERTAINMENT CO., LTD. STATEMENTS OF INCOME THREE-MONTH PERIODS ENDED MARCH 31, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) 2006 2005 (Review Only) (Review Only) Operating revenues Sales revenue (Note 5) $ 694,548 $ 446,270 Sales returns ( 14,412) ( 24,367) Sales allowances ( 10,605)( 10,990) Net sales revenue 669,531 410,913 Service revenue (Note 5) 26,723 41,883 Operating revenues 696,254 452,796 Operating costs Cost of goods sold (Notes 4(23) and 5) ( 370,136)( 218,267) Gross profit 326,118 234,529 Operating expenses (Notes 4(23) and 5) Selling expenses ( 64,288) ( 43,157) General and administrative expenses ( 94,768) ( 98,043) Research and development expenses ( 22,517)( 19,319) Total operating expenses ( 181,573)( 160,519) Operating income 144,545 74,010 Non-operating income Interest income 280 47 Gain on adjustment of financial asset (Note 4(2)) 943 - Gains on sale of investments 821 383 Foreign exchange gain 541 - Rental income (Note 5) 5,384 1,392 Gain from price recovery of inventories 2,748 - Miscellaneous income 986 1,159 Total non-operating income 11,703 2,981 Non-operating expenses Interest expense ( 2,132) ( 1,638) Investment loss accounted for under equity method (Note 4 (8)) ( 61,778) ( 11,270) Loss on decline in market value of obsolete inventories - ( 2,099) Miscellaneous losses ( 5)( 1,689) Total non–operating expenses ( 63,915)( 16,696) Income before income tax 92,333 60,295 Income tax expense (Note 4 (19)) ( 35,616)( 32,813) Net income $ 56,717 $ 27,482 2006 2005 Before income tax After income tax Before income tax After income tax Basic earnings per share (in dollars) (Note 4(20)) Net Income $ 0.63 $ 0.39 $ 0.41 $ 0.19 Assumptive pro EPS on new long-term investment accounting principle: Net income $ 92,333 $ 56,717 $ 64,862 $ 32,049 Basic earnings per share (in dollars) Net Income $ 0.63 $ 0.39 $ 0.44 $ 0.22 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated April 21, 2006 ～ 4 ～ GAMANIA DIGITAL ENTERTAINMENT CO., LTD. STATEMENTS OF CASH FLOWS THREE-MONTH PERIODS ENDED MARCH 31, (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) 2006 2005 (Review Only) (Review Only) Cash flows from operating activities Net income $ 56,717 $ 27,482 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (reversion of) allowance for sales returns ( 7,841) 6,306 Provision for