Form 6-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 6-K

 


 

REPORT OF FOREIGN PRIVATE ISSUER

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of November 2005

 


 

LG.Philips LCD Co., Ltd.

(Translation of Registrant’s name into English)

 


 

20 Yoido-dong, Youngdungpo-gu, Seoul 150-721, The Republic of Korea

(Address of principal executive offices)

 


 

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      X            Form 40-F              

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):             

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):             

 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submission to furnish a report or other document that the registration foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

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

 

Yes                      No      X    

 



Table of Contents

QUARTERLY REPORT

 

(From January 1, 2005 to September 30, 2005)

 

THIS IS A TRANSLATION OF THE QUARTERLY REPORT ORIGINALLY PREPARED IN KOREAN AND IS IN SUCH FORM AS REQUIRED BY THE KOREAN FINANCIAL SUPERVISORY COMMISSION.

 

IN THE TRANSLATION PROCESS, SOME PARTS OF THE REPORT WERE REFORMATTED, REARRANGED OR SUMMARIZED FOR THE CONVENIENCE OF READERS.

 

UNLESS EXPRESSLY STATED OTHERWISE, ALL INFORMATION CONTAINED HEREIN IS PRESENTED ON A NON-CONSOLIDATED BASIS IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN KOREA, OR KOREAN GAAP, WHICH DIFFER IN CERTAIN RESPECTS FROM GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CERTAIN OTHER COUNTRIES, INCLUDING THE UNITED STATES. WE HAVE MADE NO ATTEMPT TO IDENTIFY OR QUANTIFY THE IMPACT OF THESE DIFFERENCES.


Table of Contents

Contents

(All information is presented on a non-consolidated Korean GAAP basis)

 

1. Overview
  A. Industry
  B. Company

 

2. Information Regarding Shares
  A. Shareholder list
  B. Voting rights
  C. Dividends

 

3. Major Products and Materials
  A. Major products in 2005 (Q1~Q3)
  B. Average selling price trend of major products
  C. Major materials
  D. Price trend of major materials

 

4. Production & Equipment
  A. Production capacity and calculation
  B. Production performance and working ratio
  C. Investment plan

 

5. Sales
  A. Sales performance
  B. Sales route and sales method

 

6. Employees

 

7. Financial Information
  A. Financial highlights
  B. R&D expense
  C. Domestic credit rating
  D. Remuneration for directors in 2005 (Q1~Q3)

 

Attachment:   1. Korean GAAP Quarterly Non-consolidated Financial Statements
    2. U.S. GAAP Quarterly Consolidated Financial Statements


Table of Contents

1. Overview

 

  A. Industry

 

  (1) Industry characteristics and growth potential

 

  - TFT-LCD technology is one of the most widely used technologies in the manufacture of flat panel displays and the demand for flat panel displays is growing rapidly. The flat panel display industry is characterized by high entry barriers due to rapidly evolving technology, capital-intensive characteristics, and the significant investments required to achieve economies of scale, among other factors. There is strong competition between a limited number of players within the industry and production capacity in the industry, including ours, is being continually increased.

 

  - The demand for LCD panels for Notebook PCs & Monitors has been closely related to the IT industry cycle. The demand for LCD panels for TVs is growing with the start of HDTV broadcasting and as LCD TV is anticipated to play a key role in the digital display area. In addition, LCD panel markets for applications, such as mobile phones, PDAs, medical applications and automobile navigation systems, among others, are growing steadily.

 

  - The average selling prices of our display panels have declined in general and are expected to continually decline with time irrespective of industry-wide fluctuations as a result of, among other factors, technology advances and cost reductions.

 

  (2) Cyclicality

 

  - The TFT-LCD business has high cyclicality as well as being a capital intensive business. In spite of the increase in demand for products, this industry has experienced periodic volatility caused by imbalances between demand and supply due to capacity expansion within the industry.

 

  - Intense competition and expectations of demand growth may lead panel manufacturers to invest in manufacturing capacity on similar schedules, resulting in a surge in capacity when production is ramped up at new fabrication facilities.

 

  - During such surges in capacity growth, our customers can exert and have exerted strong downward pricing pressure, resulting in sharp declines in average selling prices and significant fluctuations in our gross margins. Conversely, demand surges and fluctuations in the supply chain can lead to price increases.

 

  (3) Competitiveness

 

  - Our ability to compete successfully also depends on factors both within and outside our control, including product pricing, performance and reliability, successful and timely investment and product development, success of our end-brand customers in marketing their brands and products, component and raw material supply costs, and general economic and industry conditions.

 

  - Core competitiveness includes technology leadership, capability to design new products and premium products, timely investment in advanced fabs, cost leadership through application of large production lines, innovation of process and productivity, and collaborative customer relationships.


Table of Contents
  - Most importantly, cost leadership and stable and long-term relationships with customers are critical to secure profit even in a buyer’s market.

 

  - A substantial portion of our sales is attributable to a limited group of end-brand customers and their designated system integrators. The loss of these end-brand customers, as a result of customers entering into strategic supplier arrangements with our competitors or otherwise, would thus result in reduced sales.

 

  - Developing new products and technologies that can be differentiated from those of our competitors is critical to the success of our business. We take active measures to protect our intellectual property internationally by obtaining patents and undertaking monitoring activities in our major markets. It is also necessary to recruit and retain the experienced key staffs and highly skilled line operators.

 

  (4) Sourcing material

 

  - Materials are sourced in-house (color filters) as well as from domestic and overseas vendors. However, recently, the domestic portion is growing due to the active participation of domestic vendors.

 

  - The shortage of raw materials may arise temporarily due to the rapid increase in demand for raw materials from capacity expansion in the TFT-LCD industry.

 

  - We have purchased, and expect to purchase, a substantial portion of our equipment from a limited number of qualified foreign and local suppliers. From time to time, increased demand for new equipment may cause lead times to extend beyond those normally required by the equipment vendors.

 

  (5) Others

 

  - Most TFT-LCD panel makers are located in Asia.

 

a. Korea: LG.Philips LCD, Samsung Electronics (including Joint Venture between Samsung Electronics and Sony Corporation), BOE-Hydis

 

b. Taiwan: AU Optronics, Chi Mei Optoelectronics, CPT, QDI, etc.

 

c. Japan: Sharp, Hitachi, etc.

 

d. China: SVA-NEC, BOE-OT, etc.


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  B. Company

 

  (1) Business overview

 

  - We started the TFT-LCD business in 1998. We currently operate six fabrication facilities located in Gumi, Korea and three module facilities located in Gumi, Korea and Nanjing, China and we are constructing our 7th generation fab (P7) in Paju, Korea.

 

  - We became the first LCD maker in the world to commence commercial production at a 4th generation fab (P3) in July 2000 and at a 5th generation fab (P4) in March 2002 to meet the demand for large-size monitors.

 

  - We started mass production at our 6th generation fab (P6) in August 2004, which has provided us with a full line-up of production facilities, and achieved P6’s initial design capacity of 90,000 input sheets per month in the third quarter of 2005, which allows us to meet growing customer demand for LCD TV panels in addition to LCD panels for Notebook PC and Monitor, etc.

 

  - Sales in the third quarter of 2005, which were led by the growing demand for large and wide LCD TV panels and a stronger pricing environment for notebook PC panels, increased by 19% to KRW 2,416 billion from sales of KRW 2,029 billion in the second quarter of 2005 and increased 32% compared to KRW 1,836 billion in the third quarter of 2004.

 

  - Operating profit in the third quarter of 2005 increased by 740% to KRW 243 billion from KRW 29 billion in the second quarter of 2005 and net income in the third quarter of 2005 increased by 453% to KRW 227 billion from KRW 41 billion in the second quarter of 2005.

 

  - Business area of the company for disclosure is limited to LCD business.

 

  (2) Market shares

 

  - World wide market share of large-size TFT-LCD panels (³10”) based on revenue

 

     2005 Q2

    2004

    2003

 

Panel for Notebook PC

   21.9 %   19.7 %   19.9 %

Panel for Monitor

   24.5 %   22.7 %   23.4 %

Panel for TV

   25.3 %   19.9 %   26.0 %

Total

   23.4 %   21.0 %   22.2 %
LOGO  Source: DisplaySearch Q3 2005                   


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  (3) Market characteristics

 

  - Due to the recent high growth in the display appliance market for the flat display format, the scale of the LCD market is growing at a rapid rate, resulting in expansion of the market centered mainly in America, Japan, Europe and China.

 

  (4) New business

 

  - In March 2004, we broke ground for a new TFT-LCD industrial complex in Paju, Korea, and construction of P7 is currently in progress.

 

  - We plan to commence mass production of primarily 42” and 47” LCDs for TVs and large size LCDs for Monitors at P7 with an initial design capacity of 45,000 sheets per month, using 1,950 x 2,250 mm glass, during the first quarter of 2006. We will expand P7’s capacity to 90,000 sheets per month depending on future market and other conditions. We currently estimate that the construction and build-out of P7, at a capacity of 90,000 sheets per month, will cost approximately KRW 5.3 trillion.

 

  - In September 2005, we entered into an agreement with the government of Poland, etc. to build a ‘back-end” module production plant in Wroclaw, a city in southern Poland, becoming the first global LCD industry player to commence such production in Europe. We will break ground for the plant during the first half of 2006 and start production during the first half of 2007 with an initial capacity of 3 million modules per year. We will invest a total of EUR 429 million in the plant by 2011, at which time it is scheduled to reach its design capacity of 11 million units per year.

 

  (5) Organization chart

 

LOGO

 

- JRD :   Joint Representative Director

 

- CEO :  Chief Executive Officer

 

- CFO :  Chief Financial Officer

 

- COO : Chief Operating Officer

 

- CTO : Chief Technology Officer


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2. Information Regarding Shares

 

  A. Shareholder List

 

  (1) Total shares issued : 357,815,700 shares as of Sep. 30, 2005

 

  (2) Principal shareholders and related parties as of Sep. 30, 2005

 

(Unit: share)

 

Name

  End of Dec. 2004

    Increase/Decrease

  Sep. 30, 2005

    Cause of change*

LGE   145,000,000 (44.57 %)   (-)9,375,000   135,625,000 (37.90 %)    
Philips   145,000,000 (44.57 %)   (-)9,375,000   135,625,000 (37.90 %)    
   

 
 

   
Total   290,000,000 (89.14 %)   —     271,250,000 (75.80 %)    

* Our issuance of new share (32,500,000 shares) in ADSs and the disposal of our shares (18,750,000 shares) by major shareholders in Jul. 2005.

 

  (3) Shareholders who own 5% or more of our shares as of Sep. 30, 2005

 

(Unit: share)

 

Name


   Type of Stock

   Number of shares

   Ratio

 

LGE

   Common Stock    135,625,000    37.90 %

Philips

   Common Stock    135,625,000    37.90 %
         
  

Total

        271,250,000    75.80 %

 

  B. Voting rights as of Sep. 30, 2005

 

(Unit: share)

 

Description


   Number of shares

1.    Shares with voting rights [A-B]    357,815,700
     A.        Total shares issued    357,815,700
     B.        Shares without voting rights    —  
2.    Shares with restricted voting rights    —  
         
             Total voting right [1-2]    357,815,700


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  C. Dividends

 

  (1) Dividends during the recent 3 fiscal years

 

Description


  

2005

(Q1~Q3)


   2004

   2003

Par value (Won)

   5,000    5,000    5,000

Net income (Million Won)

   189,164    1,655,445    1,019,100

Earnings per share (Won)

   568    5,420    3,514

Retained earning for dividends (Million Won)

   3,152,501    2,963,337    1,307,892

Total cash dividend amount (Million Won)

   —      —      —  

Total stock dividend amount (Million Won)

   —      —      —  

Cash dividend payout ratio (%)

   —      —      —  

Cash dividend yield (%)

   —      —      —  

Stock dividend yield (%)

   —      —      —  

Cash dividend per share (Won)

   —      —      —  

Stock dividend per share (Won)

   —      —      —  

* Earnings per share are calculated based on par value of 5,000 won.

(Stock split was made from par value of 10,000 won to par value of 5,000 won per share as of May 25, 2004)

* Retained earning for dividends is the amount before dividend is paid.
* Earnings per share was calculated by net income divided by weighted average number of common stock

 

3. Major Products and Materials

 

  A. Major products in 2005 (Q1~Q3)

 

(Unit: In billions of won)

 

Business

area


  

Sales

types


   Items
(Market)


 

                      Specific use                      


  

Major

trademark


     Sales (%)

 

TFT-

LCD

   Product/
Service/
Other Sales
   TFT-LCD
(Overseas)
 

Notebook PC, Monitor, TV

Applications Panels, etc.

   LG.Philips LCD      5,659 (91.0 %)
      TFT-LCD
(Korea*)
 

 

Notebook PC, Monitor,

TV Applications Panels, etc.

   LG.Philips LCD      556 (9.0 %)
                         

Total

                        6,215 (100 %)
                         


* Local export was included.


Table of Contents
  B. Average selling price trend of major products

 

(Unit: USD/M2)

 

Description


  

2005

(Q1~Q3)


   2004

   2003

TFT-LCD panel

   2,223    3,090    3,051
 
  * Half-finished products in cell format and panels smaller than 10 inches are excluded.

 

  (1) Assumptions for calculations
  Average annual (or quarterly) selling price per m2

 

  (2) Major factors contributing to price fluctuation

 

  Price change due to fluctuation in market

 

  Price change due to change in model mix

 

  C. Major materials

 

(Unit: In billions of won)

 

Business

area


   Purchase
types


   Items

   Specific use

  

Purchase amount

(%)


   

Remarks


TFT-LCD    Materials    Glass    LCD Panel
Manufacturing
   785 (22.0 %)  

Samsung Corning Co., Ltd.,

NEG, etc.

      Back-Light       684 (19.1 %)   Heesung Electronics Ltd., etc.
      Polarizer       300 (8.4 %)   LG Chem., etc.
      Others       1,803 (50.5 %)    
Total         3,572 (100.0 %)    

 

  D. Price trend of major materials

 

(Unit : Won)

 

Description


  

2005

(Q1~Q3)


   2004

   2003

Glass

   84,049    76,080    57,488

Back-Light

   44,231    35,800    33,441

Polarizer

   8,406    8,256    7,288

 

  (1) Assumption for calculation

 

  - Average unit price of major raw materials

 

  (2) Major factors contributing to price fluctuations

 

  - Change in size of raw materials and changes in quantity

 

  - Difference between demand and supply


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4. Production and Equipment

 

  A. Production capacity and calculation

 

  (1) Production capacity

 

(Unit : 1,000 Glass sheets)

 

Business area


   Items

   Business place

   2005 (Q1~Q3)

   2004

   2003

TFT-LCD

   TFT-LCD    Gumi    5,911    6,644    5,280

 

  (2) Calculation of Capacity

 

a. Method

 

   Assumptions for calculation

 

  - Based on input glass

 

  Calculation method

 

  - Average monthly input capacity for the third quarter x given periods (9 months) in case of 2005 (Q1~Q3).

 

  - Average monthly input capacity for the fourth quarter x given periods (12 months) in case of 2004 and 2003.

 

b. Average working hours

 

  - Refer to B-(2)

 

  B. Production performance and working ratio

 

  (1) Production performance

 

(Unit: 1,000 Glass sheets)

 

Business area


   Items

   Business place

   2005 (Q1~Q3)

   2004

   2003

TFT-LCD

   TFT-LCD    Gumi    5,512    6,033    4,715
 
  * Based on input glass

 

  (2) Working Ratio

 

(Unit: Hours)

 

Business
    place(area)    


   Maximum working hours of
2005 (Q1~Q3)


  Real working hours of
2005 (Q1~Q3)


 

Average

working ratio


 

Gumi

(TFT-LCD)

   6,552
(24HR. X 273Days)
  6,552
(24HR. X 273Days)
  100 %


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  C. Investment plan

 

  (1) Investment in progress

 

(Unit: In billions of won)

 

Business

area


   Description

  

Investment

period


  

Investment

Assets


  

Investment

effect


  

Total

investment


   Already
invested


   To be
invested


   Remarks

TFT-LCD    New /
Expansion, etc.
   Q1 ’04~    Building/
Machinery,
etc.
   Capacity
expansion
   6,300    3,500    2,800    —  

 

  (2) Investment Plan (Consolidated basis)

 

(Unit: In billions of won)

 

Business

area


   Project

   Expected yearly investment

  

Investment

effects


   Remarks

      2005 *

   2006*

   2007**

     

TFT-LCD

   New /
Expansion, etc.
   4,580    3,500
~4,500
   —      Capacity
Expansion, etc.
    
 
  * Expected investments in 2005 and 2006 are subject to change depending on market environment, etc.
  ** Expected investment during 2007 cannot be projected due to industry characteristics.

 

5. Sales

 

  A. Sales performance

 

(Unit: In billions of won)

 

Business

area


  

Sales

types


  

Items

(Market)


  2005
(Q1~Q3)


   2004

   2003

TFT-LCD

   Products, etc.    TFT-LCD    Overseas   5,659    7,298    5,053
         Korea*   556    782    978
         Total   6,215    8,080    6,031
 
  * Local export was included.

 

  B. Sales route and sales method

 

  (1) Sales organization

 

  - Sales departments for Notebook PC, Monitor, TV and Applications, qualification department and sales planning & administration department are grouped under the Worldwide Sales EVP.

 

  - Sales subsidiaries in America, Germany, Japan, Taiwan and China (Hong Kong, Shanghai) perform sales activities in overseas countries and provide technical support to customers.

 

 
  * There is a back-end manufacturing subsidiary in Nanjing, China.


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  (2) Sales route

 

  - LG.Philips LCD HQ & Overseas manufacturing subsidiary ® Overseas subsidiaries (USA/Europe/Japan/Taiwan /Hong Kong/Shanghai) ® System integrators, Branded customers ® End users

 

  - LG.Philips LCD HQ & Overseas manufacturing subsidiary ® System integrators, Branded customers ® End users

 

  (3) Sales methods and conditions

 

  - Direct sales & sales through overseas subsidiaries, etc.

 

  (4) Sales strategy

 

  - To secure stable sales to major PC makers and the leading consumer electronics makers worldwide

 

  - To increase sales of premium Notebook PC products, to maintain the number one market share in the larger size high-end Monitor segment and to lead the large and wide LCD TV market

 

  - To diversify our Application Market product portfolio

 

  - Purchase order from branded customers to overseas subsidiaries è Information to HQ è Schedule production plan è Ship products to subsidiaries è Sales to system integrators or branded customers by overseas subsidiaries.

 

6. Employees

 

(as of Sep. 30, 2005)

  (Unit : person, year, in millions of won)

 

Sex


   Details of employees

  

Total Salary

in 2005
(Q1~Q3)


   Per
capita
Salary


   Average
Service Period


   Office
Worker


   Line
Worker


   Others

   Total

        

Male

   4,633    4,370    —      9,003    262,162    32    3.9

Female

   430    4,052    —      4,482    80,684    21    2.1

Total

   5,063    8,422    —      13,485    342,846    28    3.3

* Director and Executive officers are excluded.


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7. Financial Information

 

A. Financial Highlights (Based on Non-consolidated, Korean GAAP)

(Unit: In millions of won)

 

Description


   2005 Q1~Q3

   2004

   2003

   2002

   2001

[Current Assets]

   3,687,444    2,638,616    1,918,329    806,156    374,198

¨ Quick Assets

   3,194,963    2,170,617    1,644,838    463,539    189,708

¨ Inventories

   492,481    467,999    273,491    342,617    184,490

[Fixed Assets]

   9,085,529    6,960,077    4,295,753    3,613,748    3,361,220

¨ Investments

   595,011    409,955    203,343    147,832    128,397

¨ Tangible Assets

   8,332,519    6,366,651    3,874,428    3,210,884    2,937,209

¨ Intangible Assets

   157,999    183,471    217,982    255,032    295,614

Total Assets

   12,772,973    9,598,693    6,214,082    4,419,904    3,735,418

[Current Liabilities]

   2,703,859    1,900,765    2,044,005    1,117,066    904,952

[Non-current Liabilities]

   2,750,919    1,925,286    1,276,045    1,436,775    1,251,713

Total Liabilities

   5,454,778    3,826,051    3,320,050    2,553,841    2,156,665

[Capital Stock]

   1,789,079    1,626,579    1,450,000    1,450,000    1,450,000

[Capital Surplus]

   2,280,421    1,012,271    —      —      —  

¨ Capital Reserve

   2,280,421    1,012,271    —      —      —  

¨ Asset Revaluation Reserve

   —      —      —      —      —  

[Retained Earnings ]

   3,280,838    3,091,674    1,436,229    417,129    128,337

[Capital Adjustment]

   (-)32,143    42,118    7,803    (-)1,066    416

Total Shareholder’s Equity

   7,318,195    5,772,642    2,894,032    1,866,063    1,578,753

Sales Revenues

   6,215,168    8,079,891    6,031,261    3,518,289    2,386,617

Operating Income

   109,236    1,640,708    1,086,517    215,724    (-)344,976

Ordinary Income

   51,937    1,683,067    1,009,731    293,249    (-)420,342

Net Income

   189,164    1,655,445    1,019,100    288,792    (-)381,603

* For the purpose of comparison, Financial Statements for FY 2003, 2002 & 2001 were reclassified according to changes in the Statements of Korean Financial Accounting Standards.


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B. R&D Expense

 

(1) Summary

 

(Unit: In millions of won)

 

Account


   2005 (Q1~Q3)

    2004

    2003

    Remarks

Direct Material Cost    189,364     170,051     141,614      
Direct Labor Cost    52,429     58,202     14,421      
Depreciation Expense    7,641     11,078     6,165      
Others    14,974     13,874     9,082      
R&D Expense Total    264,408     253,205     171,282      
Accounting Treatment                       

Selling & Admin. Expenses

   37,343     43,095     29,708      

Manufacturing Cost

   227,065     210,110     141,574      

R&D Expense / Sales Ratio [Total R&D Expense÷Sales for the period×100]

   4.25 %   3.13 %   2.84 %    

* Capex for R&D, Manufacturing Cost for R&D test run, and other R&D related cost are excluded.

 

(2) R&D achievements

 

1) Development of 20.1-inch AMOLED

 

- Joint development of 20.1-inch AMOLED with LG Electronics

 

- Development of world’s largest 20.1-inch wide AMOLED based on LTPS technology

 

2) Development of Copper bus line

 

- Next generation LCD technology to significantly improve brightness, definition and resolution, etc.

 

3) Mass production and development of World’s largest TFT-LCD panel for Full-HD TV (55-inch) in Oct. 2004.

 

- Stitch Lithography and Segmented Circuit Driving to cope with Large-size LCD Panel

 

- Achievement of High Contrast Ratio and Fast Response Time through new technologies

 

- Application of innovative panel technology to solve the weak point (gravity/touch stains) of large size

 

4) Development of Ultra High Resolution Product (30-inch)

 

- World’s 1st success in mass production of LCM applying Cu Line(source & gate Area)

 

- Achievement of Ultra High Resolution (2560x1600 : 101ppi)

 

5) Development of the World’s Lowest Power-Consumption, 32” Wide LCD TV Model

 

- Development of the world’s lowest, under 90W model (EEFL applied)

 

- High Contrast Ratio, Fast Response Time (DCR + ODC applied)

 

6) Development of High Luminance and High Color Gamut 17-inch wide LCD Panel for Notebook PC

 

- World’s 1st 500nit luminance and 72% color gamut in 17-inch wide for Notebook PC


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- Development of 6200nit luminance backlight

 

7) Development of World’s largest 10.1-inch Flexible Display

 

- Joint development with E-ink Corporation

 

C. Domestic Credit Rating

 

Subject


  

Month of Rating


  

Credit

Rating


  

Rating Agency

(Rating range)


Corporate Debenture

   Apr. 2004    AA-   

Korea Investors Service, Inc. (AAA ~ D)

National Information & Credit Evaluation, Inc.

   May. 2004    AA-   
   Nov. 2004    AA-   
   Mar. 2005    AA-   
   Jun. 2005    AA-   

Commercial Paper

   Apr. 2004    A1   

Korea Investors Service, Inc. (A1 ~ D)

National Information & Credit Evaluation, Inc.

(A1 ~ D)

   May. 2004    A1   
   Nov. 2004    A1   
   Jun. 2005    A1   

 

D. Remuneration for directors in 2005 (Q1~Q3)

 

(Unit: In millions of won)

 

Classification


  

Salary Paid


  

Approved Salary at

Shareholders Meeting


  

Per Capita Average

Salary Paid


   Remarks

Inside Directors

(4 persons)

   9,294    13,400    2,323     

Outside Directors

(5 persons)

   166       33    Audit committee consists
of three outside directors.

 

Note1) Company did not pay remuneration for the outside directors who were appointed at the 20th AGM (Mar. 23, 2005) in the first quarter of 2005.


Table of Contents

LG.Philips LCD Co., Ltd.

Interim Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004


Table of Contents

LG.Philips LCD Co., Ltd.

Index

September 30, 2005 and 2004, and December 31, 2004

 

     Page(s)

Report of Independent Accountants

   1 - 2

Non-Consolidated Financial Statements

    

Balance Sheets

   3

Statements of Income

   4

Statements of Cash Flows

   5 – 6

Notes to Non-Consolidated Financial Statements

   7 – 40


Table of Contents

LOGO

  LOGO

 

   

Samil PricewaterhouseCoopers

Kukje Center Building

191 Hankangro 2ga, Yongsanku

Seoul 140-702, KOREA

(Yongsan P.O. Box 266, 140-600)

 

Report of Independent Accountants

 

To the Board of Directors and Shareholders of

LG.Philips LCD Co., Ltd.

 

We have reviewed the accompanying non-consolidated balance sheet of LG.Philips LCD Co., Ltd. (the “Company”) as of September 30, 2005, and the related non-consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 2005 and 2004, expressed in Korean won. These interim financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these interim financial statements based on our reviews.

 

We conducted our reviews in accordance with the quarterly review and semi-annual review standards established by the Securities and Futures Commission of the Republic of Korea. These standards require that we plan and perform our review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

 

Based on our reviews, nothing has come to our attention that causes us to believe that the non-consolidated interim financial statements referred to above are not presented fairly, in all material respects, in accordance with accounting principles generally accepted in the Republic of Korea.

 

We have audited the non-consolidated balance sheet of LG.Philips LCD Co., Ltd. as of December 31, 2004, and the related non-consolidated statements of income, appropriations of retained earnings and cash flows for the year then ended, in accordance with auditing standards generally accepted in the Republic of Korea. We expressed an unqualified opinion on those financial statements in our audit report dated January 26, 2005. These financial statements are not included in this review report. The non-consolidated balance sheet as of December 31, 2004, presented herein for comparative purposes, is consistent, in all material respects, with the above audited balance sheet as of December 31, 2004.

 

Samil PricewaterhouseCoopers is the Korean member firm of PricewaterhouseCoopers. PricewaterhouseCoopers refer to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

 

1


Table of Contents

LOGO

 

As discussed in Note 1 and 15, on July 2005, pursuant to a Form F-1 Registration statement filed on July 22, 2005 with the US Securities and Exchange Commission, the Company sold 27,900,000 shares of common stock in the form of American Depositary shares (“ADSs”) for gross proceeds of US$1,189,656 thousand. In addition, pursuant to the “Underwriting Agreement” dated July 21, 2005 the Company issued 4,600,000 shares of common stock for gross proceeds of US$196,144 thousand. The Company intends to use the proceeds from these sales to fund the capital expenditures in connection with the construction of its seventh generation TFT-LCD fabrication plant (“P7”) and other LCD facilities in Korea.

 

Accounting principles and review standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in conformity with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. In addition, the procedures and practices used in the Republic of Korea to review such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those who are informed about Korean accounting principles or review standards and their application in practice.

 

Seoul, Korea

October 14, 2005

 

This report is effective as of October 14, 2005, the review report date. Certain subsequent events or circumstances, which may occur between the review report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the review report should understand that there is a possibility that the above review report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

 

2


Table of Contents

LG.Philips LCD Co., Ltd.

Non-Consolidated Balance Sheets

September 30, 2005 and December 31, 2004

(Unaudited)

 

(in millions of Korean won)

 

   2005

    2004

Assets

              

Current assets

              

Cash and cash equivalents (Note 3)

   (Won) 1,976,071     (Won) 1,274,989

Available-for-sale securities

     245       15

Trade accounts and notes receivable, net (Notes 4, 5 and 20)

     1,049,674       635,903

Inventories, net (Note 6)

     492,481       467,999

Other accounts receivable, net (Notes 4, 5 and 20)

     5,552       6,690

Accrued income, net (Note 4)

     1,304       1,470

Advanced payments, net (Note 4)

     5,653       9,793

Prepaid expenses

     18,657       27,905

Prepaid value added tax

     85,230       80,917

Deferred income tax assets (Note 18)

     22,378       —  

Others (Note 14)

     30,199       132,935
    


 

Total current assets

     3,687,444       2,638,616

Property, plant and equipment, net (Note 8)

     8,332,519       6,366,651

Long-term financial instruments (Note 3)

     16       16

Equity-method investments (Note 7)

     187,985       168,039

Non-current guarantee deposits

     24,004       19,070

Long-term prepaid expenses

     83,614       49,652

Deferred income tax assets (Note 18)

     299,392       173,178

Intangible assets, net (Note 9)

     157,999       183,471
    


 

Total assets

   (Won) 12,772,973     (Won) 9,598,693
    


 

Liabilities and Shareholders’ Equity

              

Current liabilities

              

Trade accounts and notes payable (Notes 5 and 20)

   (Won) 564,234     (Won) 451,755

Other accounts payable (Notes 5 and 20)

     1,536,380       978,501

Advances received

     1,199       53

Withholdings

     4,903       4,860

Accrued expenses (Note 5)

     61,102       116,585

Income tax payable (Note 18)

     1,055       74,581

Product warranty

     12,593       15,150

Current maturities of debentures and long-term debts (Note 10)

     435,319       205,139

Others (Note 14)

     87,074       54,141
    


 

Total current liabilities

     2,703,859       1,900,765

Debentures, net of current maturities and discounts on debentures (Note 11)

     2,370,816       1,707,716

Long-term debts, net of current maturities (Note 11)

     320,622       185,632

Accrued severance benefits, net (Note 12)

     59,446       31,938

Long-term accrued expenses (Note 13)

     35       —  
    


 

Total liabilities

     5,454,778       3,826,051
    


 

Commitments and contingencies (Note 14)

              

Shareholders’ equity

              

Capital stock (Note 15)

     1,789,079       1,626,579

Common stock, (Won)5,000 par value per share ; 400 million shares authorized ; 358 million shares issued and outstanding

              

Capital surplus (Note 16)

     2,280,421       1,012,271

Retained earnings (Note 16)

     3,280,838       3,091,674

Capital adjustments (Note 17)

     (32,143 )     42,118
    


 

Total shareholders’ equity

     7,318,195       5,772,642
    


 

Total liabilities and shareholders’ equity

   (Won) 12,772,973     (Won) 9,598,693
    


 

 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

See Report of Independent Accountants

 

3


Table of Contents

LG.Philips LCD Co., Ltd.

Non-Consolidated Statements of Income

Three-Month and Nine-Month Periods Ended September 30, 2005 and 2004

(Unaudited)

 

(in millions of Korean won, except per share amounts)

 

   For the three-month periods
ended September 30,


    For the nine-month periods
ended September 30,


     2005

    2004

    2005

    2004

Sales (Notes 20 and 21)

   (Won) 2,416,322     (Won) 1,836,181     (Won) 6,215,168     (Won) 6,229,064

Cost of sales (Note 20)

     2,069,988       1,542,111       5,837,207       4,355,386
    


 


 


 

Gross profit

     346,334       294,070       377,961       1,873,678

Selling and administrative expenses

     103,586       50,210       268,725       166,419
    


 


 


 

Operating income

     242,748       243,860       109,236       1,707,259
    


 


 


 

Non-operating income

                              

Interest income

     15,085       5,130       35,639       12,687

Foreign exchange gain

     72,041       3,046       131,559       81,163

Gain on foreign currency translation

     28,209       19,136       28,209       28,654

Gain on valuation of investments using the equity method of accounting (Note 7)

     1,401       6,471       2,906       7,590

Gain on disposal of property, plant and equipment

     16       912       2,012       2,952

Others

     3,622       1,924       11,050       7,740
    


 


 


 

       120,374       36,619       211,375       140,786
    


 


 


 

Non-operating expenses

                              

Interest expenses

     25,866       10,942       73,124       35,444

Foreign exchange losses

     63,524       26,110       138,931       127,445

Loss on foreign currency translation

     36,446       3,474       31,700       6,444

Donations

     750       11       843       10,357

Loss on disposal of accounts receivable

     1,566       2,898       6,519       4,837

Loss on valuation of investments using the equity method of accounting (Note 7)

     13,680       —         10,309       —  

Loss on disposal of property, plant and equipment

     79       —         101       20

Ramp up cost

     7,147       —         7,147       —  

Others

     —         1       —         21
    


 


 


 

       149,058       43,436       268,674       184,568
    


 


 


 

Income before income taxes

     214,064       237,043       51,937       1,663,477

Income tax expense (benefit) (Note 18)

     (12,863 )     (53,825 )     (137,227 )     43,453
    


 


 


 

Net income

   (Won) 226,927     (Won) 290,868     (Won) 189,164     (Won) 1,620,024
    


 


 


 

Basic ordinary income per share (Note 19)

   (Won) 651     (Won) 920     (Won) 568     (Won) 5,422
    


 


 


 

Basic earnings per share (Note 19)

   (Won) 651     (Won) 920     (Won) 568     (Won) 5,422
    


 


 


 

Diluted ordinary income per share (Note 19)

   (Won) 649     (Won) 920     (Won) 568     (Won) 5,422
    


 


 


 

Diluted earnings per share (Note 19)

   (Won) 649     (Won) 920     (Won) 568     (Won) 5,422
    


 


 


 

 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

See Report of Independent Accountants

 

4


Table of Contents

LG.Philips LCD Co., Ltd.

Non-Consolidated Statements of Cash Flows

Three-Month and Nine-Month Periods Ended September 30, 2005 and 2004

(Unaudited)

 

(in millions of Korean won)

 

  

For the three-month periods

ended September 30,


    For the nine-month periods
ended September 30,


 
     2005

    2004

    2005

    2004

 

Cash flows from operating activities

                                

Net income

   (Won) 226,927     (Won) 290,868     (Won) 189,164     (Won) 1,620,024  
    


 


 


 


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

     429,051       305,069       1,226,943       839,468  

Amortization of intangible assets

     10,830       11,156       33,493       33,223  

Provision for severance benefits

     8,374       5,667       34,930       26,193  

Gain on foreign currency translation, net

     10,990       (12,748 )     7,563       (25,215 )

Loss (gain) on disposal of property, plant and equipment, net

     63       (912 )     (1,911 )     (2,932 )

Amortization of discount on debentures

     9,025       2,737       20,394       8,747  

Loss (gain) on valuation of investments using the equity-method of accounting, net

     12,279       (6,471 )     7,404       (7,590 )

Stock compensation cost

     (204 )     —         35       —    

Others

     3,802       2,605       8,628       16,613  
    


 


 


 


       484,210       307,103       1,337,479       888,507  
    


 


 


 


Changes in operating assets and liabilities

                                

(Increase) decrease in trade accounts and notes receivable

     (81,592 )     545,468       (402,864 )     543,138  

Increase in inventories

     (34,827 )     (152,964 )     (24,410 )     (234,241 )

Decrease in other accounts receivable

     312       1,285       1,145       10,492  

Decrease (increase) in accrued income

     952       (1,134 )     166       (1,787 )

Decrease (increase) in advance payments

     2,886       1,900       4,140       (2,188 )

Decrease in prepaid expenses

     16,588       7,219       16,954       8,088  

(Increase) decrease in prepaid value added tax

     (8,298 )     12,532       (4,314 )     33,551  

Decrease (increase) in other current assets

     6,150       4,311       67,837       (8,537 )

Decrease in long-term other accounts receivable

     —         —         —         166  

Increase in long-term prepaid expenses

     (24,787 )     (21,987 )     (41,665 )     (24,923 )

Increase in deferred income tax

     (18,624 )     (77,343 )     (142,989 )     (44,447 )

Increase in trade accounts and notes payable

     74,934       36,794       118,641       35,386  

Increase in other accounts payable

     54,355       87,960       67,344       121,864  

Increase (decrease) in advances received

     749       (637 )     1,146       (2,375 )

(Decrease) increase in withholdings

     (769 )     (1,651 )     43       (553 )

Increase (decrease) in accrued expenses

     1,946       15,419       (55,483 )     (26,830 )

Increase (decrease) in income taxes payable

     1,055       14,615       (73,525 )     38,139  

Decrease in product warranty

     (4,353 )     (2,329 )     (11,186 )     (8,598 )

Decrease in other current liabilities

     (38,972 )     (18,218 )     (40,016 )     (10,662 )

Accrued severance benefits transferred from affiliated company, net

     524       213       1,329       1,021  

Payments of severance benefits

     (5,910 )     (3,493 )     (14,861 )     (7,980 )

Decrease in severance insurance deposit

     2,558       1,281       6,043       2,773  

Decrease in contribution to National Pension Fund

     28       35       67       78  
    


 


 


 


       (55,095 )     449,276       (526,458 )     421,575  
    


 


 


 


Net cash provided by operating activities

     656,042       1,047,247       1,000,185       2,930,106  
    


 


 


 


 

5


Table of Contents

LG.Philips LCD Co., Ltd.

Non-Consolidated Statements of Cash Flows

Three-Month and Nine-Month Periods Ended September 30, 2005 and 2004

(Unaudited)

 

(in millions of Korean won)

 

   For the three-month periods
ended September 30,


    For the nine-month periods
ended September 30,


 
     2005

    2004

    2005

    2004

 

Cash flows from investing activities

                                

Acquisition of equity-method investments

   (Won) (22,300 )   (Won) —       (Won) (22,967 )   (Won) —    

Acquisitions of available-for-sale securities

     (23 )     (42 )     (229 )     (152 )

Proceeds from disposal of available-for-sale securities

     —         —         —         157  

Proceeds from non-current guarantee deposits

     2       —         27       709  

Payments of non-current guarantee deposits

     —         (1,071 )     (4,960 )     (3,076 )

Acquisitions of property, plant and equipment

     (1,348,374 )     (1,394,434 )     (2,702,281 )     (3,304,529 )

Proceeds from disposal of property, plant and equipment

     245       956       2,722       4,151  

Acquisition of intangible assets

     (5,712 )     —         (8,021 )     (32 )
    


 


 


 


Net cash used in investing activities

     (1,376,162 )     (1,394,591 )     (2,735,709 )     (3,302,772 )
    


 


 


 


Cash flows from financing activities

                                

Repayment of short-term borrowing

     —         —         —         (62 )

Repayment on current portion of long-term debts

     —         (161,350 )     —         (467,202 )

Proceeds from issuance of long-term debts

     59,843       —         161,743       59,100  

Proceeds from issuance of debentures

     —         —         873,684       293,282  

Proceeds from issuance of common stock

     1,401,179       1,190,849       1,401,179       1,190,849  
    


 


 


 


Net cash provided by financing activities

     1,461,022       1,029,499       2,436,606       1,075,967  
    


 


 


 


Net increase in cash and cash equivalents

     740,902       682,155       701,082       703,301  

Cash and cash equivalents

                                

Beginning of the period

     1,235,169       470,364       1,274,989       449,218  
    


 


 


 


End of the period

   (Won) 1,976,071     (Won) 1,152,519     (Won) 1,976,071     (Won) 1,152,519  
    


 


 


 


 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

See Report of Independent Accountants

 

6


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

1. The Company

 

LG.Philips LCD Co., Ltd. (the “Company”) was incorporated in 1985 under the Commercial Code of the Republic of Korea and commenced the manufacturing and sales of Thin Film Transistor Liquid Crystal Display (“TFT LCD”) from 1999. On July 26, 1999, LG Electronics Inc., Koninklijke Philips Electronics N.V. (“Philips”) and the Company entered into a joint venture agreement. Pursuant to the agreement, the Company changed its name from LG LCD CO., Ltd. to LG.Philips LCD Co., Ltd. effective August 27, 1999, and on August 31, 1999, the Company issued new shares of common stock to Philips for (Won)725,000 million.

 

In July 2004, pursuant to Securities Registration Statement filed on July 16, 2004, with the Korea Stock Exchange, the Company sold 8,640,000 shares of common stock for (Won)298,080 million. Concurrently, pursuant to a Form F-1 registration statement filed on July 15, 2004, with the U.S. Securities and Exchange Commission, the Company sold 24,960,000 shares of common stock in the form of American Depositary Shares (“ADSs”) for proceeds of US$ 748,800 thousand. In September 2004, pursuant the underwriting agreement dated July 15, 2004, the Company issued an additional 1,715,700 shares of common stock in the form of ADSs for proceeds of US$ 51,471 thousand. In July 2005, pursuant to a Form F-1 Registration statement filed on July 22, 2005 with the U.S. Securities and Exchange Commission, the Company issued 27,900,000 shares of common stock in the form of American Depositary Shares (“ADSs”) for proceeds of US$ 1, 189,656 thousand. In addition, pursuant to the “Underwriting Agreement” dated July 21, 2005, the Company issued 4,600,000 shares of common stock for gross proceeds of US$ 196,144 thousand.

 

As of September 30, 2005, the Company’s shareholders are as follows:

 

    

Number of

Shares


  

Percentage of

Ownership (%)


LG Electronics Inc.

   135,625,000    37.90

Koninklijke Philips Electronics N. V.

   135,625,000    37.90

Others

   86,565,700    24.20
    
  
     357,815,700    100.00
    
  

 

See Report of Independent Accountants.

 

7


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

2. Summary of Significant Accounting Policies

 

The significant accounting policies followed by the Company in the preparation of its interim non-consolidated financial statements are summarized below:

 

Basis of Financial Statement Presentation

 

The Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English from the Korean language non-consolidated financial statements. Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, results of operations, or cash flows, is not presented in the accompanying non-consolidated financial statements.

 

Accounting Estimates

 

The preparation of the financial statements requires management to make estimates and assumptions that affect amounts reported therein. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.

 

Application of the Statements of Korean Financial Accounting Standards

 

The Korean Accounting Standards Board has published a series of Statements of Korean Financial Accounting Standards (SKFAS), which will gradually replace the existing financial accounting standards established by the Korean Financial Supervisory Commission. As SKFAS Nos. 10, 12 and 13 became applicable to the Company on January 1, 2004, the Company adopted these Standards in its financial statements covering periods beginning January 1, 2004.

 

And as SKFAS Nos. 15 through 17 became effective for the Company on January 1, 2005, the Company adopted these Standards in its financial statements for the nine-month period ended September 30, 2005.

 

Cash and Cash Equivalents

 

The Company considers cash on hand, bank deposits and highly liquid marketable securities with original maturities of three months or less to be cash and cash equivalents.

 

Revenue Recognition

 

Sales of manufactured products are recognized when significant risks and rewards of ownership of the goods are transferred to the buyer.

 

See Report of Independent Accountants.

 

8


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts and notes receivable based on the aggregate estimated collectibility of the receivables.

 

Inventories

 

The Company accounts for inventories under the provision of SKFAS No.10, Inventories.

 

Inventories are stated at the lower of cost or market, with cost being determined using the weighted-average method, except for materials-in-transit, which are stated at actual cost using the specific identification method. If the net realizable value of inventory is less than its cost, the carrying amount is reduced to the net realizable value. Any inventory valuation loss is added to the cost of sales.

 

Investments in Affiliates and Other Investments

 

The Company accounts for equity and debt securities under the provision of SKFAS No. 8, Investments in Securities. This statement requires investments in equity and debt securities to be divided into three categories: trading, available-for-sale and held-to-maturity.

 

Securities are initially carried at cost, including incidental expenses, with cost being determined using the gross average method. Debt securities, which the Company has the intent and ability to hold to maturity, are generally carried at cost, adjusted for the amortization of discounts or premiums. Premiums and discounts on debt securities are amortized over the term of the debt using the effective interest rate method. Trading and available-for-sale securities are carried at fair value, except for non-marketable securities classified as available-for-sale securities, which are carried at cost. Non-marketable debt securities are carried at a value using the present value of future cash flows, discounted at the reasonable interest rate determined considering the credit ratings provided by the independent credit rating agencies.

 

Unrealized valuation gains or losses on trading securities are charged to current operations, and those resulting from available-for-sale securities are recorded as a capital adjustment, the accumulated amount of which shall be charged to current operations when the related securities are sold, or when an impairment loss on the securities is recognized. Impairment losses are recognized in the income statement when the recoverable amounts are less than the acquisition cost of securities or adjusted cost of debt securities for the amortization of discounts or premiums.

 

Investments in equity securities of companies, over which the Company exercises significant control or influence, are recorded using the equity method of accounting. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. The Company discontinues the equity method of accounting for investments in equity method investees when the Company’s share in the accumulated losses of the investees equals the costs of the investments, and until the subsequent cumulative changes in its proportionate net income of the investees equals its cumulative proportionate net losses not recognized during the periods when the equity method was suspended.

 

See Report of Independent Accountants.

 

9


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Differences between the initial purchase price and the Company’s initial proportionate ownership in the net book value of the investee are amortized over the period up to 20 years using the straight-line method.

 

The Company’s proportionate unrealized profit arising from sales between the Company and the equity-method investees or sales between equity-method investees is eliminated. If the equity-method investees are the Company’s subsidiaries, unrealized profit arising from sales by the Company to subsidiaries is fully eliminated.

 

Foreign currency financial statements of equity method investees are translated into Korean won using the exchange rates in effect as of the balance sheet date for assets and liabilities, and annual average exchange rates for income and expenses. Any resulting translation gain or loss is included in the capital adjustment account, a component of shareholders’ equity.

 

Property, Plant and Equipment

 

The cost of property, plant and equipment includes purchase costs or manufacturing costs, incidental costs directly related to preparing the premises and equipment for use, and the discounted estimated costs to remove, dismantle or restore property, plant and equipment at the end of the estimated useful lives of the related assets when those costs meet the conditions for the recognition of liabilities.

 

Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as enumerated below:

 

     Estimated useful lives

Buildings

   20 - 40 years

Structures

   20 - 40 years

Machinery and equipment

   4 years

Vehicles

   4 years

Tools, furniture and fixtures

   4 years

 

Routine maintenance and repairs are charged to current operations as incurred. Betterments and renewals, which enhance the value of the assets over their recently appraised value, are capitalized.

 

The Company assesses the potential impairment of property, plant and equipment when there is evidence that events or changes in circumstances have made the recovery of an asset’s carrying value to be unlikely. The carrying value of the assets is reduced to the estimated realizable value and an impairment loss is recorded as a reduction in the carrying value of the related asset and charged to current operations. However, the recovery of the impaired assets would be recorded in current operations up to the cost of the assets, net of accumulated depreciation before impairment, when the estimated value of the assets exceeds the carrying value after impairment.

 

See Report of Independent Accountants.

 

10


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Intangible Assets

 

Intangible assets, comprising industrial property rights, rights to use electricity and gas supply facilities, rights to use the industrial water facility, and software costs, are stated at cost, net of accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the assets ranging from four to ten years. Research and development costs are charged to current operations when incurred, and are included in operating expenses.

 

The Company assesses the potential impairment of intangible assets when there is evidence that events or changes in circumstances have made the recovery of an asset’s carrying value to be unlikely. The carrying value of the assets is reduced to the estimated realizable value, and an impairment loss is recorded as a reduction in the carrying value of the related asset and charged to current operations. However, the recovery of the impaired assets would be recorded in current operations up to the cost of the asset, net of accumulated amortization before impairment, when the estimated value of the assets exceeds the carrying value after impairment.

 

Discounts on Debentures

 

Discounts on debentures are amortized over the repayment period of the debentures using the effective interest rate method. Amortization is included in interest expense.

 

Foreign Currency Translation

 

Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the exchange rates in effect at the balance sheet date ((Won)1,040.7:US$1 as of September 30, 2005; (Won)1,035.6:US$1 as of December 31, 2004), and the resulting translation gains and losses are recognized in current operations.

 

Warranty Reserve

 

The Company provides warranty relating to product defects for a specified period of time after sale. Estimated costs of product warranties are charged to cost at the time of sale and are included in the accompanying balance sheet as a warranty reserve.

 

Accrued Severance Benefits

 

Employees and directors with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment, based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date.

 

The Company has made deposits to the National Pension Fund in accordance with the National Pension Fund Law. The use of the deposit is restricted to the payment of severance benefits. Accordingly, accrued severance benefits in the accompanying balance sheet are presented net of such deposit.

 

Accrued severance benefits are funded through a group severance insurance plan and are presented as a deduction from accrued severance benefits.

 

See Report of Independent Accountants.

 

11


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Sales or Discount of Accounts Receivable

 

The Company sells or discounts certain accounts or notes receivable to financial institutions, and accounts for the transactions as sales of the receivables if the control over the receivables is substantially transferred to the buyers. The losses from the sales of the receivables are charged to current operations as incurred.

 

Derivatives

 

The Company enters into various derivative transactions to hedge against financial risks. Derivatives are classified into: cash flow hedges, hedges for fluctuations in fair market value caused by the changes in foreign exchange rates, and those acquired for profit. In case of cash flow hedges, unrealized holding gains and losses are recorded as capital adjustments in the balance sheet. In the case of hedging for fluctuations in fair market value, unrealized holding gains and losses are recorded in the income statement. If the contract expires, the gains and losses from derivative transactions are presented in the income statement in case of hedges for fluctuations in fair market value and are offset against sales in case of cash flow hedging.

 

Convertible bonds

 

When convertible bonds are issued, the amount paid for the conversion right, which is computed as a difference between the issuing value and the present value of future cash flows discounted at effective interest rate of bond without conversion features, is included in other capital surplus. The related adjustment account to the conversion right is presented as a deduction of face value, whereas call premium is presented as an addition.

 

Stock Appreciation Plan

 

Compensation costs for stock options granted to employees and executives are recognized on the basis of intrinsic value. Under the intrinsic value basis method, compensation costs for stock option plans are determined by calculating the difference between the exercise price and the market price of the underlying stock. Stock-based compensation cost is remeasured at each reporting date, based on the intrinsic value of the award, and is recognized as expense over the agreed minimum service period.

 

Income Taxes

 

The Company recognizes deferred income tax assets and liabilities, which represent temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred income tax assets and liabilities are computed on such temporary differences, including available net operating loss carryforwards and tax credits, by applying enacted statutory tax rates applicable to the years when such differences are expected to reverse. Deferred income tax assets are recognized when it is almost certain that such deferred income tax assets will be realized. The total income tax provision includes the current income tax expense under applicable tax regulations and the change in the balance of deferred income tax assets and liabilities during the period.

 

See Report of Independent Accountants.

 

12


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Investment tax credits are accounted for by the flow-through method, whereby income taxes are reduced in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized, deferred income tax assets, subject to considerations on their recognition, are recognized as carryforward amount.

 

3. Cash and Cash Equivalents, and Financial Instruments

 

Cash and cash equivalents, and financial instruments as of September 30, 2005 and December 31, 2004, consist of the following:

 

(in millions of Korean won)

 

   Annual interest
rate (%) as of
September 30,
2005


   2005

   2004

Cash and cash equivalents

                  

Cash on hand

   —      (Won) 7    (Won) 7

Checking accounts

   —        29      122

Time deposits

   2.9-3.4      954,087      1,130,869

Passbook accounts in Foreign currencies of US$ 935 million, JP ¥ 5,271 million and EUR 1 million (2004: US$ 139 million and JP ¥ 43 million)

   3.2-3.7      1,021,948      143,991
         

  

            1,976,071      1,274,989

Long-term financial instruments

                  

Guarantee deposits for checking accounts

   0.1-0.5      16      16
         

  

          (Won) 1,976,087    (Won) 1,275,005
         

  

 

As of September 30, 2005 and December 31, 2004, long-term financial instruments represent key money deposits required to maintain checking accounts and, accordingly, the withdrawal of such deposits is restricted.

 

See Report of Independent Accountants.

 

13


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

4. Receivables

 

The Company’s receivables, including trade accounts and notes receivable, as of September 30, 2005 and December 31, 2004, consist of the following:

 

     2005

(in millions of Korean won)

 

  

Gross

amount


   Allowance for
doubtful
accounts


   Discounts on
present
value


   Carrying
value


Trade accounts and notes receivable

   (Won) 1,051,498    (Won) 1,824    (Won) —      (Won) 1,049,674

Other accounts receivable

     5,860      308      —        5,552

Accrued income

     1,317      13      —        1,304

Advance payments

     5,710      57      —        5,653
    

  

  

  

     (Won) 1,064,385    (Won) 2,202    (Won) —      (Won) 1,062,183
    

  

  

  

 

     2004

(in millions of Korean won)

 

   Gross
amount


   Allowance for
doubtful
accounts


   Discounts on
present
value


   Carrying
value


Trade accounts and notes receivable

   (Won) 636,724    (Won) 821    (Won) —      (Won) 635,903

Other accounts receivable

     7,012      320      2      6,690

Accrued income

     1,485      15      —        1,470

Advance payments

     9,892      99      —        9,793
    

  

  

  

     (Won) 655,113    (Won) 1,255    (Won) 2    (Won) 653,856
    

  

  

  

 

As of September 30, 2005, trade bills negotiated through banks but not yet matured, amounted to approximately (Won)312,218 million (December 31, 2004: (Won)410,824 million).

 

See Report of Independent Accountants.

 

14


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

5. Assets and Liabilities Denominated in Foreign Currencies

 

As of September 30, 2005 and December 31, 2004, monetary assets and liabilities denominated in foreign currencies, excluding those disclosed elsewhere in the notes to financial statements, are as follows:

 

     2005

   2004

(in millions)

 

  

Korean Won

Equivalent


  

Foreign

Currency


  

Korean Won

Equivalent


  

Foreign

Currency


Trade accounts and notes receivable

   (Won) 1,030,621    US$
JP ¥
EUR
  897
6,996
26
   (Won) 605,500    US$
JP ¥
EUR
  494
1,264
58

Other accounts receivable

     867    US$
JP ¥
  1
31
     5,922    US$
JP ¥
EUR
  1
26
3

Trade accounts and notes payable

     177,247    US$
JP ¥
  62
12,257
     168,182    US$
JP ¥
  61
10,445

Other accounts payable

     196,944    US$
JP ¥
EUR
  15
17,073
20
     125,868    US$
JP ¥
EUR
  13
10,596
4

Accrued expenses

     11,398    US$   11      14,190    US$   14

 

6. Inventories

 

Inventories as of September 30, 2005 and December 31, 2004, consist of the following:

 

(in millions of Korean won)

 

   2005

    2004

 

Finished products

   (Won) 214,449     (Won) 244,084  

Work-in-process

     143,482       112,538  

Raw materials

     120,630       108,221  

Supplies

     54,153       53,133  
    


 


       532,714       517,976  

Less : Valuation loss

     (40,233 )     (49,977 )
    


 


     (Won) 492,481     (Won) 467,999  
    


 


 

As of September 30, 2005, inventories and property, plant and equipment are insured against fire and other casualty losses up to (Won)26,873,456 million (December 31, 2004: (Won)26,873,073 million). Additionally, as of September 30, 2005, the Company insured directors’ and officers’ liabilities up to US$ 100 million (December 31, 2004: US$ 85 million).

 

See Report of Independent Accountants.

 

15


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

7. Equity-method Investments

 

Equity-method investments as of September 30, 2005 and December 31, 2004, consist of the following:

 

     2005

(in millions of Korean won)

 

  

No. of shares

owned by the

Company


    Percentage of
Ownership
(%)


  

Acquisition

cost


  

Market or

net asset value


  

Carrying

value


LG.Philips LCD, America

   5,000,000     100    (Won) 6,082    (Won) 8,812    (Won) 7,491

LG.Philips LCD, Germany

   960,000     100      1,252      3,540      3,742

LG.Philips LCD, Japan

   1,900     100      1,088      4,443      4,397

LG.Philips LCD, Taiwan

   11,549,994     100      6,076      13,163      8,350

LG.Philips LCD, Nanjing

   —   1   100      120,355      188,706      159,264

LG.Philips LCD, Hong Kong

   115,000     100      1,736      3,503      2,194

LG.Philips LCD, Shanghai

   —   1   100      596      1,495      —  

LG.Philips LCD, Poland²

   500     100      16      16      16

Paju Electric Glass²

   266,668     40      2,667      2,531      2,531
               

  

  

                (Won) 139,868    (Won) 226,209    (Won) 187,985
               

  

  

 

     2004

(in millions of Korean won)

 

  

No. of shares

owned by the

Company


    Percentage of
Ownership
(%)


  

Acquisition

cost


  

Market or

net asset value


  

Carrying

value


LG.Philips LCD, America

   5,000,000     100    (Won) 6,082    (Won) 7,133    (Won) 7,133

LG.Philips LCD, Germany

   960,000     100      1,252      2,262      2,262

LG.Philips LCD, Japan

   1,900     100      1,088      4,052      4,052

LG.Philips LCD, Taiwan

   11,549,994     100      6,076      10,974      10,974

LG.Philips LCD, Nanjing

   —   1   100      100,071      140,241      140,241

LG.Philips LCD, Hong Kong

   115,000     100      1,736      2,491      2,491

LG.Philips LCD, Shanghai

   —   1   100      596      886      886
               

  

  

                (Won) 116,901    (Won) 168,039    (Won) 168,039
               

  

  

 


1 No shares have been issued according to the local laws or regulation.
² Paju Electric Glass and LG.Philips LCD, Poland was established during 2005.

 

See Report of Independent Accountants.

 

16


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

As of and for the nine-month period ended September 30, 2005, condensed financial statements of the affiliates, prior to the elimination of intercompany transactions, are as follows:

 

Condensed Balance Sheet

 

(in millions of Korean won)

 

  

LG.Philips LCD,

America, Inc.


   

LG.Philips LCD,

Germany GmbH


   

LG.Philips LCD,

Japan., Ltd.


   

LG.Philips LCD,

Taiwan., Ltd.


   

LG.Philips LCD,

Nanjing., Ltd.


 

Current assets

   (Won) 132,934     (Won) 206,965     (Won) 141,404     (Won) 362,277     (Won) 952,326  

Non-current assets

     913       702       1,101       2,062       230,567  
    


 


 


 


 


Total assets

   (Won) 133,847     (Won) 207,667     (Won) 142,505     (Won) 364,339     (Won) 1,182,893  
    


 


 


 


 


Current liabilities

   (Won) 125,035     (Won) 204,127     (Won) 138,041     (Won) 351,176     (Won) 862,695  

Non-current liabilities

     —         —         21       —         131,492  
    


 


 


 


 


Total liabilities

     125,035       204,127       138,062       351,176       994,187  
    


 


 


 


 


Capital stock

     6,082       1,252       1,088       4,189       120,355  

Retained earnings

     4,066       2,504       4,018       10,544       72,684  

Capital adjustments

     (1,336 )     (216 )     (663 )     (1,570 )     (4,333 )
    


 


 


 


 


Total shareholders’ equity

     8,812       3,540       4,443       13,163       188,706  
    


 


 


 


 


Total liabilities and shareholders’ equity

   (Won) 133,847     (Won) 207,667     (Won) 142,505     (Won) 364,339     (Won) 1,182,893  
    


 


 


 


 


(in millions of Korean won)

 

  

LG. Philips LCD

HongKong Co., Ltd.


   

LG. Philips LCD

Shanghai Co., Ltd.


   

LG. Philips LCD

Poland, Ltd.


    Paju Electric
Glass


    Total

 

Current assets

   (Won) 194,775     (Won) 304,105     (Won) 16     (Won) 5,080     (Won) 2,299,882  

Non-current assets

     440       387       —         2,167       238,339  
    


 


 


 


 


Total assets

   (Won) 195,215     (Won) 304,492     (Won) 16     (Won) 7,247     (Won) 2,538,221  
    


 


 


 


 


Current liabilities

   (Won) 191,686     (Won) 302,997     (Won) —       (Won) 918     (Won) 2,176,675  

Non-current liabilities

     26       —         —         —         131,539  
    


 


 


 


 


Total liabilities

     191,712       302,997               918       2,308,214  
    


 


 


 


 


Capital stock

     1,736       596       16       6,667       141,981  

Retained earnings

     2,044       1,290       —         (338 )     96,812  

Capital adjustments

     (277 )     (391 )     —         —         (8,786 )
    


 


 


 


 


Total shareholders’ equity

     3,503       1,495       16       6,329       230,007  
    


 


 


 


 


Total liabilities and shareholders’ equity

   (Won) 195,215     (Won) 304,492     (Won) 16     (Won) 7,247     (Won) 2,538,221  
    


 


 


 


 


 

See Report of Independent Accountants.

 

17


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Condensed Income Statement

 

(in millions of Korean won)

 

  

LG.Philips LCD,

America, Inc.


   

LG.Philips LCD,

Germany GmbH


   

LG.Philips LCD,

Japan., Ltd.


   

LG.Philips LCD,

Taiwan., Ltd.


   

LG.Philips LCD,

Nanjing., Ltd.


 

Sales

     (Won)691,764     (Won) 958,959     (Won) 627,216     (Won) 1,867,365     (Won) 2,929,951  

Cost of sales

     683,895       948,810       619,106       1,846,580       2,840,022  
    


 


 


 


 


Gross profit

     7,869       10,149       8,110       20,785       89,929  

Selling and administrative expenses

     6,515       6,916       6,292       6,971       49,414  
    


 


 


 


 


Operating income

     1,354       3,233       1,818       13,814       40,515  

Non-operating income (expense)

     (802 )     (885 )     (22 )     (10,081 )     (1,139 )
    


 


 


 


 


Ordinary income

     552       2,348       1,796       3,733       39,376  

Income tax expense

     344       669       980       1,060       4,876  
    


 


 


 


 


Net income

     (Won)208     (Won) 1,679     (Won) 816     (Won) 2,673     (Won) 34,500  
    


 


 


 


 


 

(in millions of Korean won)

 

  

LG. Philips LCD

HongKong Co., Ltd.


  

LG. Philips LCD

Shanghai Co., Ltd.


   

LG. Philips LCD

Poland Co., Ltd.


   Paju Electric
Glass


    Total

 

Sales

   (Won) 875,741    (Won) 836,139     (Won) —      (Won) —       (Won) 8,787,135  

Cost of sales

     870,241      831,748       —        —         8,640,402  
    

  


 

  


 


Gross profit

     5,500      4,391       —        —         146,733  

Selling and administrative expenses

     4,681      5,301       —        346       86,436  
    

  


 

  


 


Operating income(loss)

     819      (910 )     —        (346 )     60,297  

Non-operating income (expense)

     273      774       —        8       (11,874 )
    

  


 

  


 


Ordinary income(loss)

     1,092      (136 )     —        (338 )     48,423  

Income tax expense

     157      98       —        —         8,184  
    

  


 

  


 


Net income(loss)

   (Won) 935    (Won) (234 )   (Won) —      (Won) (338 )   (Won) 40,239  
    

  


 

  


 


 

See Report of Independent Accountants.

 

18


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

The details of the equity method valuation for the nine-month periods ended September 30, 2005 and 2004, are as follows:

 

     2005

(in millions of Korean won)

 

  

Balance as of

January 1, 2005


  

Acquisitions

during the
period


   Gain (loss) on
valuation of
investments using
equity method


   

Retained

earnings
adjustment


   Capital
adjustment


   

Balance as of

September 30,
2005


LG.Philips LCD, America

   (Won) 7,133    (Won) —      (Won) 312     (Won) —      (Won) 46     (Won) 7,491

LG.Philips LCD, Germany

     2,262      —        1,856       —        (376 )     3,742

LG.Philips LCD, Japan

     4,052      —        738       —        (393 )     4,397

LG.Philips LCD, Taiwan

     10,974      —        (2,137 )     —        (487 )     8,350

LG.Philips LCD, Nanjing

     140,241      20,284      (6,778 )     —        5,517       159,264

LG.Philips LCD, Hongkong

     2,491      —        (337 )     —        40       2,194

LG.Philips LCD, Shanghai

     886      —        (922 )     —        36       —  

LG. Philips LCD, Poland

     —        16      —         —        —         16

Paju Electric Glass

     —        2,667      (136 )     —        —         2,531
    

  

  


 

  


 

     (Won) 168,039    (Won) 22,967    (Won) (7,404 )   (Won) —      (Won) 4,383     (Won) 187,985
    

  

  


 

  


 

     2004

(in millions of Korean won)

 

  

Balance as of

January 1, 2004


  

Acquisitions

during the
period


   Gain (loss) on
valuation of
investments using
equity method


   

Retained

earnings
adjustment


   Capital
adjustment


   

Balance as of

September 30,

2004


LG.Philips LCD, America

   (Won) 6,840    (Won) —      (Won) 3,493     (Won) —      (Won) (338 )   (Won) 9,995

LG.Philips LCD, Germany

     568      —        (424 )     —        (144 )     —  

LG.Philips LCD, Japan

     1,788      —        2,631       —        (179 )     4,240

LG.Philips LCD, Taiwan

     5,861      —        4,807       —        (384 )     10,284

LG.Philips LCD, Nanjing

     21,515      —        (11,309 )     —        (1,178 )     9,028

LG.Philips LCD, Hongkong

     —        —        3,057       —        (94 )     2,963

LG.Philips LCD, Shanghai

     —        —        5,335       —        (67 )     5,268
    

  

  


 

  


 

     (Won) 36,572    (Won) —      (Won) 7,590     (Won) —      (Won) (2,384 )   (Won) 41,778
    

  

  


 

  


 

 

See Report of Independent Accountants.

 

19


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

As of September 30, 2005 and 2004, elimination of unrealized gains or losses in the valuation of investments using the equity method is as follows:

 

     2005

    2004

 

(in millions of Korean won)

 

   Inventories

    Property,
plant and
equipment


    Total

    Inventories

    Property,
plant and
equipment


    Total

 

LG.Philips LCD, America

   (Won) (1,321 )   (Won) —       (Won) (1,321 )   (Won) (474 )   (Won) —       (Won) (474 )

LG.Philips LCD, Germany

     202       —         202       4,342       —         4,342  

LG.Philips LCD, Japan

     (46 )     —         (46 )     201       —         201  

LG.Philips LCD, Taiwan

     (4,813 )     —         (4,813 )     (1,060 )     —         (1,060 )

LG.Philips LCD, Nanjing

     (23,598 )     (5,844 )     (29,442 )     3,041       (2,779 )     262  

LG.Philips LCD, Hongkong

     (1,309 )     —         (1,309 )     (474 )     —         (474 )

LG.Philips LCD, Shanghai

     (1,495 )     —         (1,495 )     838       —         838  

LG.Philips LCD, Poland

     —         —         —         —         —         —    

Paju Electric Glass

     —         —         —         —         —         —    
    


 


 


 


 


 


     (Won) (32,380 )   (Won) (5,844 )   (Won) (38,224 )   (Won) 6,414     (Won) (2,779 )   (Won) 3,635  
    


 


 


 


 


 


 

See Report of Independent Accountants.

 

20


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

8. Property, Plant and Equipment

 

Changes in property, plant and equipment for the nine-month periods ended September 30, 2005 and 2004, are as follows:

 

     2005

 

(in millions of Korean won)

 

   Land

   Buildings

    Structures

   

Machinery and

equipment


    Tools

   

Furniture and

fixtures


 

Balance as of January 1, 2005

   (Won) 313,620    (Won) 817,768     (Won) 114,810     (Won) 3,374,473     (Won) 20,119     (Won) 81,696  

Acquisition

     —        15,353       102       35,187       1,621       36,243  

Capitalized interest

     —        8,432       —         18,091       —         —    

Depreciation

     —        (34,784 )     (4,674 )     (1,126,188 )     (8,719 )     (53,119 )

Disposal

     —        —         —         (580 )     (8 )     (20 )

Transfer

     2,451      198,825       1,273       1,328,264       15,985       34,675  
    

  


 


 


 


 


Balance as of September 30, 2005

   (Won) 316,071    (Won) 1,005,594     (Won) 111,511     (Won) 3,629,247     (Won) 28,998     (Won) 99,475  
    

  


 


 


 


 


Accumulated depreciation

   (Won) —      (Won) 158,262     (Won) 24,796     (Won) 5,354,858     (Won) 51,065     (Won) 179,340  
    

  


 


 


 


 


 

     Vehicles

    Others

  

Machinery-

in-transit


   

Construction-

in-progress


    Total

 

Balance as of January 1, 2005

   (Won) 4,040     (Won) 2,501    (Won) 704,588     (Won) 933,036     (Won) 6,366,651  

Acquisition

     619       411      577,877       2,493,621       3,161,034  

Capitalized interest

     —         —        2,995       4,917       34,435  

Depreciation

     (1,233 )     —        —         —         (1,228,717 )

Disposal

     (221 )     —        —         —         (829 )

Transfer

     1,331       —        (787,818 )     (795,041 )     (55 )
    


 

  


 


 


Balance as of September 30, 2005

   (Won) 4,536     (Won) 2,912    (Won) 497,642     (Won) 2,636,533     (Won) 8,332,519  
    


 

  


 


 


Accumulated depreciation

   (Won) 4,477     (Won) —      (Won) —       (Won) —       (Won) 5,772,798  
    


 

  


 


 


 

See Report of Independent Accountants.

 

21


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

     2004

 

(in millions of Korean won)

 

   Land

   Buildings

    Structures

   

Machinery and

equipment


    Tools

   

Furniture and

fixtures


 

Balance as of January 1, 2004

   (Won) 88,669    (Won) 501,119     (Won) 119,013     (Won) 2,056,822     (Won) 17,751     (Won) 70,708  

Acquisition during the period

     —        5,188       206       9,838       2,055       25,295  

Capitalized interest

     55      2,773       —         14,904       —         —    

Depreciation

     —        (22,983 )     (4,272 )     (771,424 )     (7,268 )     (32,573 )

Disposal

     —        (88 )     —         (1,111 )     —         (19 )

Transfer

     224,949      321,163       (345 )     1,832,937       6,207       16,478  
    

  


 


 


 


 


Balance as of September 30, 2004

   (Won) 313,673    (Won) 807,172     (Won) 114,602     (Won) 3,141,966     (Won) 18,745     (Won) 79,889  
    

  


 


 


 


 


Accumulated depreciation

   (Won) —      (Won) 113,295     (Won) 18,379     (Won) 3,933,747     (Won) 40,750     (Won) 127,346  
    

  


 


 


 


 


 

     2004

 
     Vehicles

    Others

  

Machinery-

in-transit


   

Construction-

in-progress


    Total

 

Balance as of January 1, 2004

   (Won) 2,587     (Won) 1,529    (Won) 28,521     (Won) 987,709     (Won) 3,874,428  

Acquisition during the period

     1,788       —        1,160,482       1,908,767       3,113,619  

Capitalized interest

     —         —        3,864       4,382       25,978  

Depreciation

     (948 )     —        —         —         (839,468 )

Disposal

     —         —        —         —         (1,218 )

Transfer

     16       —        (426,109 )     (1,987,305 )     (12,009 )
    


 

  


 


 


Balance as of September 30, 2004

   (Won) 3,443     (Won) 1,529    (Won) 766,758     (Won) 913,553     (Won) 6,161,330  
    


 

  


 


 


Accumulated depreciation

   (Won) 3,204     (Won) —      (Won) —       (Won) —       (Won) 4,236,721  
    


 

  


 


 


 

As of September 30, 2005, the value of the Company’s land, as determined by the local government in Korea for property tax assessment purposes, amounts to approximately (Won)366,787 million (December 31, 2004: (Won)259,230 million).

 

The Company capitalizes the loss (gain) on foreign currency rate changes and interest expense incurred on borrowings used to finance the cost of constructing facilities and equipment. Capitalized loss (gain) on foreign exchange rate fluctuations and interest expenses for the nine-month period ended September 30, 2005, is (Won)34,435 million (2004: (Won)25,978 million).

 

For the nine-month period ended September 30, 2005, net gain on foreign currency translation, arising from foreign currency borrowings, which was deducted from capitalized interest expenses, is (Won)1,320 million (2004: net loss of (Won)5,918 million).

 

See Report of Independent Accountants.

 

22


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

For the nine-month period ended September 30, 2005, the effects of capitalized expenses on significant accounts in the balance sheet and statement of income are as follows:

 

Balance sheet

 

    

If interest expenses are

capitalized


  

If interest expenses are

expensed as incurred


   Difference

(in millions of Korean won)

 

  

Acquisition

cost


  

Accumulated

Depreciation


  

Acquisition

cost


  

Accumulated

Depreciation


   Acquisition
cost


  

Accumulated

Depreciation


Property, plant and equipment

   (Won) 14,105,318    (Won) 5,772,798    (Won) 14,070,883    (Won) 5,771,196    (Won) 34,435    (Won) 1,602
    

  

  

  

  

  

 

Statement of income

 

(in millions of Korean won)

 

   If interest expenses are
capitalized


   If interest expenses are
expensed as incurred


   Difference

 

Depreciation

   (Won) 1,228,717    (Won) 1,227,115    (Won) 1,602  

Interest expense

     73,124      106,239      (33,115 )

Foreign currency translation gain

     31,700      33,020      (1,320 )

Net income

     189,164      156,331      (32,833 )

 

9. Intangible Assets

 

Changes in intangible assets for the nine-month periods ended September 30, 2005 and 2004, are as follows:

 

     2005

 

(in millions of Korean won)

 

   Intellectual
property rights


    Rights for usage
of electricity and
gas supply
facilities


    Rights to
industrial water
facilities


    Software

    Total

 

Balance as of January 1, 2005

   (Won) 172,073     (Won) 260     (Won) 9,893     (Won) 1,245     (Won) 183,471  

Acquisition

     8,020       —         1       —         8,021  

Amortization

     (31,299 )     (24 )     (925 )     (1,245 )     (33,493 )
    


 


 


 


 


Balance as of September 30, 2005

   (Won) 148,794     (Won) 236     (Won) 8,969     (Won) —       (Won) 157,999  
    


 


 


 


 


Accumulated amortization

   (Won) 274,551     (Won) 80     (Won) 3,337     (Won) 9,713     (Won) 287,681  
    


 


 


 


 


 

See Report of Independent Accountants.

 

23


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

     2004

 

(in millions of Korean won)

 

   Intellectual
property rights


    Rights for usage
of electricity and
gas supply
facilities


    Rights to
industrial
water facilities


    Software

    Total

 

Balance as of January 1, 2004

   (Won) 209,922     (Won) 127     (Won) 4,287     (Won) 3,646     (Won) 217,982  

Acquisition during the period

     —         155       6,461       64       6,680  

Amortization

     (30,818 )     (15 )     (547 )     (1,843 )     (33,223 )
    


 


 


 


 


Balance as of September 30, 2004

   (Won) 179,104     (Won) 267     (Won) 10,201     (Won) 1,867     (Won) 191,439  
    


 


 


 


 


Accumulated amortization

   (Won) 232,949     (Won) 49     (Won) 2,104     (Won) 7,846     (Won) 242,948  
    


 


 


 


 


 

The Company has classified the amortization as part of manufacturing overhead costs. The amortization expense for the nine-month period ended September 30, 2005, amounts to (Won)33,493 million (2004: (Won)33,223 million).

 

The details of intellectual property rights as of September 30, 2005 and December 31, 2004, are as follows:

 

(in millions of Korean won)

 

  

Description


   2005

   2004

  

Remaining

Period


Intellectual property rights

   Patent relating to TFT-LCD business    (Won) 148,794    (Won) 172,073    4~10years
         

  

    

 

The Company expensed research and development costs of (Won)264,408 million for the nine-month period ended September 30, 2005 (2004: (Won)174,589 million).

 

For the nine-month periods ended September 30, 2005 and 2004, the significant expenses, which are expected to have probable future economic benefits but expensed in the period incurred due to the uncertainty in the realization of such benefits, are as follows:

 

(in millions of Korean won)

 

   2005

   2004

Training expense

   (Won) 11,023    (Won) 9,495

Advertising expense

     15,291      3,873

Expenses for foreign market expansion

     6,092      4,283
    

  

     (Won) 32,406    (Won) 17,651
    

  

 

See Report of Independent Accountants.

 

24


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

10. Current maturities of long-term debts

 

Current maturities of long-term debts as of September 30, 2005 and December 31, 2004, consist of the following:

 

(in millions of Korean won)

Type of borrowing


   Creditor

  

Annual interest

rates (%) as of

September 30,
2005


   2005

    2004

 

Long-term debt in won currency loans

   Korea
Export-Import
Bank
   5.9-6.1    (Won) 29,417     (Won) —    

Corporate bonds in won currency

        6.0      200,000       —    

Long-term debt in foreign currency debentures of US$ 182 million

   —      3M Libor + 1.0      189,928       188,997  

Long-term debt in foreign currency loans of US$ 18 million

        3M Libor + 1.0      18,212       18,123  
              


 


            437,557       207,120  

Less : Discounts on debentures

               (2,238 )     (1,981 )
              


 


               (Won) 435,319     (Won) 205,139  
              


 


 

See Report of Independent Accountants.

 

25


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

11. Long-Term Debts

 

Long-term debts as of September 30, 2005 and December 31, 2004, consist of the following:

 

(in millions of Korean won)

Type of borrowing


   Annual interest
rates (%) as of
September 30, 2005


   2005

    2004

 

Won currency debentures

                     

Non-guaranteed, payable through 2010

   3.5 – 6.0    (Won) 1,750,000     (Won) 1,350,000  

Less : Current maturities

          (200,000 )     —    

 Discounts on debentures

          (30,333 )     (33,396 )
         


 


            1,519,667       1,316,604  
         


 


Foreign currency debentures

                     

Floating rate notes, payable through 2007

   3M Libor + 0.6,      418,362       416,311  
     3M Libor + 1.0                 

Term notes, payable through 2006

   3M Libor +1.0      169,634       168,803  
         


 


            587,996       585,114  

Less : Current maturities

          (189,928 )     (188,997 )

 Discount on debentures

          (4,135 )     (5,005 )
         


 


            393,933       391,112  
         


 


Convertible bonds¹

                     

US dollar-denominated bond, payable through 2010

   —        483,780       —    

Add : Call premium

          84,613       —    

Less : Current maturities

          —         —    

 Discount on debentures

          (2,866 )     —    

 Conversion adjustment

          (108,311 )     —    
         


 


            457,216       —    
         


 


          (Won) 2,370,816     (Won) 1,707,716  
         


 


Won currency loans

                     

General loans

   5.9 – 6.1    (Won) 117,800     (Won) 117,800  
     2.5      7,968       —    

Less : Current maturities

          (29,417 )     —    
         


 


            96,351       117,800  
         


 


Foreign currency loans

                     

General loans

   3M Libor+1.0,      242,483       85,955  
     3M Libor+0.99 –                 
     3M Libor+1.35,                 
     6M Libor+1.2                 

Less : Current maturities

          (18,212 )     (18,123 )
         


 


            224,271       67,832  
         


 


          (Won) 320,622     (Won) 185,632  
         


 


 

See Report of Independent Accountants.

 

26


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 


¹ On April 19, 2005, the Company issued US dollar-denominated convertible bonds totaling US$475 million, with a zero coupon rate. On or after June 27, 2005 through April 4, 2010, the bonds are convertible into common shares at a conversion price of (Won)58,251 per share of common stock, subject to adjustment based on certain events. The bonds will mature in five years from the issue date and will be repaid at 117.49 % of their principal amount at maturity. The bondholders have a put option to be repaid at 108.39 % of their principal amount on October 19, 2007. As of September 30, 2005, the number of non-converted common shares is 8,276,681.

 

As of September 30, 2005, the foreign currency debentures denominated in U.S. dollars amount to US$ 565 million (December 31, 2004: US$ 565 million), while the foreign currency loans denominated in U.S. dollars amount to US$ 233 million (December 31, 2004: US$ 83 million).

 

The aggregate annual maturities of long-term debts outstanding as of September 30, 2005, exclusive of adjustments relating to discounts, are as follows:

 

(in millions of Korean won)

For the Period ending

September 30,


 

Won

currency
debentures


  Won
currency
loans


  Foreign
currency
debentures


  Convertible
bonds¹


 

Foreign
currency

loans


  Total

2007     (Won)—     (Won) 39,266   (Won) 189,928   (Won) —     (Won) 40,068   (Won) 269,262
2008     300,000     39,267     208,140     —       43,709     591,116
2009     550,000     9,850     —       —       43,709     603,559
2010     700,000     398     —       —       43,709     744,107
2011     —       1,594     —       —       37,465     39,059
2012     —       1,594     —       —       15,611     17,205
After 2012     —       4,382     —       —       —       4,382
   

 

 

 

 

 

    (Won) 1,550,000   (Won) 96,351   (Won) 398,068   (Won) —     (Won) 224,271   (Won) 2,268,690
   

 

 

 

 

 


¹ All convertible bonds are assumed to be converted into common shares.

 

See Report of Independent Accountants.

 

27


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

12. Accrued Severance Benefits

 

Changes in accrued severance benefits for the nine-month periods ended September 30, 2005 and 2004, consist of the following:

 

(in millions of Korean won)

 

   2005

    2004

 

Balance at the beginning of the period

   (Won) 81,955     (Won) 56,552  

Actual severance payments

     (14,861 )     (7,980 )

Transferred from/to affiliated companies, net

     1,329       1,021  

Provision for severance benefits

     34,930       26,193  
    


 


     (Won) 103,353     (Won) 75,786  

Cumulative deposits to the National Pension Fund

     (670 )     (735 )

Severance insurance deposit

     (43,237 )     (32,008 )
    


 


Balance at the end of the period

   (Won) 59,446     (Won) 43,043  
    


 


 

The severance benefits are funded approximately 41.8% as of September 30, 2005 (2004 : 42.2%), through a severance insurance deposit for the payment of severance benefits, which is deducted from accrued severance benefit liabilities. The beneficiaries of the severance insurance deposit are the Company’s employees.

 

See Report of Independent Accountants.

 

28


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

13. Stock Appreciation Plan

 

On April 7, 2005, the Company granted 450,000 shares of stock appreciations rights (“SARs”) for certain executives. Under the terms of this plan, executives, upon exercising their SARs, are entitled to receive cash equal to the amount that the market price of the Company’s common stock exceeds the exercise price of (Won) 44,050 per share. The exercise price decreased from (Won) 44,260 to (Won) 44,050 due to the additional issuance of common stock in 2005. These SARs are exercisable on or after April 8, 2008, through April 7, 2012. Additionally, when the increase rate of the Company’s share price is the same or less than the increase rate of the Korea Composite Stock Price Index (“KOSPI”) over the three-year period following the grant date, only 50% of the initially granted shares can be exercised.

 

The options activity under the SARs for the nine-month period ended September 30, 2005, is as follows:

 

     Number of shares
under SARs


Balance, January 1, 2005

   —  

Options granted

   450,000

Options exercised

   —  

Options canceled/expired

   —  
    

Balance, September 30, 2005

   450,000
    

 

As of September 30, 2005, expenses of stock-based compensation are as follows:

 

(in millions of Korean won)

 

   Expenses

Nine-month period ended September 30, 2005

   (Won) 35

October 1, 2005 and thereafter¹

   (Won) 110

¹ As of September 30, 2005, (Won)110 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over the next 18 months.

 

See Report of Independent Accountants.

 

29


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

14. Commitments and Contingencies

 

As of September 30, 2005, the Company has bank overdraft agreements with various banks amounting to (Won)59,000 million.

 

As of September 30, 2005, the Company has a revolving credit facility agreement with Shinhan Bank and Kookmin Bank totaling (Won)200,000 million (December 31, 2004: (Won)200,000 million).

 

As of September 30, 2005, the Company has agreements with several banks for U.S. dollar denominated accounts receivable negotiating facilities up to an aggregate of US$1,045 million. The Company has made agreements with several banks in relation to the opening of letters of credit amounting to (Won)140,000 million and US$105 million. The related amounts of negotiated foreign currency receivables outstanding as of September 30, 2005, amount to (Won)312,218 million (December 31, 2004: (Won)410,824 million).

 

As of September 30, 2005, in relation to its TFT-LCD business, the Company has technical license agreements with Hitachi and others. As of September 30, 2005, the Company has trademark license agreements with LG Corporation and Philips Electronics.

 

The Company enters into foreign currency forward contracts to manage the exposure to changes in currency exchange rates in accordance with its foreign currency risk management policy. The use of foreign currency forward contracts allows the Company to reduce its exposure to the risk that the eventual Korean won cash outflows resulting from operating expenses, capital expenditures, purchasing of materials and debt service will be adversely affected by changes in exchange rates.

 

A summary of said contracts is as follows :

 

(in millions)

Contracting party


   Selling position

  

Buying

position


   Contract foreign
exchange rate


   Maturity date

HSBC and others

   US$ 3,129    (Won) 3,204,221    (Won)94.31:US$1-    October 4, 2005 -
                   (Won)1,157.6:US$1    September 15, 2006

City bank and others

   EUR 122    (Won) 156,168    (Won)1,227.68:EUR 1-    October 21, 2005 -
                   (Won)1,352.44:EUR1    September 13, 2006

ABN AMRO and others

   (Won) 328,559    JP ¥ 34,239    (Won)9.202: JP ¥1-    October 13, 2005 -
                   (Won)10.288:JP ¥1    September 1, 2006

Korea Development Bank and others

   US$ 137    JP ¥ 15,200    JP ¥108.94: US$1-    October 4, 2005 -
                   JP ¥112.185: US$1    December 29, 2005

 

See Report of Independent Accountants.

 

30


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

As of September 30, 2005, the Company recorded unrealized gains and losses on outstanding foreign currency forward contracts of (Won)15,362 million and (Won)75,207 million, respectively. Total unrealized gains and losses of (Won)426 million and (Won)27,597 million, respectively, were charged to current operations for the nine-month period ended September 30, 2005, as these contracts did not meet the requirements for a cash flow hedge. Unrealized gains and losses of (Won)12,377 million and (Won)37,671 million, respectively, incurred relating to cash flow hedges from forecasted exports, were recorded as capital adjustments.

 

The forecasted hedged transactions are expected to occur on September 15, 2006. The aggregate amount of all deferred gains and losses of (Won)14,936 million and (Won)47,610 million, respectively, recorded net of tax under capital adjustments, are expected to be included in the determination of gain and loss within a year from September 30, 2005.

 

For the nine-month period ended September 30, 2005, the Company recorded realized exchange gains of (Won)25,336 million (2004: (Won)28,545 million) on foreign currency forward contracts upon settlement, and for the nine-month period ended September 30, 2005, realized exchange losses amounted to (Won)47,803 million (2004: (Won)40,487 million).

 

The Company entered into cross-currency swap contracts to manage the exposure to changes in currency exchange rates in accordance with its foreign currency risk management policy and to manage the exposure to changes in interest rates related to floating rate notes. These transactions do not meet the requirements for hedge accounting for financial statement purposes. Therefore, the resulting realized and unrealized gains or losses, measured by quoted market prices, are recognized in current operations as gains or losses as the exchange rates change.

 

A summary of such contracts is as follows:

 

(in millions)

Contracting party


   Buying position

   Selling position

   Contract foreign
exchange rate


  Maturity date

HSBC and others

   US$ 470      —      3M Libor   October 2, 2005 -
September 15, 2006
       —      (Won) 496,630    2.85% - 4.20%    

 

As of September 30, 2005, unrealized gains and losses of (Won)5,026 million and (Won)2,452 million, respectively, were charged to current operations, as these contracts do not fulfill the requirements for hedge accounting for financial statement purposes.

 

See Report of Independent Accountants.

 

31


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

The Company entered into currency option contracts in order to manage the exposure to change in foreign currency exchange rate related to foreign currency bonds in accordance with its foreign currency risk management policy.

 

The summary of said contract is as follows :

 

(in millions)

Contracting party


  

Form of Option


   Contract Amount

   Exercise Price

   Maturity date

HSBC and one other bank

  

Daily Accrual

Forward

   US$30    (Won)1,029.00/US$ ~
(Won)1,033.65/US$
   October 26, 2005 ~
October 28, 2005

 

These option contracts have been valued at fair market value and a valuation loss of (Won)192 million has been reflected in this quarter’s net income.

 

The Company is involved in several legal proceedings and claims arising in the ordinary course of business. In August 2002, the Company filed a complaint against Chunghwa Picture Tubes, Tatung Company and Tatung Co. of America, alleging patent infringement relating to liquid crystal displays and the manufacturing process for TFD-LCDs. Subsequently, the Company filed a complaint against customers of Chunghwa Picture Tubes, which included ViewSonic Corp., Jeans Co, Lite-On Technology Corp., Lite-On Technology International, Inc., TpV Technology and Invision Peripheral Inc. In June 2004, Chunghwa Picture Tubes filed a counter-claim against the Company in the United States District Court for the Central District of California for alleged ownership for certain patent and violation of U.S. antitrust laws. In May 2004, the Company filed a complaint against Tatung Co., parent company of Chunghwa Picture Tubes and ViewSonic Corp., and other claiming patent infringement on rear mountable liquid crystal display devices in United States District of Delaware and Patent country Court in the United Kingdom. The Company filed a complaint against Chunghwa Picture Tubes in American Arbitration Association in connection with the ownership for patent. On May 24, 2004, the Company filed a Complaint for Declaratory Judgment of properly recorded inventorship in United States District Court for the district of Massachusetts. In January 2005, Chunghwa Picture Tubes filed a complaint for patent infringement against the Company. On May 13, 2005, the Company also filed a complaint against Chunghwa Picture Tubes, Tatung Company and Viewsonic Corporation, alleging patent infringement related to liquid crystal display and the manufacturing process for TFT-LCDs in the United States District of Delaware. On September 20, 2005, the United States District Court for the Central District of California dismissed the patent case against Tatung Company and other defendants regarding the patent infringement by Chunghwa Picture Tubes relating to the side mounting patent. Accordingly, the Company has revised its claim and has refiled so that the side mounting patent can be effectively included in the original patent infringement case. The Company’s management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have any material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

See Report of Independent Accountants.

 

32


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

15. Capital Stock

 

On March 19, 2004, at their Annual General Meeting, the stockholders approved an increase of the authorized shares from 200 million to 400 million, and a stock split on a 2:1 basis effective May 25, 2004. The number of issued common shares as of September 30, 2005 is 357,815,700 (2004: 325,315,700).

 

In July 2004, pursuant to Securities Registration Statement filed on July 16, 2004, with the Korea Stock Exchange, the Company sold 8,640,000 shares of common stock for (Won)298,080 million. Concurrently, pursuant to a Form F-1 registration statement filed on July 15, 2004, with the U.S. Securities and Exchange Commission, the Company sold 24,960,000 shares of common stock in the form of American Depositary Shares (“ADSs”) for proceeds of US$748,800 thousand. In September 2004, pursuant to underwriting agreement dated July 15, 2004, the Company issued an additional 1,715,700 shares of common stock in the form of ADSs for US$51,471 thousand. In July 2005, pursuant to the Form F-1 Registration statement filed on July 22, 2005 with the U.S. Securities and Exchange Commission, the Company issued 27,900,000 shares of common stock in the form of American Depositary Shares (“ADSs”) for proceeds of US$ 1, 189,656 thousand. In addition, pursuant to the “Underwriting Agreement” dated July 21, 2005, the Company issued 4,600,000 shares of common stock for gross proceeds of US$ 196,144 thousand. The Company intends to use the proceeds from these sales to fund the capital expenditures in connection with the construction of its seventh generation TFT-LCD fabrication plant (“P7”) and other LCD facilities in Korea.

 

Issuances and other movements in common stock from January 1, 2004 to September 30, 2005, are as follows:

 

(in millions of Korean won)

Date of Issuance


  

Remarks


   Par Value

   Additional
Paid-in Capital


 

January 1, 2004

        (Won) 1,450,000    (Won) —    

July 22, 2004

   Issuance of common stock      168,000      1,001,833  

September 7, 2004

   Issuance of common stock      8,579      50,721  
     Stock issuance cost      —        (40,283 )

July 26, 2005

   Issuance of common stock      162,500      1,259,469  
     Stock issuance cost      —        (20,789 )
         

  


Balance as of September 30, 2005

        (Won) 1,789,079    (Won) 2,250,951  
         

  


 

See Report of Independent Accountants.

 

33


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

16. Capital Surplus and Retained Earnings

 

Capital surplus as of September 30, 2005 and December 31, 2004, are as follows:

 

(in millions of Korean won)

 

   2005

   2004

Additional paid in capital

   (Won) 2,250,951    (Won) 1,012,271

Conversion right¹

     29,470      —  
    

  

     (Won) 2,280,421    (Won) 1,012,271
    

  


¹ The total amount before tax effect is (Won)33,185 million as of September 30, 2005.

 

Retained earnings as of September 30, 2005 and December 31, 2004, are as follows:

 

(in millions of Korean won)

 

   2005

   2004

Legal reserve

   (Won) 60,086    (Won) 60,086

Reserve for business rationalization

     68,251      68,251

Unappropriated retained earnings

     3,152,501      2,963,337
    

  

     (Won) 3,280,838    (Won) 3,091,674
    

  

 

The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock through an appropriate resolution by the Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.

 

17. Capital Adjustments

 

Capital adjustments as of September 30, 2005 and December 31, 2004, are as follows:

 

(in millions of Korean won)

 

   2005

    2004

 

Foreign currency translation loss on the affiliates¹

   (Won) (6,849 )   (Won) (13,169 )

Gain on valuation of derivative instruments¹

     12,377       55,287  

Loss on valuation of derivative instruments¹

     (37,671 )     —    
    


 


     (Won) (32,143 )   (Won) 42,118  
    


 



¹ Tax effects were deducted.

 

See Report of Independent Accountants.

 

34


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

18. Income Taxes

 

Income tax expense (benefit) for the nine-month periods ended September 30, 2005 and 2004, are as follows:

 

(in millions of Korean won)

 

   2005

    2004

 

Current income taxes

   (Won) 5,763     (Won) 87,900  

Deferred income taxes from temporary differences

     (27,313 )     (11,802 )

Deferred income taxes from tax credit

     (121,280 )     (32,645 )

Deferred income taxes from capital adjustment and capital surplus

     5,603       —    
    


 


Income tax expense (benefit)

   (Won) (137,227 )   (Won) 43,453  
    


 


 

The income tax effect of temporary differences, including available net operating loss carryforwards and tax credits, comprising the deferred income tax assets and liabilities as of September 30, 2005 and December 31, 2004, are as follows:

 

(in millions of Korean won)

 

   2005

   2004

 

Inventories

   (Won) 9,228    (Won) 7,564  

Investments

     7,616      (1,463 )

Other current assets

     3,302      (2,158 )

Property, plant and equipment

     33,254      24,631  

Tax credit carryforward

     259,108      137,828  

Deferred income taxes from capital adjustment and capital surplus

     5,603      —    

Others

     3,659      6,776  
    

  


     (Won) 321,770    (Won) 173,178  
    

  


 

Available tax credits as of September 30, 2005, amounted to (Won)287,898 million. Tax credits can be carried forward up to four or five years under the Corporate Income Tax Law in Korea.

 

See Report Independent Accountants.

 

35


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

The reconciliation between income before income taxes to taxable income for the nine-month periods ended September 30, 2005 and 2004, are as follows

 

(in millions of Korean won)

 

   2005

    2004

 

Income before income taxes

   (Won) 51,937     (Won) 1,663,477  

Add (deduct) :

                

Temporary differences

     51,645       (12,120 )

Permanent differences

     (4,366 )     —    
    


 


Taxable income

   (Won) 99,216     (Won) 1,675,597  
    


 


 

The statutory income tax rate, including resident tax surcharges, applicable to the Company was approximately 29.7% in 2004, and was amended to 27.5% effective for fiscal years beginning January 1, 2005, in accordance with the Corporate Income Tax Law enacted in December 2003.

 

Under the Foreign Investment Promotion Act of Korea, from September 1999, the Company is entitled to an exemption from income taxes in proportion to the percentage of foreign equity for seven years following the registration of each foreign equity investment, and at one-half of that percentage for the subsequent three years.

 

The effective income tax rates applicable to the Company differs from the statutory income tax rate due to temporary differences in recognizing certain income and expenses for financial reporting and income tax purposes, and the tax exemption under the Foreign Investment Promotion Act of Korea. The effective tax rate of the Company for the nine-month period ended September 30, 2005, is negative 264.22% (2004: 7.36%).

 

Changes in accumulated temporary differences for the nine-month period ended September 30, 2005 are as follows:

 

(in millions of Korean won)

 

   January 1, 2005

    Increase (decrease)

    September 30, 2005

 

Inventories

   (Won) 47,233     (Won) (5,388 )   (Won) 41,845  

Investments

     (9,599 )     44,133       34,534  

Derivatives

     (14,157 )     34,042       19,885  

Property, plant and equipment

     109,496       20,603       130,099  

Warranty accrual

     15,151       (2,558 )     12,593  

Others

     12,333       (39,187 )     (26,854 )
    


 


 


Total

   (Won) 160,457     (Won) 51,645     (Won) 212,102  
    


 


 


Addition(deduction) to capital

   (Won) —       (Won) 10,712     (Won) 10,712  
    


 


 


Tax credit carryforward

   (Won) 137,828     (Won) 121,280     (Won) 259,108  
    


 


 


 

See Report of Independent Accountants.

 

36


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

19. Earnings Per Share

 

Earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Ordinary income per share is computed by dividing ordinary income allocated to common stock, which is net income allocated to common stock as adjusted by extraordinary gains or losses, net of related income taxes, by the weighted-average number of common shares outstanding during the period.

 

Earnings per share for the three-month and nine-month periods ended September 30, 2005 and 2004, is calculated as follows:

 

    

For the three-month

periods ended September 30,


  

For the nine-month

periods ended September 30,


(in millions, except for per share amount)

 

   2005

   2004

   2005

   2004

Net income as reported on the statements of income

   (Won) 226,927    (Won) 290,868    (Won) 189,164    (Won) 1,620,024

Weighted-average number of common shares outstanding

     349      316      333      299
    

  

  

  

Earnings per share

   (Won) 651    (Won) 920    (Won) 568    (Won) 5,422
    

  

  

  

Diluted earnings per share

   (Won) 649    (Won) 920    (Won) 568    (Won) 5,422
    

  

  

  

 

The Company has issued no diluted securities until the Company issued convertible bonds on April 19, 2005. Therefore, diluted earnings per share is identical to basic earnings per share and diluted ordinary income per share to basic ordinary income per share, for the three month-period ended March 31, 2005. And, diluted earnings per share is identical to basic earnings per share and diluted ordinary net income as the convertible bond issued have no dilutive effect for the nine-month period ended September 30, 2005. The diluted ordinary earnings per share and the diluted net earnings per share is (Won) 649 per share for the three month period ended September 30, 2005.

 

See Report of Independent Accountants.

 

37


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

Diluted earnings per share for the three-month period ended September 30, 2005, is as follows:

 

(in millions, except for per share amount)

 

Net income allocated to common stock

   (Won) 226,927

Add : Interest expense on convertible bonds¹

     4,533
    

Diluted net income allocated to common stock

     231,460

Weighted average number of common shares and diluted securities outstanding during the period

     357
    

Diluted earnings per share ²

   (Won) 649
    


¹ Tax effect was deducted.
² Convertible bonds have no dilutive effect as these amounts exceed basic earnings per share.

 

Additionally, earnings (loss) per share for the three-month period ended June 30, 2005, and for the year ended December 31, 2004, are as follows:

 

     June 30, 2005

    December 31, 2004

Basic earnings (loss) per share

   (Won)  (116 )   (Won) 5,420

Diluted earnings (loss) per share

   (Won)  (116 )   (Won) 5,420

 

See Report of Independent Accountants.

 

38


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

20. Transactions with Related Parties

 

Significant transactions which occurred in the normal course of business with related companies for the nine-month periods ended September 30, 2005 and 2004, and the related account balances outstanding as of September 30, 2005 and 2004, are summarized as follows:

 

(in millions of Korean won)

 

   Sales ¹

   Purchases ¹

   Receivables

   Payables

LG Electronics Inc.-Domestic

   (Won) 284,781    (Won) 118,895    (Won) 37,522    (Won) 51,917

LG Electronics Inc.-Overseas

     61,689      2      21,177      15

LG Corporation

     —        7,939      10,970      822

LG Chem Ltd.

     —        283,647      —        39,406

LG Philips LCD America, Inc.

     560,268      2      62,235      68

LG Philips LCD Taiwan Co., Ltd.

     565,339      —        10,766      68

LG Philips LCD Japan Co., Ltd.

     600,001      —        108,542      1

LG Philips LCD Germany GmbH

     690,373      8,079      107,125      8,084

LG Philips LCD Nanjing Co., Ltd.

     2,170,908      1,115      484,596      78

LG Philips LCD Shanghai Co., Ltd.

     574,139      —        108,663      —  

LG Philips LCD Hong Kong Co., Ltd.

     352,543      —        76,025      59

LG International – Domestic

     417      2,665      —        822

LG International – Overseas

     68,922      897,127      728      237,710

Serveone

     —        94,093      —        37,158

Micron Ltd.

     —        86,270      —        41,752

LG CNS.

     —        75,181      —        12,350

Philips

     —        34,382      81      3,363

Others

     53,231      38,117      18,354      6,514
    

  

  

  

2005 Total

   (Won) 5,982,611    (Won) 1,647,514    (Won) 1,046,784    (Won) 440,187
    

  

  

  

2004 Total

   (Won) 5,961,324    (Won) 2,828,718    (Won) 488,517    (Won) 593,393
    

  

  

  


¹ Includes sales and purchases of property, plant and equipment.
² As Korean Fair Trade Commission approved GS Group to split from LG Group in January 2005, LG Construction and LG Retail Co. Ltd., and others were no longer classified as related parties.

 

See Report of Independent Accountants.

 

39


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

September 30, 2005 and 2004, and December 31, 2004

(Unaudited)

 

21. Segment Information

 

The Company operates only one segment, the TFT-LCD division. Export sales represent about 90% of total sales for the nine-month periods ended September 30, 2005 and 2004.

 

The following is a summary of operations by country based on the location of the customers for the nine-month periods ended September 30, 2005 and 2004:

 

(in millions of Korean won)

 

Sales


   Domestic

   Taiwan

   Japan

   America

   China

   Europe

   Others

   Total

2005

   (Won) 556,487    (Won) 565,375    (Won) 600,004    (Won) 560,644    (Won) 3,107,185    (Won) 710,640    (Won) 114,833    (Won) 6,215,168

2004

   (Won) 616,120    (Won) 1,090,407    (Won) 738,337    (Won) 507,255    (Won) 2,399,250    (Won) 781,138    (Won) 96,557    (Won) 6,229,064

 

22. Supplemental Cash Flow Information

 

Significant transactions not affecting cash flows for the nine-month periods ended September 30, 2005 and 2004, are as follows:

 

(in millions of Korean won)

 

   2005

   2004

Other accounts payable arising from the purchase of property, plant and equipment

   (Won) 1,313,703    (Won) 717,889
    

  

 

See Report of Independent Accountants.

 

40


Table of Contents

LG.Philips LCD Co., Ltd.

Consolidated Balance Sheets

(Unaudited)

 

 

(in millions of Korean won and thousands of US dollars, except for share data)

 

   December 31, 2004

   September 30, 2005

   

(Note 2)

September 30, 2005


 

ASSETS

                       

Current assets:

                       

Cash and cash equivalents

   (Won) 1,361,239    (Won) 2,129,456     $ 2,042,840  

Accounts receivable, net

                       

Trade, net

     461,996      776,910       745,309  

Due from affiliates

     427,914      531,047       509,446  

Others, net

     64,407      57,180       54,854  

Inventories

     804,117      723,917       694,471  

Deferred income taxes

     7,743      19,626       18,828  

Prepaid expense

     30,233      21,921       21,029  

Prepaid value added tax

     95,240      110,808       106,301  

Other current assets

     146,040      38,494       36,930  
    

  


 


Total current assets

     3,398,929      4,409,359       4,230,008  

Long-term prepaid expenses

     49,648      83,707       80,302  

Property, plant and equipment, net

     6,563,977      8,578,817       8,229,870  

Deferred income taxes

     178,450      309,156       296,581  

Intangibles, net

     37,435      42,341       40,619  

Other assets

     34,062      41,856       40,152  
    

  


 


Total assets

   (Won) 10,262,501    (Won) 13,465,236     $ 12,917,532  
    

  


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                       

Current liabilities:

                       

Short-term borrowings

   (Won) 483,220    (Won) 347,382     $ 333,252  

Current portion of long-term debt

     212,992      447,308       429,114  

Trade accounts and notes payable

                       

Trade

     490,524      602,836       578,315  

Due to affiliates

     92,593      127,167       121,994  

Other accounts payable

                       

Others

     439,210      1,172,034       1,124,361  

Due to affiliates

     576,708      392,713       376,739  

Accrued expenses

     119,864      56,924       54,609  

Income taxes payables

     76,812      7,115       6,826  

Other current liabilities

     82,162      191,767       183,967  
    

  


 


Total current liabilities

     2,574,085      3,345,246       3,209,177  

Long-term debt, net of current portion

     1,993,151      2,875,674       2,758,705  

Long-term accrued expense

     —        1,671       1,603  

Accrued severance benefits, net

     31,964      59,467       57,048  
    

  


 


Total liabilities

     4,599,200      6,282,058       6,026,533  
    

  


 


Commitments and contingencies

                       

Stockholders’ equity:

                       

Capital stock

                       

Common stock : (Won)5,000 par value; authorized 400 million shares; issued and outstanding 325 million shares at December 31, 2004 and 358 million shares at September 31 2005

     1,626,579      1,789,078       1,716,307  

Capital Surplus

     1,001,940      2,243,216       2,151,972  

Retained earnings

     3,001,042      3,182,976       3,053,507  

Accumulated other comprehensive income (loss)

     33,740      (32,092 )     (30,787 )
    

  


 


Total stockholders’ equity

     5,663,301      7,183,178       6,890,999  
    

  


 


Total liabilities and stockholders’ equity

   (Won) 10,262,501    (Won) 13,465,236     $ 12,917,532  
    

  


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

41


Table of Contents

LG.Philips LCD Co., Ltd.

Consolidated Statements of Income

(Unaudited)

 

 

(in millions of Korean won and thousands of

US dollars, except for per share amount)

 

   For the three month periods ended
September 30,


    For the nine month periods ended
September 30,


 
   2004

    2005

    2004

    2005

    2005

 
                             (Note 2)  

Sales

                                        

Related parties

   (Won) 821,346     (Won) 1,068,773     (Won) 2,621,274     (Won) 2,779,955     $ 2,666,879  

Others

     1,052,233       1,671,734       3,770,788       4,332,928       4,156,685  
    


 


 


 


 


       1,873,579       2,740,507       6,392,062       7,112,883       6,823,564  
                                    


Cost of sales

     1,543,259       2,364,366       4,423,667       6,613,579       6,344,569  
    


 


 


 


 


Gross profit

     330,320       376,141       1,968,395       499,304       478,995  
    


 


 


 


 


Selling, general and administrative expenses

     65,609       137,490       222,809       350,047       335,809  
    


 


 


 


 


Operating income (loss)

     264,711       238,651       1,745,586       149,257       143,186  
    


 


 


 


 


Other income (expense)

                                        

Interest income

     5,227       15,446       12,998       36,487       35,003  

Interest expense

     (13,870 )     (27,451 )     (40,832 )     (81,149 )     (77,848 )

Foreign exchange gain (loss), net

     (6,002 )     (9,568 )     (18,047 )     (33,016 )     (31,673 )

Others, net

     271       (1,021 )     857       (527 )     (507 )
    


 


 


 


 


Total other income (expense)

     (14,374 )     (22,594 )     (45,024 )     (78,205 )     (75,025 )
    


 


 


 


 


Income before income taxes

     250,337       216,057       1,700,562       71,052       68,161  

Provision (benefit) for income taxes

     (47,557 )     (21,952 )     52,428       (110,882 )     (106,372 )
    


 


 


 


 


Net income

   (Won) 297,894     (Won) 238,009     (Won) 1,648,134     (Won) 181,934     $ 174,533  
    


 


 


 


 


Net income per common share

                                        

Basic

   (Won) 943     (Won) 682     (Won) 5,512     (Won) 546     $ 524  

Diluted

   (Won) 943     (Won) 677     (Won) 5,512     (Won) 546     $ 524  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

42


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LG.Philips LCD Co., Ltd.

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

(in millions of Korean won)

 

   Common Stock

   Capital Surplus

  

Retained
Earnings


  

Accumulated
Other

Comprehensive

Income (Loss)


  

Total


   Shares

   Amount

  

Additional

Paid-In

Capital


  

Unearned

Compensation,

net of tax


        

Balance as of December 31, 2003

   290,000,000    (Won) 1,450,000    (Won) —      (Won) —      (Won) 1,297,355    (Won) 3,836    (Won) 2,751,191
    
  

  

  

  

  

  

Issuance of Common Stock

   35,315,700      176,579      1,014,270                           1,190,849

Unearned Compensation

                        (11,923)                     

Stock compensation expense

                        605                    605

Comprehensive income :

                                              

Net income

                               1,648,134             1,648,134

Cumulative translation adjustment

                                      (2,388)      (2,388)

Net unrealized gains on derivative, net of tax

                                      (174)      (174)
                                            

Total comprehensive income

                                             1,645,572
    
  

  

  

  

  

  

Balance as of September 30, 2004

   325,315,700    (Won) 1,626,579    (Won) 1,014,270    (Won) (11,318)    (Won) 2,945,489    (Won) 1,274    (Won) 5,576,294
    
  

  

  

  

  

  

Balance as of December 31, 2004

   325,315,700    (Won) 1,626,579    (Won) 1,012,271    (Won) (10,331)    (Won) 3,001,042    (Won) 33,740    (Won) 5,663,301
    
  

  

  

  

  

  

Issuance of Common Stock

   32,500,000      162,499      1,238,679                           1,401,178

Unearned Compensation

                                              

Stock compensation expense

                        2,597                    2,597

Comprehensive income :

                                              

Net income

                               181,934             181,934

Cumulative translation adjustment, net of tax

                                      6,321      6,321

Net unrealized gains on derivative, net of tax

                                      (72,153)      (72,153)
                                            

Total comprehensive income

                                             116,102
    
  

  

  

  

  

  

Balance as of September 30, 2005

   357,815,700    (Won) 1,789,078    (Won) 2,250,950    (Won) (7,734)    (Won) 3,182,976    (Won) (32,092)    (Won) 7,183,178
    
  

  

  

  

  

  

 

(in thousands of US dollars) (Note 2)

 

   Common Stock

   Capital Surplus

   

Retained
Earnings


  

Accumulated
Other

Comprehensive

Income (Loss)


   

Total


 
   Shares

   Amount

   Additional
Paid-In
Capital


   Unearned
Compensation


        

Balance as of December 31, 2004

   325,315,700    $ 1,560,417    $ 971,097    $ (9,911 )   $ 2,878,974    $ 32,368     $ 5,432,945  
    
  

  

  


 

  


 


Issuance of Common Stock

   32,500,000      155,890      1,188,295                             1,344,185  

Unearned Compensation

                                                  

Stock compensation expense

                        2,491                      2,491  

Comprehensive income :

                                                  

Net income

                                174,533              174,533  

Cumulative translation adjustment

                                       6,063       6,063  

Net unrealized gains on derivative, net of tax

                                       (69,218 )     (69,218 )
                                              


Total comprehensive income

                                               111,378  
    
  

  

  


 

  


 


Balance as of September 30, 2005

   357,815,700    $ 1,716,307    $ 2,159,392    $ (7,420 )   $ 3,053,507    $ (30,787 )   $ 6,890,999  
    
  

  

  


 

  


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

43


Table of Contents

LG.Philips LCD Co., Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

(in millions of Korean won and thousands of US dollars)

 

   For the nine month periods ended September 30,

 
   2004

    2005

    2005

 
                 (Note 2)  

Cash flows from operating activities:

                        

Net income

   (Won) 1,648,134     (Won) 181,934     $ 174,534  

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

                        

Depreciation

     849,689       1,255,835       1,204,753  

Provision for severance benefits

     29,391       34,949       33,527  

Foreign exchange loss (gain), net

     (28,993 )     15,071       14,458  

Amortization of intangible assets

     4,747       5,242       5,029  

(Gain) loss on disposal of property, plant and equipment, net

     (104 )     70       67  

Amortization of debt issuance cost

     5,423       4,291       4,116  

Stock compensation expense

     605       2,597       2,491  

(Increase) in deferred income taxes assets, net

     (41,621 )     (137,008 )     (131,435 )

Others, net

     (10,965 )     50,261       48,217  

Change in operating assets and liabilities:

                        

(Increase) decrease in accounts receivable

     272,543       (456,946 )     (438,360 )

Decrease (increase) in inventories

     (349,880 )     80,273       77,008  

Decrease (increase) in other current assets

     (50,078 )     92,080       88,335  

Increase in trade accounts and notes payable

     88,238       148,897       142,841  

Increase in other accounts payable

     148,669       58,293       55,922  

Decrease in accrued expenses

     (17,470 )     (62,940 )     (60,380 )

(Decrease) increase in other current liabilities

     22,229       (55,811 )     (53,541 )
    


 


 


Net cash provided by operating activities

     2,570,557       1,217,088       1,167,582  
    


 


 


Cash flows from investing activities:

                        

Purchase of property, plant and equipment

                        

Purchase from related parties

     (2,254,925 )     (706,699 )     (677,954 )

Purchase from others

     (1,161,497 )     (2,079,821 )     (1,995,224 )

Proceeds from sales of property, plant and equipment

     4,151       2,726       2,615  

Purchase of intangible assets

     —         (10,147 )     (9,734 )

Others, net

     (2,272 )     (7,727 )     (7,412 )
    


 


 


Net cash used in investing activities

     (3,414,543 )     (2,801,668 )     (2,687,709 )
    


 


 


Cash flows from financing activities:

                        

Proceeds (repayment of) from short-term borrowings

     472,863       (134,606 )     (129,131 )

Proceeds from issuance of long-term debt

     352,391       1,090,026       1,045,689  

Repayment of long-term debt

     (467,202 )     (5,872 )     (5,633 )

Proceeds from issuance of common stock

     1,190,849       1,401,180       1,344,186  
    


 


 


Net cash provided by financing activities

     1,548,901       2,350,728       2,255,111  
    


 


 


Effect of exchange rate changes on cash and cash equivalents

     2,914       2,069       1,986  
    


 


 


Net increase in cash and cash equivalents

     707,829       768,217       736,970  

Cash and cash equivalents:

                        

Beginning of period

     504,014       1,361,239       1,305,870  
    


 


 


End of period

   (Won) 1,211,843     (Won) 2,129,456     $ 2,042,840  
    


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

44


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2005

 

1. Basis of presentation

 

The accompanying unaudited interim consolidated financial statements of LG.Philips LCD Co., Ltd. (“LPL”), and its consolidated subsidiaries (hereinafter collectively referred to as the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information and, accordingly, do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2004. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results for these interim periods. The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 

2. United States dollar amounts

 

The Company operates primarily in Korea and its financial accounting records are maintained in Korean Won. The US dollar amounts are provided herein as supplementary information solely for the convenience of the reader. Korean Won amounts are expressed in US dollars at the rate of (Won)1042.40 : US$1, the US Federal Reserve Bank of New York noon buying exchange rate in effect on September 30, 2005. The US dollar amounts are unaudited and are not presented in accordance with generally accepted accounting principles in either Korea or the United States of America, and should not be construed as a representation that the Korean Won amounts shown could be converted, realized or settled in US dollars at this or any other rate.

 

3. Inventories

 

Inventories at December 31, 2004 and September 30, 2005 comprise the following:

 

(in millions of Korean won)

 

   December 31, 2004

   September 30, 2005

Finished products

   (Won) 511,008    (Won) 345,859

Work in process

     124,356      188,844

Raw materials

     168,753      189,214
    

  

     (Won) 804,117    (Won) 723,917
    

  

 

45


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2005

 

4. Derivative Instruments and Hedging Activities

 

Derivatives for cash flow hedge

 

During the nine month periods ended September 30, 2004 and 2005, two and three hundred thirty-nine foreign currency forward contracts were designated as cash flow hedges, respectively. During the nine month periods ended September 30, 2004 and 2005, these cash flow hedges were fully effective and changes in the fair value of the derivatives, of (Won)4,167 million and (Won)(25,294) million, were recorded in other comprehensive income. The deferred losses of (Won)25,294 million for derivatives designated as cash flow hedges are expected to be reclassified into losses within the next twelve months.

 

Derivatives for trading

 

For the nine month periods ended September 30, 2004 and 2005, the Company recorded realized exchange gains of (Won)28,545 million and (Won)25,336 million and realized exchange losses of (Won)40,487 million and (Won)47,803 million, respectively, on derivative contracts designated for trading upon settlement.

 

In addition, for the nine month periods ended September 30, 2004 and 2005, the Company recorded unrealized gains of (Won)9,047 million and (Won)5,452 million and unrealized losses of (Won)5,535 million and (Won)25,337 million, respectively, relating to these derivative contracts designated for trading.

 

5. Convertible bonds

 

The Company issued U.S. dollar-denominated non-interest bearing convertible bonds amounting to US$475 million due 2010. The bonds are convertible at (Won)58,435 for one common share from July 27, 2005 to April 4, 2010, redeemable from April 19, 2008 to the due date. The bonds enable the holder to put the debt back to the Company at a specified price.

 

6. Stockholder’s equity

 

In July 2004, pursuant to Securities Registration Statement filed on July 16, 2004 with Korean Stock Exchange, the Company sold 8,640,000 shares of common stock for gross proceeds of (Won)298,080 million. Concurrently, pursuant to a Form F-1 registration statement filed on July 15, 2004 with the Securities and Exchange Commission, the Company sold 24,960,000 shares of common stock in the form of American Depositary shares (“ADSs”) for gross proceeds of US$748,800 thousands ((Won)871,753 million).

 

In September 2004, pursuant to the underwriting agreement dated July 15, 2004 , the Company sold 1,715,700 shares of common stock in the form of American Depositary shares (“ADSs”) for gross proceeds of US$51,471 thousands ((Won)59,300 million).

 

The Company intends to use the proceeds of these sales to fund the capital expenditures associated with the construction of its seventh generation TFT-LCD fabrication plant (“P7”) and other LCD facility in Korea.

 

On May 21, 2004, employees of the Company formed an employee stock ownership association, (“ESOA”), which has the right to purchase on behalf of its membership up to 20% (1,728,000 shares) of shares offered publicly in Korea, pursuant to Korean Securities and Exchange Act. Employees purchased the shares through ESOA with the loan provided by the Company at the initial public offering price ((Won)34,500) and put under individual employee’s account. 20% of the 20% of shares (345,600 shares) purchased by employees with loans from the Company is essentially a restricted stock award which vests over four years. Total compensation costs are accounted for

 

46


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2005

 

“unearned compensation”, shown as a deduction of Capital Surplus, and it will be amortized during four year vesting period. During the nine month period ended September 30, 2005, the Company recorded compensation expense of (Won)2,040 million. The unearned compensation (Won)7,734 million are expected to be reclassified into earnings within the next thirty-six months.

 

In July 2005, pursuant to a Form F-1 registration statement filed on July 22, 2005 with the U.S. Securities and Exchange Commission, the Company sold 27,900,000 shares of common stock in the form of American Depository Shares (“ADSs”) for gross proceed of US$ 1,189,656 thousands ((Won) 1,220,706 million).

 

In July 2005, pursuant to the underwriting agreement dated July 21, 2005, the Company sold 4,600,000 shares of common stock in the form of American Depository shares (“ADSs”) for gross proceeds of US$ 196,144 thousands ((Won)201,263 million).

 

7. Stock Appreciation Plan

 

Effective January 1, 2005, the company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period.

 

On April 7, 2005, the Company granted 450,000 shares of stock appreciations rights (“SARs”) for selected management employees. Under the terms of this plan, management, on exercise, receive cash equal to the amount that the market price of the Company’s common stock exceeds the strike price ((Won)44,050) of the SARs.

 

The following table shows total stock-based compensation expense included in the consolidated statement of operations:

 

(in millions of Korean won)

 

   September 30, 2005

 

Cost of goods sold

   (Won) 705  

Selling general and administrative

     966  

Income tax benefits

     (66 )
    


Total stock-based compensation expense

   (Won) 1,605  
    


 

As of September 30, 2005, (Won)5,012 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over the next twenty-one months.

 

There were no capitalized stock-based compensation costs at September 30, 2005

 

47


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2005

 

The following tables summarize option activity under the SARs during the third quarter of 2005:

 

(in Korean won)

 

   Weighted-average
exercise price


   Number of shares
under option


   Weighted average
remaining
contractual lift
(in years)


                  

Balance at March 31, 2005

   (Won) —      —      —  

Options granted

   (Won) 44,050    450,000     

Options exercised

     —      —       

Options canceled/expired

     —      —       
           
    

Balance at September 30, 2005

   (Won) 44,050    450,000    7
           
    

Exercisable at September 30, 2005

   (Won) —      —      —  
           
    

 

In connection with the adoption of SFAS 123(R), the company assessed its valuation technique and related assumptions. The company estimates the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R) and Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 107. Key input assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by selected managements who receive SARs, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company under SFAS 123(R).

 

The fair value of SARs was estimated using a Black-Scholes valuation model with the following assumptions:

 

     September 30, 2005

 

Option term (years) 1

     3  

Volatility 2

     50.8 %

Risk-free interest rate (Korean government bond)

     4.6 %

Dividend yield

     0 %

Weighted average fair value per option granted

   (Won) 14,851  

1 The option term is the number of years that the company estimates, based primarily on history, that options will be outstanding prior to settlement.
2 Measured using historical daily price changes of the company’s stock over the respective term of the option.

 

48


Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2005

 

8. Commitments and Contingencies

 

The Company is subject to several legal proceedings and claims arising in the ordinary course of business. In August 2002, the Company filed a complaint against Chunghwa Picture Tubes, Tatung Company and Tatung Co. of America, alleging patent infringement relating to liquid crystal displays and the manufacturing process for TFT-LCDs. Subsequently the Company filed a complaint against customers of Chunghwa Picture Tubes, including ViewSonic Corp., Jeans Co, Lite-On Technology Corp., Lite-On Technology International, Inc., TpV Technology and Invision Peripheral Inc. In September 2004, Chunghwa Picture Tubes filed a counter-claim against the Company in the United States District Court for the Central District of California for alleged infringement of certain patents and violation of U.S. antitrust laws. In May 2004, the Company filed a complaint against Tatung Co., the parent company of Chunghwa Picture Tubes and ViewSonic Corp. and others, claiming patent infringement of rear mountable liquid crystal display devices in the United States District of Delaware and the Patent Country Court in the United Kingdom. The Company also filed a complaint against Chunghwa Picture Tubes with the American Arbitration Association in connection with the ownership of certain patents. On May 25, 2004, the Company filed a Complaint for Declaratory Judgement of properly recorded inventorship in the United States District Court for the District of Massachusetts. In January 2005, Chunghwa Picture Tubes filed a complaint for patent infringement against the Company. On May 13, 2005, the Company also filed a complaint against Chunghwa Picture Tubes, Tatung Company and Viewsonic Corporation, alleging patent infringement relating to liquid crystal displays and the manufacturing process for TFT-LCDs in the United States District of Delaware.

 

The Company’s management does not expect the outcome in any of these legal proceedings, individually or collectively, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. On September 20, 2005 the United States District Court for the Central District of California dismissed the patent case against Tatung Company and other defendants regarding the patent infringement by Chunghwa Picture Tubes relating to the side mounting patent. Accordingly, the Company has revised its claim and has refilled so that the side mounting patent can be effectively included in the original infringement case. The Company’s management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have any material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

9. Net Income Per Share

 

Net income per share for the nine month periods ended September 30, 2004 and 2005 is calculated as follows:

 

(In millions, except for per share amount)

 

   2004

   2005

Net income as reported on the income statements

   (Won) 1,648,134    (Won) 181,934

Weighted-average number of common shares outstanding

     299      333
    

  

Net income per share

   (Won) 5,512    (Won) 546
    

  

 

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LG. Philips LCD Co., Ltd.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 and 2005

 

Convertible bonds, which have a potentially dilutive effect by decreasing net income allocated to common stock, were excluded from the computation of diluted EPS since they did not have a dilutive effect.

 

10. Supplemental Cash Flows Information

 

Supplemental cash flows information for the nine month periods ended September 30, 2004 and 2005 is as follows:

 

(in millions of Korean won)

 

   2004

   2005

Non-cash investing and financing activities:

             

Other accounts payable arising from the purchase of property, plant and equipment

   (Won) 717,889    (Won) 1,313,703

 

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SIGNATURES

 

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.

 

    LG.Philips LCD Co., Ltd.
    (Registrant)

Date: November 14, 2005

  By:  

/s/ Ron H. Wirahadiraksa


    (Signature)    
    Name:   Ron H. Wirahadiraksa
    Title:   Joint Representative Director /
        President & Chief Financial Officer

 

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