Form 6-K

1934 Act Registration No. 1-15128

 


SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 6-K

 


REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

Dated September 19, 2007

 


United Microelectronics Corporation

(Translation of Registrant’s Name into English)

 


No. 3 Li Hsin Road II

Science Park

Hsinchu, Taiwan, R.O.C.

(Address of Principal Executive Office)

 


(Indicate by check mark whether the registrant files or will file annual reports under cover of form 20-F or Form 40-F.)

Form 20-F      V             Form 40-F              

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes                      No      V    

(If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable )

 



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  United Microelectronics Corporation
Date: 9/19/2007   By  

/s/ Chitung Liu

    Chitung Liu
    Chief Financial Officer


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Exhibit

 

Exhibit  

Description

99.1   United Microelectronics Corporation (and Subsidiaries) Financial Statements With Report of Independent Auditors for the Six-Month Periods Ended June 30, 2007 And 2006


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Exhibit 99.1

United Microelectronics Corporation (and Subsidiaries) Financial Statements With Report of Independent Auditors for the Six-Month Periods Ended June 30, 2007 And 2006


UNITED MICROELECTRONICS CORPORATION

FINANCIAL STATEMENTS

WITH REPORT OF INDEPENDENT AUDITORS

FOR THE SIX-MONTH PERIODS ENDED

JUNE 30, 2007 AND 2006

Address:    No. 3 Li-Hsin Road II, Hsinchu Science Park, Hsinchu City, Taiwan, R.O.C.

Telephone: 886-3-578-2258

The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail.


REPORT OF INDEPENDENT AUDITORS

English Translation of a Report Originally Issued in Chinese

To United Microelectronics Corporation

We have audited the accompanying balance sheets of United Microelectronics Corporation as of June 30, 2007 and 2006, and the related statements of income, statements of changes in stockholders’ equity, and cash flows for the six-month periods ended June 30, 2007 and 2006. 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. As described in Note 4(8) to the financial statements, certain long-term investments were accounted for under the equity method based on financial statements as of June 30, 2007 and 2006 of the investees, which were audited by other auditors. Our opinion insofar as it relates to the investment income amounting to NT$470 million and NT$499 million for the six-month periods ended June 30, 2007 and 2006, respectively, and the related long-term investment balances of NT$7,049 million and NT$5,706 million as of June 30, 2007 and 2006, respectively, is based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of China and “Guidelines for Certified Public Accountants’ Examination and Reports on Financial Statements”, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of United Microelectronics Corporation as of June 30, 2007 and 2006, and the results of its operations and its cash flows for the six-month periods ended June 30, 2007 and 2006, in conformity with the “Business Entity Accounting Law”, the “Regulation on Business Entity Accounting Handling”, the “Guidelines Governing the Preparation of Financial Reports by Securities Issuers” and accounting principles generally accepted in the Republic of China.

As described in Note 3 to the financial statements, effective from January 1, 2006, United Microelectronics Corporation has adopted the ROC Statement of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” and No. 36, “Financial Instruments: Disclosure and Presentation” to account for the financial instruments.

As described in Note 3 to the financial statements, effective from January 1, 2006, goodwill is no longer to be amortized.

We have also audited the consolidated financial statements of United Microelectronics Corporation as of and for the six-month periods ended June 30, 2007 and 2006, and have expressed an unqualified opinion with explanatory paragraph on such financial statements.

August 1, 2007

Taipei, Taiwan

Republic of China

Notice to Readers

The accompanying audited financial statements are intended only to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.

 

1


English Translation of Financial Statements Originally Issued in Chinese

UNITED MICROELECTRONICS CORPORATION

BALANCE SHEETS

June 30, 2007 and 2006

(Expressed in Thousands of New Taiwan Dollars)

 

          As of June 30,  
     

Notes

   2007     2006  

Assets

       

Current assets

       

Cash and cash equivalents

   2, 4(1)    $ 77,057,682     $ 90,049,580  

Financial assets at fair value through profit or loss, current

   2, 3, 4(2)      7,797,358       1,506,063  

Held-to-maturity financial assets, current

   2, 3, 4(3)      200,000       779,456  

Notes receivable

        3,094       4,847  

Notes receivable - related parties

   5      44,134       68,788  

Accounts receivable, net

   2, 4(4)      7,200,069       5,356,211  

Accounts receivable - related parties, net

   2, 5      6,906,610       7,126,292  

Other receivables

   2      449,199       722,558  

Inventories, net

   2, 4(5)      10,911,414       10,383,292  

Prepaid expenses

        1,034,187       849,094  

Deferred income tax assets, current

   2, 4(20)      2,126,562       2,720,051  
                   

Total current assets

        113,730,309       119,566,232  
                   

Funds and investments

       

Available-for-sale financial assets, noncurrent

   2, 3, 4(6), 4(11)      46,727,005       37,864,803  

Held-to-maturity financial assets, noncurrent

   2, 3, 4(3)      —         200,000  

Financial assets measured at cost, noncurrent

   2, 3, 4(7), 4(11)      2,321,538       2,265,728  

Long-term investments accounted for under the equity method

   2, 3, 4(8), 4(11)      41,329,192       33,261,799  

Prepayment for long-term investments

        247,712       —    
                   

Total funds and investments

        90,625,447       73,592,330  
                   

Property, plant and equipment

   2, 4(9), 7     

Land

        1,132,576       1,132,576  

Buildings

        17,006,507       16,249,112  

Machinery and equipment

        411,555,214       380,689,179  

Transportation equipment

        74,328       78,461  

Furniture and fixtures

        2,515,541       2,300,342  
                   

Total cost

        432,284,166       400,449,670  

Less : Accumulated depreciation

        (311,201,376 )     (274,361,684 )

Add : Construction in progress and prepayments

        19,631,876       10,539,974  
                   

Property, plant and equipment, net

        140,714,666       136,627,960  
                   

Intangible assets

       

Goodwill

   2, 3      3,745,122       3,745,122  

Technological know-how

   2      —         299,877  
                   

Total intangible assets

        3,745,122       4,044,999  
                   

Other assets

       

Deferred charges

   2      1,391,518       1,627,918  

Deferred income tax assets, noncurrent

   2, 4(20)      3,420,348       4,414,737  

Other assets - others

   2, 4(10), 6      1,926,157       1,956,997  
                   

Total other assets

        6,738,023       7,999,652  
                   

Total assets

      $ 355,553,567     $ 341,831,173  
                   

Liabilities and Stockholders’ Equity

       

Current liabilities

       

Financial liabilities at fair value through profit or loss, current

   2, 3, 4(12)    $ 423,226     $ 1,188,290  

Accounts payable

        4,957,912       4,733,091  

Income tax payable

   2      288,100       1,188,953  

Accrued expenses

        6,680,702       5,781,758  

Cash dividends payable

   4(18)      12,461,529       7,161,301  

Payable on equipment

        4,202,021       4,398,689  

Other payables

   4(18)      2,339,614       311,960  

Current portion of long-term liabilities

   2, 4(13)      23,022,656       10,312,904  

Other current liabilities

        544,346       1,888,116  
                   

Total current liabilities

        54,920,106       36,965,062  
                   

Long-term liabilities

       

Bonds payable

   2, 4(13)      7,494,762       30,279,246  
                   

Total long-term liabilities

        7,494,762       30,279,246  
                   

Other liabilities

       

Accrued pension liabilities

   2, 4(14)      3,128,223       3,044,682  

Deposits-in

        13,180       21,451  

Deferred credits - intercompany profits

   2      3,579       9,806  

Other liabilities - others

   2      448,439       551,252  
                   

Total other liabilities

        3,593,421       3,627,191  
                   

Total liabilities

        66,008,289       70,871,499  
                   

Capital

   2, 4(15), 4(16), 4(18)     

Common stock

        191,442,517       188,452,341  

Stock dividends for distribution

        —         2,248,771  

Additional paid-in capital

   2, 4(15)     

Premiums

        61,138,863       60,712,685  

Treasury stock transactions

        8,938       —    

Change in equities of long-term investments

        6,623,992       6,655,250  

Retained earnings

   4(15), 4(18)     

Legal reserve

        18,476,942       16,699,508  

Special reserve

        824,922       322,150  

Unappropriated earnings

        7,062,654       3,434,838  

Adjusting items in stockholders’ equity

   2, 4(6)     

Cumulative translation adjustment

        (578,030 )     (855,518 )

Unrealized gain or loss on financial instruments

        33,939,144       19,677,371  

Treasury stock

   2, 4(8), 4(15), 4(17)      (29,394,664 )     (26,387,722 )
                   

Total stockholders’ equity

        289,545,278       270,959,674  
                   

Total liabilities and stockholders’ equity

      $ 355,553,567     $ 341,831,173  
                   

The accompanying notes are an integral part of the financial statements.

 

2


English Translation of Financial Statements Originally Issued in Chinese

UNITED MICROELECTRONICS CORPORATION

STATEMENTS OF INCOME

For the six-month periods ended June 30, 2007 and 2006

(Expressed in Thousands of New Taiwan Dollars, Except for Earnings per Share)

 

          For the six-month period ended June 30,  
    

Notes

   2007     2006  

Operating revenues

   2, 5     

Sales revenues

      $ 47,012,083     $ 49,078,075  

Less: Sales returns and discounts

        (239,147 )     (456,096 )
                   

Net sales

        46,772,936       48,621,979  

Other operating revenues

        1,349,028       1,512,987  
                   

Net operating revenues

        48,121,964       50,134,966  
                   

Operating costs

   4(19)     

Cost of goods sold

        (38,652,158 )     (40,738,614 )

Other operating costs

        (845,661 )     (999,065 )
                   

Operating costs

        (39,497,819 )     (41,737,679 )
                   

Gross profit

        8,624,145       8,397,287  

Unrealized intercompany profit

   2      (96,448 )     (91,439 )

Realized intercompany profit

   2      105,892       120,153  
                   

Gross profit-net

        8,633,589       8,426,001  
                   

Operating expenses

   2, 4(19)     

Sales and marketing expenses

        (1,382,075 )     (1,373,023 )

General and administrative expenses

        (1,368,713 )     (1,207,715 )

Research and development expenses

   2      (4,638,829 )     (4,130,707 )
                   

Subtotal

        (7,389,617 )     (6,711,445 )
                   

Operating income

        1,243,972       1,714,556  
                   

Non-operating income

       

Interest revenue

        690,166       709,934  

Investment gain accounted for under the equity method, net

   2, 4(8)      1,130,733       582,324  

Dividend income

        55,684       26,371  

Gain on disposal of property, plant and equipment

   2      80,034       93,923  

Gain on disposal of investments

   2      4,257,822       18,370,659  

Exchange gain, net

   2, 10      —         90,800  

Gain on recovery of market value of inventories

   2      58,259       —    

Gain on valuation of financial liabilities

   2      —         89,197  

Other income

        280,296       440,236  
                   

Subtotal

        6,552,994       20,403,444  
                   

Non-operating expenses

       

Interest expense

   4(9)      (81,187 )     (397,415 )

Loss on disposal of property, plant and equipment

   2      (62,722 )     (23,501 )

Exchange loss, net

   2, 10      (29,734 )     —    

Loss on decline in market value and obsolescence of inventories

   2      —         (401,003 )

Financial expenses

        (87,819 )     (104,842 )

Impairment loss

   2, 4(11)      (246,144 )     (21,807 )

Loss on valuation of financial assets

   2      (70,893 )     (252,191 )

Loss on valuation of financial liabilities

   2      (44,586 )     —    

Other losses

        (29,296 )     (36,390 )
                   

Subtotal

        (652,381 )     (1,237,149 )
                   

Income from continuing operations before income tax

        7,144,585       20,880,851  

Income tax expense

   2, 4(20)      (774,917 )     (1,354,548 )
                   

Net income from continuing operations

        6,369,668       19,526,303  

Cumulative effect of changes in accounting principles (the net amount after deducted tax expense $0)

   3      —         (1,188,515 )
                   

Net income

      $ 6,369,668     $ 18,337,788  
                   
         Pre-tax    Post-tax    Pre-tax     Post-tax  

Earnings per share-basic (NTD)

   2, 4(21)          

Income from continuing operations

     $ 0.40    $ 0.36    $ 1.13     $ 1.06  

Cumulative effect of changes in accounting principles

       —        —        (0.06 )     (0.06 )
                                

Net income

     $ 0.40    $ 0.36    $ 1.07     $ 1.00  
                                

Earnings per share-diluted (NTD)

   2, 4(21)          

Income from continuing operations

     $ 0.39    $ 0.35    $ 1.09     $ 1.02  

Cumulative effect of changes in accounting principles

       —        —        (0.06 )     (0.06 )
                                

Net income

     $ 0.39    $ 0.35    $ 1.03     $ 0.96  
                                

Pro forma information on earnings as if subsidiaries’ investment in the Company is not treated as treasury stock

   2, 4(21)          

Net income

      $6,369,668    $ 18,337,788  
                

Earnings per share-basic (NTD)

    $ 0.36    $ 0.99  
                

Earnings per share-diluted (NTD)

    $ 0.35    $ 0.95  
                

The accompanying notes are an integral part of the financial statements.

 

3


English Translation of Financial Statements Originally Issued in Chinese

UNITED MICROELECTRONICS CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six-month periods ended June 30, 2007 and 2006

(Expressed in Thousands of New Taiwan Dollars)

 

     Notes    Capital           Retained Earnings     Unrealized
Gain/Loss on
Financial
Instruments
    Cumulative
Translation
Adjustment
   

Treasury Stock

   

Total

 
       

Common

Stock

   

Stock

Dividends
for Distribution

   Collected in
Advance
    Additional
Paid-in
Capital
   

Legal

Reserve

  

Special

Reserve

    Unappropriated
Earnings
         

Balance as of January 1, 2006

   4(15)    $ 197,947,033     $ —      $ 36,600     $ 85,381,599     $ 15,996,839    $ 1,744,171     $ 8,831,782     $ (9,527,362 )   $ (241,153 )   $ (41,885,956 )   $ 258,283,553  

The effect of adopting SFAS NO. 34

   3(2)      —         —        —         —         —        —         —         23,499,003       11,547       —         23,510,550  

Appropriation of 2005 retained earnings

   4(18)                         

Legal reserve

        —         —        —         —         702,669      —         (702,669 )     —         —         —         —    

Special reserve

        —         —        —         —         —        (1,422,021 )     1,422,021       —         —         —         —    

Cash dividends

        —         —        —         —         —        —         (7,161,267 )     —         —         —         (7,161,267 )

Stock dividends

        —         895,158      —         —         —        —         (895,158 )     —         —         —         —    

Remuneration to directors and supervisors

        —         —        —         —         —        —         (6,324 )     —         —         —         (6,324 )

Employee bonus - cash

        —         —        —         —         —        —         (305,636 )     —         —         —         (305,636 )

Employee bonus - stock

        —         458,455      —         —         —        —         (458,455 )     —         —         —         —    

Additional paid-in capital transferred to common stock

   4(18)      —         895,158      —         (895,158 )     —        —         —         —         —         —         —    

Purchase of treasury stock

   2, 4(17)      —         —        —         —         —        —         —         —         —         (24,279,397 )     (24,279,397 )

Cancellation of treasury stock

   2, 4(15), 4(17)      (10,000,000 )     —        —         (3,269,100 )     —        —         (6,371,128 )     —         —         19,640,228       —    

Adjustment of treasury stock due to loss of control over subsidiary

        —         —        —         —         —        —         (9,256,116 )     2,620,135       —         20,137,403       13,501,422  

Net income in the first half of 2006

        —         —        —         —         —        —         18,337,788       —         —         —         18,337,788  

Adjustment of additional paid-in capital accounted for under the equity method

   2      —         —        —         (15,280 )     —        —         —         —         —         —         (15,280 )

Adjustment of funds and investments disposal

   2      —         —        —         (14,110,993 )     —        —         —         —         8,171       —         (14,102,822 )

Changes in unrealized loss on available-for-sale financial assets

   2      —         —        —         —         —        —         —         (149,372 )     —         —         (149,372 )

Changes in unrealized gain on financial instruments of investees

   2      —         —        —         —         —        —         —         3,234,967       —         —         3,234,967  

Exercise of employee stock options

   2, 4(16)      468,708       —        —         276,867       —        —         —         —         —         —         745,575  

Common stock transferred from capital collected in advance

   2      36,600       —        (36,600 )     —         —        —         —         —         —         —         —    

Changes in cumulative translation adjustment

   2      —         —        —         —         —        —         —         —         (634,083 )     —         (634,083 )
                                                                                         

Balance as of June 30, 2006

   4(15)    $ 188,452,341     $ 2,248,771    $ —       $ 67,367,935     $ 16,699,508    $ 322,150     $ 3,434,838     $ 19,677,371     $ (855,518 )   $ (26,387,722 )   $ 270,959,674  
                                                                                         

Balance as of January 1, 2007

   4(15)    $ 191,311,927     $ —      $ 11,405     $ 67,707,287     $ 16,699,508    $ 322,150     $ 17,774,335     $ 27,557,845     $ (824,922 )   $ (29,394,664 )   $ 291,164,871  

Appropriation of 2006 retained earnings

   4(18)                         

Legal reserve

        —         —        —         —         1,777,434      —         (1,777,434 )     —         —         —         —    

Special reserve

        —         —        —         —         —        502,772       (502,772 )     —         —         —         —    

Cash dividends

        —         —        —         —         —        —         (12,461,529 )     —         —         —         (12,461,529 )

Remuneration to directors and supervisors

        —         —        —         —         —        —         (15,494 )     —         —         —         (15,494 )

Employee bonus - cash

        —         —        —         —         —        —         (2,324,120 )     —         —         —         (2,324,120 )

Net income in the first half of 2007

        —         —        —         —         —        —         6,369,668       —         —         —         6,369,668  

Adjustment of additional paid-in capital accounted for under the equity method

   2      —         —        —         1,713       —        —         —         —         —         —         1,713  

Adjustment of funds and investments disposal

   2      —         —        —         (5,515 )     —        —         —         —         —         —         (5,515 )

Changes in unrealized gain on available-for-sale financial assets

   2      —         —        —         —         —        —         —         5,273,095       —         —         5,273,095  

Changes in unrealized gain on financial instruments of investees

   2      —         —        —         —         —        —         —         1,108,204       —         —         1,108,204  

Exercise of employee stock options

   2, 4(16)      119,185       —        —         68,308       —        —         —         —         —         —         187,493  

Common stock transferred from capital collected in advance

   2      11,405       —        (11,405 )     —         —        —         —         —         —         —         —    

Changes in cumulative translation adjustment

   2      —         —        —         —         —        —         —         —         246,892       —         246,892  
                                                                                         

Balance as of June 30, 2007

   4(15)    $ 191,442,517     $ —      $ —       $ 67,771,793     $ 18,476,942    $ 824,922     $ 7,062,654     $ 33,939,144     $ (578,030 )   $ (29,394,664 )   $ 289,545,278  
                                                                                         

The accompanying notes are an integral part of the financial statements.

 

4


English Translation of Financial Statements Originally Issued in Chinese

UNITED MICROELECTRONICS CORPORATION

STATEMENTS OF CASH FLOWS

For the six-month periods ended June 30, 2007 and 2006

(Expressed in Thousands of New Taiwan Dollars)

 

     For the six-month period ended June 30,  
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 6,369,668     $ 18,337,788  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     17,766,348       22,717,399  

Amortization

     637,484       921,607  

Bad debt expenses (reversal)

     (1,409 )     7,825  

Loss (gain) on decline (recovery) in market value and obsolescence of inventories

     (58,259 )     401,003  

Cash dividends received under the equity method

     353,592       —    

Investment gain accounted for under the equity method

     (1,130,733 )     (582,324 )

Loss on valuation of financial assets and liabilities

     115,479       1,351,509  

Impairment loss

     246,144       21,807  

Gain on disposal of investments

     (4,257,822 )     (18,370,659 )

Gain on disposal of property, plant and equipment

     (17,312 )     (70,422 )

Exchange loss (gain) on financial assets and liabilities

     1,581       (13,861 )

Exchange loss (gain) on long-term liabilities

     283,791       (226,299 )

Amortization of bond discounts

     34,725       48,280  

Amortization of deferred income

     (71,874 )     (59,747 )

Changes in assets and liabilities:

    

Financial assets and liabilities at fair value through profit or loss, current

     442,351       370,882  

Notes and accounts receivable

     (1,768,915 )     (217,198 )

Other receivables

     17,318       111,015  

Inventories

     (724,112 )     (829,918 )

Prepaid expenses

     (388,537 )     (427,841 )

Deferred income tax assets

     501,808       201,116  

Accounts payable

     (162,351 )     (9,516 )

Accrued expenses

     (105,203 )     (3,706 )

Other current liabilities

     (95,092 )     470,496  

Capacity deposits

     (714,685 )     (9,400 )

Accrued pension liabilities

     41,448       40,904  

Other liabilities - others

     —         35,640  
                

Net cash provided by operating activities

     17,315,433       24,216,380  
                

Cash flows from investing activities:

    

Acquisition of available-for-sale financial assets

     (199,450 )     (296,823 )

Proceeds from disposal of available-for-sale financial assets

     497,559       5,115,113  

Proceeds from maturities of held-to-maturity financial assets

     776,000       —    

Acquisition of financial assets measured at cost

     (119,875 )     —    

Proceeds from disposal of financial assets measured at cost

     400       31,188  

Acquisition of long-term investments accounted for under the equity method

     (494,598 )     (3,465,263 )

Proceeds from disposal of long-term investments accounted for under the equity method

     169,901       7,801,029  

Prepayment for long-term investments

     (247,712 )     —    

Proceeds from liquidation of long-term investments

     10,679       —    

Acquisition of property, plant and equipment

     (21,494,703 )     (11,198,577 )

Proceeds from disposal of property, plant and equipment

     236,492       100,882  

Increase in deferred charges

     (617,504 )     (599,150 )

Decrease in other assets - others

     23,283       60,117  
                

Net cash used in investing activities

     (21,459,528 )     (2,451,484 )
                

 

5


English Translation of Financial Statements Originally Issued in Chinese

UNITED MICROELECTRONICS CORPORATION

STATEMENTS OF CASH FLOWS

For the six-month periods ended June 30, 2007 and 2006

(Expressed in Thousands of New Taiwan Dollars)

 

     For the six-month period ended June 30,  
     2007     2006  

(continued)

    

Cash flows from financing activities:

    

Redemption of bonds

   $ (2,259,992 )   $ (5,250,000 )

Exercise of employee stock options

     187,493       745,575  

Purchase of treasury stock

     —         (23,831,089 )

Increase (decrease) in deposits-in

     (1,269 )     627  
                

Net cash used in financing activities

     (2,073,768 )     (28,334,887 )
                

Effect of exchange rate changes on cash and cash equivalents

     (119,257 )     22,948  
                

Decrease in cash and cash equivalents

     (6,337,120 )     (6,547,043 )

Cash and cash equivalents at beginning of period

     83,394,802       96,596,623  
                

Cash and cash equivalents at end of period

   $ 77,057,682     $ 90,049,580  
                

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 502,693     $ 777,461  
                

Cash paid for income tax

   $ 1,949,551     $ 78,693  
                

Investing activities partially paid by cash:

    

Acquisition of property, plant and equipment

   $ 15,594,957     $ 10,319,403  

Add: Payable at beginning of period

     10,101,767       5,277,863  

Less: Payable at end of period

     (4,202,021 )     (4,398,689 )
                

Cash paid for acquiring property, plant and equipment

   $ 21,494,703     $ 11,198,577  
                

Investing and financing activities not affecting cash flows:

    

Principal amount of exchangeable bonds exchanged by bondholders

   $ 3,285,254     $ 69,621  

Book value of available-for-sale financial assets delivered for exchange

     (895,055 )     (20,242 )

Elimination of related balance sheet accounts

     392,118       15,302  
                

Recognition of gain on disposal of investments

   $ 2,782,317     $ 64,681  
                

The accompanying notes are an integral part of the financial statements.

 

6


UNITED MICROELECTRONICS CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2007 and 2006

(Expressed in Thousands of New Taiwan Dollars unless Otherwise Specified)

 

1. HISTORY AND ORGANIZATION

United Microelectronics Corporation (the Company) was incorporated in May 1980 and commenced operations in April 1982. The Company is a full service semiconductor wafer foundry, and provides a variety of services to satisfy customer needs. These services include intellectual property, embedded IC design, design verification, mask tooling, wafer fabrication, and testing. The Company’s common shares were publicly listed on the Taiwan Stock Exchange (TSE) in July 1985 and its American Depositary Shares (ADSs) were listed on the New York Stock Exchange (NYSE) in September 2000.

The numbers of employees as of June 30, 2007 and 2006 were 13,528 and 12,448, respectively.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements were prepared in conformity with the “Business Entity Accounting Law”, “Regulation on Business Entity Accounting Handling”, “Guidelines Governing the Preparation of Financial Reports by Securities Issuers” and accounting principles generally accepted in the Republic of China (R.O.C.).

Summary of significant accounting policies is as follows:

Use of Estimates

The preparation of the Company’s Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that will affect the amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results may differ from those estimates.

Foreign Currency Transactions

Transactions denominated in foreign currencies are remeasured into the local functional currencies and recorded based on the exchange rates prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are remeasured into the local functional currencies at the exchange rates prevailing at the balance sheet date, with the related exchange gains or losses included in the statements of income. Translation gains or losses from investments in foreign entities are recognized as cumulative translation adjustment in stockholders’ equity.

 

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Non-monetary assets and liabilities denominated in foreign currencies that are reported at fair value with changes in fair value charged to the statements of income, are remeasured at the exchange rate at the balance sheet date, with related exchange gains or losses recorded in the statements of income. Non-monetary assets and liabilities denominated in foreign currencies that are reported at fair value with changes in fair value charged to stockholders’ equity, are remeasured at the exchange rate at the balance sheet date, with related exchange gains or losses recorded as adjustment items to stockholders’ equity. Non-monetary assets and liabilities denominated in foreign currencies and reported at cost are remeasured at historical exchange rates.

Translation of Foreign Currency Financial Statements

The financial statements of the Company’s Singapore branch (the Branch) are translated into New Taiwan Dollars using the spot rates as of each financial statement date for asset and liability accounts and average exchange rates for profit and loss accounts. The cumulative translation effects from the Branch using functional currencies other than New Taiwan Dollars are included in the cumulative translation adjustment in stockholders’ equity.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and with maturity dates that do not present significant risks on changes in value resulting from changes in interest rates, including commercial paper with original maturities of three months or less.

Financial Instruments

In accordance with ROC Statement of Financial Accounting Standard (SFAS) No. 34, “Financial Instruments: Recognition and Measurement” and the “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, financial assets are classified as either financial assets at fair value through profit or loss, held-to-maturity financial assets, financial assets measured at cost, or available-for-sale financial assets. Financial liabilities are recorded at fair value through profit or loss.

The Company accounts for purchase or sale of financial instruments as of the trade date, which is the date the Company commits to purchasing or selling the asset or liability. Financial assets and financial liabilities are initially recognized at fair value plus acquisition or issuance costs.

 

8


  a. Financial instruments at fair value through profit or loss

Financial instruments held for short-term sale or repurchase purposes and derivative financial instruments not qualified for hedge accounting are classified as financial assets or liabilities at fair value through profit or loss.

This category of financial instruments is measured at fair value and changes in fair value are recognized in the statements of income. Stock of listed companies, convertible bonds, and close-end funds are measured at closing prices as of the balance sheet date. Open-end funds are measured at the unit price of the net assets as of the balance sheet date. The fair value of derivative financial instruments is determined by using valuation techniques commonly used by market participants.

 

  b. Held-to-maturity financial assets

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity financial assets if the Company has both the positive intention and ability to hold the financial assets to maturity. Investments intended to be held to maturity are measured at amortized cost.

The Company recognizes an impairment loss if objective evidence of impairment loss exists. However, the impairment loss may be reversed if the value of asset recovers subsequently and the Company concludes the recovery is related to improvements in events or factors that originally caused the impairment loss. The new cost basis as a result of the reversal cannot exceed the amortized cost prior to the impairment.

 

  c. Financial assets measured at cost

Unlisted stock, funds, and other securities without reliable market prices are measured at cost. When objective evidence of impairment exists, the Company recognizes an impairment loss, which cannot be reversed in subsequent periods.

 

  d. Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial instruments not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables. Subsequent measurement is calculated at fair value. Investments in listed companies are measured at closing prices as of the balance sheet date. Any gain or loss arising from the change in fair value, excluding impairment loss and exchange gain or loss arising from monetary financial assets denominated in foreign currencies, is recognized as an adjustment to stockholders’ equity until such investment is reclassified or disposed of, upon which the cumulative gain or loss previously charged to stockholders’ equity will be recorded in the statement of income.

 

9


The Company recognizes an impairment loss when objective evidence of impairment exists. Any reduction in the impairment loss of equity investments in subsequent periods will be recognized as an adjustment to stockholders’ equity. The impairment loss of a debt security may be reversed and recognized in the current period’s statement of income if the security recovers and the Company concludes the recovery is clearly related to improvements in the factors or events that originally caused the impairment.

Allowance for Doubtful Accounts

An allowance for doubtful accounts is provided based on management’s judgment of the collectibility and aging analysis of accounts and other receivables.

Inventories

Inventories are accounted for on a perpetual basis. Raw materials are recorded at actual purchase costs, while the work in process and finished goods are recorded at standard costs and adjusted to actual costs using the weighted-average method at the end of each month. Inventories are stated individually by category at the lower of aggregate cost or market value as of the balance sheet date. The market values of raw materials and supplies are determined on the basis of replacement cost while the market values of work in process and finished goods are determined by net realizable values. An allowance for loss on decline in market value or obsolescence is provided, when necessary.

Long-term Investments Accounted for Under the Equity Method

Long-term investments are initially recorded at acquisition cost. Investments acquired by the contribution of technological know-how are credited to deferred credits among affiliates, which will be amortized to income over a period of 5 years.

Investments in which the Company has ownership of at least 20% or exercises significant influence on operating decisions are accounted for under the equity method. Prior to January 1, 2006, the difference of the acquisition cost and the underlying equity in the investee’s net assets as of acquisition date was amortized over 5 years; however, effective January 1, 2006, goodwill arising from new acquisitions is analyzed and accounted for under the ROC SFAS No. 25, “Business Combination – Accounting Treatment under Purchase Method”, where goodwill is no longer to be amortized.

The change in the Company’s proportionate share in the net assets of an investee resulting from its acquisition of additional stock issued by the investee at a rate not proportionate to its existing equity ownership is charged to the additional paid-in capital and long-term investments accounts.

Unrealized intercompany gains and losses arising from sales from the Company to equity method investees are eliminated in proportion to the Company’s ownership percentage at end of period until realized through transactions with third parties. Intercompany gains and losses arising from transactions between the Company and majority-owned (above 50%) subsidiaries are eliminated entirely until realized through transactions with third parties.

 

10


Unrealized intercompany gains and losses due to sales from equity method investees to the Company are eliminated in proportion to the Company’s weighted-average ownership percentage of the investee until realized through transactions with third parties.

Unrealized intercompany gains and losses arising from transactions between two equity method investees are eliminated in proportion to the Company’s multiplied weighted-average ownership percentage with the investees until realized through transactions with third parties. Those intercompany gains and losses arising from transactions between two majority-owned subsidiaries are eliminated in proportion to the Company’s weighted-average ownership percentage in the subsidiary that incurred the gain or loss.

If the recoverable amount of investees accounted for under the equity method is less than its carrying amount, the difference is to be recognized as impairment loss in the current period.

The total value of an investment and related receivables cannot be negative. If, after the investment loss is recognized, the net book value of the investment is less than zero, the investment is reclassified to other liabilities—others on the balance sheet.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Interest incurred on loans used to finance the construction of property, plant and equipment is capitalized and depreciated accordingly. Maintenance and repairs are charged to expense as incurred. Significant renewals and improvements are treated as capital expenditures and are depreciated over their estimated useful lives. When property, plant and equipment are disposed, their original cost and accumulated depreciation are written off and the related gain or loss is classified as non-operating income or expense. Idle assets are classified as other assets at the lower of net book or net realizable value, with the difference charged to non-operating expenses.

Depreciation is recognized on a straight-line basis using the estimated economic life of the assets less salvage value, if any. The estimated economic life of the property, plant and equipment is as follows: buildings – 20 to 55 years; machinery and equipment – 5 years; transportation equipment – 5 years; furniture and fixtures – 5 years.

Intangible Assets

Effective January 1, 2006, goodwill generated from business combinations is no longer subject to amortization.

Technological know-how is stated at cost and amortized over its estimated economic life using the straight-line method.

An impairment loss will be recognized when the decreases in fair value of intangible assets are other than temporary. The book value after recognizing the impairment loss is recorded as the new cost.

 

11


Deferred Charges

Deferred charges are stated at cost and amortized on a straight-line basis as follows: intellectual property license fees - select the shorter term of contract or estimated economic life of the related technology; and software - 3 years.

Prior to December 31, 2005, the issuance costs of convertible and exchangeable bonds were classified as deferred charges and amortized over the life of the bonds. Effective January 1, 2006, the unamortized amounts as of December 31, 2005 were reclassified as a bond discount and recorded as a deduction to bonds payable. The amounts are amortized using the effective interest method over the remaining life of the bonds. If the difference between the straight-line method and the effective interest method is immaterial, the amortization of the bond discount may be amortized using the straight-line method and recorded as the adjustment of interest expenses.

Convertible and Exchangeable Bonds

The excess of the stated redemption price over par value is accrued as interest payable and expensed over the redemption period using the effective interest method.

When convertible bondholders exercise their conversion rights, the book value of the bonds is credited to common stock at an amount equal to the par value of the common stock with the excess credited to additional paid-in capital. No gain or loss is recognized on bond conversion.

When exchangeable bondholders exercise their right to exchange their bonds for reference shares, the book value of the bonds is offset against the book value of the investments in reference shares and the related stockholders’ equity accounts, with the difference recognized as a gain or loss on disposal of investments.

In accordance with ROC SFAS No. 34, “Financial Instruments: Recognition and Measurement,” effective as of January 1, 2006, since the economic and risk characteristics of the embedded derivative instrument and the host contract are not clearly and closely related, derivative financial instruments embedded in exchangeable bonds shall be bifurcated and accounted as financial liabilities at fair value through profit or loss.

Pension Plan

All regular employees are entitled to a defined benefit pension plan that is managed by an independently administered pension fund committee. Fund assets are deposited in the committee’s name in the Bank of Taiwan and hence, not associated with the Company. Therefore, fund assets are not to be included in the Company’s financial statements. Pension benefits for employees of the Branch are provided in accordance with the local regulations.

 

12


The Labor Pension Act of the ROC (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. Employees subject to the Labor Standards Law, a defined benefit plan, were allowed to choose to either elect the pension calculation under the Act or continue to be subject to the pension calculation under the Labor Standards Law. Those employees that elected to be subject to the Act will have their seniority achieved under the Labor Standards Law retained upon election of the Act, and the Company will make monthly contributions of no less than 6% of these employees’ monthly wages to the employees’ individual pension accounts.

The accounting for the Company’s pension liability is computed in accordance with ROC SFAS No.18. Net pension costs of the defined benefit plan are recorded based on an actuarial valuation. Pension cost components such as service cost, interest cost, expected return on plan assets, the amortization of net obligation at transition, pension gain or loss, and prior service cost, are all taken into consideration by the actuary. The Company recognizes expenses from the defined contribution pension plan in the period in which the contribution becomes due.

Employee Stock Option Plan

The Company uses intrinsic value method to recognize compensation cost for its employee stock options issued since January 1, 2004. Under the intrinsic value method, the Company recognizes the difference between the market price of the stock on date of grant and the exercise price of its employee stock option as compensation cost. The Company also discloses pro forma net income and earnings per share under the fair value method for options granted since January 1, 2004.

Treasury Stock

The Company adopted ROC SFAS No. 30, “Accounting for Treasury Stocks” which requires that treasury stock held by the Company to be accounted for under the cost method. The cost of treasury stock is shown as a deduction to stockholders’ equity, while any gain or loss from selling treasury stock is treated as an adjustment to additional paid-in capital. The Company’s stock held by its subsidiaries is also treated as treasury stock. Cash dividends received by subsidiaries from the Company are recorded as additional paid-in capital - treasury stock transactions.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. Most of the Company’s sales transactions have shipping terms of Free on Board (FOB) or Free Carrier (FCA) shipment in which title and the risk of loss or damage is transferred to the customer upon delivery of the product to a carrier approved by the customer.

Allowance for sales returns and discounts are estimated taking into consideration customer complaints, historical experiences, management judgment and any other known factors that might significantly affect collectibility. Such allowances are recorded in the same period in which sales are made.

 

13


Research and Development Expenditures

Research and development expenditures are charged to expenses as incurred.

Capital Expenditures Versus Operating Expenditures

An expenditure is capitalized when it is probable that the Company will receive future economic benefits associated with the expenditure. Otherwise, the expenditure is expensed as incurred.

Income Tax

The Company adopted ROC SFAS No. 22, “Accounting for Income Taxes” for inter-period and intra-period income tax allocation. The provision for income taxes includes deferred income tax assets and liabilities that are a result of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, loss carry-forward and investment tax credits. A valuation allowance on deferred income tax assets is provided to the extent that it is more likely than not that the tax benefits 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 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 reversal date of the temporary difference.

According to ROC SFAS No. 12, “Accounting for Income Tax Credits”, the Company recognizes the tax benefit from the purchase of equipment and technology, research and development expenditure, employee training, and certain equity investment by the flow-through method.

Income tax (10%) on unappropriated earnings is recorded as expense in the year in which the shareholders have resolved that the earnings shall be retained.

The Income Basic Tax Act of the R.O.C. (the IBTA) became effective on January 1, 2006. Set up by the Executive Yuan, the IBTA is a supplemental 10% tax that is payable if the income tax payable determined by the ROC Income Tax Act is below the minimum amount as prescribed by the IBTA. The IBTA is calculated based on taxable income as defined by the IBTA, which includes most income that is exempted from income tax under various legislations. The impact of the IBTA has been considered in the Company’s income tax for the current reporting period.

Earnings per Share

Earnings per share is computed according to ROC SFAS No. 24, “Earnings Per Share.” Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the current reporting period. Diluted earnings per share is computed by taking basic earnings per share into consideration plus additional common shares that would have been outstanding if the dilutive share equivalents had been issued. Net income (loss) is also adjusted for interest and other income or expenses derived from any underlying dilutive share equivalents. The weighted-average of outstanding shares is adjusted retroactively for stock dividends and bonus share issues.

 

14


Asset Impairment

Pursuant to ROC SFAS No. 35, the Company assesses indicators of impairment for all its assets (except for goodwill) within the scope of the standard at each balance sheet date. If impairment is indicated, the Company compares the asset’s carrying amount with the recoverable amount of the assets or the cash-generating unit (CGU) associated with the asset and writes down the carrying amount to the recoverable amount where applicable. The recoverable amount is defined as the higher of fair value less the costs to sell, and the values in use. For previously recognized losses, the Company assesses at the balance sheet date any indication that the impairment loss no longer exists or may have diminished. If there is any such indication, the Company recalculates the recoverable amount of the asset, and if the recoverable amount has increased as a result of the increase in the estimated service potential of the assets, the Company reverses the impairment loss so that the resulting carrying amount of the asset does not exceed the amount (net of amortization or depreciation) that would otherwise result had no impairment loss been recognized for the assets in prior years.

In addition, a goodwill-allocated CGU or group of CGUs is tested for impairment each year, regardless of whether impairment is indicated. If an impairment test reveals that the carrying amount, including goodwill, of CGU or group of CGUs is greater than its recoverable amount, there is an impairment loss. The loss is first recorded against the CGU’s goodwill, with any remaining loss allocated to other assets on a pro rata basis proportionate to their carrying amounts. The write-down of goodwill cannot be reversed in subsequent periods under any circumstances.

Impairment losses and reversals are classified as non-operating loss and income, respectively.

 

3. ACCOUNTING CHANGES

Goodwill

The Company adopted the amendments to ROC SFAS No. 1, “Conceptual Framework of Financial Accounting and Preparation of Financial Statements,” SFAS No. 5, “Long-Term Investments in Equity Securities,” and SFAS No. 25, “Business Combinations - Accounting Treatment under Purchase Method,” all of which have discontinued the amortization of goodwill effective January 1, 2006. As a result of adopting the revised SFAS No.1, revised SFAS No.5 and revised SFAS No.25 on January 1, 2006, the Company’s total assets as of June 30, 2006 are NT$429 million higher than if it had continued to account for goodwill under the prior year’s requirements. The net income and earnings per share for the six-month period ended June 30, 2006, are NT$429 million and NT$0.02 higher, respectively, than if the Company had continued to account for goodwill under the prior year’s requirements.

Financial Instruments

 

  (1) The Company adopted ROC SFAS No. 34, “Financial Instruments: Recognition and Measurement” and SFAS No. 36, “Financial Instruments: Disclosure and Presentation” to account for the financial instruments effective January 1, 2006.

 

15


  (2) The above changes in accounting principles increased the Company’s total assets, total liabilities, and stockholders’ equity as of January 1, 2006 by NT$23,648 million, NT$1,326 million, and NT$22,322 million, respectively; and resulted in an unfavorable cumulative effect of changes in accounting principles of NT$1,189 million deducted from net income, thereby reducing earnings per share by NT$0.06 for the six-month period ended June 30, 2006.

 

4. CONTENTS OF SIGNIFICANT ACCOUNTS

 

  (1) CASH AND CASH EQUIVALENTS

 

     As of June 30,
     2007    2006

Cash:

     

Cash on hand

   $ 1,921    $ 1,874

Checking and savings accounts

     2,276,717      1,516,567

Time deposits

     55,954,024      79,104,197
             

Subtotal

     58,232,662      80,622,638
             

Cash equivalents:

     18,825,020      9,426,942
             

Total

   $ 77,057,682    $ 90,049,580
             

 

  (2) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS, CURRENT

 

     As of June 30,

Held for trading

   2007    2006

Listed stocks

   $ 7,686,348    $ 1,138,214

Convertible bonds

     111,010      313,439

Open-end fund

     —        54,410
             

Total

   $ 7,797,358    $ 1,506,063
             

During the six-month periods ended June 30, 2007 and 2006, net loss arising from the changes in fair value of financial assets at fair value through profit or loss, current, were NT$69 million and NT$250 million, respectively.

 

  (3) HELD-TO-MATURITY FINANCIAL ASSETS

 

     As of June 30,  
     2007    2006  

Credit-linked deposits and repackage bonds

   $ 200,000    $ 979,456  

Less: Non-current portion

     —        (200,000 )
               

Total

   $ 200,000    $ 779,456  
               

 

16


  (4) ACCOUNTS RECEIVABLE, NET

 

     As of June 30,  
     2007     2006  

Accounts receivable

   $ 7,369,981     $ 5,547,886  

Less: Allowance for sales returns and discounts

     (169,912 )     (133,825 )

Less: Allowance for doubtful accounts

     —         (57,850 )
                

Net

   $ 7,200,069     $ 5,356,211  
                

 

  (5) INVENTORIES, NET

 

     As of June 30,  
     2007     2006  

Raw materials

   $ 845,409     $ 933,763  

Supplies and spare parts

     1,837,976       1,691,672  

Work in process

     8,167,776       8,325,959  

Finished goods

     800,431       305,657  
                

Total

     11,651,592       11,257,051  

Less: Allowance for loss on decline in market value and obsolescence

     (740,178 )     (873,759 )
                

Net

   $ 10,911,414     $ 10,383,292  
                

Inventories were not pledged.

 

  (6) AVAILABLE-FOR-SALE FINANCIAL ASSETS, NONCURRENT

 

     As of June 30,
     2007    2006

Common stock

   $ 46,727,005    $ 36,448,324

Preferred stock

     —        1,416,479
             

Total

   $ 46,727,005    $ 37,864,803
             

During the six-month periods ended June 30, 2007 and 2006, the total unrealized gain adjustment to stockholders’ equity due to changes in fair value of available-for-sale assets were NT$8,450 million and NT$4,861 million, respectively.

Additionally, the Company recognized gains of NT$3,177 million and NT$5,010 million due to the disposal of available-for-sale assets during the six-month periods ended June 30, 2007 and 2006, respectively.

 

17


  (7) FINANCIAL ASSETS MEASURED AT COST, NONCURRENT

 

     As of June 30,
     2007    2006

Common stock

   $ 1,495,556    $ 1,458,246

Preferred stock

     467,645      300,000

Funds

     358,337      507,482
             

Total

   $ 2,321,538    $ 2,265,728
             

 

  (8) LONG-TERM INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD

 

  a. Details of long-term investments accounted for under the equity method are as follows:

 

     As of June 30,
     2007    2006

Investee Company

   Amount    Percentage of
Ownership or
Voting Rights
   Amount    Percentage of
Ownership or
Voting Rights
Listed companies            

UMC JAPAN

   $ 5,578,444    50.09    $ 6,134,625    50.09

HOLTEK SEMICONDUCTOR INC.

     903,961    23.12      922,620    24.67

ITE TECH. INC.

     380,738    21.62      347,675    22.04

UNIMICRON TECHNOLOGY CORP. (UNIMICRON) (Note A)

     —      —        4,531,744    20.40
                   

Subtotal

     6,863,143         11,936,664   
                   
Unlisted companies            

UMC GROUP (USA)

     982,297    100.00      803,681    100.00

UNITED MICROELECTRONICS (EUROPE) B.V.

     295,851    100.00      276,285    100.00

UMC CAPITAL CORP.

     3,969,316    100.00      2,140,698    100.00

UNITED MICROELECTRONICS CORP. (SAMOA)

     5,246    100.00      12,865    100.00

UMCI LTD.

     98    100.00      23    100.00

TLC CAPITAL CO., LTD.

     8,328,633    100.00      6,030,797    100.00

FORTUNE VENTURE CAPITAL CORP. (Note B)

     11,417,688    99.99      6,332,605    99.99

UNITED MICRODISPLAY OPTRONICS CORP. (UMO) (Note C)

     257,487    85.24      252,208    86.72

PACIFIC VENTURE CAPITAL CO., LTD. (PACIFIC) (Note D)

     127,379    49.99      277,379    49.99

MTIC HOLDINGS PTE LTD.

     78,805    49.94      —      —  

MEGA MISSION LIMITED PARTNERSHIP

     2,551,817    45.00      —      —  

UNITECH CAPITAL INC.

     1,122,669    42.00      746,830    42.00

NEXPOWER TECHNOLOGY CORP.

     295,176    36.66      —      —  

 

18


     As of June 30,
     2007    2006

Investee Company

   Amount    Percentage of
Ownership or
Voting Rights
   Amount    Percentage of
Ownership or
Voting Rights

HSUN CHIEH INVESTMENT CO., LTD. (HSUN CHIEH) (Note E)

   $ 4,943,314    36.49    $ 4,069,373    36.49

XGI TECHNOLOGY INC. (Note F)

     40,619    16.44      65,721    16.50

AMIC TECHNOLOGY CORP. (Note F)

     49,654    11.82      53,403    11.86

THINTEK OPTRONICS CORP. (THINTEK) (Notes C)

     —      —        11,837    27.82

HIGHLINK TECHNOLOGY CORP. (HIGHLINK) (Notes F, G)

     —      —        251,430    18.99
                   

Subtotal

     34,466,049         21,325,135   
                   

Total

   $ 41,329,192       $ 33,261,799   
                   

   

Note A

  :   As the Company did not have significant influence after decreasing its percentage of ownership in UNIMICRON in November 2006, the investee was classified as available-for-sale financial asset.

Note B

  :   As of June 30, 2007 and 2006, the cost of the investment was NT$11,590 million and NT$6,504 million, respectively. After deducting the Company’s stock held by the subsidiary (treated as treasury stock by the Company) of NT$172 million in both years, the residual book values totalled NT$11,418 million and NT$6,332 million as of June 30, 2007 and 2006, respectively.

Note C

  :   THINTEK was merged into UMO on October 1, 2006. The exchange ratio was 2.31 to 1.

Note D

  :   On June 27, 2006, PACIFIC set July 3, 2006 as its liquidation date through decision at its shareholders’ meeting. The liquidation has not been completed as of June 30, 2007.

Note E

  :   As of January 27, 2006, the Company sold 58.5 million shares of HSUN CHIEH. The Company’s ownership percentage decreased from 99.97% to 36.49%. As HSUN CHIEH ceased to be a subsidiary, the Company’s stock held by HSUN CHIEH was reclassified from treasury stock to long-term investments accounted for under the equity method. The reclassification increased long-term investments accounted for under the equity method and stockholders’ equity by NT$10,881 million.

Note F

  :   The equity method was applied for investees, in which the total ownership held by the Company and its subsidiaries is over 20%.

 

19


Note G   :   As of March 1, 2007, HIGHLINK (an equity method investee) and EPITECH TECHNOLOGY CORP. (EPITECH) (accounted for as a noncurrent available-for-sale financial asset) merged into EPISTAR CORP. and was continued as EPISTAR CORP. (classified as a noncurrent available-for-sale financial asset after the merger).
    During the transaction, 5.5 shares of the HIGHLINK were exchanged for 1 share of EPISTAR CORP. and 3.08 shares of the EPITECH were exchanged for 1 share of EPISTAR CORP.

 

  b. Total gain arising from investments accounted for under the equity method were NT$1,131 million and NT$582 million for the six-month periods ended June 30, 2007 and 2006, respectively. Among which, investment income amounted to NT$470 million and NT$499 million for the six-month periods ended June 30, 2007 and 2006, respectively, and the related long-term investment balances of NT$7,049 million and NT$5,706 million as of June 30, 2007 and 2006, respectively, were determined based on the investees’ financial statements audited by other auditors.

 

  c. The long-term equity investments were not pledged.

 

  (9) PROPERTY, PLANT AND EQUIPMENT

 

     As of June 30, 2007
     Cost    Accumulated
Depreciation
    Book Value

Land

   $ 1,132,576    $ —       $ 1,132,576

Buildings

     17,006,507      (5,768,922 )     11,237,585

Machinery and equipment

     411,555,214      (303,416,061 )     108,139,153

Transportation equipment

     74,328      (57,757 )     16,571

Furniture and fixtures

     2,515,541      (1,958,636 )     556,905

Construction in progress and prepayments

     19,631,876      —         19,631,876
                     

Total

   $ 451,916,042    $ (311,201,376 )   $ 140,714,666
                     
     As of June 30, 2006
     Cost    Accumulated
Depreciation
    Book Value

Land

   $ 1,132,576    $ —       $ 1,132,576

Buildings

     16,249,112      (5,029,042 )     11,220,070

Machinery and equipment

     380,689,179      (267,628,301 )     113,060,878

Transportation equipment

     78,461      (57,351 )     21,110

Furniture and fixtures

     2,300,342      (1,646,990 )     653,352

Construction in progress and prepayments

     10,539,974      —         10,539,974
                     

Total

   $ 410,989,644    $ (274,361,684 )   $ 136,627,960
                     

 

  a. Total interest expense before capitalization amounted to NT$144 million and NT$397 million for the six-month periods ended June 30, 2007 and 2006, respectively.

 

20


Details of capitalized interest are as follows:

 

     For the six-month period ended June 30,
     2007     2006

Machinery and equipment

   $ 54,965     $ —  

Other property, plant and equipment

     7,680       —  
              

Total interest capitalized

   $ 62,645     $ —  
              

Interest rates applied

     0.67%~0.92 %     —  
              

 

  b. Property, plant, and equipment were not pledged.

 

  (10) OTHER ASSETS - OTHERS

 

     As of June 30,
     2007    2006

Leased assets

   $ 1,224,825    $ 1,355,758

Deposits-out

     642,214      542,121

Others

     59,118      59,118
             

Total

   $ 1,926,157    $ 1,956,997
             

Please refer to Note 6 for deposits-out pledged as collateral.

 

  (11) IMPAIRMENT

 

     For the six-month period ended June 30,
     2007    2006

Available for sale financial assets, noncurrent

   $ 162,481    $ —  

Financial assets measured at cost, noncurrent

     83,663      —  

Long-term investments accounted for under the equity method

     —        21,807
             

Total

   $ 246,144    $ 21,807
             

 

  (12) FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS, CURRENT

 

     As of June 30,
     2007    2006

Interest rate swaps

   $ 423,226    $ 633,039

Derivatives embedded in exchangeable bonds

     —        555,251
             

Total

   $ 423,226    $ 1,188,290
             

During the six-month periods ended June 30, 2007 and 2006, net gain arising from the changes in fair value of financial liabilities at fair value through profit or loss, current were NT$341 million and NT$99 million, respectively.

 

21


  (13) BONDS PAYABLE

 

     As of June 30,  
     2007     2006  

Unsecured domestic bonds payable

   $ 18,000,000     $ 25,250,000  

Convertible bonds payable

     12,551,874       12,361,174  

Exchangeable bonds payable

     —         3,101,961  

Less: discounts on bonds payable

     (34,456 )     (120,985 )
                

Total

     30,517,418       40,592,150  

Less: current portion

     (23,022,656 )     (10,312,904 )
                

Net

   $ 7,494,762     $ 30,279,246  
                

 

  a. During the period from April 16 to April 27, 2001, the Company issued five-year and seven-year unsecured bonds totaling NT$15,000 million, each with a face value of NT$7,500 million. The interest is paid annually with stated interest rates of 5.1195% through 5.1850% and 5.2170% through 5.2850%, respectively. The five-year bonds and seven-year bonds are repaid starting from April 2004 to April 2006 and April 2006 to April 2008, respectively, both in three yearly installments at the rates of 30%, 30% and 40%. On April 27, 2006, the five-year bonds were fully repaid.

 

  b. During the period from October 2 to October 15, 2001, the Company issued three-year and five-year unsecured bonds totaling NT$10,000 million, each with a face value of NT$5,000 million. The interest was paid annually with stated interest rates of 3.3912% through 3.420% and 3.4896% through 3.520%, respectively. On October 15, 2006 and 2004, the five-year bonds and the three-year bonds were fully repaid, respectively.

 

  c. On May 10, 2002, the Company issued zero coupon exchangeable bonds listed on the EuroMTF Market of the Luxembourg stock Exchange (LSE). The terms and conditions of the bonds are as follows:

 

  (a) Issue Amount: US$235 million

 

  (b) Period: May 10, 2002 ~ May 10, 2007

 

  (c) Redemption

 

  i. The Company may redeem the bonds, in whole or in part, after three months of the issuance and prior to the maturity date, at their principal amount if the closing price of the AU Optionics Corp. (AUO) common shares on the TSE, translated into US dollars at the prevailing exchange rate, for a period of 20 consecutive trading days, the last of which occurs not more than 10 days prior to the date upon which notice of such redemption is published, is at least 120% of the exchange price then in effect translated into US dollars at the rate of NT$34.645=US$1.00.

 

22


  ii. The Company may redeem the bonds, in whole, but not in part, if at least 90% in principal amount of the bonds has already been exchanged, redeemed or purchased and cancelled.

 

  iii. The Company may redeem all, but not part, of the bonds, at any time, in the event of certain changes in the R.O.C.’s tax rules which would require the Company to gross up for payments of principal, or to gross up for payments of interest or premium.

 

  iv. The Company will, at the option of the bondholders, redeem such bonds on February 10, 2005 at its principal amount.

 

  (d) Terms of Exchange

 

  i. Underlying securities: ADSs or common shares of AUO.

 

  ii. Exchange Period: The bonds are exchangeable at any time on or after June 19, 2002 and prior to April 10, 2007, into AUO common shares or AUO ADSs; provided, however, that if the exercise date falls within 5 business days from the beginning of, and during, any closed period, the right of the exchanging holder of the bonds to vote with respect to the shares it receives will be subject to certain restrictions.

 

  iii. Exchange Price and Adjustment: The exchange price is NT$44.3 per share, determined on the basis of a fixed exchange rate of NT$34.645=US$1.00. The exchange price will be subject to adjustments upon the occurrence of certain events set out in the indenture.

 

  (e) Exchange of the Bonds

As of June 30, 2007 and 2006, certain bondholders have exercised their rights to exchange their bonds with the total principal amount of US$235 million and US$139 million into AUO shares, respectively. Gain arising from the exercise of exchange rights during the six-month periods ended June 30, 2007 and 2006 amounted NT$2,782 million and NT$65 million, respectively, and were recognized as gain on disposal of investment.

 

  (f) Redemption at maturity date

At the maturity date of May 10, 2007, the Company had redeemed the bonds at 100% of the unpaid principal amount of US$0.3 million outstanding.

 

23


  d. During the period from May 21 to June 24, 2003, the Company issued five-year and seven-year unsecured bonds totaling NT$15,000 million, each with a face value of NT$7,500 million. The interest is paid annually with stated interest rates of 4.0% minus USD 12-Month LIBOR and 4.3% minus USD 12-Month LIBOR, respectively. Stated interest rates are reset annually based on the prevailing USD 12-Month LIBOR. The five-year bonds and seven-year bonds are repayable in 2008 and 2010, respectively, upon the maturity of the bonds.

 

  e. On October 5, 2005, the Company issued zero coupon convertible bonds on the LSE. The terms and conditions of the bonds are as follows:

 

  (a) Issue Amount: US$381.4 million

 

  (b) Period: October 5, 2006 ~ February 15, 2008 (Maturity date)

 

  (c) Redemption

 

  i. On or at any time after April 5, 2007, if the closing price of the ADSs listed on the NYSE has been at least 130% of either the conversion price or the last adjusted conversion price, for 20 out of 30 consecutive ADS trading days, the Company may redeem all, but not some only, of the bonds.

 

  ii. If at least 90% in principal amount of the bonds have already been redeemed, repurchased, cancelled or converted, the Company may redeem all, but not some only, of the bonds.

 

  iii. In the event that the Company’s ADSs or shares have officially cease to be listed or admitted for trading on the New York Stock Exchange or the Taiwan Stock Exchange, as the case may be, each bondholder shall have the right, at such bondholder’s option, to require the Company to repurchase all, but not in part, of such bondholder’s bonds at their principal amount.

 

  iv. In the event of certain changes in taxation in the R.O.C. resulting in the Company becoming required to pay additional amounts, the Company may redeem all, but not in part, of the bonds at their principal amount; bondholders may elect not to have their bonds redeemed by the Company in such event, in which case the bondholders shall not be entitled to receive payments of such additional amounts.

 

  v. If a change of control occurs with respect to the Company, each bondholder shall have the right at such bondholder’s option, to require the Company to repurchase all, but not in part, of such bondholder’s bonds at their principal amount.

 

  vi. The Company will pay the principal amount of the bonds at its maturity date, February 15, 2008.

 

24


  (d) Conversion

 

  i. Conversion Period: Except for the closed period, the bonds may be converted into the Company’s ADSs on or after November 4, 2005 and on or prior to February 5, 2008.

 

  ii. Conversion Price and Adjustment: The conversion price is US$3.693 per ADS. The applicable conversion price will be subject to adjustments upon the occurrence of certain events set out in the indenture.

 

  f. Repayments of the above-mentioned bonds in the future years are as follows:

(Assuming the convertible bonds are paid off upon maturity.)

 

Bonds repayable in

   Amount

2007

   $ —  

2008

     23,051,874

2009

     —  

2010

     7,500,000

2011 and thereafter

     —  
      

Total

   $ 30,551,874
      

 

  (14) PENSION PLAN

 

  a. The Labor Pension Act of the R.O.C. (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. Employees subject to the Labor Standards Law, a defined benefit plan, were allowed to choose to either elect the pension calculation under the Act or continue to be subject to the pension calculation under the Labor Standards Law. Those employees that elected to be subject to the Act will have their seniority achieved under the Labor Standards Law retained upon election of the Act, and the Company will make monthly contributions of no less than 6% of these employees’ monthly wages to the employees’ individual pension accounts. The Company has made monthly contributions based on each individual employee’s salary or wage to employees’ pension accounts beginning July 1, 2005 and totaled of NT$194 million and NT$180 million were contributed by the Company for the six-month periods ended June 30, 2007 and 2006, respectively. Pension benefits for employees of the Branch are provided in accordance with the local regulations ,and during the six-month periods ended June 30, 2007 and 2006, the Company has made contributions of NT$55 million and NT$46 million, respectively.

 

25


  b. The defined benefit plan under the Labor Standards Law is disbursed based on the units of service years and the average salary in the last month of the service year. Two units per year are awarded for the first 15 years of services while one unit per year is awarded after the completion of the fifteenth year. The total units shall not exceed 45 units. In accordance to the plan, the Company contributes an amount equivalent to 2% of the employees’ total salaries and wages on a monthly basis to the pension fund deposited at the Bank of Taiwan in the name of an administered pension fund committee. Pension costs amounting to NT$94 million and NT$95 million were recognized for the six-month periods ended June 30, 2007 and 2006, respectively. The corresponding balances of the pension fund were NT$1,245 million and NT$1,135 million as of June 30, 2007 and 2006, respectively.

 

  (15) CAPITAL STOCK

 

  a. The Company had 26,000 million common shares authorized to be issued, and 18,845 million shares were issued as of June 30, 2006, each at a par value of NT$10.

 

  b. The Company has issued a total of 277 million ADSs, which were traded on the NYSE as of June 30, 2006. The total number of common shares of the Company represented by all issued ADSs was 1,384 million shares as of June 30, 2006. One ADS represents five common shares.

 

  c. Among the employee stock options issued by the Company on October 7, 2002 and January 3, 2003, 47 million shares were exercised during the six-month period ended June 30, 2006. The issuance process through the authority had been completed.

 

  d. On May 22, 2006, the Company cancelled 1,000 million shares of treasury stocks, which were bought back during the period from February 16, 2006 to April 11, 2006 for retention of the Company’s creditability and stockholders’ interests.

 

  e. As recommended by the board of directors, and approved by the shareholders on the meeting held on June 12, 2006, the Company issued 225 million new shares from capitalization of retained earnings and additional paid-in capital that amounted to NT$2,249 million, of which NT$895 million was stock dividend, NT$459 million was employee bonus, and NT$895 million was additional paid-in capital. The issuance process through the authority had been completed.

 

  f. The Company had 26,000 million common shares authorized to be issued, and 19,144 million shares was issued as of June 30, 2007, each at a par value of NT$10.

 

26


  g. The Company had issued a total of 315 million ADSs, which were traded NYSE as of June 30, 2007. The total number of common shares of the Company represented by all issued ADSs was 1,576 million shares as of June 30, 2007. One ADS represents five common shares.

 

  h. Among the employee stock options issued by the Company on October 7, 2002, January 3, 2003 and October 13, 2004, 12 million shares were exercised during the six-month period ended June 30, 2007. The issuance process through the authority had been completed.

 

  i. Approved by the shareholders’ meeting on June 11, 2007, the Company had resolved to carry out a capital reduction of NT$ 57,394 million with the cancellation of 5,739 million of its outstanding shares. The capital reduction through the authority is still in process.

 

  (16) EMPLOYEE STOCK OPTIONS

On September 11, 2002, October 8, 2003, September 30, 2004, and December 22, 2005, the Company was authorized by the Securities and Futures Bureau of the Financial Supervisory Commission, Executive Yuan, to issue employee stock options with a total number of 1 billion, 150 million, 150 million, and 350 million units, respectively. Each unit entitles an optionee to subscribe to 1 share of the Company’s common stock. Settlement upon the exercise of the options will be made through the issuance of new shares by the Company. The exercise price of the options was set at the closing price of the Company’s common stock on the date of grant. The contractual life is 6 years and an optionee may exercise the options in accordance with certain schedules as prescribed by the plan starting 2 years from the date of grant. Detailed information relevant to the employee stock options is disclosed as follows:

 

Date of grant

  

Total number of
options granted

(in thousands)

   Total number of
options outstanding
(in thousands)
  

Exercise price

(NTD)

October 7, 2002

   939,000    531,986    $ 15.7

January 3, 2003

   61,000    44,411    $ 17.7

November 26, 2003

   57,330    44,910    $ 24.7

March 23, 2004

   33,330    21,575    $ 22.9

July 1, 2004

   56,590    43,590    $ 20.7

October 13, 2004

   20,200    12,332    $ 17.8

April 29, 2005

   23,460    17,145    $ 16.4

August 16, 2005

   54,350    39,160    $ 21.6

September 29, 2005

   51,990    44,974    $ 19.7

January 4, 2006

   39,290    28,130    $ 17.7

May 22, 2006

   42,058    35,200    $ 19.2

August 24, 2006

   28,140    24,070    $ 18.4

 

27


  a. A summary of the Company’s stock option plans, and related information for the six-month periods ended June 30, 2007 and 2006, are as follows:

 

     For the six-month period ended June 30,
     2007    2006
    

Option

(in thousands)

    Weighted-average
Exercise Price
(NTD)
  

Option

(in thousands)

    Weighted-average
Exercise Price
(NTD)

Outstanding at beginning of period

     913,958     $ 17.5      975,320     $ 17.3

Granted

     —       $ —        81,348     $ 18.4

Exercised

     (11,918 )   $ 15.7      (46,871 )   $ 15.7

Forfeited

     (14,557 )   $ 19.7      (32,891 )   $ 18.6
                     

Outstanding at end of period

     887,483     $ 17.5      976,906     $ 17.4
                     

Exercisable at end of period

     662,435     $ 16.7      502,264     $ 16.5
                     

Weighted-average fair value of options granted during the period (NTD)

   $ —          $ 5.9    

 

  b. The information of the Company’s outstanding stock options as of June 30, 2007, is as follows:

 

     

Range of
Exercise Price

   Outstanding Stock Options    Exercisable Stock Options

Authorization Date

     

Option

(in thousands)

   Weighted-average
Remaining
Contractual Live
(Years)
  

Weighted-average
Exercise Price

(NTD)

  

Option

(in thousands)

   Weighted-average
Exercise Price
(NTD)

2002.09.11

   $ 15.7~ $17.7    576,397    1.29    $ 15.9    576,133    $ 15.9

2003.10.08

   $ 20.7~ $24.7    110,075    2.70    $ 22.8    72,405    $ 23.1

2004.09.30

   $ 16.4~ $21.6    113,611    4.04    $ 19.7    13,897    $ 17.0

2005.12.22

   $ 17.7~ $19.2    87,400    4.84    $ 18.5    —      $ —  
                     
      887,483    2.17    $ 17.5    662,435    $ 16.7
                     

 

  c. The Company uses intrinsic value method to recognize compensation costs for its employee stock options issued since January 1, 2004. The compensation costs for the six-month periods ended June 30, 2007 and 2006 are nil because the Company grants options with the exercise price equal to the current market price. Pro forma information using the fair value method on net income and earnings per share is as follows:

 

     For the six-month period ended June 30, 2007
     Basic earnings per share    Diluted earnings per share

Net Income

   $ 6,369,668    $ 6,497,263

Earnings per share (NTD)

   $ 0.36    $ 0.35

Pro forma net income

   $ 6,166,802    $ 6,294,397

Pro forma earnings per share (NTD)

   $ 0.35    $ 0.34

 

28


    

For the six-month period ended June 30, 2006

(retroactively adjusted)

     Basic earnings per share    Diluted earnings per share

Net Income

   $ 18,337,788    $ 18,175,519

Earnings per share (NTD)

   $ 1.00    $ 0.96

Pro forma net income

   $ 18,147,409    $ 17,985,140

Pro forma earnings per share (NTD)

   $ 0.99    $ 0.95

The fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the six-month period ended June 30, 2006: expected dividend yield of 1.37%; volatility factors of the expected market price of the Company’s common stock of 37.09%~41.14%; risk-free interest rate of 1.88%~2.28%; and expected life of the options of 4~5 years.

 

  (17) TREASURY STOCK

 

  a. The Company bought back its own shares from the open market during the six-month periods ended June 30, 2007 and 2006. Details of the treasury stock transactions are as follows:

For the six-month period ended June 30, 2007

(In thousands of shares)

 

Purpose

   As of
January 1, 2007
   Increase    Decrease   

As of

June 30, 2007

For transfer to employees

   842,067    —      —      842,067

For conversion of the convertible bonds into shares

   500,000    —      —      500,000
                   

Total shares

   1,342,067    —      —      1,342,067
                   

For the six-month period ended June 30, 2006

(In thousands of shares)

 

Purpose

   As of
January 1, 2006
   Increase    Decrease   

As of

June 30, 2006

For transfer to employees

   442,067    243,171    —      685,238

For conversion of the convertible bonds into shares

   500,000    —      —      500,000

For retention of the Company’s creditability and stockholders’ interests

   —      1,000,000    1,000,000    —  
                   

Total shares

   942,067    1,243,171    1,000,000    1,185,238
                   

 

29


  b. According to the Securities and Exchange Law of the R.O.C., the total shares of treasury stock shall not exceed 10% of the Company’s issued stock, and the total purchase amount shall not exceed the sum of the retained earnings, additional paid-in capital – premiums, and realized additional paid-in capital. As such, the maximum number of shares of treasury stock that the Company could hold as of June 30, 2007 and 2006, was 1,914 million shares and 1,885 million shares, while the ceiling amount was NT$86,687 million and NT$80,233 million, respectively.

 

  c. In compliance with Securities and Exchange Law of the R.O.C., treasury stock should not be pledged, nor should it be entitled to voting rights or receiving dividends. Stock held by subsidiaries is treated as treasury stock. These subsidiaries have the same rights as other stockholders except for subscription to new stock issuance. Starting June 22, 2005, stocks held by subsidiaries no longer have voting rights according to the revised Companies Act.

 

  d. As of June 30, 2007, the Company’s subsidiary, FORTUNE VENTURE CAPITAL CORP., held 22 million shares of the Company’s stock, with a book value of NT$19.85 per share. The closing price on June 30, 2007 was NT$19.85.

As of June 30, 2006, the Company’s subsidiary, FORTUNE VENTURE CAPITAL CORP., held 22 million shares of the Company’s stock, with a book value of NT$19.4 per share. The closing price on June 30, 2006 was NT$19.4.

 

  (18) RETAINED EARNINGS AND DIVIDEND POLICIES

According to the Company’s Articles of Incorporation, current year’s earnings, if any, shall be distributed in the following order:

 

  a. Payment of all taxes and dues;

 

  b. Offset prior years’ operation losses;

 

  c. Set aside 10% of the remaining amount after deducting items (a) and (b) as a legal reserve;

 

  d. Set aside 0.1% of the remaining amount after deducting items (a), (b), and (c) as directors’ and supervisors’ remuneration; and

 

  e. After deducting items (a), (b), and (c) above from the current year’s earnings, no less than 5% of the remaining amount together with the prior years’ unappropriated earnings is to be allocated as employees’ bonus, which will be settled through issuance of new shares of the Company, or cash. Employees of the Company’s subsidiaries, meeting certain requirements determined by the board of directors, are also eligible for the employees’ bonus.

 

  f. The distribution of the remaining portion, if any, will be recommended by the board of directors and subject to shareholders’ approval.

 

30


The policy for dividend distribution should reflect factors such as the current and future investment environment, fund requirements, domestic and international competition and capital budgets; as well as the benefit of shareholders, share bonus equilibrium, and long-term financial planning. The board of directors shall make the distribution proposal annually and present it at the shareholders’ meeting. The Company’s Articles of Incorporation further provide that no more than 80% of the dividends to shareholders, if any, may be paid in the form of stock dividends. Accordingly, at least 20% of the dividends must be paid in the form of cash.

The distributions of retained earnings for the years 2006 and 2005 were approved through the shareholders’ meetings held on June 11, 2007 and June 12, 2006, respectively. The details of distribution are as follows:

 

     2006    2005

Cash Dividend

   $ 0.70 per share    $ 0.40 per share

Stock Dividend

     —      $ 0.05 per share

Employees’ bonus – Cash Dividend (NTD thousands)

     2,324,120      305,636

Employees’ bonus – Stock Dividend (NTD thousands)

     —        458,455

Directors’ and Supervisors’ remuneration (NTD thousands)

     15,494      6,324

Pursuant to Article 41 of the Securities and Exchange Law of the R.O.C., a special reserve is set aside from the current net income and unappropriated earnings for items that are accounted for as deductions to stockholders’ equity such as unrealized loss on long-term investment and cumulative translation adjustments. However, there are the following exceptions for the Company’s investees’ unrealized loss on long-term investments arising from the merger, which was recognized by the Company in proportion to the Company’s ownership percentage:

 

  a. According to the explanatory letter No. 101801 of the Securities and Futures Commission (SFC), if the Company recognizes the investees’ additional paid-in capital–excess from the merger in proportion to the ownership percentage, then the special reserve is exempted for the amount originated from the acquisition of the long-term investments.

 

  b. If the Company and its investees transfer a portion of the additional paid-in capital to increase capital, a special reserve equal to the amount of the transfer shall be provided according to the explanatory letter No. 101801-1 of the SFC.

 

  c. In accordance with the explanatory letter No. 170010 of the SFC applicable to listed companies, in the case where the market value of the Company’s stock held by its subsidiaries at period-end is lower than the book value, a special reserve shall be provided in the Company’s accounts in proportion to its ownership percentage.

For the 2005 appropriations approved by the shareholders’ meeting on June 12, 2006, unrealized loss on long-term investments exempted from the provision of special reserve pursuant to the above regulations amounted to NT$18,208 million.

 

31


  (19) OPERATING COSTS AND EXPENSES

The Company’s personnel, depreciation, and amortization expenses are summarized as follows:

 

     For the six-month period ended June 30,
     2007    2006
     Operating
costs
   Operating
expenses
   Total    Operating
costs
   Operating
expenses
   Total

Personnel expenses

                 

Salaries

   $ 4,546,395    $ 1,426,027    $ 5,972,422    $ 3,401,756    $ 1,015,022    $ 4,416,778

Labor and health insurance

     223,957      64,156      288,113      213,244      59,748      272,992

Pension

     263,286      79,893      343,179      249,115      72,347      321,462

Other personnel expenses

     46,646      16,042      62,688      41,122      11,869      52,991

Depreciation

     16,759,835      1,001,753      17,761,588      21,611,294      1,098,235      22,709,529

Amortization

     34,953      602,531      637,484      98,047      823,560      921,607

 

  (20) INCOME TAX

 

  a. Reconciliation between the income tax expense and the income tax calculated on pre-tax financial statement income based on the statutory tax rate is as follows:

 

     For the six-month period ended June 30,  
     2007     2006  

Income tax on pre-tax income at statutory tax rate

   $ 2,515,182     $ 5,197,957  

Permanent differences

     (2,479,003 )     (4,438,925 )

Change in investment tax credit

     2,426,148       (311,360 )

Change in valuation allowance

     (1,960,519 )     (246,556 )

Income basic tax

     272,707       1,153,000  

Income tax on interest revenue separately taxed

     402       432  
                

Income tax expense

   $ 774,917     $ 1,354,548  
                

 

  b. Significant components of deferred income tax assets and liabilities are as follows:

 

     As of June 30,  
     2007     2006  
     Amount    Tax effect     Amount    Tax effect  

Deferred income tax assets

          

Investment tax credit

      $ 12,438,810        $ 13,920,405  

Loss carry-forward

   $ 3,815,034      953,758     $ 10,005,826      2,501,456  

Pension

     3,123,974      780,993       3,042,614      760,654  

Allowance on sales returns and discounts

     370,106      92,527       737,457      184,364  

Allowance for loss on decline in market value and obsolescence of inventories

     668,476      167,119       761,978      190,495  

Unrealized exchange loss

     176,200      44,050       —        —    

Others

     754,262      188,566       812,027      203,007  
                      

Total deferred income tax assets

        14,665,823          17,760,381  

Valuation allowance

        (7,150,594 )        (8,428,805 )
                      

Net deferred income tax assets

        7,515,229          9,331,576  
                      

 

32


     As of June 30,  
     2007     2006  
     Amount     Tax effect     Amount     Tax effect  

Deferred income tax liabilities

        

Unrealized exchange gain

   $ —       $ —       $ (461,337 )   $ (115,334 )

Depreciation

     (5,732,562 )     (1,433,140 )     (6,078,835 )     (1,519,709 )

Others

     (2,140,717 )     (535,179 )     (2,246,979 )     (561,745 )
                    

Total deferred income tax liabilities

       (1,968,319 )       (2,196,788 )
                    

Total net deferred income tax assets

     $ 5,546,910       $ 7,134,788  
                    

Deferred income tax assets—current

     $ 5,058,003       $ 6,089,901  

Deferred income tax liabilities—current

       (205,497 )       (320,832 )

Valuation allowance

       (2,725,944 )       (3,049,018 )
                    

Net

       2,126,562         2,720,051  
                    

Deferred income tax assets—noncurrent

       9,607,820         11,670,480  

Deferred income tax liabilities—noncurrent

       (1,762,822 )       (1,875,956 )

Valuation allowance

       (4,424,650 )       (5,379,787 )
                    

Net

       3,420,348         4,414,737  
                    

Total net deferred income tax assets

     $ 5,546,910       $ 7,134,788  
                    

 

  c. The Company’s income tax returns for all the fiscal years up to 2003 have been assessed and approved by the R.O.C. Tax Authority.

 

  d. The Company was granted several four or five-year income tax exemption periods with respect to income derived from the expansion of operations. The starting dates of the exemption periods attributable to the expansion in 2002 and 2003 have not yet been decided. The income tax exemption for other periods will expire on December 31, 2012.

 

  e. The Company earns investment tax credits for the amount invested in production equipment, research and development, and employee training.

As of June 30, 2007, the Company’s unused investment tax credit was as follows:

 

Expiration Year    Investment tax credits earned   

Balance of unused

investment tax credits

2007    $ 1,611,785    $ 622,672
2008      6,296,685      6,296,685
2009      2,549,487      2,549,487
2010      1,633,049      1,633,049
2011      1,336,917      1,336,917
             
Total    $ 13,427,923    $ 12,438,810
             

 

33


  f. Under the rules of the Income Tax Law of the R.O.C., net losses can be carried forward for 5 years. As of June 30, 2007, the unutilized accumulated losses were as follows:

 

Expiration Year

   Accumulated losses   

Unutilized accumulated

losses

2007

   $ 3,773,826    $ 3,773,826

2008 (Transferred in from merger with SiSMC)

     2,283      2,283

2009 (Transferred in from merger with SiSMC)

     38,925      38,925
             

Total

   $ 3,815,034    $ 3,815,034
             

 

  g. The balance of the Company’s imputation credit accounts as of June 30, 2007 and 2006 were NT$2,112 million and NT$9 million, respectively. The expected creditable ratio for 2006 and the actual creditable ratio for 2005 was 11.88% and 0 %, respectively.

 

  h. The Company’s earnings generated in the year ended December 31, 1997 and prior years have been fully appropriated.

 

  (21) EARNINGS PER SHARE

 

  a. The Company’s capital structure is composed mainly of zero coupon convertible bonds and employee stock options. Therefore, in consideration of such complex structure, the calculated basic and diluted earnings per share for the six-month periods ended June 30, 2007 and 2006, are disclosed as follows:

 

     For the six-month period ended June 30, 2007
     Amount   

Shares
expressed

in thousands

   Earnings per share (NTD)
     Income
before
income tax
   Net income       Income
before
income tax
   Net income

Earning per share-basic (NTD)

              

Income from continuing operations

   $ 7,144,585    $ 6,369,668    17,777,875    $ 0.40    $ 0.36

Cumulative effect of changes in accounting principles

     —        —           —        —  
                              

Net income

   $ 7,144,585    $ 6,369,668       $ 0.40    $ 0.36
                              

Effect of dilution

              

Employee stock options

   $ —      $ —      122,417      

Convertible bonds payable

     133,258      127,595    516,382      

Earning per share-diluted:

              

Income from continuing operations

   $ 7,277,843    $ 6,497,263    18,416,674    $ 0.39    $ 0.35

Cumulative effect of changes in accounting principles

     —        —           —        —  
                              

Net income

   $ 7,277,843    $ 6,497,263       $ 0.39    $ 0.35
                              

 

34


     For the six-month period ended June 30, 2006 (retroactively adjusted)  
     Amount          Earnings per share (NTD)  
    

Income

before

income tax

    Net income    

Shares
expressed

in thousands

   Income
before
income tax
    Net income  

Earning per share-basic (NTD)

           

Income from continuing operations

   $ 20,880,851     $ 19,526,303     18,382,155    $ 1.13     $ 1.06  

Cumulative effect of changes in accounting principles

     (1,188,515 )     (1,188,515 )        (0.06 )     (0.06 )
                                   

Net income

   $ 19,692,336     $ 18,337,788        $ 1.07     $ 1.00  
                                   

Effect of dilution

           

Employee stock options

   $ —       $ —       131,297     

Convertible bonds payable

     (156,606 )     (162,269 )   516,382     

Earning per share-diluted:

           

Income from continuing operations

   $ 20,724,245     $ 19,364,034     19,029,834    $ 1.09     $ 1.02  

Cumulative effect of changes in accounting principles

     (1,188,515 )     (1,188,515 )        (0.06 )     (0.06 )
                                   

Net income

   $ 19,535,730     $ 18,175,519        $ 1.03     $ 0.96  
                                   

 

  b. Pro forma information on earnings as if subsidiaries’ investment in the Company is not treated as treasury stock is set out as follows:

 

(shares expressed in thousands)

   For the six month period ended
June 30, 2007
     Basic    Diluted

Net income

   $ 6,369,668    $ 6,497,263
             

Weighted-average of shares outstanding:

     

Beginning balance

     17,789,126      17,789,126

Weighted-average shares of exercising employee stock options

     10,819      10,819

Dilutive shares of employee stock options accounted for under treasury stock method

     —        122,417

Dilutive shares issued assuming conversion of bonds

     —        516,382
             

Ending balance

     17,799,945      18,438,744
             

Earnings per share

     

Net income (NTD)

   $ 0.36    $ 0.35
             

 

35


(shares expressed in thousands)

  

For the six month period ended
June 30, 2006

(retroactively adjusted)

 
     Basic     Diluted  

Net income

   $ 18,337,788     $ 18,175,519  
                

Weighted-average of shares outstanding:

    

Beginning balance

     18,852,636       18,852,636  

Increase in capital through 2006 retained earnings and additional paid-in capital at proportion of 1.3%

     234,604       234,604  

Purchase of 1,243,171 thousand shares of treasury stock from January 1 to June 30, 2006

     (623,210 )     (623,210 )

Weighted-average shares of exercising employee stock options

     30,859       30,859  

Dilutive shares of employee stock options accounted for under treasury stock method

     —         131,297  

Dilutive shares issued assuming conversion of bonds

     —         516,382  
                

Ending balance

     18,494,889       19,142,568  
                

Earnings per share

    

Net income (NTD)

   $ 0.99     $ 0.95  
                

 

5. RELATED PARTY TRANSACTIONS

 

  (1) Name and Relationship of Related Parties

 

Name of related parties

  

Relationship with the Company

UMC GROUP (USA) (UMC-USA)    Equity Investee
UNITED MICROELECTRONICS (EUROPE) B.V.    Equity Investee
UMC CAPITAL CORP.    Equity Investee
UNITED MICROELECTRONICS CORP. (SAMOA)    Equity Investee
UMCI LTD.    Equity Investee
UMC JAPAN (UMCJ)    Equity Investee
UNITECH CAPITAL INC.    Equity Investee
MEGA MISSION LIMITED PARTNERSHIP    Equity Investee
MTIC HOLDINGS PTE. LTD.    Equity Investee
FORTUNE VENTURE CAPITAL CORP.    Equity Investee
HSUN CHIEH INVESTMENT CO., LTD.    Equity Investee
UNITED MICRODISPLAY OPTRONICS CORP.    Equity Investee
HOLTEK SEMICONDUCTOR INC. (HOLTEK)    Equity Investee

 

36


Name of related parties

  

Relationship with the Company

ITE TECH. INC.    Equity Investee
AMIC TECHNOLOGY CORP.    Equity Investee
PACIFIC VENTURE CAPITAL CO., LTD.    Equity Investee
XGI TECHNOLOGY INC.    Equity Investee
TLC CAPITAL CO., LTD.    Equity Investee
HIGHLINK TECHNOLOGY CORP. (merged into EPISTAR CORP. since March 2007)    Equity Investee
NEXPOWER TECHNOLOGY CORP.    Equity Investee
SILICON INTEGRATED SYSTEMS CORP.    The Company’s director
UNITRUTH INVESTMENT CORP.    Subsidiary’s equity investee
UWAVE TECHNOLOGY CORP.    Subsidiary’s equity investee
UCA TECHNOLOGY INC.    Subsidiary’s equity investee
AFA TECHNOLOGY, INC.    Subsidiary’s equity investee
STAR SEMICONDUCTOR CORP. (No longer an subsidiary’s equity investee since March 2007)    Subsidiary’s equity investee
USBEST TECHNOLOGY INC. (No longer an subsidiary’s equity investee since February 2007)    Subsidiary’s equity investee
SMEDIA TECHNOLOGY CORP.    Subsidiary’s equity investee
U-MEDIA COMMUNICATIONS, INC. (No longer an subsidiary’s equity investee since May 2007)    Subsidiary’s equity investee
CRYSTAL MEDIA INC.    Subsidiary’s equity investee
MOBILE DEVICES INC.    Subsidiary’s equity investee
CHIP ADVANCED TECHNOLOGY INC.    Same chairman with the Company’s subsidiary

 

  (2) Significant Related Party Transactions

 

  a. Operating revenues

 

     For the six-month period ended June 30,
     2007    2006
     Amount    Percentage    Amount    Percentage

UMC-USA

   $ 22,337,422    46    $ 24,239,799    49

Others

     5,924,940    13      8,147,730    16
                       

Total

   $ 28,262,362    59    $ 32,387,529    65
                       

The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection period for overseas sales to related parties was net 60 days, while the terms for domestic sales were month-end 45~60 days. The collection period for third party overseas sales was net 30~60 days, while the terms for third party domestic sales were month-end 30~60 days.

 

37


  b. Notes receivable

 

     As of June 30,
     2007    2006
     Amount    Percentage    Amount    Percentage

HOLTEK

   $ 44,134    93    $ 68,752    93

Others

     —      —        36    —  
                       

Total

   $ 44,134    93    $ 68,788    93
                       

 

  c. Accounts receivable

 

     As of June 30,
     2007    2006
     Amount     Percentage    Amount     Percentage

UMC-USA

   $ 5,113,267     35    $ 5,493,509     41

UME BV

     1,401,612     10      1,366,652     10

Others

     647,215     4      1,013,730     8
                         

Total

     7,162,094     49      7,873,891     59
             

Less: Allowance for sales returns and discounts

     (254,897 )        (635,702 )  

Less: Allowance for doubtful accounts

     (587 )        (111,897 )  
                     

Net

   $ 6,906,610        $ 7,126,292    
                     

 

  d. Endorsements and guarantees

The Company did not provide any note as endorsement and guarantee for related parties during the six-month period ended June 30, 2007.

As of June 30, 2006, the Company provided notes of endorsement or guarantees on behalf of its subsidiary, UMCJ, totaling NT$2,247 million.

 

6. ASSETS PLEDGED AS COLLATERAL

As of June 30, 2007

 

     Amount   

Party to which asset(s)

was pledged

   Purpose of pledge

Deposit-out

   $ 620,996    Customs    Customs duty
            

(Time deposit)

         guarantee

As of June 30, 2006

 

     Amount   

Party to which asset(s)

was pledged

   Purpose of pledge

Deposit-out

   $ 520,846    Customs    Customs duty
            

(Time deposit)

         guarantee

 

38


7. COMMITMENTS AND CONTINGENT LIABILITIES

 

  (1) The Company has entered into several patent license agreements and development contracts of intellectual property for a total contract amount of approximately NT$19.5 billion. Royalties and development fees for future years are set NT$5.2 billion as of June 30, 2007.

 

  (2) The Company signed several construction contracts for the expansion of its factory space. As of June 30, 2007, these construction contracts have amounted to approximately NT$5.2 billion and the unpaid portion of the contracts, which was not accrued, was approximately NT$2.2 billion.

 

  (3) The Company entered into several operating lease contracts for land. These renewable operating leases are set to expire in various years through to 2032 and are renewable. Future minimum lease payments under those leases are as follows:

 

For the year ended December 31,

   Amount

2007 (3rd quarter and thereafter)

   $ 107,279

2008

     213,381

2009

     213,014

2010

     213,399

2011

     213,800

2012 and thereafter

     2,015,785
      

Total

   $ 2,976,658
      

 

  (4) The Company entered into several wafer-processing contracts with its principal customers. According to the contracts, the Company shall guarantee processing capacity, while these customers make deposits to the Company.

 

  (5) The Company has entered into contracts for the purchase of materials and masks with certain vendors. As of June 30, 2007, the commitment of these construction contracts has amounted to approximately NT$6.6 billion, and the unpaid portion of the contracts, which was not accrued, was approximately NT$4.7 billion.

 

  (6) On February 15, 2005, the Hsinchu District Prosecutor’s Office conducted a search of the Company’s facilities. On February 18, 2005, the Company’s former Chairman Mr. Robert H.C. Tsao, released a public statement, explaining that its assistance to Hejian Technology Corp. (Hejian) did not involve any investment or technology transfer. Furthermore, from the very beginning there was a verbal indication that, at the proper time, the Company would be compensated appropriately for its assistance, and circumstances permitting, at some time in the future, it will push through the merger between two companies. However, no promise was made by the Company and no written agreement was made and executed. Upon the Company’s request to materialize the said verbal indication by compensating in the form of either cash or equity, the Chairman of the holding company of Hejian offered 15% of the approximately 700 million outstanding shares of the holding company of Hejian in return for the Company’s past assistance and for continued assistance in the future.

 

39


Immediately after the Company had received such offer, it filed an application with the Investment Commission of the Ministry of Economic Affairs on March 18, 2005 (Ref. No. 94-Lian-Tung-Tzu-0222), for their executive guidance for the successful transfer of said shares to the Company. The shareholders meeting dated June 13, 2005 resolved that to the extent permitted by law the Company shall try to get the 15% of the outstanding shares offered by the holding company of Hejian as an asset of the Company. The holding company of Hejian offered 106 million shares of its outstanding common shares in return for the Company’s assistance. The holding company of Hejian has put all such shares in escrow. The Company was informed of such escrow on August 4, 2006. The subscription price per share of the holding company of Hejian in the last offering was US$1.1. Therefore, the total market value of the said shares is worth more than US$110 million. However, the Company may not acquire the ownership of nor exercise the rights of the said shares with any potential stock dividend or cash dividend distributed in the future until the ROC laws and regulations allow the Company to acquire and exercise. In the event that any stock dividend or cash dividend is distributed, the Company’s stake in the holding company of Hejian will accumulate accordingly.

In April 2005, the Company’s former Chairman Mr. Robert H.C. Tsao was personally fined with in the aggregate amount of NT$3 million by the Financial Supervisory Commission, Executive Yuan, R.O.C. (ROC FSC) for failure to disclose material information relating to Hejian in accordance with applicable rules. As a result of the imposition of the fines by the ROC FSC, the Company was also fined in the amount of NT$30,000 by Taiwan Stock Exchange (TSE) for the alleged non-compliance with the disclosure rules in relation to the material information. The Company and its former Chairman Mr. Robert H.C. Tsao have filed for administrative appeal and reconsideration with the Executive Yuan, R.O.C. and TSE, respectively. Mr. Robert H.C. Tsao’s administrative appeal was dismissed by the Execution Yuan, R.O.C. on February 21, 2006 and the ROC FSC transferred the case against Mr. Robert H.C. Tsao to the Administrative Enforcement Agency for enforcement of the fine. Mr. Robert H.C. Tsao has filed an administrative action against the ROC FSC with Taipei High Administrative Court on April 14, 2006. As of June 30, 2007, the result of such reconsideration and administrative action has not been finalized. The case is being processed in Taipei High Administrative Court.

For the Company’s assistance to Hejian Technology Corp., the Company’s former Chairman Mr. Robert H.C. Tsao, former Vice Chairman Mr. John Hsuan, and Mr. Duen-Chian Cheng, the General Manager of Fortune Venture Capital Corp., which is 99.99% owned by the Company, were indicted for violating the Business Entity Accounting Law and breach of trust under the Criminal Law by Hsinchu District Court’s Prosecutor’s Office on January 9, 2006. Mr. Robert H.C. Tsao and Mr. John Hsuan had officially resigned from their positions of the Company’s Chairman, Vice Chairman and directors prior to the announcement of the prosecution; for this reason, at the time of the prosecution, Mr. Robert H.C. Tsao and Mr. John Hsuan no longer served as the Company’s directors and had not executed their duties as the Company’s Chairman and Vice Chairman. In the future, if a guilty judgment is pronounced by the court, such consequences would be Mr. Robert H.C. Tsao, Mr. John Hsuan and Mr. Duen-Chian Cheng’s personal concerns only; the Company would not be subject to indictment regarding this case.

 

40


On February 15, 2006, the Company was fined in the amount of NT$5 million for unauthorized investment activities in Mainland China, implicating violation of Article 35 of the Act “Governing Relations Between Peoples of the Taiwan Area and the Mainland Area” by the R.O.C. Ministry of Economic Affairs (MOEA). However, as the Company believes it was illegally and improperly fined, the Company had filed an administrative appeal against MOEA to the Executive Yuan on March 16, 2006. On October 19, 2006, Executive Yuan denied the administrative appeal filed by UMC. UMC had filed an administrative litigation case against MOEA on December 8, 2006. Taipei High Administrative Court announced and reversed MOEA’s administrative sanction on July 19, 2007. As of the reporting date, the Company is not aware whether MOEA has had an appeal against the Company.

 

8. SIGNIFICANT DISASTER LOSS

None.

 

9. SIGNIFICANT SUBSEQUENT EVENT

On July 17, 2007, the Company cancelled 192 million shares of treasury stocks, which were bought back during the period from March 24, 2004 to May 23, 2004 for transfer to employees.

 

10. OTHERS

 

  (1) Certain comparative amounts have been reclassified to conform to the current year’s presentation.

 

  (2) Financial risk management objectives and policies

The Company’s principal financial instruments, other than derivatives, is comprise of cash and cash equivalents, common stock, preferred stock, convertible bonds, open-end funds, bank loans, and bonds payable. The main purpose of these financial instruments is to manage financing for the Company’s operations. The Company also holds various other financial assets and liabilities such as accounts receivable and accounts payable, which arise directly from its operations.

The Company also enters into derivative transactions, including credit-link deposits, interest rate swaps and forward currency contracts. The purpose of these derivative transactions is to mitigate interest rate risk and foreign currency exchange risks arising from the Company’s operations and financing activities.

The main risks arising from the Company’s financial instruments include cash flow interest rate risk, foreign currency risk, commodity price risk, credit risk, and liquidity risk.

 

41


Cash flow interest rate risk

The Company utilizes interest rate swap agreements to avoid its cash flow interest rate risk on its counter-floating rate of unsecured domestic bonds issued during the period from May 21 to June 24, 2003. The periods of the interest rate swap agreements are the same as those of the domestic bonds, which are five and seven years. The floating rate is reset annually.

Foreign currency risk

The Company has foreign currency risk arising from purchases or sales. The Company utilizes spot or forward contracts to avoid foreign currency risk. The Company buys or sells the same amount of foreign currency with hedged through forward hedging items for contracts. In principal, the Company does not carry out any forward contracts for uncertain commitments.

Commodity price risk

The Company’s exposure to commodity price risk is minimal.

Credit risk

The Company trades only with established and creditworthy third parties. It is the Company’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis, which consequently minimizes the Company’s exposure to bad debts.

With respect to credit risk arising from the other financial assets of the Company, which are comprised of cash and cash equivalents, available-for-sale financial assets and certain derivative instruments, the Company’s exposure to credit risk arising from the default of counter-parties is limited to the carrying amount of these instruments.

Although the Company trades only with established third parties, it will request collateral to be provided by third parties with less favorable financial positions.

Liquidity risk

The Company’s objective is to maintain a balance of funding continuity and flexibility through the use of financial instruments such as cash and cash equivalents, bank loans and bonds.

 

42


  (3) Information of financial instruments

 

  a. Fair value of financial instruments

 

     As of June 30,
     2007    2006

Financial Assets

   Book Value    Fair Value    Book Value    Fair Value

Non-derivative

           

Cash and cash equivalents

   $ 77,057,682    $ 77,057,682    $ 90,049,580    $ 90,049,580

Financial assets at fair value through profit or loss, current

     7,797,358      7,797,358      1,506,063      1,506,063

Held-to-maturity financial assets, current

     200,000      200,000      779,456      779,456

Notes and accounts receivable

     14,603,106      14,603,106      13,278,696      13,278,696

Available-for-sale financial assets, noncurrent

     46,727,005      46,727,005      37,864,803      37,864,803

Held-to-maturity financial assets, noncurrent

     —        —        200,000      200,000

Financial assets measured at cost, noncurrent

     2,321,538      —        2,265,728      —  

Long-term investments accounted for under the equity method

     41,329,192      42,940,292      33,261,799      39,096,736

Prepayment for long-term investments

     247,712      —        —        —  

Deposits-out

     642,214      642,214      542,121      542,121

Financial Liabilities

                   

Non-derivative

           

Payables

   $ 30,929,878    $ 30,929,878    $ 23,575,752    $ 23,575,752

Capacity deposits (current portion)

     174,020      174,020      892,482      892,482

Bonds payable (current portion included)

     30,517,418      30,598,801      40,592,150      41,303,619

Derivative

           

Interest rate swaps

   $ 423,226    $ 423,226    $ 633,039    $ 633,039

Derivatives embedded in exchangeable bonds

     —        —        555,251      555,251

 

43


  b. The methods and assumptions used to measure the fair value of financial instruments are as follows:

 

  i. The book values of short-term financial instruments approximate their fair value due to their short maturities. Short-term financial instruments include cash and cash equivalents, notes receivable, accounts receivable, current portion of capacity deposits, and payables.

 

  ii. The fair value of financial assets at fair value through profit or loss and available-for-sale financial assets are based on the quoted market prices.

 

  iii. The fair value of held-to-maturity financial assets and long-term investments accounted for under equity method are based on the quoted market prices. If market prices are unavailable, the Company estimates the fair value based on the book values.

 

  iv. The fair value of financial assets measured at cost and prepayment for long-term investments are unable to estimate since there is no active market in trading those unlisted investments.

 

  v. The fair value of deposits-out is based on their book value since the deposit periods are principally within one year and renewed upon maturity.

 

  vi. The fair value of bonds payable is determined by the market price.

 

  vii. The fair value of derivative financial instruments is based on the amount the Company expects to receive (positive) or to pay (negative) assuming that the contracts are settled in advance at the balance sheet date.

 

  c. The fair value of the Company’s financial instruments is determined by the quoted prices in active markets, or if the market for a financial instrument is not active, the Company establishes fair value by using a valuation technique:

 

     Active Market Quotation    Valuation Technique

Non-derivative Financial Instruments

     2007.06.30      2006.06.30      2007.06.30      2006.06.30

Financial assets

           

Financial assets at fair value through profit or loss, current

   $ 7,797,358    $ 1,506,063    $ —      $ —  

Available-for-sale financial assets, noncurrent

     46,727,005      37,864,803      —        —  

 

44


     Active Market Quotation    Valuation Technique

Non-derivative Financial Instruments

     2007.06.30      2006.06.30      2007.06.30      2006.06.30

Financial assets

           

Long-term investments accounted for under the equity method

   $ 42,940,292    $ 39,096,736    $ —      $ —  

Financial liabilities

           

Bonds payable (current portion included)

     30,598,801      41,303,619      —        —  

Derivative Financial Instruments

           

Financial liabilities

           

Interest rate swaps

   $ —      $ —      $ 423,226    $ 633,039

Derivatives embedded in exchangeable bonds

     —        —        —        555,251

 

  d. The Company recognized gains in NT$341 million and NT$99 million arising from the changes in fair value of financial liabilities at fair value through profit or loss for the six-month periods ended June 30, 2007 and 2006, respectively.

 

  e. The Company’s financial liabilities with cash flow interest rate risk exposure as of June 30, 2007 and 2006 amounted to NT$423 million and NT$633 million, respectively.

 

  f. During the six-month periods ended June 30, 2007 and 2006, total interest revenue for financial assets or liabilities that are not at fair value through profit or loss were NT$690 million and NT$710 million, respectively, while interest expense for the six-month periods ended June 30, 2007 and 2006 each amounted to NT$144 million and NT$397 million, respectively.

 

  (4) The Company and its subsidiary, UMC JAPAN, held credit-linked deposits and repackage bonds recognized as held-to-maturity financial assets for the earning of interest income. The details are disclosed as follows:

 

45


  a. Principal amount in original currency

As of June 30, 2007

The Company

 

Credit-linked deposits and repackage bonds referenced to

   Amount    Due Date

ADVANCED SEMICONDUCTOR ENGINEERING INC. European Convertible Bonds and Loans

   NTD    200 million    2007.09.25

As of June 30, 2006

The Company

 

Credit-linked deposits and repackage bonds referenced to

   Amount    Due Date

SILICONWARE PRECISION INDUSTRIES CO., LTD. European Convertible Bonds and Loans

   NTD    400 million    2007.02.05

SILICONWARE PRECISION INDUSTRIES CO., LTD. European Convertible Bonds and Loans

   NTD    200 million    2007.02.05

UMC JAPAN European Convertible Bonds

   JPY    640 million    2007.03.28

ADVANCED SEMICONDUCTOR ENGINEERING INC. European Convertible Bonds and Loans

   NTD    200 million    2007.09.25

UMC JAPAN

 

Credit-linked deposits and repackage bonds referenced to

   Amount    Due Date

UMC JAPAN European Convertible Bonds

   JPY    500 million    2007.03.29

 

  b. Credit risk

The counterparties of the above investments are major international financial institutions. The repayment in full of these investments is subject to the non-occurrence of one or more credit events, which are referenced to the entities’ fulfillment of their own obligations as well as repayment of their corporate bonds. Upon the occurrence of one or more of such credit events, the Company and its subsidiary, UMC JAPAN, may receive less than the full amount of these investments or nothing. The Company and its subsidiary, UMC JAPAN, have selected reference entities with high credit ratings to minimize the credit risk.

 

  c. Liquidity risk

Early withdrawal is not allowed for the above investments unless called by the issuer. However, the anticipated liquidity risk is low since most of the investments will either have matured within one year, or are relatively liquid in the secondary market.

 

  d. Market risk

There is no market risk for the above investments except for the fluctuations in the exchange rates of US Dollars and Japanese Yen to NT Dollars at the balance sheet date and the settlement date.

 

46


  (5) The Company and its subsidiary, UMC JAPAN, entered into interest rate swap and forward contracts for hedging the interest rate risk arising from the counter-floating rate of domestic bonds and for hedging the exchange rate risk arising from the net assets or liabilities denominated in foreign currency. The hedging strategy was developed with the objective to reduce the market risk for non-trading purpose. The relevant information on the derivative financial instruments entered into by the Company is as follows:

 

  a. The Company utilized interest rate swap agreements to hedge its interest rate risk on its counter-floating rate of unsecured domestic bonds issued during the period from May 21 to June 24, 2003. The periods of the interest rate swap agreements are the same as those of the domestic bonds, which are five and seven years. The floating rate is reset annually. The details of interest rate swap agreements are summarized as follows:

As of June 30, 2007 and 2006, the Company had the following interest rate swap agreements in effect:

 

Notional Amount

  

Contract Period

  

Interest Rate Received

   Interest Rate Paid  

NT$7,500 million

   May 21, 2003 to June 24, 2008   

4.0% minus USD

12-Month LIBOR

   1.52 %

NT$7,500 million

   May 21, 2003 to June 24, 2010   

4.3% minus USD

12-Month LIBOR

   1.48 %

 

  b. The details of forward contracts entered into by the Company and its subsidiary, UMC JAPAN, are summarized as follows:

The Company and its subsidiary, UMC JAPAN, did not hold any forward contracts as of June 30, 2007.

The Company did not hold any forward contracts as of June 30, 2006.

UMC JAPAN

 

Type

  

Notional Amount

  

Contract Period

Forward contracts

   Sell USD 3 million    June 14, 2006 to July 31, 2006

 

  c. Transaction risk

 

  (a) Credit risk

There is no significant credit risk exposure with respect to the above transactions as the counter-parties are reputable financial institutions with good global standing.

 

  (b) Liquidity and cash flow risk

The cash flow requirements on the interest rate swap agreements are limited to the net interest payables or receivables arising from the differences in the swap rates. The cash flow requirements on forward contracts are limited to the net difference between the forward and spot rates at the settlement date. Therefore, no significant cash flow risk is anticipated since the working capital is sufficient to meet the cash flow requirements.

 

47


  (c) Market risk

Interest rate swap agreements and forward contracts are intended for hedging purposes. Gains or losses arising from the fluctuations in interest rates and exchange rates are likely to be offset against the gains or losses from the hedged items. As a result, no significant exposure to market risk is anticipated.

 

  d. The presentation of derivative financial instruments on financial statements

The Company

As of June 30, 2007 and 2006, the Company’s interest rate swap agreements were classified as current liabilities amounting to NT$423 million and NT$633 million, respectively.

UMC JAPAN

As of June 30, 2006, the balance of current liabilities arising from forward contracts was JPY2 million and related exchange loss of JPY7 million and exchange gain of JPY24 million were recorded under non-operating loss and revenue for the six-month periods ended June 30, 2007 and 2006, respectively.

 

11. ADDITIONAL DISCLOSURES

 

  (1) The following are additional disclosures for the Company and its affiliates as required by the ROC Securities and Futures Bureau:

 

  a. Financing provided to others for the six-month period ended June 30, 2007: please refer to Attachment 1.

 

  b. Endorsement/Guarantee provided to others for the six-month period ended June 30, 2007: please refer to Attachment 2.

 

  c. Securities held as of June 30, 2007: please refer to Attachment 3.

 

  d. Individual securities acquired or disposed of with accumulated amount exceeding the lower of NT$100 million or 20 percent of capital stock for the six-month period ended June 30, 2007: please refer to Attachment 4.

 

  e. Acquisition of individual real estate with amount exceeding the lower of NT$100 million or 20 percent of capital stock for the six-month period ended June 30, 2007: please refer to Attachment 5.

 

  f. Disposal of individual real estate with amount exceeding the lower of NT$100 million or 20 percent of capital stock for the six-month period ended June 30, 2007: please refer to Attachment 6.

 

48


  g. Related party transactions for purchases and sales amounts exceeding the lower of NT$100 million or 20 percent of capital stock for the six-month period ended June 30, 2007: please refer to Attachment 7.

 

  h. Receivables from related parties with amounts exceeding the lower of NT$100 million or 20 percent of capital stock as of June 30, 2007: please refer to Attachment 8.

 

  i. Names, locations and related information of investees as of June 30, 2007: please refer to Attachment 9.

 

  j. Financial instruments and derivative transactions: please refer to Note 10.

 

  (2) Investment in Mainland China

None.

 

49


ATTACHMENT 1 (Financing provided to others for the six-month period ended June 30, 2007)

(Amount in thousand; Currency denomination in NTD unless otherwise specified)

 

                                                       Collateral          

No.

   Lender    Counter-
party
   Financial
statement account
   Maximum balance
for the period
   Ending balance    Interest rate    Nature of
financing
   Amount of sales to
(purchases from)
counter-party
   Reason for
financing
   Allowance
for doubtful
accounts
   Item    Value    Limit of financing
amount for individual
counter-party
   Limit of total
financing amount

None

                                         

 

50


ATTACHMENT 2 (Endorsement/Guarantee provided to others for the six-month period ended June 30, 2007)

(Amount in thousand; Currency denomination in NTD unless otherwise specified)

 

No.

   Endorsor/Guarantor    Receiving party    Relationship    Limit of
guarantee/endorsement
amount for receiving
party
   Maximum balance for the
period
   Ending balance    Amount of collateral
guarantee/endorsement
   Percentage of
accumulated guarantee
amount to net assets
value from the latest
financial statement
   Limit of total
guarantee/endorsement
amount

None

                          

 

51


ATTACHMENT 3 (Securities held as of June 30, 2007)

(Amount in thousand; Currency denomination in NTD unless otherwise specified)

UNITED MICROELECTRONICS CORPORATION

 

                    June 30, 2007     

Type of securities

  

Name of securities

  

Relationship

  

Financial statement account

   Units
(thousand)/
bonds/shares
(thousand)
   Book value    Percentage of
ownership
(%)
   Market value/
Net assets value
   Shares as
collateral
(thousand)
Convertible bonds    TATUNG CORP.    —      Financial assets at fair value through profit or loss, current    402    $ 52,260    —      $ 52,260    None
Convertible bonds    CHANG WAH ELECTRONMATERIALS INC.    —      Financial assets at fair value through profit or loss, current    500      58,750    —        58,750    None
Stock    PROMOS TECHNOLOGIES INC.    —      Financial assets at fair value through profit or loss, current    471,400      6,505,320    7.67      6,505,320    None
Stock    L&K ENGINEERING CO., LTD.    —      Financial assets at fair value through profit or loss, current    1,683      101,664    0.99      101,664    None
Stock    MICRONAS SEMICONDUCTOR HOLDING AG    —      Financial assets at fair value through profit or loss, current    280      182,711    0.94      182,711    None
Stock    ACTION ELECTRONICS CO., LTD.    —      Financial assets at fair value through profit or loss, current    16,270      335,972    0.44      335,972    None
Stock    FIRICH ENTERPRISES CO.,LTD.    —      Financial assets at fair value through profit or loss, current    122      92,893    0.22      92,893    None
Stock    CHINA DEVELOPMENT FINANCIAL HOLDING CORP.    —      Financial assets at fair value through profit or loss, current    23,538      335,419    0.21      335,419    None
Stock    YANG MING MARINE TRANSPORT CORP.    —      Financial assets at fair value through profit or loss, current    3,254      82,980    0.14      82,980    None
Stock    SILICONWARE PRECISION INDUSTRIES CO., LTD.    —      Financial assets at fair value through profit or loss, current    708      49,389    0.03      49,389    None
Stock    UMC GROUP (USA)    Investee company    Long-term investments accounted for under the equity method    16,438      982,297    100.00      982,297    None
Stock    UNITED MICROELECTRONICS (EUROPE) B.V.    Investee company    Long-term investments accounted for under the equity method    9      295,851    100.00      288,237    None
Stock    UMC CAPITAL CORP.    Investee company    Long-term investments accounted for under the equity method    124,000      3,969,316    100.00      3,969,316    None
Stock    UNITED MICROELECTRONICS CORP. (SAMOA)    Investee company    Long-term investments accounted for under the equity method    280      5,246    100.00      5,246    None
Stock    UMCI LTD.    Investee company    Long-term investments accounted for under the equity method    880,006      98    100.00      98    None
Stock    TLC CAPITAL CO., LTD.    Investee company    Long-term investments accounted for under the equity method    600,000      8,328,633    100.00      8,328,633    None
Stock    FORTUNE VENTURE CAPITAL CORP.    Investee company    Long-term investments accounted for under the equity method    499,994      11,417,688    99.99      12,003,717    None
Stock    UNITED MICRODISPLAY OPTRONICS CORP.    Investee company    Long-term investments accounted for under the equity method    84,093      257,487    85.24      257,487    None

 

52


ATTACHMENT 3 (Securities held as of June 30, 2007)

(Amount in thousand; Currency denomination in NTD unless otherwise specified)

UNITED MICROELECTRONICS CORPORATION

 

                    June 30, 2007     

Type of securities

  

Name of securities

  

Relationship

  

Financial statement account

   Units
(thousand)/
bonds/shares
(thousand)
   Book value    Percentage of
ownership
(%)
   Market value/
Net assets value
   Shares as
collateral
(thousand)
Stock    UMC JAPAN    Investee company    Long-term investments accounted for under the equity method    496    $ 5,578,444    50.09    $ 2,634,102    None
Stock    PACIFIC VENTURE CAPITAL CO., LTD.    Investee company    Long-term investments accounted for under the equity method    30,000      127,379    49.99      142,144    None
Stock    MTIC HOLDINGS PTE LTD.    Investee company    Long-term investments accounted for under the equity method    4,000      78,805    49.94      78,805    None
Fund    MEGA MISSION LIMITED PARTNERSHIP    Investee company    Long-term investments accounted for under the equity method    —        2,551,817    45.00      2,551,817    None
Stock    UNITECH CAPITAL INC.    Investee company    Long-term investments accounted for under the equity method    21,000      1,122,669    42.00      1,122,669    None
Stock    NEXPOWER TECHNOLOGY CORP.    Investee company    Long-term investments accounted for under the equity method    29,330      295,176    36.66      299,098    None
Stock    HSUN CHIEH INVESTMENT CO., LTD.    Investee company    Long-term investments accounted for under the equity method    33,624      4,943,314    36.49      4,813,451    None
Stock    HOLTEK SEMICONDUCTOR INC.    Investee company    Long-term investments accounted for under the equity method    49,439      903,961    23.12      3,287,719    None
Stock    ITE TECH. INC.    Investee company    Long-term investments accounted for under the equity method    24,229      380,738    21.62      2,059,496    None
Stock    XGI TECHNOLOGY INC.    Investee company    Long-term investments accounted for under the equity method    5,868      40,619    16.44      40,619    None
Stock    AMIC TECHNOLOGY CORP.    Investee company    Long-term investments accounted for under the equity method    16,200      49,654    11.82      75,341    None
Stock    UNIMICRON TECHNOLOGY CORP.       Available-for-sale financial assets, noncurrent    202,367      10,199,274    19.89      10,199,274    None
Stock    FARADAY TECHNOLOGY CORP.       Available-for-sale financial assets, noncurrent    55,611      7,312,904    17.00      7,312,904    None
Stock    UNITED FU SHEN CHEN TECHNOLOGY CORP.       Available-for-sale financial assets, noncurrent    18,460      134,390    16.60      134,390    None
Stock    SILICON INTEGRATED SYSTEMS CORP.    The Company’s director    Available-for-sale financial assets, noncurrent    228,956      4,212,788    16.26      4,212,788    None
Stock    NOVATEK MICROELECTRONICS CORP.       Available-for-sale financial assets, noncurrent    60,073      10,332,490    11.53      10,332,490    None
Stock    C-COM CORP.       Available-for-sale financial assets, noncurrent    3,083      27,715    4.40      27,715    None
Stock    SPRINGSOFT, INC.       Available-for-sale financial assets, noncurrent    8,323      536,802    4.20      536,802    None

 

53


ATTACHMENT 3 (Securities held as of June 30, 2007)

(Amount in thousand; Currency denomination in NTD unless otherwise specified)

UNITED MICROELECTRONICS CORPORATION

 

                    June 30, 2007     

Type of securities

  

Name of securities

   Relationship   

Financial statement account

   Units
(thousand)/
bonds/shares
(thousand)
   Book value    Percentage of
ownership
(%)
   Market value/
Net assets value
   Shares as
collateral
(thousand)

Stock

   CHIPBOND TECHNOLOGY CORP.       Available-for-sale financial assets, noncurrent    12,330    $ 580,114    4.15    $ 580,114    None

Stock

   EPISTAR CORP.       Available-for-sale financial assets, noncurrent    18,969      2,551,289    3.61      2,551,289    None

Stock

   KING YUAN ELECTRONICS CO., LTD.       Available-for-sale financial assets, noncurrent    35,008      983,723    3.21      983,723    None

Stock

   BILLIONTON SYSTEMS INC.       Available-for-sale financial assets, noncurrent    2,048      29,079    2.63      29,079    None

Stock

   MEDIATEK INC.       Available-for-sale financial assets, noncurrent    13,910      7,122,175    1.44      7,122,175    None

Stock

   TOPOINT TECHNOLOGY CO., LTD.       Available-for-sale financial assets, noncurrent    841      73,142    1.07      73,142    None

Stock

   MEGA FINANCIAL HOLDING COMPANY       Available-for-sale financial assets, noncurrent    95,577      2,126,584    0.86      2,126,584    None

Stock

   AU OPTRONICS CORP.       Available-for-sale financial assets, noncurrent    3,650      204,406    0.05      204,406    None

Stock

   HON HAI PRECISION INDUSTRY CO., LTD.       Available-for-sale financial assets, noncurrent    1,057      300,130    0.02      300,130    None

Stock

   PIXTECH, INC.       Financial assets measured at cost, noncurrent    9,883      —      17.63      note    None

Stock

   UNITED INDUSTRIAL GASES CO., LTD.       Financial assets measured at cost, noncurrent    13,185