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 February 2007

 


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

Submission of Audit Report

 

1. Name of external auditor   :Samil Accounting Corporation  
2. Date of receiving audit report   :February 20, 2007  
3. Auditor’s opinion    

 

     FY 2006    FY 2005

Audit Report on Consolidated Financial Statements

   Unqualified    Unqualified

Audit Report on Non-consolidated Financial Statements

   Unqualified    Unqualified

 

4. Financial Highlights of Consolidated Financial Statements  

(Unit: KRW M, Korean GAAP, Consolidated)

 

Items

   FY 2006     FY 2005  

Total Assets

   13,487,787     13,674,082  

Total Liabilities

   6,598,111     5,998,485  

Total Shareholders’ Equity

   6,889,676     7,675,597  

Capital Stock

   1,789,079     1,789,079  

Revenues

   10,624,200     10,075,580  

Operating Income

   (-)879,038     469,697  

Ordinary Income

   (-)1,021,476     368,695  

Net Income

   (-)769,313     517,012  

Total Shareholders’ Equity / Capital Stock

   385.1 %   429.0 %

 

5. Financial Highlights of Non-consolidated Financial Statements  

(Unit: KRW M, Korean GAAP, Non-consolidated)

 

Items

   FY 2006     FY 2005  

Total Assets

   12,815,847     12,995,915  

Total Liabilities

   5,926,171     5,320,318  

Total Shareholders’ Equity

   6,889,676     7,675,597  

Capital Stock

   1,789,079     1,789,079  

Revenues

   10,200,660     8,890,155  

Operating Income

   (-)945,208     447,637  

Ordinary Income

   (-)1,024,369     367,281  

Net Income

   (-)769,313     517,012  

Total Shareholders’ Equity / Capital Stock

   385.1 %   429.0 %


Table of Contents

LG.Philips LCD Co., Ltd. and

Subsidiaries

Consolidated Financial Statements

December 31, 2006 and 2005

 

3


Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Index

December 31, 2006 and 2005

 

     Page(s)

Report of Independent Auditors

   5 - 6

Consolidated Financial Statements

  
Consolidated Balance Sheets    7

Consolidated Statements of Operations

   8

Consolidated Statements of Shareholders’ Equity

   9

Consolidated Statements of Cash Flows

   10 - 11

Notes to Consolidated Financial Statements

   12 - 54

 

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Table of Contents
   A member firm of
LOGO    LOGO
    

www.samil.com

Kukje Center Building

191 Hangangno 2-ga, Yongsan-gu

Seoul 140-702, KOREA

(Yongsan P.O. Box 266, 140-600)

Report of Independent Auditors

To the Shareholders and Board of Directors of

LG.Philips LCD Co., Ltd. and its Subsidiaries

We have audited the accompanying consolidated balance sheets of LG.Philips LCD Co., Ltd. and its subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended, expressed in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LG.Philips LCD Co., Ltd. and its subsidiaries as of December 31, 2006 and 2005, and the results of their operations, the changes in their shareholders’ equity and their cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

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

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Accounting principles and auditing standards and their application in practice vary among countries. The accompanying consolidated 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 audit 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 auditing standards and their application in practice.

/s/ Samil PricewaterhouseCoopers

Seoul, Korea

February 13, 2007

This report is effective as of February 13, 2007, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Consolidated Balance Sheets

December 31, 2006 and 2005

 

(in millions of Korean won)    2006     2005  

Assets

    

Current assets

    

Cash and cash equivalents (Note 3)

   (Won) 954,362     (Won) 1,579,452  

Available-for-sale securities

     23       354  

Trade accounts and notes receivable, net (Notes 4, 5 and 21)

     859,300       1,266,899  

Inventories, net (Note 6)

     1,052,705       690,785  

Other accounts receivable, net (Notes 4, 5 and 21)

     112,182       66,203  

Accrued income, net (Note 4)

     850       1,369  

Advance payments, net (Note 4)

     7,050       5,994  

Prepaid expenses

     23,536       21,603  

Prepaid value added tax

     93,058       131,230  

Deferred income tax assets (Note 19)

     677       5,373  

Other current assets (Note 15)

     50,884       76,806  
                

Total current assets

     3,154,627       3,846,068  

Property, plant and equipment, net (Note 8)

     9,428,046       9,199,599  

Long-term financial instruments (Note 3)

     13       16  

Available-for-sale securities

     1       1  

Equity method investment (Note 7)

     19,284       14,156  

Non-current guarantee deposits

     22,454       28,070  

Long-term prepaid expenses

     138,051       83,112  

Deferred income tax assets (Note 19)

     601,485       343,754  

Intangible assets, net (Note 9)

     123,826       159,306  
                

Total assets

   (Won) 13,487,787     (Won) 13,674,082  
                

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Short-term borrowings (Note 10)

   (Won) 250,105     (Won) 308,969  

Trade accounts and notes payable (Notes 5 and21)

     949,436       693,588  

Other accounts payable (Notes 5 and 21)

     1,249,405       1,474,556  

Advances received (Note 5)

     45,785       58,431  

Withholdings

     25,376       12,055  

Accrued expenses (Note 5)

     55,867       69,968  

Income tax payable (Note 19)

     4,658       21,788  

Current maturities of long-term debts (Note 10)

     563,630       440,840  

Warranty reserve

     31,261       24,947  

Other current liabilities (Note 15)

     33,266       33,693  
                

Total current liabilities

     3,208,789       3,138,835  

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

     2,319,391       2,385,272  

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

     987,597       430,697  

Accrued severance benefits, net (Note 13)

     81,885       43,206  

Long-term accrued expenses

     430       —    

Deferred income tax liabilities (Note 19)

     19       475  
                

Total liabilities

     6,598,111       5,998,485  
                

Commitments and contingencies (Note 15)

    

Shareholders’ equity

    

Capital stock (Note 16)

    

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

     1,789,079       1,789,079  

Capital surplus (Note 17)

     2,275,172       2,279,250  

Retained earnings (Note 17)

     2,839,373       3,608,686  

Capital adjustments (Note 18)

     (13,948 )     (1,418 )
                

Total shareholders’ equity

     6,889,676       7,675,597  
                

Total liabilities and shareholders’ equity

   (Won) 13,487,787     (Won) 13,674,082  
                

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

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Consolidated Statements of Operations

Years ended December 31, 2006 and 2005

 

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

   2006     2005
Sales (Notes 21 and 23)    (Won) 10,624,200     (Won) 10,075,580
Cost of sales (Note 21)      10,932,316       9,094,711
              

Gross profit (loss)

     (308,116 )     980,869
Selling and administrative expenses      570,922       511,172
              

Operating income (loss)

     (879,038 )     469,697
              
Non-operating income     

Interest income

     29,309       50,622

Rental income

     7,811       207

Foreign exchange gains (Note 15)

     306,132       273,790

Gain on foreign currency translation (Note 15)

     62,576       68,520

Gain on disposal of property, plant and equipment

     488       128

Gain on valuation of equity method investment (Note 7)

     5,128       —  

Others

     32,799       22,786
              
     444,243       416,053
              
Non-operating expenses     

Interest expenses

     179,199       104,928

Foreign exchange losses (Note 15)

     344,941       334,330

Loss on foreign currency translation (Note 15)

     20,341       38,481

Loss on disposal of accounts receivable

     20,778       16,858

Loss on valuation of equity method investment (Note 7)

     —         244

Loss on disposal of property, plant and equipment

     1,062       572

Loss on disposal of available-for-sale securities

     35       —  

Loss on disposal of investments

     118       —  

Donations

     1,837       2,319

Ramp up cost (Note 6)

     18,043       18,928

Others

     327       395
              
     586,681       517,055
              

Income (loss) before income taxes

     (1,021,476 )     368,695

Income tax benefit (Note 19)

     252,163       148,317
              

Net income (loss)

   (Won) (769,313 )   (Won) 517,012
              

Ordinary income (loss) per share (Note 20)

   (Won) (2,150 )   (Won) 1,523
              

Earnings (loss) per share (Note 20)

   (Won) (2,150 )   (Won) 1,523
              

Diluted ordinary income (loss) per share (Note 20)

   (Won) (2,150 )   (Won) 1,523
              

Diluted earnings (loss) per share (Note 20)

   (Won) (2,150 )   (Won) 1,523
              

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

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2006 and 2005

 

(in millions of Korean won)    Common Stock    Capital Surplus     Retained Earnings     Capital Adjustments     Total  

Balance as of January 1, 2005

   (Won) 1,626,579    (Won) 1,012,271     (Won) 3,091,674     (Won) 42,117     (Won) 5,772,641  

Issuance of common stock

     162,500      1,266,979       —         —         1,429,479  

Net income

     —        —         517,012       —         517,012  

Changes in capital adjustments

     —        —         —         (43,535 )     (43,535 )
                                       

Balance as of December 31, 2005

     1,789,079      2,279,250       3,608,686       (1,418 )     7,675,597  

Net loss

          (769,313 )       (769,313 )

Changes in capital surplus

        (4,078 )         (4,078 )

Changes in capital adjustments

            (12,530 )     (12,530 )
                                       

Balance as of December 31, 2006

   (Won) 1,789,079    (Won) 2,275,172     (Won) 2,839,373     (Won) (13,948 )   (Won) 6,889,676  
                                       

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

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

Years ended December 31, 2006 and 2005

 

(in millions of Korean won)    2006     2005  

Cash flows from operating activities

    

Net income (loss)

   (Won) (769,313 )   (Won) 517,012  
                

Adjustments to reconcile net income (loss) to net cash provided by operating activities

    

Depreciation

     2,593,439       1,746,901  

Amortization of intangible assets

     45,410       45,421  

Provision for severance benefits

     55,183       43,851  

Gain on foreign currency translation, net

     (52,233 )     (34,462 )

Loss on disposal of available-for-sale securities

     35       —    

Loss on disposal of investments

     118       —    

Gain on disposal of property, plant and equipment, net

     574       444  

Amortization of discount on debentures

     35,615       29,891  

Loss (gain) on valuation of equity method investments

     (5,128 )     244  

Others

     46,013       28,909  
                
     2,719,026       1,861,199  
                

Changes in operating assets and liabilities

    

Decrease (increase) in trade accounts and notes receivable

     409,123       (398,445 )

Decrease (increase) in inventories

     (361,919 )     114,503  

Decrease (increase) in other accounts receivable

     (46,148 )     (2,415 )

Decrease in accrued income

     519       101  

Decrease (increase) in advance payments

     (1,056 )     3,832  

Decrease (increase) in prepaid expenses

     23,549       16,566  

Decrease (increase) in prepaid value added tax

     38,172       (35,634 )

Decrease in other current assets

     25,793       67,891  

Decrease in long-term other accounts receivable

     —         1  

Increase in long-term prepaid expenses

     (80,420 )     (43,016 )

Increase in current deffered income tax assets

     50       (8,011 )

Increase in non-current deferred income tax assets

     (259,346 )     (172,265 )

Increase in trade accounts and notes payable

     256,642       122,926  

Increase in other accounts payable

     22,767       218,698  

Increase (decrease) in advances received

     (12,777 )     56,179  

Increase in unearned revenues

     7,055       —    

Increase in withholdings

     13,322       5,927  

Decrease in accrued expenses

     (14,101 )     (49,896 )

Decrease in income taxes payable

     (17,131 )     (54,815 )

Decrease in warranty reserve

     (39,699 )     (23,179 )

Decrease in other current liabilities

     (8,293 )     (54,133 )

Decrease in deferred income tax liabilities

     (456 )     —    

Increase in long-term accrued expenses

     430       —    

Accrued severance benefits transferred from affiliated company, net

     3,531       2,484  

Payment of severance benefits

     (33,932 )     (16,306 )

Decrease (increase) in severance insurance deposits

     13,829       (18,817 )

Decrease in contributions to the National Pension Fund

     68       29  

Increase in consolidation adjustments, net

     (23,785 )     (2,000 )
                
     (84,213 )     (269,795 )
                

Net cash provided by operating activities

     1,865,500       2,108,416  
                

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Consolidated Statement of Cash Flows

Years ended December 31, 2006 and 2005

 

(in millions of Korean won)    2006     2005  

Cash flows from investing activities

    

Acquisition of equity-method investments

   (Won) —       (Won) (14,400 )

Acquisition of available-for-sale securities

     (53 )     (339 )

Proceeds from disposal of long-term financial instruments

     3       —    

Proceeds from disposal of available-for-sale securities

     349       —    

Proceeds from non-current guarantee deposits

     10,138       2  

Payments of non-current guarantee deposits

     (4,640 )     (4,732 )

Acquisition of property, plant and equipment

     (3,075,985 )     (4,166,151 )

Proceeds from disposal of property, plant and equipment

     11,252       461  

Acquisition of intangible assets

     (8,251 )     (12,704 )

Increase in other current assets

     (8 )     (11 )
                

Net cash used in investing activities

     (3,067,195 )     (4,197,874 )
                

Cash flows from financing activities

    

Repayment of short-term borrowings

     (58,307 )     (173,004 )

Repayment of current maturities of long-term debts

     (442,848 )     (212,931 )

Proceeds from issuance of debentures

     399,600       1,073,684  

Proceeds from issuance of long-term debts

     678,160       218,580  

Proceeds from issuance of common stock

     —         1,401,342  
                

Net cash provided by financing activities

     576,605       2,307,671  
                

Net increase (decrease) in cash and cash equivalents

     (625,090 )     218,213  

Cash and cash equivalents (Note 24)

    

Beginning of the year

     1,579,452       1,361,239  
                

End of the year

   (Won) 954,362     (Won) 1,579,452  
                

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

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

1. The Companies

The accompanying consolidated financial statements include the accounts of LG. Philips LCD Co., Ltd. (the “Company” or the “Controlling Company”) and its consolidated subsidiaries. The general information on the Controlling Company and its consolidated subsidiaries is described below.

The Controlling Company

LG.Philips LCD Co., Ltd. was incorporated in 1985 as the original name of LG Soft, Ltd., under the Commercial Code of the Republic of Korea and commenced the manufacturing and sale 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 and Philips acquired a 50% interest in LG LCD Co., Ltd.

The Controlling Company listed its shares with the Korea Stock Exchange and with the US Securities and Exchange Commission in July, 2004. In 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 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 December 31, 2006, the Company’s shareholders are as follows:

 

    

Number of

Shares

   Percentage of
Ownership (%)

LG Electronics Inc.

   135,625,000    37.9

Koninklijke Philips Electronics N. V.

   117,625,000    32.9

Others

   104,565,700    29.2
         
   357,815,700    100.0
         

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Consolidated Subsidiaries

Consolidated subsidiaries as of December 31, 2006, are as follows:

 

     Total issued and
outstanding shares
    No. of shares owned by
the Controlling Company
    Percentage of
Ownership (%)

Overseas Subsidiaries

      

LG.Philips LCD America, Inc.

   5,000,000     5,000,000     100

LG.Philips LCD Japan Co., Ltd.

   1,900     1,900     100

LG.Philips LCD Germany GmbH

   960,000     960,000     100

LG.Philips LCD Taiwan Co., Ltd.

   11,550,000     11,549,994     100

LG.Philips LCD Nanjing Co., Ltd.

   —   1   —   1   100

LG.Philips LCD Hong Kong Co., Ltd.

   115,000     115,000     100

LG.Philips LCD Shanghai Co., Ltd.

   —   1   —   1   100

LG.Philips LCD Poland Sp.z o.o.

   2,385,900     2,385,900     100

LG.Philips LCD Guangzhou Co., Ltd.

   —   1   —   1   100

1

No shares have been issued in accordance with the local laws and regulations.

The primary business activities of the consolidated subsidiaries are as follows:

 

  (1) LG.Philips LCD America, Inc. (LPLA)

LPLA was incorporated in California, U.S.A., in September 1999, to sell the TFT-LCD products of LG.Philips LCD Co., Ltd. As of December 31, 2006 and 2005, its capital stock amounted to US$5 million and is wholly owned by LG.Philips LCD Co., Ltd.

 

  (2) LG.Philips LCD Japan Co., Ltd. (LPLJ)

LPLJ was incorporated in Tokyo, Japan, in October 1999, to sell the TFT-LCD products of LG.Philips LCD Co., Ltd. As of December 31, 2006 and 2005, its capital stock amounted to JP¥95 million and is wholly owned by LG.Philips LCD Co., Ltd.

 

  (3) LG.Philips LCD Germany GmbH (LPLG)

LPLG was incorporated in Düsseldorf, Germany, in November 1999, to sell the TFT-LCD products of LG.Philips LCD Co., Ltd. As of December 31, 2006 and 2005, its capital stock amounted to EUR 1 million and is wholly owned by LG.Philips LCD Co., Ltd.

 

  (4) LG.Philips LCD Taiwan Co., Ltd. (LPLT)

LPLT was incorporated in Taipei, Taiwan, in April 1999, to sell TFT-LCD products and its shares were acquired by the Company in May 2000. As of December 31, 2006 and 2005, its capital stock amounted to NTD116 million.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

  (5) LG.Philips LCD Nanjing Co., Ltd. (LPLCN)

LPLCN was incorporated in Nanjing, China, in July 2002, to manufacture and sell TFT-LCD products. As of December 31, 2006, its capital stock amounted to CNY 1,380 million (2005: CNY 1,069 million), and is wholly owned by LG. Philips LCD Co., Ltd.

 

  (6) LG.Philips LCD Hong Kong Co., Ltd. (LPLHK)

LPLHK was incorporated in Hong Kong in January 2003, to sell the TFT-LCD products of LG.Philips LCD Co., Ltd. As of December 31, 2006 and 2005, its capital stock amounted to HK$ 12 million and is wholly owned by LG.Philips LCD Co., Ltd.

 

  (7) LG.Philips LCD Shanghai Co., Ltd. (LPLSH)

LPLSH was incorporated in Shanghai, China, in January 2003, to sell the TFT-LCD products of LG.Philips LCD Co., Ltd. As of December 31, 2006 and 2005, its capital stock amounted to CNY 4 million and is wholly owned by LG.Philips LCD Co., Ltd.

 

  (8) LG.Philips LCD Poland Sp. z o.o.(LPL Poland)

LPL Poland was incorporated in Poland on September 6, 2005, to manufacture and sell the TFT-LCD products of LG. Philips LCD Co., Ltd. As of December 31, 2006, its capital stock amounted to PLN 238,590,000 (2005: PLN 50,000), and is wholly owned by LG. Philips LCD Co., Ltd.

 

  (9) LG.Philips LCD Guangzhou Co., Ltd. (LPLGZ)

LPLGZ was incorporated in Guangzhou, China, on June 30, 2006, to manufacture and sell the TFT LCD products of LG. Philips LCD Co., Ltd. As of December 31, 2006, its capital stock amounted to CNY 318 million and is wholly owned by LG. Philips LCD Co., Ltd.

Equity-method investments

The primary business activities of the equity-method investments are as follows:

 

  (1) Paju Electric Glass Co., Ltd. (PEG)

PEG was incorporated in Paju, Korea, in January 2005, to produce electric glass. As of December 31, 2006, its capital stock amounted to (Won)36,000 million and 40% shares of PEG are owned by LG.Philips LCD Co., Ltd.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Consolidated Subsidiaries

A summary of financial data of the consolidated subsidiaries, prior to the elimination of intercompany transactions, is as follows:

Condensed Balance Sheets

 

(in millions of Korean won)   

LG.Philips LCD

America, Inc.

    LG.Philips LCD
Germany GmbH
   

LG.Philips LCD

Japan.Co., Ltd.

    LG.Philips LCD
Taiwan Co., Ltd.
   

LG.Philips LCD

Nanjing Co., Ltd.

 

Current assets Non-current assets

   (Won)
 
85,901
5,366
 
 
  (Won)
 
361,469
1,797
 
 
  (Won)
 
90,473
1,045
 
 
  (Won)
 
328,203
3,731
 
 
  (Won)
 
76,262
369,940
 
 
                                        

Total assets

   (Won) 91,267     (Won) 363,266     (Won) 91,518     (Won) 331,934     (Won) 446,202  
                                        

Current liabilities

   (Won) 81,858     (Won) 359,202     (Won) 86,925     (Won) 319,534     (Won) 80,490  

Non-current liabilities

     —         —         34       —         157,057  
                                        

Total liabilities

     81,858       359,202       86,959       319,534       237,547  
                                        

Capital stock

     6,082       1,252       1,088       4,189       177,854  

Retained earnings

     5,672       3,057       4,812       10,906       51,571  

Capital adjustments

     (2,345 )     (245 )     (1,341 )     (2,695 )     (20,770 )
                                        

Total shareholders’ equity

     9,409       4,064       4,559       12,400       208,655  
                                        

Total liabilities and shareholders’ equity

   (Won) 91,267     (Won) 363,266     (Won) 91,518     (Won) 331,934     (Won) 446,202  
                                        
(in millions of Korean won)   

LG. Philips LCD

HongKong Co., Ltd.

    LG. Philips LCD
Shanghai Co., Ltd.
   

LG. Philips LCD

Poland Sp z o.o.

    LG. Philips LCD
Guangzhou Co., Ltd.
    Total  

Current assets

   (Won) 174,257     (Won) 248,379     (Won) 32,110     (Won) 25,941     (Won) 1,422,995  

Non-current assets

     356       216       200,616       11,670       594,737  
                                        

Total assets

   (Won) 174,613     (Won) 248,595     (Won) 232,726     (Won) 37,611     (Won) 2,017,732  
                                        

Current liabilities

   (Won) 168,580     (Won) 244,628     (Won) 166,489     (Won) 720     (Won) 1,508,426  

Non-current liabilities

     19       —         431       —         157,541  
                                        

Total liabilities

     168,599       244,628       166,920       720       1,665,967  
                                        

Capital stock

     1,736       596       76,590       38,264       307,651  

Retained earnings

     5,040       3,936       (10,360 )     (957 )     73,677  

Capital adjustments

     (762 )     (565 )     (424 )     (416 )     (29,563 )
                                        

Total shareholders’ equity

     6,014       3,967       65,806       36,891       351,765  
                                        

Total liabilities and shareholders’ equity

   (Won) 174,613     (Won) 248,595     (Won) 232,726     (Won) 37,611     (Won) 2,017,732  
                                        

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Condensed Statements of Income

 

(in millions of Korean won)    LG.Philips
LCD,
America, Inc.
   

LG.Philips
LCD,

Germany
GmbH

    LG.Philips
LCD, Japan
Co., Ltd.
   

LG.Philips
LCD,

Taiwan Co.,
Ltd.

    LG.Philips
LCD, Nanjing
Co., Ltd.
 

Sales

   (Won) 1,035,463     (Won) 1,653,550     (Won) 1,190,264     (Won) 2,749,688     (Won) 1,688,227  

Cost of sales

     1,019,704       1,636,554       1,180,483       2,727,103       1,615,202  
                                        

Gross profit

     15,759       16,996       9,781       22,585       73,025  

Selling and administrative expenses

     11,054       11,074       8,120       9,937       57,928  
                                        

Operating income

     4,705       5,922       1,661       12,648       15,097  

Non-operating income (expense)

     (2,707 )     (4,572 )     305       (10,834 )     —    
                                        

Ordinary income

     1,998       1,350       1,966       1,814       15,097  

Income tax expense (benefit)

     771       647       1,095       667       (1,113 )
                                        

Net income

   (Won) 1,227     (Won) 703     (Won) 871     (Won) 1,147     (Won) 16,210  
                                        
(in millions of Korean won)    LG. Philips
LCD
HongKong
Co., Ltd.
   

LG. Philips
LCD

Shanghai

Co., Ltd.

    LG. Philips
LCD Poland
Sp z o.o.
   

LG. Philips
LCD

Guangzhou
Co., Ltd.

    Total  

Sales

   (Won) 1,097,365     (Won) 1,163,364     (Won) 9     (Won) —       (Won) 10,577,930  

Cost of sales

     1,087,564       1,154,570       —         —         10,421,180  
                                        

Gross profit

     9,801       8,794       9       —         156,750  

Selling and administrative expenses

     7,106       7,532       12,056       800       125,607  
                                        

Operating income (loss)

     2,695       1,262       (12,047 )     (800 )     31,143  

Non-operating income (expense)

     443       601       1,693       (157 )     (15,228 )
                                        

Ordinary income (loss)

     3,138       1,863       (10,354 )     (957 )     15,915  

Income tax expense

     365       462       —         —         2,894  
                                        

Net income (loss)

   (Won) 2,773     (Won) 1,401     (Won) (10,354 )   (Won) (957 )   (Won) 13,021  
                                        

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

2. Summary of Significant Accounting Policies

The significant accounting policies followed by the Company and its consolidated subsidiaries in the preparation of the accompanying consolidated financial statements, are summarized below.

Basis of Consolidated 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 consolidated financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language consolidated financial statements.

Accounting Estimates

The preparation of the financial statements requires management to make certain 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. 18 through 20 became applicable to the Company on January 1, 2006, the Company adopted these Standards in its financial statements covering periods beginning January 1, 2006.

Principles of Consolidation

The fiscal year end of the consolidated subsidiaries is the same as that of the Controlling Company. Differences in accounting policy, between the Controlling Company and consolidated subsidiaries, are adjusted during consolidation.

The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiaries.

All intercompany transactions and balances with consolidated subsidiaries have been eliminated during consolidation (Note 21).

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

To eliminate the investment account of the Controlling Company and corresponding capital accounts of subsidiaries, the purchase method or the pooling of interest method is applied, depending on the nature of the transaction. In using the purchase method, when the Company has control over a subsidiary, the Company records the differences between the initial investment accounts and corresponding capital accounts of subsidiaries as goodwill or negative goodwill, which is amortized over less than 20 years, using the straight-line method.

Unrealized gains or losses included in inventories and other assets as a result of intercompany transactions are eliminated based on the average gross profit ratio of the corresponding company. Unrealized gains or losses, arising from sales by the Controlling Company to the consolidated subsidiaries, is fully eliminated and charged to the equity of the Controlling Company. Unrealized gains or losses, arising from sales by the consolidated subsidiaries to the Controlling Company, or sales between consolidated subsidiaries, are fully eliminated, and charged to the equity of the Controlling Company and the minority interests, based on the percentage of ownership.

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.

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

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.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Unrealized valuation gains or losses on trading securities are charged to current operations, and those resulting from available-for-sale securities are recorded as capital adjustments, the accumulated amount of which shall be charged to current operations when the related securities are sold, or when an impairment losses on the securities are 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 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.

Difference between the initial purchase price and the Company’s initial proportionate ownership in the net book value of the investee is 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.

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 their intended 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 life

Buildings

   20 ~ 40 years

Structures

   20 ~ 40 years

Machinery and equipment

   4 years

Vehicles

   4 years

Tools, furniture and fixtures

   3 ~ 5 years

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

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Property, plant and equipment, which were acquired by the Company through government subsidies, are recorded at their fair values if the cost is lower than the market value. The government subsidies are presented as a deduction from the acquisition cost. The current year’s subsidies are offset against depreciation expense over the useful life of the property, plant and equipment, and the remaining amount is recognized as a loss on sale upon disposal of the property, plant and equipment.

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 is 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.

Lease Transactions

The Company accounts for lease transactions as either operating lease or capital lease, depending on the terms of the lease agreement. As of December 31, 2006, current lease transactions are classified only as operating leases and the related lease rentals are charged to expense when incurred.

Intangible Assets

Intangible assets, consisting of industrial property rights, rights to use electronics and gas supply facilities, rights to use the industrial water facility, goodwill 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 its 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 is 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 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)929.6: US$1 as of December 31, 2006;(Won)1.013.0: US$1 as of December 31, 2005), and the resulting translation gains and losses are recognized in current operations.

Translation of Foreign Currency Statements

Foreign currency financial statements of consolidated subsidiaries are translated into Korean won using the exchange rates in effect at 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 shareholders’ equity.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

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. The warranty reserve as of December 31, 2006, is (Won)31,261 million (2005: (Won)24,947 million), and provision for warranty reserve for the year ended in December 31, 2006, is (Won)46,013 million (2005: (Won)28,909 million).

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 these deposits 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.

Sale 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 sale 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 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 hedges.

Convertible bonds

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

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

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 year.

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 based on estimates when there are reasonable assumptions 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 year.

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 probability of utilization, are recognized for the carryforward amount.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

3. Cash and Cash Equivalents, and Financial Instruments

Cash and cash equivalents, and financial instruments as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)    Annual interest
rate (%) as of
December 31, 2006
   2006    2005

Cash and cash equivalents

        

Cash on hand

   —      (Won) 6    (Won) 6

Checking accounts

   —        34      51

Time deposits

   4.16      663,480      942,359

Passbook accounts in millions of foreign currencies of

        

US$ 130, JP¥ 391,

        

EUR 16, NTD 52,

        

CNY 998, HKD 103, PLN 46

        

(2005 : US$, 517, JP¥ 268,

        

EUR 6 , NTD 93,

        

CNY 706, HKD, 96)

   5.63      290,842      637,036
                
        954,362      1,579,452
Long-term financial instruments         

Guarantee deposit for checking accounts

        13      16
                
      (Won) 954,375    (Won) 1,579,468
                

As of December 31, 2006 and 2005, long-term financial instruments represent key money deposits required to maintain checking accounts and, accordingly, the withdrawal of such deposits is restricted.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

4. Receivables

The Company’s receivables, including trade accounts and notes receivable, as of December 31, 2006 and 2005, consist of the following:

 

     2006

(in millions of Korean won)

   Gross amount    Allowance for
doubtful accounts
   Carrying value

Trade accounts and notes receivable

   (Won) 862,553    (Won) 3,253    (Won) 859,300

Other accounts receivable

     112,561      379      112,182

Accrued income

     858      8      850

Advance payments

     7,105      55      7,050
                    
   (Won) 983,077    (Won) 3,695    (Won) 979,382
                    
     2005

(in millions of Korean won)

   Gross amount    Allowance for
doubtful accounts
   Carrying value

Trade accounts and notes receivable

   (Won) 1,270,781    (Won) 3,882    (Won) 1,266,899

Other accounts receivable

     66,660      457      66,203

Accrued income

     1,383      14      1,369

Advance payments

     6,054      60      5,994
                    
   (Won) 1,344,878    (Won) 4,413    (Won) 1,340,465
                    

There were no negotiated foreign currency receivables outstanding as of December 31, 2006, and 2005. As of December 31, 2006, trade bills to overseas subsidiaries negotiated through banks but not yet matured, which was recorded as short-term borrowing, amounted to (Won)204,528 million (2005: (Won)303,904 million).

LG. Philips LCD Shanghai (“LPLSH”) sells accounts receivables for up to US$200 million through Standard Chartered Bank and LG. Philips LCD Taiwan (“LPLT”) sells accounts receivables for up to US$250 million through China Trust Bank and other banks. As of December 31, 2006, accounts receivables sold, which are not yet matured for LPLSH and LPLT are (Won)41,914 million and (Won)112,715 million, respectively.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

In September 2004, the Company entered into a five-year accounts receivable securitization program (the “Program”) with a financial institution. The Program allows the Company to sell, on a revolving basis, an undivided interest up to US$300 million in eligible accounts receivables of four subsidiaries, namely, LG.Philips LCD America (“LPLA”), LG.Philips LCD Germany (“LPLG”), LG.Philips LCD Taiwan (“LPLT”) and LG.Philips LCD Japan (“LPLJ”), while retaining a subordinated interest in a portion of the receivables. The eligible receivables of LPLA and LPLG are sold without legal recourse to third party conduits through LG. Philips LCD America Finance Corporation, a qualifying bankruptcy-remote special purpose entity, which is wholly owned by LPLA but is not consolidated for financial reporting purposes. The eligible receivables of LPLT and LPLJ are sold without legal recourse to third party conduits through ABN AMRO Taipei Branch and ABN AMRO Tokyo Branch, respectively.

As of December 31, 2006, the outstanding balance of securitized accounts receivable held by the third party conduits totaled (Won)364,785 million (2005: (Won)272,571 million), of which the Company’s subordinated retained interest was (Won)70,643 million (2005 : (Won)52,532 million). Accordingly, (Won)294,122 million (2005: (Won)220,039 million) of accounts receivable balances, net of applicable allowances, was removed from the consolidated balance sheets as of December 31, 2006. Losses including the loss on sale of receivables, various program and facility fees associated with the Program totaled approximately (Won)15,509 million for the year ended December 31, 2006.

In October 2006, the Company entered into a five-year accounts receivable selling program with Standard Chartered Bank. The Company sells accounts receivables of four subsidiaries, namely, LPLA, LPLG, LPLSH and LG.Philips LCD Hongkong (“LPLHK”), on a revolving basis, up to US$ 469 million. As of December 31, 2006, the amount of accounts receivable recorded as sales is \185,633 million.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

5. Assets and Liabilities Denominated in Foreign Currencies

As of December 31, 2006 and 2005, monetary assets and liabilities denominated in foreign currencies, excluding those disclosed elsewhere in the accompanying notes, are as follows:

 

     2006    2005
(in millions)   

Korean Won

equivalent

   Foreign
currency
  

Korean Won

equivalent

   Foreign
currency

Trade accounts and notes receivable

   (Won) 908,888    US$ 917    (Won) 1,258,328    US$ 480
      JP¥ 675       JP¥ 16,914
      EUR 41       EUR 142
            NTD 10,773
            HKD 938

Other accounts receivable

     11,031    US$ 2      63,535    US$ 7
      JP¥ 98       JP¥ 705
      EUR 6       EUR 15
            NTD 1,006
            CNY 8

Trade accounts and notes payable

     392,405    US$ 288      291,505    US$ 63
      JP¥ 14,697       JP¥ 11,150
      EUR —         EUR 1
      CNY 80       CNY 1,041

Other accounts payable

     277,965    US$ 16,814      197,188    US$ 14
      JP¥ 5,379       JP¥ 16,170
      EUR 21,027       EUR 17
      NTD 8       NTD 24
      CNY 1,773       CNY 179
      HKD —         HKD 3
      PLN 14,310      

Accrued expenses

     11,418    US$ 1      10,886    US$ 7
      JP¥ 11       JP¥ 8
      EUR 1       EUR 1
      NTD 101       NTD 46
      CNY 24       CNY 12
      HKD 2       HKD 1
      PLN 9         —  

Advanced received

     —        —        51,991    US$ 51

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

6. Inventories

Inventories as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)    2006     2005  

Finished products

   (Won) 641,913     (Won) 355,532  

Work-in-process

     312,231       170,775  

Raw materials

     129,981       142,717  

Supplies

     101,581       66,142  
                
     1,185,706       735,166  

Less : Valuation loss

     (133,001 )     (44,381 )
                
   (Won) 1,052,705     (Won) 690,785  
                

For the year ended December 31, 2006, the Company recorded ramp-up cost of (Won) 18,043 million (2005: (Won) 18,928 million) to counter the unusual low volume of production.

As of December 31, 2006, inventories and property, plant and equipment are insured against fire and other casualty losses for up to (Won)24,679,994 million, CNY 6,220 million, US$ 40 million, NTD 7 million (2005: (Won)30,088,637 million, CNY 5,451 million, US$ 19 million, NTD 5 million and EUR 11 million). Also, as of December 31, 2006, the Company insured directors’ and officers’ liabilities for up to US$ 100 million (2005: (Won)100 million).

 

7. Equity-method Investment

Equity-method investment as of December 31, 2006 and 2005, consist of the following:

 

     2006
(in millions of Korean won)   

No. of shares

owned by the

Company

   Percentage of
Ownership
(%)
  

Acquisition

cost

   Market or net
asset value
  

Carrying

value

Paju Electric Glass

   1,440,000    40    (Won) 14,400    (Won) 20,631    (Won) 19,284
                              
   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

Paju Electric Glass

   1,440,000    40    (Won) 14,400    (Won) 14,083    (Won) 14,156
                              

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

As of and for the year ended December 31, 2006, condensed financial statements of the investees, prior to the elimination of intercompany transactions, are as follows:

Condensed Balance Sheets

 

(in millions of Korean won)    Paju Electric Glass

Current assets

   (Won) 65,070

Non-current assets

     26,192
      

Total assets

   (Won) 91,262
      

Current liabilities

   (Won) 46,713

Non-current liabilities

     167
      

Total liabilities

     46,880
      

Capital stock

     36,000

Retained earnings

     8,382

Capital adjustments

     —  
      

Total shareholders’ equity

     44,382
      

Total liabilities and shareholders’ equity

   (Won) 91,262
      

Condensed Income Statement

 

(in millions of Korean won)    Paju Electric Glass  

Sales

   (Won) 164,379  

Cost of sales

     153,782  
        

Gross profit

     10,597  

Selling and administrative expenses

     2,373  
        

Operating income

     8,224  

Non-operating expense

     (23 )
        

Ordinary income

     8,201  

Income tax benefit

     (790 )
        

Net income

   (Won) 8,991  
        

The financial statements of the investee were adjusted due to a change in an accounting policy. Details of said adjustment are as follows :

 

     2006
Company name   

Reason for

adjustment

   Net asset value
before adjustment
   Adjustment
amount
   Net asset value
after adjustment

Paju Electric Glass

   Unification of
depreciation method
   (Won) 44,382    (Won) 7,195    (Won) 51,577
                       

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

The details of the equity method valuation for the years ended December 31, 2006 and 2005, are as follows:

 

     2006
(in millions of Korean won)   

Balance as of

January 1,
2006

   Acquisitions
during the
year
   Gain on valuation
of equity method
investments
    Retained
earnings
adjustment
   Capital
adjustment
   Balance as of
December
31, 2006

Paju Electric Glass

   (Won) 14,156    (Won) —      (Won) 5,128     (Won) —      (Won) —      (Won) 19,284
                                          
     2005
(in millions of Korean won)   

Balance as of

January 1,
2005

   Acquisitions
during the
year
   Loss on valuation
of equity method
investments
    Retained
earnings
adjustment
   Capital
adjustment
   Balance as of
December
31, 2005

Paju Electric Glass

   (Won) —      (Won) 14,400    (Won) (244 )   (Won) —      (Won) —      (Won) 14,156
                                          

As of December 31, 2006 and 2005, the eliminated unrealized losses in the valuation of equity method investments are as follows:

 

     2006     2005
     Inventories     Property, plant
and equipment
   Total     Inventories    Property, plant
and equipment
   Total

Paju Electric Glass

   (Won) (1,347 )   (Won) —      (Won) (1,347 )   (Won) —      (Won) —      (Won) —  
                                           

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

8. Property, Plant and Equipment

Changes in property, plant and equipment for the years ended December 31, 2006 and 2005, are as follows:

 

     2006  
(in millions of Korean won)    Land     Buildings     Structures    

Machinery

and

equipment

    Tools     Furniture and
fixtures
 

Balance as of January 1, 2006

   (Won) 316,236     (Won) 1,711,762     (Won) 122,827     (Won) 5,178,056     (Won) 66,107     (Won) 155,393  

Acquisition

     18,402       94,215       1,952       174,801       4,088       40,350  

Capitalized interest

     —         1       2       19,723       —         —    

Depreciation

     —         (86,247 )     (7,666 )     (2,399,770 )     (22,496 )     (75,536 )

Disposal

     —         (1,168 )     —         (1,213 )     (1 )     314  

Transfer

     925       40,442       20,499       2,880,013       33,317       45,079  

Subsidy (increase)decrease

     (18,402 )     (1,161 )     (1,970 )     (76 )     —         —    
                                                

Balance as of December 31, 2006

   (Won) 317,161     (Won) 1,757,844     (Won) 135,644     (Won) 5,851,534     (Won) 81,015     (Won) 165,600  
                                                

Accumulated depreciation

   (Won) —       (Won) 267,524     (Won) 34,240     (Won) 8,183,774     (Won) 86,275     (Won) 269,866  
                                                

 

     Vehicles     Other   

Machinery-

in-transit

    Construction-
in-progress
    Total  

Balance as of January 1, 2006

   (Won) 6,465     (Won) 6,052    (Won) 505,787     (Won) 1,130,914     (Won) 9,199,599  

Acquisition

     957       —        672,451       1,821,866       2,829,082  

Capitalized interest

     —         —        —         6,401       26,127  

Depreciation

     (2,526 )     —        —         —         (2,594,241 )

Disposal

     —         —        (9,759 )     —         (11,827 )

Transfer

     2,164       2,408      (1,050,106 )     (1,975,009 )     (268 )

Subsidy (increase)decrease

     —         —        —         1,183       (20,426 )
                                       

Balance as of December 31, 2006

   (Won) 7,060     (Won) 8,460    (Won) 118,373     (Won) 985,355     (Won) 9,428,046  
                                       

Accumulated depreciation

   (Won) 7,815     (Won) —      (Won) —       (Won) —       (Won) 8,849,494  
                                       

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

     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) 884,154     (Won) 114,875     (Won) 3,433,928     (Won) 25,932     (Won) 90,478  

Acquisition

     —        33,270       616       106,669       11,828       58,429  

Capitalized interest

     —        7,300       —         33,009       —       (Won) —    

Depreciation

     —        (49,491 )     (6,617 )     (1,622,375 )     (12,036 )     (58,199 )

Disposal

     —        —         —         (581 )     (12 )     (83 )

Transfer

     2,616      836,529       13,953       3,227,406       40,395       64,768  
                                               

Balance as of December 31, 2005

   (Won) 316,236    (Won) 1,711,762     (Won) 122,827     (Won) 5,178,056     (Won) 66,107     (Won) 155,393  
                                               

Accumulated depreciation

   (Won) —      (Won) 178,817     (Won) 26,448     (Won) 5,838,978     (Won) 59,440     (Won) 194,476  
                                               

 

     Vehicles     Other    Machinery-
in-transit
   

Construction-

in-progress

    Total  

Balance as of January 1, 2005

   (Won) 4,961     (Won) 2,501    (Won) 704,588     (Won) 953,145     (Won) 6,528,182  

Acquisition

     1,175       604      945,207       3,218,320       4,376,118  

Capitalized interest

     —         —        1,663       4,747       46,719  

Depreciation

     (1,784 )     —        —         —         (1,750,502 )

Disposal

     (229 )     —        —         —         (905 )

Transfer

     2,342       2,947      (1,145,671 )     (3,045,298 )     (13 )
                                       

Balance as of December 31, 2005

   (Won) 6,465     (Won) 6,052    (Won) 505,787     (Won) 1,130,914     (Won) 9,199,599  
                                       

Accumulated depreciation

   (Won) 5,352     (Won) —      (Won) —       (Won) —       (Won) 6,303,511  
                                       

As of December 31, 2006, the value of the Company’s land, as determined by the local government in Korea for property tax assessment purposes, amounts to approximately (Won)403,198 million (2005 : (Won)366,820 million).

The Company capitalizes the loss on foreign currency rate changes and interest expense incurred on borrowings used to finance the cost of constructing facilities and equipment. Capitalized loss on foreign exchange rate fluctuations and interest expense for the year ended December 31, 2006, amount (Won)26,127 million (2005: (Won)46,719 million).

For the year ended December 31, 2006, net loss on foreign currency translation, arising from foreign currency borrowings, which was deducted from capitalized interest expenses, is (Won)9,628 million (2005: (Won) 4,133 million).

 

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Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

For the year ended December 31, 2006, the effects of capitalized expenses on significant accounts in the balance sheet and statement of operations 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) 18,277,542    (Won) 8,849,494    (Won) 18,162,681    (Won) 8,820,557    (Won) 114,861    (Won) 28,937
                                         

Statement of operations

 

(in millions of Korean won)    If interest expenses
are capitalized
   If interest expenses
are expensed as incurred
   Difference  

Depreciation

   (Won) 2,594,241    (Won) 2,579,074    (Won) 15,167  

Interest expense

     179,199      214,954      (35,755 )

Foreign currency translation gain

     62,576      72,204      9,628  

Net income

     769,313      780,273      (10,960 )

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

9. Intangible Assets

Changes in intangible assets for the years ended December 31, 2006 and 2005, are as follows:

 

     2006  
(in millions of Korean won)    Intellectual
property
rights
    Rights for
industrial water
facilities
    Software     Others     Total  

Balance as of January 1, 2006

   (Won) 141,013     (Won) 8,653     (Won) 9,413     (Won) 227     (Won) 159,306  

Acquisition during the year

     8,252       —         1,678       —         9,930  

Reversal

     —         —         —         —         —    

Amortization

     (42,941 )     (1,232 )     (1,179 )     (58 )     (45,410 )
                                        

Balance as of December 31, 2006

   (Won) 106,324     (Won) 7,421     (Won) 9,912     (Won) 169     (Won) 123,826  
                                        

Accumulated amortization

   (Won) 328,082     (Won) 4,878     (Won) 12,740     (Won) 1,057     (Won) 346,757  
                                        

 

     2005  
     Intellectual
property
rights
    Rights for
industrial water
facilities
    Software     Others     Total  

Balance as of January 1, 2005

   (Won) 172,073     (Won) 9,893     (Won) 9,785     (Won) 259     (Won) 192,010  

Acquisition during the year

     10,829       12       1,894       —         12,735  

Reversal

     —         (18 )     —         —         (18 )

Amortization

     (41,889 )     (1,234 )     (2,266 )     (32 )     (45,421 )
                                        

Balance as of December 31, 2005

   (Won) 141,013     (Won) 8,653     (Won) 9,413     (Won) 227     (Won) 159,306  
                                        

Accumulated amortization

   (Won) 285,141     (Won) 3,646     (Won) 11,561     (Won) 1,115     (Won) 301,463  
                                        

The Company has classified the amortization as part of manufacturing overhead cost. The total amortization expense for the year ended December 31, 2006, amount to (Won)45,410 million (2005: (Won)45,421 million).

The details of intellectual property rights as of December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)  

Description

  2006   2005   Remaining period

Intellectual
property rights

 

Patent relating to
TFT-LCD business

  (Won) 106,324   (Won) 141,013   4 ~ 10 years
               

The Company expensed research and development costs of (Won)438,867 million for the year ended December 31, 2006 (2005: (Won)365,437 million).

 

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Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

For the years ended December 31, 2006 and 2005, the significant expenses, which are expected to have probable future economic benefits but expensed in the period incurred, consist of the following:

 

(in millions of Korean won)    2006    2005

Training expenses

   (Won) 16,533    (Won) 15,042

Advertising expenses

     24,143      21,907

Expenses for foreign market expansion

     5,255      8,835
             
   (Won) 45,931    (Won) 45,784
             

10. Short-Term Borrowings

Short-term borrowings as of December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)   

Creditor

  

Annual interest

rates (%) as of
December 31, 2006

   2006    2005

Documents against acceptance of US$ 220 million (2005 : US$ 300 million)

   Woori Bank and others    3M Libor + 0.7 –0.9    (Won) 204,528    (Won) 303,904

General loans of US$ 13 million, JP¥ 1,520 million, EUR 8 million, and PLN 39 million (2005 : US$ 5 million)

   Mizuho Bank and others    3M Libor + 0.5 –0.8      45,577      5,065
                   
         (Won) 250,105    (Won) 308,969
                   

 

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Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

11. Long-Term Debts and Debentures

Long-term debts and debentures as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)    Annual interest
rates (%) as of
December 31, 2006
   2006     2005  
Won currency debentures        

Non-guaranteed, payable through 2010

   3.5 – 5.0    (Won) 1,550,000     (Won) 1,750,000  

Private debentures, payable in 2011

   5.3 – 5.89      600,000       200,000  

Less: Current maturities

        (300,000 )     (200,000 )

Discounts on debentures

        (16,036 )     (28,120 )
                   
        1,833,964       1,721,880  
                   
Foreign currency debentures        

Floating rate notes, payable through 2007

   3ML+0.6      185,920       304,913  

Term notes, payable through 2006

   —        —         82,559  
                   
        —         387,472  

Less: Current maturities

        (185,920 )     (184,872 )

Discount on debentures

        —         (1,960 )
                   
        —         200,640  
                   
Convertible bonds¹        

US dollar-denominated bond, payable through 2010

   —        483,780       483,780  

Add : Call premium

        84,613       84,613  

Less : Discount on debentures

        (2,139 )     (2,724 )

Conversion adjustment

        (80,827 )     (102,917 )
                   
        485,427       462,752  
                   
      (Won) 2,319,391     (Won) 2,385,272  
                   
Won currency loans        

General loans

   5.53 – 6.1    (Won) 238,383     (Won) 117,800  
   3.25      14,634       8,620  

Less : Current maturities

        (39,267 )     (29,417 )
                   
        213,750       97,003  
                   
Foreign currency loans        

General loans

   5.26 – 6.15      167,599       144,607  
   3ML+1.0      —         17,727  
   6ML+1.2      44,621       48,624  
   3ML+0.99 –1.35      139,440       151,950  
   3ML+0.35 –0.47      464,800       —    

Less : Current maturities

        (42,613 )     (29,214 )
                   
        773,847       333,694  
                   
      (Won) 987,597     (Won) 430,697  
                   

¹ On April 19, 2005, the Company issued US dollar-denominated convertible bonds totalling 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 December 31, 2006, the number of non-converted common shares is 8,276,681.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

As of December 31, 2006, the foreign currency debentures denominated in U.S. dollars amount to US$ 200 million (2005 : US$ 383 million), while the foreign currency loans denominated in U.S. dollars and Chinese yuan renminbi amounted to US$ 845 million and CNY 260 million (2005 : US$ 326 million and CNY 263 million), respectively.

Current maturities of long-term debts and debentures as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)    Annual interest
rate (%) as of
      

Type of borrowing

   December 31, 2006    2006     2005  

Long -tem debt in won currency loans

   5.9 – 6.1    (Won) 39,266     (Won) 29,417  

Long-term debt in won currency debt

   6.0      300,000       200,000  

Long-term debt in foreign currency debentures of US$ 200 million (2005: US$ 183 million)

   3ML+0.6      185,920       184,872  

Long-term debt in foreign currency loans of US$ 45 million (2005: US$ 28 million)

   6ML+1.2      42,613       29,215  
   5.97     
                   
        567,799       443,504  

Less: Discount on debentures

        (4,169 )     (2,664 )
                   
      (Won) 563,630     (Won) 440,840  
                   

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

The aggregate annual maturities of long-term debts outstanding as of December 31, 2006, exclusive of adjustments relating to discounts, are as follows:

 

(in millions of Korean won)

For the year ending December 31,

   Won currency
debentures
   Won currency
loans
   Convertible
bonds
   Foreign
currency
loans
   Total

2008

   (Won) 250,000    (Won) 61,766    (Won) —      (Won) 102,830    (Won) 414,596

2009

     600,000      40,451      —        85,673      726,124

2010

     600,000      32,065      483,780      85,683      1,201,528

2011

     400,000      32,927      —        492,688      925,615

2012

     —        32,927      —        6,973      39,900

Thereafter

     —        13,614      —        —        13,614
                                  
   (Won) 1,850,000    (Won) 213,750    (Won) 483,780    (Won) 773,847    (Won) 3,321,377
                                  

12. Leases

The Company entered into various lease agreements for the rental of certain machinery and equipment. The Company accounts for these leases as operating leases, under which lease payments are charged to expense as incurred.

As of December 31, 2006, future lease payments under these operating lease agreements are as follows:

 

(in millions of Korean won)

For the period ending December 31,

   Annual payment

2007

   (Won) 1,549

2008

     1,085

2009

     605

2010

     345

2011

     86
      

Total

   (Won) 3,670
      

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

13. Accrued Severance Benefits

Changes in accrued severance benefits for the years ended December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)    2006     2005  

Balance at the beginning of the year

   (Won) 112,010     (Won) 81,981  

Actual severance payments

     (33,932 )     (16,306 )

Transferred from / to affiliated companies, net

     3,531       2,484  

Provision for severance benefits

     55,183       43,851  
                
     136,792       112,010  

Cumulative deposits to National Pension Fund

     (640 )     (708 )

Severance insurance deposit

     (54,267 )     (68,096 )
                

Balance at the end of the year

   (Won) 81,885     (Won) 43,206  
                

The severance benefits are funded approximately 39.7% (2005 : 60.8%) as of December 31, 2006, 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.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

14. Stock Appreciation Plan

On April 7, 2005, the Company granted 450,000 shares of stock appreciations rights (“SARs”) to certain executives. Under the terms of this plan, executives, upon exercising their SARs, are entitled to receive cash equal to the excess of the market price of the Company’s common stock over 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 starting 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 year ended December 31, 2006 and 2005, is as follows:

 

     2006    2005

Beginning, number of shares under SARs

   410,000    —  

Options granted

   —      450,000

Options canceled/expired¹

   150,000    40,000
         

Ending, number of shares under SARs

   260,000    410,000
         

¹ Options canceled due to the retirement of several executive officers.

The Company did not recognize any compensation costs in 2006 as market price is below than exercise price as of December 31, 2006.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

15. Commitments and Contingencies

As of December 31, 2006, the Controlling Company has bank overdraft agreements with various banks amounting to (Won)59,000 million.

As of December 31, 2006, the Controlling Company has a revolving credit facility agreement with several banks totaling (Won)200,000 million and US$ 100 million.

As of December 31, 2006, the Controlling Company has agreements with several banks for U.S. dollar denominated accounts receivable negotiating facilities for up to US$ 1,186.5 million. The Controlling Company has made agreements with several banks in relation to the opening of letters of credit amounting to (Won)90,000 million and US$ 123.5 million.

The Controlling Company receives repayment guarantees from ABN AMRO Bank amounting to US$ 8.5 million relating to tax payments in Poland.

LPLA has entered into a line of credit agreement for up to US$10 million with Comerica Bank. LPLJ and LPLT are provided with repayment guarantees from UFJ Bank and ABN AMRO Bank amounting to JP¥1,300 million and NTD68 million, respectively, relating to their local tax payments.

As of December 31, 2006, in relation to its TFT-LCD business, the Controlling Company has patent license agreements with Hitachi and others. As of December 31, 2006, the Controlling Company has trademark license agreements with LG Corporation and Philips Electronics.

The Controlling 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

BNP and others

   US$ 2,064    (Won) 1,951,067   

(Won)916.40:US$1 -

(Won)974.30:US$1

   January 3, 2007 – December 11, 2007

Kookmin Bank and others

     EUR 180    (Won) 217,757   

(Won)1,164.28:EUR 1 -

(Won)1,229.17:EUR1

   January 9, 2007 –November 19, 2007

HSBC and others

   (Won) 334,571      JP¥ 40,500   

(Won) 7.9790: JP(Won)1 -

(Won)8.7140: JP(Won)1

   January 12, 2007 –December 14, 2007

Kookmin Bank and others

   US$ 78        JP¥ 9,000   

JP¥114.42: US$1 -

JP¥116.10: US$1

   January 12, 2007 –April 16, 2007

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

As of December 31, 2006, the Controlling Company recorded unrealized gains and losses on outstanding foreign currency forward contracts of (Won)35,560 million and (Won)19,996 million, respectively. Total unrealized gains and losses of (Won)2,496 million and (Won)5,843 million, respectively, were charged to operations for the year ended December 31, 2006, as these contracts did not meet the requirements for a cash flow hedge. Net unrealized gains and losses, net of related taxes, incurred relating to cash flow hedges from forecasted exports, were recorded as capital adjustments.

The forecasted hedged transactions are expected to be completed on December 14, 2007. The aggregate amount of all deferred gains and losses of (Won)33,064 million and (Won)14,153 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 December 31, 2006.

For the year ended December 31, 2006, the Company recorded realized exchange gains of (Won)246,904 million (2005: (Won)107,825 million) on foreign currency forward contracts upon settlement, and realized exchange losses of (Won)78,768 million (2005: (Won)112,618 million).

The Controlling 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.

A summary of these contracts is as follows:

 

(in millions)

Contracting party

   Buying
position
   Selling
position
   Contract foreign
exchange rate
    Maturity date

Kookmin Bank and others

   US$
 
100
—  
    
(Won)
—  
96,170
   3M Libor
4.54
 
%
  August 29, 2011

As of December 31, 2006, unrealized gains and losses of (Won)623 million and (Won)3,210 million, respectively, were charged to loss on valuation.

For the year ended December 31, 2006, the Controlling Company recorded realized gains of (Won)361 million (2005: (Won)903 million) and realized losses of (Won)26,174 million (2005: (Won)7,734 million) on cross-currency swap contracts upon settlement.

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

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

A summary of these contracts is as follows:

 

(in millions)

Contracting party

   USD Put Buying    USD Call Selling    Strike Price    Maturity date

KDB and others

   US$ 50    US$ 100    (Won)957.30:US$1 -
(Won)966.50:US$1
   May 21, 2007 –
June 21, 2007

As of December 31, 2006, unrealized gains of (Won)1,557 million were charged to current operations, as these contracts do not fulfill the requirement for hedge accounting for financial statement purposes.

The Controlling Company entered into interest rate swap contracts to manage the exposure to changes in interest rates related to floating rate notes.

A summary of these contracts follows:

 

(in millions)

Contracting party

   Contract
Amount
   Contract Foreign Exchange Rate   Maturity date

SC First Bank

   US$ 150    Accept floating rate
Pay fixed rate
   6 M Libor
5.375% -5.644%
  May 21, 2009 –
May 24, 2010

As of December 31, 2006, unrealized losses of (Won)2,152 million was charged to capital adjustments, as these contracts fulfill the requirements for hedge accounting for financial statement purposes.

For the year ended December 31, 2006, the Controlling Company recorded realized gains of (Won) 6 million and realized losses of (Won) 27 million on interest rate swap contracts upon settlement.

The Controlling Company is involved in several legal proceedings and claims arising in the ordinary course of business. In August 29, 2002, the Controlling 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 of TFT-LCDs. In June 2004, Chunghwa Picture Tubes filed a counter-claim against the Controlling Company in the United States District Court under the Central District of California for alleged ownership for certain patents and violation of U.S. antitrust laws. In October 2006, the court of the Central District of California dismissed the counter-claim for alleged ownership for certain patents. In November 2006, the Jury in California issued a verdict that Chunghwa Picture Tubes, Tatung Company and Tatung Co. of America had willfully infringed a patent owned by the Company, and awarded the Company US$53.5 million in damages. The Controlling Company also filed a complaint against Chunghwa Picture Tubes with the American Arbitration Association in connection with the ownership of certain patents. In June 20, 2006, the American Arbitration Association decided in favor of the Controlling Company.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

In May 27, 2004, the Controlling Company filed a complaint in the United States District of Delaware and the Patent County Court in the United Kingdom 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. On November 28, 2005, the Controlling Company lost its patent infringement case against Tatung Company and ViewSonic Corp. in the Patent County Court in United Kingdom. The Controlling Company appealed this judgment. On December 20, 2006, the Court of Appeals dismissed the appeal.

On January 10, 2005, Chunghwa Picture Tubes filed a complaint for patent infringement against LG Electronics Inc.(“LGE”) and the Controlling Company in the United States District Court for the Central District of California. However, Chungwha Picture Tubes and the Controlling Company have proposed to stay the case until June 2007. Chungwha Picture Tubes later withdrew the case against LGE.

On May 13, 2005, the Controlling 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 of TFT-LCDs in the United States District of Delaware. On July 27, 2006, the Jury in Delaware issued a verdict that Chunghwa Picture Tubes had willfully infringed a patent owned by the Company, and awarded the Company $52.4 million in damages.

On January 9, 2006, New Medium Technology LLC, AV Technologies LLC, IP Innovation LLC, and Technology Licensing Corporation filed a complaint for patent infringement against the Controlling Company in the United States District Court for the Northern District of Illinois.

On December 1, 2006, the Controlling Company filed a complaint against Chi Mei Optoelectronics Corp., AU Optronics Corp., Tatung Company, ViewSonic Corp. and others alleging patent infringement related to liquid crystal display and manufacturing process for TFT-LCDs in the United States District Court for the District of Delaware.

The Controlling Company’s management does not expect that the outcome in any of these legal proceedings and claims, individually or collectively, will have any material adverse effect on the Controlling Company’s financial condition, results of operations or cash flows.

The Controlling Company is currently under investigation by the fair trade or antitrust authorities in Korea, Japan, US and other markets with respect to possible anti-competitive activities in the LCD industry. As of December 31, 2006, the Controlling Company, along with a number of other companies in the LCD industry, have been named as defendants in a number of purported federal class actions in the United States alleging that the defendants violated the antitrust laws in connection with the sale of LCD panels. Each of these matters remains in the very early stages and the Controlling Company is not in a position to predict their outcome. However, the Controlling Company intends to defend itself vigorously in these matters.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

16. Capital Stock

On March 19, 2005, at their Annual General Meeting, the stockholders approved the increase in the authorized shares from 200 million to 400 million, and a stock split on a 2:1 basis effective May 25, 2005. The number of issued common shares as of December 31, 2006 and 2005, is 357,815,700.

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 $51,471 thousand. In July 2005, pursuant to the Form F-1 Registration statement filed on July 22, 2005, with the U.S. Securities and Exchange Commission, the Company sold 27,900,000 shares of common stock in the form of American Depositary Shares (“ADSs”) for gross proceeds of US$ 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.

Issuances and other movements in common stock from January 1, 2005 to December 31, 2006, are as follows:

 

(in millions of Korean won)

Date of Issuance

  

Remarks

   Par Value    Additional
Paid-in Capital
 

January 1, 2005, balance

      (Won) 1,626,579    (Won) 1,012,271  

July 26, 2005

  

Issuance of common stock

Stock issuance cost

    
 
162,500
—  
    
 
1,259,469
(20,627
 
)
                  

December 31, 2005, balance

      (Won) 1,789,079    (Won) 2,251,113  
                  

December 31, 2006, balance

      (Won) 1,789,079    (Won) 2,251,113  
                  

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

17. Capital Surplus and Retained Earnings

Capital surplus as of December 31, 2006 and 2005, consists of:

 

(in millions of Korean won)    2006    2005

Additional paid in capital

   (Won) 2,251,113    (Won) 2,251,113

Conversion right¹

     24,059      28,137
             
   (Won) 2,275,172    (Won) 2,279,250
             

¹ Net of tax effects.

Retained earnings as of December 31, 2006 and 2005, consists of:

 

(in millions of Korean won)    2006    2005

Legal reserve

   (Won) 60,086    (Won) 60,086

Reserve for business rationalization

     68,251      68,251

Unappropriated retained earnings

     2,711,036      3,480,349
             
   (Won) 2,839,373    (Won) 3,608,686
             

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 or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.

18. Capital Adjustments

Capital adjustments as of December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)    2006     2005  

Overseas subsidiary translation adjustment1

   (Won) (26,550 )   (Won) (11,729 )

Gain on valuation of derivative instruments1

     24,423       29,293  

Loss on valuation of derivative instruments1

     (11,821 )     (18,982 )
                
   (Won) (13,948 )   (Won) (1,418 )
                

1

Net of tax effects.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

19. Income Taxes

Income tax expense (benefit) for the years ended December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)    2006     2005  

Current income taxes

   (Won) 7,589     (Won) 31,981  

Deferred income taxes from temporary differences

     (21,015 )     (20,519 )

Deferred income taxes from accumulated deficit carryforward

     (248,493 )     —    

Deferred income taxes from tax credit

     16,017       (155,148 )

Deferred income taxes added to shareholders’ equity

     (6,261 )     (4,631 )
                

Income tax benefit

   (Won) (252,163 )   (Won) (148,317 )
                

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 December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)    2006     2005  

Inventories

   (Won) 21,267     (Won) 8,570  

Other current assets

     492       (4,133 )

Property, plant and equipment

     59,974       34,762  

Warranty liabilities

     8,840       4,320  

Tax credit carryforward

     436,486       292,976  

Deferred income taxes from net losses carryforward

     248,493       —    

Deferred income taxes added to shareholders’ equity

     (10,892 )     (4,631 )

Others

     (2,990 )     16,788  

Deduction of unrealizable deferred income tax assets

     (159,527 )     —    
                
   (Won) 602,143     (Won) 348,652  
                

Available tax credits as of December 31, 2006, amounted to (Won)481,414 million. Tax credits can be carried forward up to four or five years under the Corporate Income Tax Law in Korea.

The Company estimates the realizability of deferred tax assets based on the estimated taxable income. The Company did not recognize (Won)159,527 million of deferred tax assets as they were determined to be unrealizable.

As of December 31, 2006, as the possibility of sale of investments or payment of dividends from subsidiaries in the near future is minimal, the Company did not recognize (Won)25,102 million of temporary differences related to the valuation of equity method investments.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

The reconciliation between income before income taxes and taxable income for the years ended December 31, 2006 and 2005, follows:

 

(in millions of Korean won)    2006     2005

Income (Loss) before income taxes

   (Won) (1,021,476 )   (Won) 368,695

Add (deduct) :

    

Temporary differences

     127,585       61,467

Permanent differences

     12,419       1,578
              

Taxable income

   (Won) (881,472 )   (Won) 431,740
              

The statutory income tax rate, including resident tax surcharges, applicable to the Company is 27.5% for the year end December 31, 2006 and 2005. The statutory income tax rates applicable to overseas subsidiaries are approximately 7.5%~40.0%.

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 year ended December 31, 2006, is 24.69% (2005: negative 40.23%).

Changes in accumulated temporary differences for the year ended December 31, 2006, are as follows:

 

(in millions of Korean won)    January 1, 2006     Increase (decrease)     December 31, 2006  

Inventories

   (Won) 40,943     (Won) 36,019     (Won) 76,962  

Derivatives

     (18,229 )     20,019       1,790  

Property, plant and equipment

     140,485       56,246       196,731  

Warranty reserve

     20,601       10,660       31,261  

Others

     48,734       (3,689 )     45,045  
                        

Total

   (Won) 232,534     (Won) 119,255     (Won) 351,789  
                        

Deduction from capital

   (Won) (31,250 )   (Won) (8,357 )   (Won) (39,607 )
                        

Net loss carryforward

   (Won) —       (Won) 903,610     (Won) 903,610  
                        

Tax credit carryforward

   (Won) 292,976     (Won) 143,510     (Won) 436,486  
                        

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

20. Earnings Per Share

Earnings(Loss) per share is computed by dividing net income(loss) by the weighted-average number of common shares outstanding during the year. Ordinary income(loss) per share is computed by dividing ordinary income(loss) 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 year.

Earnings(Loss) per share for the three-month periods and years ended December 31, 2006 and 2005, ia calculated as follows:

 

     For the three-month
periods ended December 31,
   For the years
ended December 31,
(in millions, except for per share amount)    2006     2005    2006     2005

Net income(loss) as reported on the statements of operations

   (Won) (174,345 )   (Won) 327,848    (Won) (769,313 )   (Won) 517,012

Weighted-average number of common shares outstanding

     358       358      358       339
                             

Earnings(Loss) per share

   (Won) (487 )   (Won) 916    (Won) (2,150 )   (Won) 1,523
                             

Diluted earnings(loss) per share

   (Won) (487 )   (Won) 908    (Won) (2,150 )   (Won) 1,523
                             

The Company issued convertible bonds on April 19, 2005. Diluted earnings per share is identical to basic earnings and diluted ordinary income per share as the convertible bonds issued have no dilutive effect for the year ended December 31, 2006.

The diluted ordinary earnings per share and the diluted net earnings per share were (Won)908 per share for the three-month period ended December 31, 2005. Diluted earnings per share for the three-month period ended December 31, 2005, was calculated as follows:

 

(in millions, except for per share amount)     

Net income allocated to common stock

   (Won) 327,848

Add : Interest expense on convertible bonds¹

     4,548
      

Diluted net income allocated to common stock

     332,396

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

     366
      

Diluted earnings per share

   (Won) 908
      

¹ Net of tax effects.

 

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Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

Earnings(Loss) per share for the three-month period ended September 30, 2006, follows:

 

     September 30, 2006  

Basic loss per share

   (Won) (897 )

Diluted loss per share

   (Won) (897 )

21. Related Party Transactions

The ultimate parent company is LG Corporation and the parent company of the Company is LG Electronics Inc., which is responsible for the consolidated financial statements.

Significant transactions which occurred in the normal course of business with related companies during the years ended December 31, 2006 and 2005, and the related account balances outstanding as of December 31, 2006 and 2005, are summarized as follows:

Between LG.Philips LCD and consolidated subsidiaries

 

(in millions of Korean won)    2006    2005

Sales 1

   (Won) 8,632,419    (Won) 7,870,776

Purchases

     149,502      10,701

Accounts receivable

     1,167,626      1,237,187

Accounts payable

     27,449      12,004

¹ Includes sale of property, plant and equipment amounting to (Won)33 million.

Between consolidated subsidiaries

 

(in millions of Korean won)    2006    2005

Accounts receivable and payable

   (Won) 3,867    (Won) 571,563

Sales and purchases

     1,393,359      3,411,230

 

49


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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

In the normal course of business, the Company purchases raw materials from, and sells its products to, shareholder companies and other companies within the LG Group. Such transactions and the related accounts receivable and payable, excluding consolidated subsidiaries, durning the year ended December 31, 2006 and 2005, and as of December 31, 2006 and 2005, are summarized as follows:

 

(in millions of Korean won)    Sales¹    Purchases 2
     2006    2005    2006    2005

Parents companies

           

LG Electronics Inc

   (Won) 1,729,344    (Won) 1,821,507    (Won) 134,236    (Won) 179,577

Philips

     1,331,407      1,323,637      74,550      52,229

Company that has significant influence over the Company

           

LG Corporation

     —        —        13,151      11,218

Equity-method investee

           

Paju Electric Glass Co., Ltd.

     6      1      162,182      —  

Other related parties

           

LG Chem Ltd.

     —        —        708,770      620,930

LG International

     960,426      743,768      1,006,078      1,338,057

Serveone

     299      —        175,665      146,109

Micron Ltd.

     237      —        113,268      125,224

LG CNS

     5      —        103,056      113,615

Others

     39,762      75,141      140,730      61,959
                           

Total

   (Won) 4,061,486    (Won) 3,964,054    (Won) 2,631,686    (Won) 2,648,918
                           

 

(in millions of Korean won)    Receivables    Payables
     2006    2005    2006    2005

Parent companies

           

LG Electronics Inc.

   (Won) 138,959    (Won) 219,327    (Won) 13,574    (Won) 66,751

Philips

     112,569      176,599      5,863      4,548

Company that has significant influence over the Company

           

LG Corporation

     2,340      10,970      548      1,692

Equity-method investee

           

Paju Electric Glass Co., Ltd.

     —        —        22,535      —  

Other related parties

           

LG Chem Ltd.

     —        —        180,425      72,319

LG International

     58,684      47,515      122,953      198,422

Serveone

     2,373      —        47,169      36,792

Micron Ltd.

     —        —        50,568      55,234

LG CNS

     —        —        8,528      32,370

Others

     12,428      22,320      26,971      9,790
                           

Total

   (Won) 327,353    (Won) 476,731    (Won) 479,134    (Won) 477,918
                           

¹ Includes sale of property, plant and equipment amounting to (Won)798 million.

2

Includes purchases of property, plant and equipment amounting to (Won)797,486 million.

 

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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

Significant management¹ compensation costs for the nine-month period ended September 30, 2006, are as follows:

 

(in millions for Korean won)

  

Short-term employee salaries

   (Won) 1,506

Post-retirement benefits

     374
      
   (Won) 1,880
      

¹ Management herein refers to the directors who have significant control and responsibilities on the Controlling Company’s operations and business. Total ceiling for compensation for such directors in 2006 is (Won)13.4 billion.

22. Value Added Information

Value added information for the years ended December 31, 2006 and 2005, consist of the following:

 

     2006
(in millions of Korean won)    Cost of Sales    Selling and
administrative
expense
   Research and
development
expenses
   Construction-
in-progress
   Total

Salaries and wages

   (Won) 549,710    (Won) 68,393    (Won) 26,065    (Won) 10,314    (Won) 654,482

Severance benefits

     45,833      5,612      2,698      1,040      55,183

Employee fringe benefits

     92,087      9,274      3,655      1,347      106,363

Rent

     2,440      13,777      509      —        16,726

Depreciation

     2,618,279      7,003      13,567      803      2,639,652

Taxes and dues

     7,477      4,317      216      20      12,030
                                  
   (Won) 3,315,826    (Won) 108,376    (Won) 46,710    (Won) 13,524    (Won) 3,484,436
                                  

 

     2005
(in millions of Korean won)    Cost of Sales    Selling and
administrative
expense
   Research and
development
expenses
   Construction-
in-progress
   Total

Salaries and wages

   (Won) 386,021    (Won) 60,459    (Won) 20,231    (Won) 41,748    (Won) 508,459

Severance benefits

     31,624      4,455      1,740      6,033      43,852

Employee fringe benefits

     71,886      10,647      2,635      4,060      89,228

Rent

     2,124      6,958      439      —        9,521

Depreciation

     1,775,328      10,523      6,472      3,600      1,795,923

Taxes and dues

     5,009      4,366      169      200      9,744
                                  
   (Won) 2,271,992    (Won) 97,408    (Won) 31,686    (Won) 55,641    (Won) 2,456,727
                                  

 

51


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LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

23. Segment Information

The Company operates only one segment, the TFT-LCD division. Export sales represent about 92% of total sales for the year ended December 31, 2006.

The following is a summary of operations by country based on the location of the customers for the years ended December 31, 2006 and 2005 :

 

(in millions of Korean won)

Sales

   Domestic    Asia    America    Europe    Others    Total

2006

   (Won) 805,164    (Won) 6,534,476    (Won) 1,033,726    (Won) 1,753,717    (Won) 497,117    (Won) 10,624,200
                                         

2005

   (Won) 990,900    (Won) 6,688,993    (Won) 1,062,374    (Won) 1,329,989    (Won) 3,324    (Won) 10,075,580
                                         

24. Supplemental Cash Flow Information

Significant transaction not affecting cash flow for the years ended December 31, 2006 and 2005, follows:

 

(in millions of Korean won)    2006    2005

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

   (Won) 854,019    (Won) 1,077,932
             

25. Operating Results for the Final Interim Period

Significant operating results for the three-month period ended December 31, 2006, are as follows :

 

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

Sales

   (Won) 3,065,294

Cost of sales

     3,090,235

Operating loss

     176,588

Net loss

     174,345

Loss per share

     487

Diluted loss per share

     487

 

52


Table of Contents

LG.Philips LCD Co., Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

 

26. Approval of Non-Consolidated Financial Statements

The December 31, 2006 non-consolidated financial statements of the Company were approved at the Board of Directors’ meeting on January 16, 2007.

27. Subsequent Events

On January 16, 2007, the Board of Directors appointed Mr. Young Su Kwon to replace Mr. Bon Joon Koo as the Joint Representative Director of the Controlling Company. This appointment will be ratified by the shareholders during the 22nd Shareholders’ Meeting scheduled to be held on February 28, 2007.

In February 2007, the Controlling Company and certain of its officers and directors have been named as defendants in a federal class action in the United States by the shareholders of the Controlling Company alleging violations of the U.S. Securities Exchange Act of 1934, as amended, by the Controlling Company and certain of its officers and directors in connection with possible anti-competitive activities in the LCD industry. The Controlling Company and the officers and directors intend to defend themselves vigorously in this matter.

In February, 2007, Anvik Corporation filed a patent infringement case against the Company, along with other LCD manufacturing companies, in connection with the usage of photo-masking equipments manufactured by Nikon Corporation.

 

53


Table of Contents

LG.Philips LCD Co., Ltd.

Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

54


Table of Contents

LG.Philips LCD Co., Ltd.

Index

December 31, 2006 and 2005

 

     Page(s)

Report of Independent Auditors

   56 - 57

Non-Consolidated Financial Statements

  

Balance Sheets

   58

Statements of Operations

   59

Statements of Appropriations of Retained Earnings

   60

Statements of Cash Flows

   61 - 63

Notes to Non-Consolidated Financial Statements

   64 - 100

Report on the Review of Internal Accounting Control System

   101 -102

Report on the Operations of the Internal Accounting Control SystSem

   103


Table of Contents
LOGO   

A member firm of

 

LOGO

 

     www.samil.com
   Kukje Center Building
   191 Hangangno 2-ga, Yongsan-gu
   Seoul 140-702, KOREA
   (Yongsan P.O. Box 266, 140-600)

Report of Independent Auditors

To the Board of Directors and Shareholders of

LG.Philips LCD Co., Ltd.

We have audited the accompanying non-consolidated balance sheets of LG.Philips LCD Co., Ltd. (the “Company”) as of December 31, 2006 and 2005, and the related non-consolidated statements of operations, appropriations of retained earnings, and cash flows for the years then ended, expressed in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of LG.Philips LCD Co., Ltd. as of December 31, 2006 and 2005, and the results of its operations, the changes in its retained earnings and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

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


Table of Contents

Accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated 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 audit 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 auditing standards and their application in practice.

 

/s/ Samil PricewaterhouseCoopers

Seoul, Korea
February 13, 2007

This report is effective as of February 13, 2007, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

 

57


Table of Contents

LG.Philips LCD Co., Ltd.

Non-Consolidated Balance Sheets

December 31, 2006 and 2005

 

(in millions of Korean won)    2006     2005  

Assets

    

Current assets

    

Cash and cash equivalents (Note 3)

   (Won) 788,066     (Won) 1,465,025  

Available-for-sale securities

     23       354  

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

     1,049,408       1,034,196  

Inventories, net (Note 6)

     735,376       471,765  

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

     27,036       15,751  

Accrued income, net (Note 4)

     820       1,369  

Advance payments, net (Note 4)

     5,431       5,959  

Prepaid expenses

     22,051       20,532  

Prepaid value added tax

     52,837       102,094  

Deferred income tax assets (Note 18)

     —         4,647  

Others (Note 14)

     50,608       75,242  
                

Total current assets

     2,731,656       3,196,934  

Property, plant and equipment, net (Note 8)

     8,860,076       8,988,459  

Long-term financial instruments (Note 3)

     13       16  

Equity-method investments (Note 7)

     361,545       213,968  

Non-current guarantee deposits

     17,338       24,000  

Long-term prepaid expenses

     137,974       83,023  

Deferred income tax assets (Note 18)

     593,063       339,621  

Intangible assets, net (Note 9)

     114,182       149,894  
                

Total assets

   (Won) 12,815,847     (Won) 12,995,915  
                

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Trade accounts and notes payable (Notes 5 and 20)

   (Won) 943,924     (Won) 563,874  

Other accounts payable (Notes 5 and 20)

     1,066,642       1,445,471  

Advances received

     461       609  

Withholdings

     9,045       12,004  

Accrued expenses (Note 5)

     67,814       73,772  

Income tax payable (Note 18)

     —         19,499  

Warranty reserve

     28,015       16,023  

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

     553,089       429,352  

Others (Note 14)

     25,399       33,678  
                

Total current liabilities

     2,694,389       2,594,282  

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

     2,319,391       2,385,272  

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

     830,540       297,577  

Accrued severance benefits, net (Note 12)

     81,851       43,187  
                

Total liabilities

     5,926,171       5,320,318  
                

Commitments and contingencies (Note 14)

    

Shareholders’ equity

    

Capital stock (Note 15)

    

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

     1,789,079       1,789,079  

Capital surplus (Note 16)

     2,275,172       2,279,250  

Retained earnings (Note 16)

     2,839,373       3,608,686  

Capital adjustments (Note 17)

     (13,948 )     (1,418 )
                

Total shareholders’ equity

     6,889,676       7,675,597  
                

Total liabilities and shareholders’ equity

   (Won) 12,815,847     (Won) 12,995,915  
                

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

 

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LG.Philips LCD Co., Ltd.

Non-Consolidated Statements of Operations

Years ended December 31, 2006 and 2005

 

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

   2006    2005

Sales (Notes 20 and 22)

   (Won) 10,200,660    (Won) 8,890,155

Cost of sales (Note 21)

     10,688,068      8,029,141
             

Gross profit (loss)

     (487,408)      861,014

Selling and administrative expenses

     457,800      413,377
             

Operating income(loss)

     (945,208)      447,637
             

Non-operating income

     

Interest income

     26,178      48,942

Rental income

     7,811      207

Foreign exchange gains (Note 14)

     182,386      181,522

Gain on foreign currency translation (Note 14)

     50,945      47,714

Gain on valuation of equity method investments (Note 7)

     58,513      946

Gain on disposal of property, plant and equipment

     518      2,090

Others

     44,480      24,642
             
     370,831      306,063
             

Non-operating expenses

     

Interest expenses

     159,339      97,544

Foreign exchange losses (Note 14)

     234,859      228,158

Loss on foreign currency translation (Note 14)

     13,423      23,914

Loss on disposal of property, plant and equipment

     1,046      115

Loss on disposal of accounts receivable

     9,922      7,868

Loss on disposal of available-for-sale securities

     35      —  

Loss on valuation of equity method investments (Note 7)

     11,379      7,574

Loss on valuation of investment assets

     118      —  

Ramp up cost (Note 6)

     18,043      18,928

Donations

     1,821      2,318

Others

     7      —  
             
     449,992      386,419
             

Income(loss) before income taxes

     (1,024,369)      367,281

Income tax benefit (Note 18)

     255,056      149,731

Net income(loss)

   (Won) (769,313)    (Won) 517,012
             

Ordinary income(loss) per share (Note 19)

   (Won) (2,150)    (Won) 1,523
             

Earnings(loss) per share (Note 19)

   (Won) (2,150)    (Won) 1,523
             

Diluted ordinary income(loss) per share (Note 19)

   (Won) (2,150)    (Won) 1,523
             

Diluted earnings(loss) per share (Note 19)

   (Won) (2,150)    (Won) 1,523
             

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

 

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LG.Philips LCD Co., Ltd.

Non-Consolidated Statements of Appropriations of Retained Earnings

Years ended December 31, 2006 and 2005

(Date of appropriations : February 28, 2007 and February 28, 2006 for the years ended December 31, 2006 and 2005, respectively)

 

(in millions of Korean won)

   2006     2005

Retained earnings before appropriations

    

Unappropriated retained earnings carried over from prior year

   (Won) 3,480,349     (Won) 2,963,337

Net income(loss)

     (769,313 )     517,012
              
     2,711,036       3,480,349

Appropriation of retained earnings

     —         —  
              

Unappropriated retained earnings carried forward to the subsequent year

   (Won) 2,711,036     (Won) 3,480,349
              

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

 

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LG.Philips LCD Co., Ltd.

Non-Consolidated Statements of Cash Flows

Years ended December 31, 2006 and 2005

 

(in millions of Korean won)

   2006    2005

Cash flows from operating activities

     

Net income(loss)

   (Won)  (769,313)    (Won) 517,012

Adjustments to reconcile net income(loss) to net cash provided by operating activities

     

Depreciation

     2,521,931      1,704,733

Amortization of intangible assets

     44,231      44,400

Provision for severance benefits

     55,157      43,834

Gain on foreign currency translation, net

     (47,145)      (27,942)

Loss on disposal of available-for-sale securities

     35      —  

Loss on disposal of investment assets

     118      —  

Gain on disposal of property, plant and equipment, net

     528      (1,975)

Amortization of discount on debentures

     35,615      29,891

Loss (gain) on valuation of equity method investments, net

     (47,134)      6,628

Provision for warranty reserve

     35,641      17,215
             
     2,598,977      1,816,784
             

Changes in operating assets and liabilities

     

Increase in trade accounts and notes receivable

     (14,465)      (410,487)

Increase in inventories

     (263,611)      (3,766)

Increase in other accounts receivable

     (11,454)      (11,425)

Decrease in accrued income

     549      100

Decrease in advance payments

     527      3,834

Decrease in prepaid expenses

     23,964      16,930

(Increase) decrease in prepaid value added tax

     49,257      (21,178)

Decrease in other current assets

     24,502      67,645

Increase in long-term prepaid expenses

     (80,434)      (42,927)

Increase in deferred income tax

     (255,057)      (175,720)

Increase in trade accounts and notes payable

     381,007      113,747

Increase (decrease) in other accounts payable

     (35,028)      222,019

Increase (decrease) in advances received

     (148)      556

Increase in withholdings

     (2,959)      7,144

Decrease in accrued expenses

     (5,958)      (42,813)

Decrease in income taxes payable

     (19,499)      (55,081)

Decrease in warranty reseve

     (23,649)      (16,342)

Decrease in other current liabilities

     (9,089)      (54,142)

Accrued severance benefits transferred from affiliated company

     3,531      2,485

Payment of severance benefits

     (33,921)      (16,282)

Increase (decrease) in severance insurance deposit

     13,829      (18,817)

Decrease in contribution to National Pension Fund

     68      29
             
     (258,038)      (434,491)
             

Net cash provided by operating activities

     1,571,626      1,899,305
             

 

61


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LG.Philips Lcd Co., Ltd.

Non-Consolidated Statements of Cash Flows

Years ended December 31, 2006 and 2005

 

(in millions of Korean won)

   2006     2005  

Cash flows from investing activities

    

Acquisition of equity method investments

   (Won) (152,481 )   (Won) (54,557 )

Proceeds from sale of equity method investments

     37,643       —    

Acquisition of available-for-sale securities

     (53 )     (339 )

Proceeds from disposal of available for sale securities

     349       —    

Proceed from non-current guarantee deposits

     11,185       3  

Payment of non-current guarantee deposits

     (4,648 )     (4,933 )

Proceeds from disposal of property, plant and equipment

     11,503       2,830  

Acquisition of property, plant and equipment

     (2,743,732 )     (4,071,762 )

Acquisition of intangible assets

     (8,251 )     (10,811 )

Disposal of long-term financial instruments

     3       —    
                

Net cash used in investing activities

     (2,848,482 )     (4,139,569 )
                

Cash flows from financing activities

    

Repayment of current maturities of long-term debts

     (432,017 )     (207,120 )

Issuance of debentures

     399,600       1,073,684  

Proceeds from long-term debts

     632,314       162,395  

Proceeds from issuance of common stock

     —         1,401,341  
                

Net cash provided by financing activities

     599,897       2,430,300  
                

Net increase (decrease) in cash and cash equivalents

     (676,959 )     190,036  

Cash and cash equivalents (Note 23)

    

Beginning of the year

     1,465,025       1,274,989  
                

End of the year

   (Won) 788,066     (Won) 1,465,025  
                

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

 

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Table of Contents

LG.Philips Lcd Co., Ltd.

Non-Consolidated Statements of Cash Flows

Years ended December 31, 2006 and 2005

1. The Company

LG.Philips LCD Co., Ltd. (the “Company”) was incorporated in 1985 as the original name of LG Soft, Ltd., under the Commercial Code of the Republic of Korea and commenced the manufacturing and sales of Thin Film Transistor Liquid Crystal Display (“TFT LCD”) in 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 and Philips acquired a 50% interest in LG LCD Co., Ltd.

The Company listed its shares with the Korea Stock Exchange and with US Securities and Exchange Commission in July, 2004. 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 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 December 31, 2006, the Company’s shareholders are as follows:

 

    

Number of

Shares

  

Percentage of

Ownership (%)

LG Electronics Inc.

   135,625,000    37.9

Koninklijke Philips Electronics N. V.

   117,625,000    32.9

Others

   104,565,700    29.2
         
   357,815,700    100.0
         

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

2. Summary of Significant Accounting Policies

The significant accounting policies followed by the Company in the preparation of its year end 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.

Accounting Estimates

The preparation of the financial statements requires management to make certain 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. 18 through 20 became applicable to the Company on January 1, 2006, the Company adopted these Standards in its financial statements covering periods beginning January 1, 2006.

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.

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

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. If, however, the circumstances which caused the valuation loss cease to exist, the valuation loss is reversed up to the original carrying amount before valuation. The said reversal is a deduction from 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 capital adjustments, the accumulated amount of which shall be charged to current operations when the related securities are sold, or when an impairment losses on the securities are 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 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.

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

Difference between the initial purchase price and the Company’s initial proportionate ownership in the net book value of the investee is 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 their intended 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.

Property, plant and equipment, which were acquired by the Company through government subsidies, are recorded at their fair values if the cost is lower than the market value. The government subsidies are presented as a deduction from the acquisition cost. The current year’s subsidies are offset against depreciation expense over the useful life of the property, plant and equipment, and the remaining amount is recognized as a loss on sale upon disposal of the property, plant and equipment.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

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 is 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.

Intangible Assets

Intangible assets, consisting of 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 its 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 is 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)929.6: US$1 as of December 31, 2006; (Won)1,013.0 : US$1 as of December 31, 2005), 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. The warranty reserve as of December 31, 2006, is (Won)28,015 million (2005: (Won)16,023 million), and provision for warranty reserve for the year ended December 31, 2006, is (Won)35,641 million (2005: (Won)17,215 million).

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.

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

The Company has made deposits to the National Pension Fund in accordance with the National Pension Fund Law. The use of these deposits 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.

Sale 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 sale 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 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 hedges.

Convertible bonds

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

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

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 based on estimates when there are reasonable assumptions 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 year.

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 utilized. To the extent such credits are not currently utilized, deferred income tax assets, subject to considerations on their probability of utilization, are recognized as carryforward amount.

3. Cash and Cash Equivalents, and Financial Instruments

Cash and cash equivalents, and financial instruments as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)

   Annual interest
rate (%) as of
December 31, 2006
   2006    2005

Cash and cash equivalents

        

Cash on hand

   —      (Won) 6    (Won) 6

Checking accounts

   —        34      51

Time deposits

   4.16      663,480      942,359

Passbook accounts in

Foreign currencies
of US$129 million,
JP¥ 319 million,
EUR 1.5 million
(2005: US$ 516 million
and JP¥ 6 million)

   5.63      124,546      522,609
                
        788,066      1,465,025

Long-term financial instruments

        

Guarantee deposits for checking accounts

        13      16
                
      (Won) 788,079    (Won) 1,465,041
                

As of December 31, 2006 and 2005, long-term financial instruments represent key money deposits required to maintain checking accounts and, accordingly, the withdrawal of such deposits is restricted.

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

4. Receivables

The Company’s receivables, including trade accounts and notes receivable, as of December 31, 2006 and 2005, consist of the following:

 

     2006

(in millions of Korean won)

   Gross amount    Allowance for
doubtful accounts
   Carrying value

Trade accounts and notes receivable

   (Won) 1,050,318    (Won) 910    (Won) 1,049,408

Other accounts receivable

     27,342      306      27,036

Accrued income

     828      8      820

Advance payments

     5,486      55      5,431
                    
   (Won) 1,083,974    (Won) 1,279    (Won) 1,082,695
                    
     2005

(in millions of Korean won)

   Gross amount    Allowance for
doubtful accounts
   Carrying value

Trade accounts and notes receivable

   (Won) 1,035,155    (Won) 959    (Won) 1,034,196

Other accounts receivable

     16,148      397      15,751

Accrued income

     1,383      14      1,369

Advance payments

     6,019      60      5,959
                    
   (Won) 1,058,705    (Won) 1,430    (Won) 1,057,275
                    

As of December 31, 2006, trade bills negotiated through banks but not yet matured, amounted to approximately (Won)204,528 million (2005: (Won)303,904 million).

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

5. Assets and Liabilities Denominated in Foreign Currencies

As of December 31, 2006 and 2005, monetary assets and liabilities denominated in foreign currencies, excluding those disclosed elsewhere in the notes to financial statements, are as follows:

 

     2006    2005

(in millions)

   Korean Won
Equivalent
  

Foreign

Currency

   Korean Won
Equivalent
  

Foreign

Currency

Trade accounts and notes receivable

   (Won) 1,039,254    US$
JP¥
EUR
  994
3,530
71
   (Won) 1,027,180    US$
JP¥
EUR
  904
10,579
17

Other accounts receivable

     12,575    US$
JP¥
EUR
  4
107
6
     2,372    US$
JP¥
  2
40

Trade accounts and notes payable

     383,771    US$
JP¥
  289
14,756
     163,496    US$
JP¥
  63
11,574

Other accounts payable

     84,466    US$
JP¥
EUR
  21
6,999
8
     163,970    US$
JP¥
EUR
  14
15,608
13

Accrued expenses

     —      —     —        5,769    US$   6

6. Inventories

Inventories as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)

   2006     2005  

Finished products

   (Won) 311,808     (Won) 191,918  

Work-in-process

     312,231       131,483  

Raw materials

     129,373       124,999  

Supplies

     101,068       59,750  
                
     854,480       508,150  

Less : Valuation loss

     (119,104 )     (36,385 )
                
   (Won) 735,376     (Won) 471,765  
                

For the year ended December 31, 2006, the Company recorded ramp-up cost of (Won) 18,043 million (2005: (Won) 18,928 million) to counter the unusual low volume of production.

As of December 31, 2006, inventories and property, plant and equipment are insured against fire and other casualty losses for up to (Won) 24,679,994 million (2005: (Won)30,088,667 million). Additionally, as of December 31, 2006, the Company insured directors’ and officers’ liabilities for up to US$ 100 million (2005: US$ 100 million).

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

7. Equity-method Investments

Equity-method investments as of December 31, 2006 and 2005, consist of the following:

 

     2006

(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, Inc.

   5,000,000     100    (Won) 6,082    (Won) 9,409    (Won) 8,535

LG.Philips LCD Germany GmbH

   960,000     100      1,252      4,064      7,383

LG.Philips LCD Japan Co., Ltd.

   1,900     100      1,088      4,559      4,048

LG.Philips LCD Taiwan Co., Ltd.

   11,549,994     100      6,076      12,400      6,413

LG.Philips LCD Nanjing Co., Ltd.

   (1 )   100      177,854      208,655      205,224

LG.Philips LCD HongKong Co., Ltd.

   115,000     100      1,736      6,014      4,184

LG.Philips LCD Shanghai Co., Ltd.

   (1 )   100      596      3,967      3,777

LG.Philips LCD Poland Sp. z o.o.

   2,385,900     100      76,591      65,806      65,806

LG.Philips LCD Guangzhou Co, Ltd. ( 2 )

   (1 )   100      38,264      36,891      36,891

Paju Electric Glass

   1,440,000     40      14,400      20,631      19,284
                         
        (Won) 323,939    (Won) 372,396    (Won) 361,545
                         

 

     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, Inc.

   5,000,000     100    (Won) 6,082    (Won) 8,952    (Won) 6,388

LG.Philips LCD Germany GmbH

   960,000     100      1,252      3,255      2,100

LG.Philips LCD Japan Co., Ltd.

   1,900     100      1,088      4,106      3,787

LG.Philips LCD Taiwan Co., Ltd.

   11,549,994     100      6,076      12,232      7,460

LG.Philips LCD Nanjing Co., Ltd.

   (1 )   100      140,212      203,406      176,814

LG.Philips LCD HongKong Co., Ltd.

   115,000     100      1,736      3,627      2,643

LG.Philips LCD Shanghai Co., Ltd.

   (1 )   100      596      2,713      611

LG.Philips LCD Poland Sp. z o.o.

   500     100      16      9      9

Paju Electric Glass

   1,440,000     40      14,400      14,083      14,156
                         
        (Won) 171,458    (Won) 252,383    (Won) 213,968
                         

(1)

No shares have been issued according to the local laws or regulation.

(2)

LG.Philips LCD Guangzhou was established in 2006.

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

As of and for the year ended December 31, 2006, condensed financial statements of the investees, 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.Co., Ltd.
    LG.Philips LCD
Taiwan Co., Ltd.
    LG.Philips LCD
Nanjing Co., Ltd.
 

Current assets

Non-current assets

   (Won)
 
85,901
5,366
 
 
  (Won)
 
361,469
1,797
 
 
  (Won)
 
90,473
1,045
 
 
  (Won)
 
328,203
3,731
 
 
  (Won)
 
76,262
369,940
 
 
                                        

Total assets

   (Won) 91,267     (Won) 363,266     (Won) 91,518     (Won) 331,934     (Won) 446,202  
                                        

Current liabilities

Non-current liabilities

   (Won)
 
81,858
—  
 
 
  (Won)
 
359,202
—  
 
 
  (Won)
 
86,925
34
 
 
  (Won)
 
319,534
—  
 
 
  (Won)
 
80,490
157,057
 
 
                                        

Total liabilities

     81,858       359,202       86,959       319,534       237,547  
                                        

Capital stock

     6,082       1,252       1,088       4,189       177,854  

Retained earnings

     5,672       3,057       4,812       10,906       51,571  

Capital adjustments

     (2,345 )     (245 )     (1,341 )     (2,695 )     (20,770 )
                                        

Total shareholders’

equity

     9,409       4,064       4,559       12,400       208,655  
                                        

Total liabilities and

shareholders’ equity

   (Won) 91,267     (Won) 363,266     (Won) 91,518     (Won) 331,934     (Won) 446,202  
                                        

 

(in millions of Korean won)

   LG. Philips
LCD
HongKong
Co., Ltd.
    LG. Philips
LCD
Shanghai Co.,
Ltd.
    LG. Philips
LCD
Poland Sp z
o.o.
    LG. Philips
LCD
Guangzhou
Co., Ltd.
    Paju
Electric
Glass
   Total  

Current assets

Non-current assets

   (Won)
 
174,257
356
 
 
  (Won)
 
248,379
216
 
 
  (Won)
 
32,110
200,616
 
 
  (Won)
 
25,941
11,670
 
 
  (Won)
 
65,070
26,192
   (Won)
 
1,488,065
620,929
 
 
                                               

Total assets

   (Won) 174,613     (Won) 248,595     (Won) 232,726     (Won) 37,611     (Won) 91,262    (Won) 2,108,994  
                                               

Current liabilities

Non-current liabilities

   (Won)
 
168,580
19
 
 
  (Won)
 
244,628
—  
 
 
  (Won)
 
166,489
431
 
 
  (Won)
 
720
—  
 
 
  (Won)
 
46,713
167
   (Won)
 
1,555,139
157,708
 
 
                                               

Total liabilities

     168,599       244,628       166,920       720       46,880      1,712,847  
                                               

Capital stock

     1,736       596       76,590       38,264       36,000      343,651  

Retained earnings

     5,040       3,936       (10,360 )     (957 )     8,382      82,059  

Capital adjustments

     (762 )     (565 )     (424 )     (416 )     —        (29,563 )
                                               

Total shareholders’
equity

     6,014       3,967       65,806       36,891       44,382      396,147  
                                               

Total liabilities and
shareholders’ equity

   (Won) 174,613     (Won) 248,595     (Won) 232,726     (Won) 37,611     (Won) 91,262    (Won) 2,108,994  
                                               

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

Condensed Income Statement

 

(in millions of Korean won)

  

LG.Philips
LCD,
America,

Inc.

    LG.Philips
LCD,
Germany
GmbH
   

LG.Philips
LCD,

Japan Co.,
Ltd.

  

LG.Philips
LCD,
Taiwan Co.,

Ltd.

   

LG.Philips
LCD,
Nanjing Co.,

Ltd.

 

Sales

   (Won) 1,035,463     (Won) 1,653,550     (Won) 1,190,264    (Won) 2,749,688     (Won) 1,688,227  

Cost of sales

     1,019,704       1,636,554       1,180,483      2,727,103       1,615,202  
                                       

Gross profit

     15,759       16,996       9,781      22,585       73,025  

Selling and administrative expenses

     11,054       11,074       8,120      9,937       57,928  
                                       

Operating income

     4,705       5,922       1,661      12,648       15,097  

Non-operating income (expense)

     (2,707 )     (4,572 )     305      (10,834 )     —    
                                       

Ordinary income

     1,998       1,350       1,966      1,814       15,097  

Income tax expense (benefit)

     771       647       1,095      667       (1,113 )
                                       

Net income(loss)

   (Won) 1,227     (Won) 703     (Won) 871    (Won) 1,147     (Won) 16,210  
                                       

 

(in millions of Korean won)

   LG. Philips
LCD
HongKong
Co., Ltd.
  

LG. Philips
LCD
Shanghai

Co., Ltd.

   LG. Philips
LCD
Poland Sp
z o.o.
    LG. Philips
LCD
Guangzhou
Co., Ltd.
    Paju
Electric
Glass
    Total  

Sales

   (Won) 1,097,365    (Won) 1,163,364    (Won) 9     (Won) —       (Won) 164,379     (Won) 10,742,309  

Cost of sales

     1,087,564      1,154,570      —         —         153,782       10,574,962  
                                              

Gross profit

     9,801      8,794      9       —         10,597       167,347  

Selling and administrative

expenses

     7,106      7,532      12,056       800       2,373       127,980  
                                              

Operating income

     2,695      1,262      (12,047 )     (800 )     8,224       39,367  

Non-operating income (expense)

     443      601      1,693       (157 )     (23 )     (15,251 )
                                              

Ordinary income

     3,138      1,863      (10,354 )     (957 )     8,201       24,116  

Income tax expense (benefit)

     365      462      —         —         (790 )     2,104  
                                              

Net income(loss)

   (Won) 2,773    (Won) 1,401    (Won) (10,354 )   (Won) (957 )   (Won) 8,991     (Won) 22,012  
                                              

The financial statements of an investee were adjusted due to a change in an accounting policy.

Details of said adjustment are as follows:

 

    

2006

Company name

  

Reason for adjustment

   Net asset value
before adjustment
   Adjustment
amount
   Net asset value
after adjustment

Paju Electric Glass

   Unification of depreciation method    (Won) 44,382    (Won) 7,195    (Won) 51,577
                       

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

The details of the equity method valuation for the years ended December 31, 2006 and 2005, are as follows:

 

     2006

(in millions of Korean won)

   Balance as of
January 1,
2006
   Acquisitions
during the
year
   Gain (loss) on
valuation of
equity method
investments
    Retained
earnings
adjustment
    Capital
adjustment
   

Balance as of

December 31,

2006

LG.Philips LCD
America, Inc.

   (Won) 6,388    (Won) —      (Won) 2,917     (Won) —       (Won) (770 )   (Won) 8,535

LG.Philips LCD
Germany GmbH

     2,100      —        5,178       —         105       7,383

LG.Philips LCD
Japan Co., Ltd.

     3,787      —        680       —         (419 )     4,048

LG.Philips LCD
Taiwan Co., Ltd.

     7,460      —        (68 )     —         (979 )     6,413

LG.Philips LCD
Nanjing Co., Ltd.

     176,814      37,643      39,370       (37,643 )     (10,960 )     205,224

LG.Philips LCD
HongKong Co., Ltd.

     2,643      —        1,927       —         (386 )     4,184

LG.Philips LCD
Shanghai Co., Ltd.

     611      —        3,313       —         (147 )     3,777

LG.Philips LCD
Poland Sp. z o.o.

     9      76,574      (10,355 )     —         (422 )     65,806

LG.Philips LCD
Guangzhou Co., Ltd.
( 2 )

     —        38,264      (956 )     —         (417 )     36,891

Paju Electric Glass

     14,156      —        5,128       —         —         19,284
                                            
   (Won) 213,968    (Won) 152,481    (Won) 47,134     (Won) (37,643 )   (Won) (14,395 )   (Won) 361,545
                                            

 

     2005

(in millions of Korean won)

   Balance as of
January 1,
2005
   Acquisitions
during the
year
   Gain (loss) on
valuation of
equity method
investments
    Retained
earnings
adjustment
   Capital
adjustment
   

Balance as of

December 31,

2005

LG.Philips LCD
America, Inc.

   (Won) 7,133    (Won) —      (Won) (552 )   (Won) —      (Won) (193 )   (Won) 6,388

LG.Philips LCD
Germany GmbH

     2,262      —        348       —        (510 )     2,100

LG.Philips LCD
Japan Co., Ltd.

     4,052      —        388       —        (653 )     3,787

LG.Philips LCD
Taiwan Co., Ltd.

     10,974      —        (2,881 )     —        (633 )     7,460

LG.Philips LCD
Nanjing Co., Ltd.

     140,241      40,141      (3,608 )     —        40       176,814

LG.Philips LCD
HongKong Co., Ltd.

     2,491      —        210       —        (58 )     2,643

LG.Philips LCD
Shanghai Co., Ltd.

     886      —        (283 )     —        8       611

LG.Philips LCD
Poland Sp. z o.o.

     —        16      (6 )     —        (1 )     9

Paju Electric Glass

     —        14,400      (244 )     —        —         14,156
                                           
   (Won) 168,039    (Won) 54,557    (Won) (6,628 )   (Won) —      (Won) (2,000 )   (Won) 213,968
                                           

 

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Table of Contents

LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

As of December 31, 2006 and 2005, the eliminated unrealized gains or losses in the valuation of equity method investments are as follows:

 

     2006     2005  
     Inventories     Property,
plant and
equipment
    Total     Inventories     Property,
plant and
equipment
    Total  

LG.Philips LCD America, Inc.

   (Won) (874 )   (Won) —       (Won) (874 )   (Won) (2,564 )   (Won) —       (Won) (2,564 )

LG.Philips LCD Germany GmbH

     3,319       —         3,319       (1,155 )     —         (1,155 )

LG.Philips LCD Japan Co., Ltd.

     (511 )     —         (511 )     (319 )     —         (319 )

LG.Philips LCD Taiwan Co., Ltd.

     (5,987 )     —         (5,987 )     (4,772 )     —         (4,772 )

LG.Philips LCD Nanjing Co., Ltd.

     107       (3,538 )     (3,431 )     (21,216 )     (5,376 )     (26,592 )

LG.Philips LCD HongKong Co., Ltd.

     (1,830 )     —         (1,830 )     (984 )     —         (984 )

LG.Philips LCD Shanghai Co., Ltd.

     (190 )     —         (190 )     (2,102 )     —         (2,102 )

LG.Philips LCD Poland Sp. z o.o.

     —         —         —         —         —         —    

LG.Philips Guangzhou Co., Ltd. ( 2 )

     —         —         —         —         —         —    

Paju Electric Glass

     (1,347 )     —         (1,347 )     —         —         —    
                                                
   (Won) (7,313 )   (Won) (3,538 )   (Won) (10,851 )   (Won) (33,112 )   (Won) (5,376 )   (Won) (38,488 )
                                                

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

8. Property, Plant and Equipment

Changes in property, plant and equipment for the years ended December 31, 2006 and 2005, are as follows:

 

     2006  

(in millions of Korean won)

   Land    Buildings     Structures     Machinery and
equipment
    Tools    

Furniture
and

fixtures

 

Balance as of January 1, 2006

   (Won) 316,236    (Won) 1,633,119     (Won) 122,772     (Won) 5,078,844     (Won) 50,471     (Won) 146,673  

Acquisition during the year

     —        30,971       748       34,529       69       33,174  

Capitalized interest

     —        1       2       19,723       —         —    

Depreciation

     —        (83,756 )     (7,447 )     (2,333,913 )     (21,742 )     (73,419 )

Disposal

     —        (1,168 )     —         (993 )     (1 )     (109 )

Transfer

     925      40,442       20,499       2,873,435       33,317       45,079  

Subsidy (increase) decrease

        (1,161 )     (1,970 )     (76 )     —         —    
                                               

Balance as of December 31, 2006

   (Won) 317,161    (Won) 1,618,448     (Won) 134,604     (Won) 5,671,549     (Won) 62,114     (Won) 151,398  
                                               

Accumulated depreciation

   (Won) —      (Won) 255,969     (Won) 34,168     (Won) 8,082,424     (Won) 76,189     (Won) 260,061  
                                               

 

     Vehicles     Others    Machinery-
in-transit
    Construction-
in-progress
    Total  

Balance as of January 1, 2006

   (Won) 5,560     (Won) 6,052    (Won) 505,787     (Won) 1,122,945     (Won) 8,988,459  

Acquisition during the year

     74       —        596,088       1,686,893       2,382,546  

Capitalized interest

     —         —        —         6,401       26,127  

Depreciation

     (2,457 )     —        —         —         (2,522,734 )

Disposal

     —         —        (9,759 )     —         (12,030 )

Transfer

     2,164       2,408      (1,050,106 )     (1,968,431 )     (268 )

Subsidy (increase) decrease

     —         —        —         1,183       (2,024 )
                                       

Balance as of December 31, 2006

   (Won) 5,341     (Won) 8,460    (Won) 42,010     (Won) 848,991     (Won) 8,860,076  
                                       

Accumulated depreciation

   (Won) 6,952     (Won) —      (Won) —       (Won) —       (Won) 8,715,763  
                                       

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

     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 during the year

     —        19,830       448       39,954       1,616       57,152  

Capitalized interest

     —        7,300       —         33,009       —         —    

Depreciation

     —        (48,308 )     (6,439 )     (1,583,280 )     (11,647 )     (56,910 )

Disposal

     —        —         —         (580 )     (12 )     (33 )

Transfer

     2,616      836,529       13,953       3,215,268       40,395       64,768  
                                               

Balance as of December 31, 2005

   (Won) 316,236    (Won) 1,633,119     (Won) 122,772     (Won) 5,078,844     (Won) 50,471     (Won) 146,673  
                                               

Accumulated depreciation

   (Won) —      (Won) 172,237     (Won) 26,424     (Won) 5,788,542     (Won) 54,745     (Won) 188,769  
                                               

 

     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 during the year

     1,156       604      945,207       3,218,322       4,284,289  

Capitalized interest

     —         —        1,663       4,747       46,719  

Depreciation

     (1,749 )     —        —         —         (1,708,333 )

Disposal

     (229 )     —        —         —         (854 )

Transfer

     2,342       2,947      (1,145,671 )     (3,033,160 )     (13 )
                                       

Balance as of December 31, 2005

   (Won) 5,560     (Won) 6,052    (Won) 505,787     (Won) 1,122,945     (Won) 8,988,459  
                                       

Accumulated depreciation

   (Won) 4,860     (Won) —      (Won) —       (Won) —       (Won) 6,235,577  
                                       

As of December 31, 2006, the value of the Company’s land, as determined by the local government in Korea for property tax assessment purposes, amounts to approximately (Won)403,198 million (2005: (Won)366,820 million).

The Company capitalizes the loss on foreign currency rate changes and interest expense incurred on borrowings used to finance the cost of constructing facilities and equipment. Capitalized loss on foreign exchange rate fluctuations and interest expenses for the year ended December 31, 2006, amount to (Won)26,127 million (2005: (Won)46,719 million).

For the year ended December 31, 2006, net loss on foreign currency translation, arising from foreign currency borrowings, which was deducted from capitalized interest expenses, is (Won)9,628 million (2005: net loss of (Won)4,133 million).

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

For the year ended December 31, 2006, the accumulated effects of capitalized expenses on significant accounts in the balance sheet and statement of operations 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) 17,578,852    (Won) 8,715,762    (Won) 17,463,991    (Won) 8,686,825    (Won) 114,861    (Won) 28,937
                                         

Statement of Operations

 

(in millions of Korean won)

   If interest expenses are
capitalized
   If interest expenses are
expensed as incurred
   Difference  

Depreciation

   (Won) 2,522,734    (Won) 2,507,567    (Won) 15,167  

Interest expense

     159,339      195,094      (35,755 )

Foreign currency translation gain

     50,945      60,573      9,628  

Net income

     769,313      780,273      (10,960 )

9. Intangible Assets

Changes in intangible assets for the years ended December 31, 2006 and 2005, are as follows:

 

     2006  

(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, 2006

   (Won) 141,013     (Won) 228     (Won) 8,653     (Won) —      (Won) 149,894  

Acquisition during the year

     8,251       268       —         —        8,519  

Reversal

     —         —         —         —        —    

Amortization

     (42,940 )     (59 )     (1,232 )     —        (44,231 )
                                       

Balance as of December 31, 2006

   (Won) 106,324     (Won) 437     (Won) 7,421     (Won) —      (Won) 114,182  
                                       

Accumulated amortization

   (Won) 328,083     (Won) 146     (Won) 4,878     (Won) 9,713    (Won) 342,820  
                                       

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

     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 during the year

     10,829       —         12       —         10,841  

Reversal

     —         —         (18 )     —         (18 )

Amortization

     (41,889 )     (32 )     (1,234 )     (1,245 )     (44,400 )
                                        

Balance as of December 31, 2005

   (Won) 141,013     (Won) 228     (Won) 8,653     (Won) —       (Won) 149,894  
                                        

Accumulated amortization

   (Won) 285,138     (Won) 88     (Won) 3,646     (Won) 9,713     (Won) 298,585  
                                        

The Company has classified the amortization as part of manufacturing overhead costs. The amortization expense for the year ended December 31, 2006, amounts to (Won)44,231 million (2005: (Won)44,400 million).

The details of intellectual property rights as of December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)

  

Description

   2006    2005   

Remaining

Period

Intellectual property rights

   Patent relating to TFT-LCD business    (Won) 106,324    (Won) 141,013    4-10 years
                   

The Company expensed research and development costs of (Won)436,112 million for the year ended December 31, 2006 (2005: (Won)361,761 million).

For the years ended December 31, 2006 and 2005, the significant expenses, which are expected to have probable future economic benefits but expensed in the year incurred due to the uncertainty in the realization of such benefits, are as follows:

 

(in millions of Korean won)

   2006    2005

Training expenses

   (Won) 13,247    (Won) 14,283

Advertising expenses

     24,024      21,728

Expenses for foreign market expansion

     5,255      8,835
             
   (Won) 42,526    (Won) 44,846
             

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

10. Current Maturities of Long-Term Debts and Debentures

Current maturities of long-term debts and debentures as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)

Type of borrowing

   Creditor    Annual interest
rates (%) as of
December 31, 2006
   2006     2005  

Long-term debt in won currency loans

   Korea Export-
Import Bank
   5.9-6.1    (Won) 39,267     (Won) 29,417  

Corporate bonds in won currency

      6.0      300,000       200,000  

Long-term debt in foreign currency debentures of US$ 200 million

   —      3M Libor + 0.6      185,920       184,872  

Long-term debt in foreign currency loans of US$ 34 million

   Woori Bank    6M Libor + 1.2      32,071       17,727  
                      
           557,258       432,016  

Less : Discounts on debentures

        (4,169 )     (2,664 )
                      
         (Won) 553,089     (Won) 429,352  
                      

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

11. Long-Term Debts and Debentures

Long-term debts as of December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)

  

Annual interest

rates (%) as of
December 31, 2006

   2006     2005  
Type of borrowing        

Won currency debentures

       

Non-guaranteed, payable through 2010

   3.5 – 5.0      (Won) 1,550,000     (Won) 1,750,000  

Private debentures, payable in 2011

   5.3 – 5.89      600,000       200,000  

Less : Current maturities

        (300,000 )     (200,000 )

 Discounts on debentures

        (16,036 )     (28,120 )
                   
        1,833,964       1,721,880  
                   

Foreign currency debentures

       

Floating rate notes, payable through 2007

   3M Libor+0.6,      185,920       304,913  

Term notes, payable through 2006

        —         82,559  
                   
        185,920       387,472  

Less : Current maturities

        (185,920 )     (184,872 )

 Discount on debentures

        —         (1,960 )
                   
        —         200,640  
                   

Convertible bonds¹

       

US dollar-denominated bonds,

payable through 2010

   —        483,780       483,780  

Add : Call premium

        84,613       84,613  

 Less : Current maturities

        —         —    

 Discount on debentures

        (2,139 )     (2,724 )

 Conversion adjustment

        (80,827 )     (102,917 )
                   
        485,427       462,752  
                   
      (Won) 2,319,391     (Won) 2,385,272  
                   

Won currency loans

       

General loans

   5.53 – 6.1    (Won) 238,383     (Won) 117,800  
   3.5      14,634       8,620  

Less : Current maturities

        (39,267 )     (29,417 )
                   
        213,750       97,003  
                   

Foreign currency loans

       

General loans

   3M Libor+1.0,
3M Libor+0.99 –1.35,
3M Libor+0.35 –0.47,
6M Libor+1.2
     648,861       218,301  

Less : Current maturities

        (32,071 )     (17,727 )
                   
        616,790       200,574  
                   
      (Won) 830,540     (Won) 297,577  
                   

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

¹On 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 December 31, 2006, the number of non-converted common shares is 8,276,681.

As of December 31, 2006, the foreign currency debentures denominated in U.S. dollars amount to US$ 200 million (2005: US$ 383 million), while the foreign currency loans denominated in U.S. dollars amount to US$ 698 million (2005: US$ 215 million).

The aggregate annual maturities of long-term debts outstanding as of December 31, 2006, exclusive of adjustments relating to discounts, are as follows:

(in millions of Korean won)

 

For the

Year ending

December 31,

  

Won

currency
debentures

   Won
currency
loans
   Convertible
bonds
   Foreign
currency
loans
   Total

2008

   (Won) 250,000    (Won) 61,766    (Won) —      (Won) 39,043    (Won) 350,809

2009

     600,000      40,451      —        39,043      679,494

2010

     600,000      32,065      483,780      39,043      1,154,888

2011

     400,000      32,927      —        492,688      925,615

2012

     —        32,927      —        6,973      39,900

Thereafter

     —        13,614      —        —        13,614
                                  
   (Won) 1,850,000    (Won) 213,750    (Won) 483,780    (Won) 616,790    (Won) 3,164,320
                                  

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

12. Accrued Severance Benefits

Changes in accrued severance benefits for the years ended December 31, 2006 and 2005, consist of the following:

 

(in millions of Korean won)

   2006     2005  

Balance at the beginning of the year

   (Won) 111,992     (Won) 81,955  

Actual severance payments

     (33,921 )     (16,282 )

Transferred from/to affiliated companies, net

     3,531       2,485  

Provision for severance benefits

     55,157       43,834  
                
     136,759       111,992  

Cumulative deposits to the National Pension Fund

     (640 )     (708 )

Severance insurance deposit

     (54,268 )     (68,097 )
                

Balance at the end of the year

   (Won) 81,851     (Won) 43,187  
                

The severance benefits are funded approximately 39.7% as of December 31, 2006 (2005 : 60.8%), 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.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

13. Stock Appreciation Plan

On April 7, 2005, the Company granted 450,000 shares of stock appreciations rights (“SARs”) to certain executives. Under the terms of this plan, executives, upon exercising their SARs, are entitled to receive cash equal to the excess of the market price of the Company’s common stock over 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 starting 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 year ended December 31, 2006, follows:

 

     2006    2005

Beginning, number of shares under SARs

   410,000    —  

Options granted

   —      450,000

Options canceled/expired¹

   150,000    40,000
         

Ending, number of shares under SARs

   260,000    410,000
         

¹ Options canceled due to the retirement of several executive officers.

The Company did not recognize any compensation costs in 2006 as market price is below the exercise price as of December 31, 2006.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

14. Commitments and Contingencies

As of December 31, 2006, the Company has bank overdraft agreements with various banks amounting to (Won)59,000 million.

As of December 31, 2006, the Company has a revolving credit facility agreement with several banks totaling (Won)200,000 million and US$ 100 million.

As of December 31, 2006, the Company has agreements with several banks for U.S. dollar denominated accounts receivable negotiating facilities up to US$1,186.5 million. The Company has made agreements with several banks in relation to the opening of letters of credit amounting to (Won)90,000 million and US$123.5 million.

The Company receives repayment guarantees from ABN AMRO Bank amounting to US$8.5 million relating to tax payments in Poland.

As of December 31, 2006, in relation to its TFT-LCD business, the Company has patent license agreements with Hitachi and others. As of December 31, 2006, 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

BNP and others      US$ 2,064    (Won) 1,951,067    (Won)
(Won)
916.40:US$1-
974.30:US$1
  

January 3, 2007 –

December 11, 2007

Kookmin Bank and others      EUR 180    (Won) 217,757    (Won)
(Won)
1,164.28:EUR 1-
1,229.17:EUR1
  

January 9, 2007 –

November 19, 2007

HSBC and others    (Won) 334,571      JP¥ 40,500    (Won)
(Won)
7.9790: JP¥1-
8.7140:JP¥1
  

January 12, 2007 –

December 14, 2007

Kookmin Bank and others      US$ 78      JP¥ 9,000     
 
JP¥114.42: US$1-
JP¥116.10: US$1
  

January 12, 2007 –

April 16, 2007

As of December 31, 2006, the Company recorded unrealized gains and losses on outstanding foreign currency forward contracts of (Won)35,560 million and (Won) 19,996 million, respectively. Total unrealized gains and losses of (Won)2,496 million and (Won)5,843 million, respectively, were charged to operations for the year ended December 31, 2006, as these contracts did not meet the requirements for a cash flow hedge. Net unrealized gains and losses, net of related taxes, incurred relating to cash flow hedges from forecasted exports, were recorded as capital adjustments.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

The forecasted hedged transactions are expected to be completed on December 14, 2007. The aggregate amount of all deferred gains and losses of (Won)33,064 million and (Won)14,153 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 December 31, 2006.

For the year ended December 31, 2006, the Company recorded realized exchange gains of (Won)246,904 million

(2005:(Won)107,825 million) on foreign currency forward contracts upon settlement, and realized exchange losses of (Won)78,768 million (2005:(Won)112,618 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.

A summary of these contracts is as follows:

 

(in millions)    Contract foreign      

Contracting party

   Buying position    Selling position    exchange rate     Maturity date
   US$  100      —      3M Libor     August 29, 2011
Kookmin Bank      —      (Won)  96,170    4.54 %  

As of December 31, 2006, unrealized gains and losses of (Won)623 million and (Won)3,210 million, respectively, were charged to loss on valuation.

For the year ended December 31, 2006, the Company recorded realized gains of (Won)361 million (2005: (Won)903 million) and realized losses of (Won)26,174 million (2005: (Won)7,734 million) on cross-currency swap contracts upon settlement.

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

A summary of these contracts is as follows:

 

(in millions)

Contracting party

   USD Put Buying    USD Call Selling    Strike Price    Maturity date

KDB and others

   US$  50    US$  100    (Won)
(Won)
 957.30:US$1-
966.50:US$1
   May 21, 2007 –
June 21, 2007

As of December 31, 2006, unrealized gains of (Won)1,557 million were charged to current operations, as these contracts do not fulfill the requirement for hedge accounting for financial statement purposes.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

The Company entered into interest rate swap contracts to manage the exposure to changes in interest rates related to floating rate notes.

A summary of these contracts is as follows:

 

(in millions)

Contracting party

  

Contract

Amount

   Contract Foreign Exchange Rate   Maturity date

SC First Bank

   US$ 150    Accept floating rate
Pay fixed rate
   6 M Libor
5.375% - 5.644%
  May 21, 2009
– May 24, 2010

As of December 31, 2006, unrealized losses of (Won)2,152 million was charged to capital adjustments, as these contracts fulfill the requirements for hedge accounting for financial statement purposes.

For the year ended December 31, 2006, the Company recorded realized gains of (Won) 6 million and realized losses of (Won) 27 million on interest rate swap contracts upon settlement.

The Company is involved in several legal proceedings and claims arising in the ordinary course of business. In August 29, 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 of TFT-LCDs. In June 2004, Chunghwa Picture Tubes filed a counter-claim against the Company in the United States District Court under the Central District of California for alleged ownership for certain patents and violation of U.S. antitrust laws. In October 2006, the court of the Central District of California dismissed the counter-claim for alleged ownership for certain patents. In November 2006, the Jury in California issued a verdict that Chunghwa Picture Tubes, Tatung Company and Tatung Co. of America had willfully infringed a patent owned by the Company, and awarded the Company US$53.5 million in damages. The Company also filed a complaint against Chunghwa Picture Tubes with the American Arbitration Association in connection with the ownership of certain patents. In June 20, 2006, the American Arbitration Association decided in favor of the Company.

In May 27, 2004, the Company filed a complaint in the United States District of Delaware and the Patent County Court in the United Kingdom 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. On November 28, 2005, the Company lost its patent infringement case against Tatung Company and ViewSonic Corp. in the Patent County Court in United Kingdom. The Company appealed this judgment. On December 20, 2006, the Court of Appeals dismissed the appeal.

On January 10, 2005, Chunghwa Picture Tubes filed a complaint for patent infringement against LG Electronics Inc.(“LGE”) and the Company in the United States District Court for the Central District of California. However, Chungwha Picture Tubes and the Company have proposed to stay the case until June 2007. Chungwha Picture Tubes later withdrew the case against LGE.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

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 of TFT-LCDs in the United States District of Delaware. On July 27, 2006, the Jury in Delaware issued a verdict that Chunghwa Picture Tubes had willfully infringed a patent owned by the Company, and awarded the Company $52.4 million in damages.

On January 9, 2006, New Medium Technology LLC, AV Technologies LLC, IP Innovation LLC, and Technology Licensing Corporation filed a complaint for patent infringement against the Company in the United States District Court for the Northern District of Illinois.

On December 1, 2006, the Company filed a complaint against Chi Mei Optoelectronics Corp., AU Optronics Corp., Tatung Company, ViewSonic Corp. and others alleging patent infringement related to liquid crystal display and manufacturing process for TFT-LCDs in the United States District Court for the District of Delaware.

The Company’s management does not expect that the outcome in any of these legal proceedings and claims, individually or collectively, will have any material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company is currently under investigation by the fair trade or antitrust authorities in Korea, Japan, US and other markets with respect to possible anti-competitive activities in the LCD industry. As of December 31, 2006, the Company, along with a number of other companies in the LCD industry, has been named as defendant in a number of federal class actions in the United States alleging that the defendants violated the antitrust laws in connection with the sale of LCD panels. Each of these matters remains in the very early stages and the Company is not in a position to predict their outcome. However, the Company intends to defend itself vigorously in these matters.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

15. Capital Stock

On March 19, 2004, at their Annual General Meeting, the stockholders approved the increase in 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 December 31, 2006, is 357,815,700 (2005: 357,815,700).

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 sold an additional 1,715,700 shares of common stock in the form of ADSs for US$51,471 thousand. In July 2005, pursuant to the Form F-1 Registration statement filed on July 22, 2005, with the U.S. Securities and Exchange Commission, the Company sold 27,900,000 shares of common stock in the form of American Depositary Shares (“ADSs”) for gross proceeds of US$ 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.

Issuances and other movements in common stock from January 1, 2005 to December 31, 2006, are as follows:

 

(in millions of Korean won)                 

Date of Issuance

   Remarks    Par Value    Additional
Paid-in Capital
 
January 1, 2005, balance       (Won) 1,626,579    (Won) 1,012,271  
July 26, 2005    Issuance of common stock      162,500      1,259,469  
   Stock issuance cost      —        (20,627 )
                  
December 31, 2005, balance       (Won) 1,789,079    (Won) 2,251,113  
                  
December 31, 2006, balance       (Won) 1,789,079    (Won) 2,251,113  
                  

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

16. Capital Surplus and Retained Earnings

Capital surplus as of December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)

   2006    2005

Additional paid in capital

   (Won) 2,251,113    (Won) 2,251,113

Conversion rights¹

     24,059      28,137
             
   (Won) 2,275,172    (Won) 2,279,250
             

¹ Net of tax effects.

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 or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.

17. Capital Adjustments

Capital adjustments as of December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)

   2006     2005  

Foreign currency translation loss on the affiliates¹

   (Won) (26,550 )   (Won) (11,729 )

Gain on valuation of derivative instruments¹

     24,423       29,293  

Loss on valuation of derivative instruments¹

     (11,821 )     (18,982 )
                
   (Won) (13,948 )   (Won) (1,418 )
                

¹ Net of tax effects.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

18. Income Taxes

Income tax expense (benefit) for the years ended December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)

   2006     2005  

Current income taxes

   (Won) —       (Won) 25,989  

Deferred income taxes from temporary differences

     (16,319 )     (15,941 )

Deferred income taxes from tax credit

     16,017       (155,148 )

Deferred income taxes added to shareholders’ equity

     (6,261 )     (4,631 )

Deferred income taxes from losses carried forward

     (248,493 )     —    
                

Income tax benefit

   (Won) (255,056 )   (Won) (149,731 )
                

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 December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)

   2006     2005  

Inventories

   (Won) 21,098     (Won) 8,354  

Investments

     (11,578 )     7,584  

Other current assets

     492       (4,133 )

Property, plant and equipment

     40,875       34,403  

Tax credit carryforward

     436,486       292,976  

Deferred income taxes added to shareholders’ equity

     (10,892 )     (4,631 )

Deferred income taxes from losses carried forward

     248,493       —    

Others

     27,616       9,715  

Deduction of unrealizable deferred income tax assets

     (159,527 )     —    
                
   (Won) 593,063     (Won) 344,268  
                

Available tax credits as of December 31, 2006, amounted to (Won)481,414 million. Tax credits can be carried forward up to four or five years under the Corporate Income Tax Law in Korea.

The Company estimates the realizability of deferred tax assets based on the estimated taxable income. The Company did not recognize (Won)159,527 million of deferred tax assets as they were determined to be unrealizable.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

As of December 31, 2006, as the possibility of sale of investments or payment of dividends from subsidiaries in the near future is minimal, the Company did not recognize (Won)25,102 million of temporary differences related to the valuation of equity method investments.

The reconciliation between income before income taxes and taxable income for the years ended December 31, 2006 and 2005, follows :

 

(in millions of Korean won)

   2006     2005  
Income(loss) before income taxes    (Won) (1,024,369 )   (Won) 367,281  

Add (deduct) :

    

Temporary differences

     115,712       37,012  

Permanent differences

     5,047       (4,578 )
                
Taxable income    (Won) (903,610 )   (Won) 399,715  
                

The statutory income tax rate, including resident tax surcharges, applicable to the Company is 27.5% for years ended December 31, 2006 and 2005.

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 year ended December 31, 2006, is 24.90% (2005: negative 40.77%).

Changes in accumulated temporary differences for the year ended December 31, 2006, are as follows:

 

(in millions of Korean won)

   January 1, 2006     Increase (decrease)     December 31, 2006  
Inventories    (Won) 36,848     (Won) 39,871     (Won) 76,719  
Investments      33,450       (75,550 )     (42,100 )
Derivatives      (18,229 )     20,019       1,790  
Property, plant and equipment      135,701       12,934       148,635  
Warranty reserve      16,023       11,992       28,015  
Others      (6,324 )     45,543       39,219  
                        

Total

   (Won) 197,469     (Won) 54,809     (Won) 252,278  
                        
Deduction from capital    (Won) (31,250 )   (Won) (8,357 )   (Won) (39,607 )
                        
Net loss carryforward    (Won) —       (Won) 903,610     (Won) 903,610  
                        
Tax credit carryforward    (Won) 292,976     (Won) 143,510     (Won) 436,486  
                        

 

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19. Earnings Per Share

Earnings(Loss) per share is computed by dividing net income(loss) by the weighted-average number of common shares outstanding during the period. Ordinary income(loss) per share is computed by dividing ordinary income(loss) allocated to common stock, which is net income(loss) 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(Loss) per share for the three-month periods and years ended December 31, 2006 and 2005, is calculated as follows:

 

     For the three-month
periods ended December 31,
   For the years
ended December 31,

(in millions, except for per share amount)

   2006     2005    2006     2005

Net income(loss) as reported on
the statements of operations

   (Won) (174,345 )   (Won) 327,848    (Won) (769,313 )   (Won) 517,012

Weighted-average number of common
shares outstanding

     358       358      358       339
                             
Earnings(Loss) per share    (Won) (487 )   (Won) 916    (Won) (2,150 )   (Won) 1,523
                             
Diluted earnings(loss) per share    (Won) (487 )   (Won) 908    (Won) (2,150 )   (Won) 1,523
                             

The Company issued convertible bonds on April 19, 2005. Diluted earnings per share is identical to basic earnings and diluted ordinary income per share as the convertible bonds issued have no dilutive effect for the year ended December 31, 2006.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

The diluted ordinary earnings per share and the diluted net earnings per share were (Won)908 per share for the three-month period ended December 31, 2005. Diluted earnings per share for the three-month period ended December 31, 2005, was calculated as follows:

 

(in millions, except for per share amount)     

Net income allocated to common stock

   (Won)  327,848

Add : Interest expense on convertible bonds¹

     4,548
      

Diluted net income allocated to common stock

     332,396

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

     366
      

Diluted earnings per share

   (Won) 908
      

¹ Net of tax effects.

Earnings(Loss) per share for the three-month period ended September 30, 2006, follows:

 

     September 30, 2006  

Basic loss per share

   (Won) (897 )

Diluted loss per share

   (Won) (897 )

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

20. Related Party Transactions

The Company’s ultimate parent company is LG Corporation, while its parent is LG Electronics Inc., which is responsible for the consolidated financial statements.

Significant transactions which occurred in the ordinary course of business with related companies for the years ended December 31, 2006 and 2005, and the related account balances outstanding as of December 31, 2006 and 2005, are summarized as follows:

 

      Sales ¹    Purchases ¹

(in millions of Korean won)

   2006    2005    2006    2005

Parent companies

           

LG Electronics Inc.-domestic

   (Won) 454,709    (Won) 388,616    (Won) 134,137    (Won) 179,562

LG Electronics Inc.-overseas

     378,509      101,786      26      —  

Philips-domestic

     —        —        38,985      413

Philips-overseas

     525      391      35,565      51,816

Company that has significant influence over the Company

           

LG Corporation

     —        —        13,151      11,218

Overseas subsidiaries

           

LG.Philips LCD America, Inc.

     967,273      786,908      3      —  

LG.Philips LCD Taiwan Co., Ltd.

     1,973,370      791,783      899      28

LG.Philips LCD Japan Co., Ltd.

     1,145,535      890,659      4      —  

LG.Philips LCD Germany GmbH.

     1,700,712      1,011,926      170      8,878

LG.Philips LCD Nanjing Co., Ltd.

     992,995      3,055,775      148,380      1,795

LG.Philips LCD Shanghai Co.,Ltd.

     1,033,561      817,675      26      —  

LG.Philips LCD Hongkong Co., Ltd.

     816,141      516,050      20      —  

LG.Philips LCD Poland Sp. z o.o.

     2,813      —        —        —  

LG.Philips LCD Guangzhou Co., Ltd.

     19      —        —        —  

Equity-method investee

           

Paju Electric Glass Co., Ltd.

     6      1      162,182      —  

Other related parties

           

LG Chem Ltd.

     —        —        650,545      406,035

LG International – domestic

     3      905      17,715      3,940

LG International – overseas

     205,610      127,240      861,271      1,271,734

Serveone

     299      —        175,665      146,109

Micron Ltd.

     237      —        113,268      125,224

LG CNS

     5      —        90,253      108,766

Others

     32,484      74,340      140,730      61,959
                           

Total

   (Won) 9,704,806    (Won) 8,564,055    (Won) 2,582,995    (Won) 2,377,477
                           

¹ Includes sales of (Won)831 million and purchases of property, plant and equipment of (Won)797,486 million.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

(in millions of Korean won)

   Receivables    Payables
     2006    2005    2006    2005

Parent companies

           

LG Electronics Inc.-domestic

   (Won) 25,236    (Won) 27,383    (Won) 13,501    (Won) 66,251

LG Electronics Inc.-overseas

     45,390      40,773      —        370

Philips-domestic

     —        —        2,426      291

Philips-overseas

     179      171      3,401      4,244

Company that has significant influence over the Company

           

LG Corporation

     2,340      10,970      548      1,692

Overseas subsidiaries

           

LG.Philips LCD America, Inc.

     77,085      22,683      3      —  

LG.Philips LCD Taiwan Co., Ltd.

     221,085      53,521      1,732      1

LG.Philips LCD Japan Co., Ltd.

     67,754      130,090      138      1

LG.Philips LCD Germany GmbH.

     313,340      103,637      2,063      8,886

LG.Philips LCD Nanjing Co., Ltd.

     3,400      375,158      23,367      3,068

LG.Philips LCD Shanghai Co.,Ltd.

     184,204      202,329      10      —  

LG.Philips LCD Hongkong Co., Ltd.

     93,535      45,863      136      48

LG.Philips LCD Poland Sp. zo.o.

     2,676      1      —        —  

LG.Philips LCD Guangzhou Co., Ltd.

     19      —        —        —  

Equity-method investee

           

Paju Electric Glass Co., Ltd.

     —        —        22,535      —  

Other related parties

           

LG Chem Ltd.

     —        —        180,425      44,602

LG International – domestic

     7,960      11      1,337      986

LG International – overseas

     196      3,114      109,760      191,252

Serveone

     2,373      —        47,169      36,792

Micron Ltd.

     —        —        50,568      55,234

LG CNS

     —        —        8,343      32,127

Others

     12,368      21,409      26,970      9,791
                           

Total

   (Won) 1,059,140    (Won) 1,037,113    (Won) 494,432    (Won) 455,636
                           

Key management¹ compensation costs for the year ended December 31, 2006, are as follows:

 

(in millions of Korean won)

    

Officers’ salaries

   (Won)  1,506

Post-retirement benefits

     374
      
   (Won) 1,880
      

¹ Key management refers to the directors who have significant control and responsibilities on the Company’s operations and business. Total ceiling for compensation for such directors in 2006 is (Won)13.4 billion.

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

21. Value Added Information

Value added information for the years ended December 31, 2006 and 2005, consist of the following:

 

     2006

(in millions of Korean won)

   Cost of sales    Selling and
administrative
expenses
   Research and
development
expense
   Construction-
in-progress
   Total

Salaries and wages

   (Won) 533,985    (Won) 43,932    (Won) 26,065    (Won) 10,314    (Won) 614,296

Severance benefits

     45,833      5,586      2,698      1,040      55,157

Employee fringe benefits

     86,989      5,537      3,655      1,347      97,528

Rent

     2,430      3,154      509      —        6,093

Depreciation

     2,549,490      3,105      13,567      803      2,566,965

Taxes and dues

     7,400      1,726      216      20      9,362
                                  
   (Won) 3,226,127    (Won) 63,040    (Won) 46,710    (Won) 13,524    (Won) 3,349,401
                                  

 

     2005

(in millions of Korean won)

   Cost of sales    Selling and
administrative
expenses
   Research and
development
expense
   Construction-
in-progress
   Total

Salaries and wages

   (Won) 374,972    (Won) 42,267    (Won) 20,231    (Won) 41,748    (Won) 479,218

Severance benefits

     31,624      4,437      1,740      6,033      43,834

Employee fringe benefits

     68,450      8,361      2,635      4,060      83,506

Rent

     2,110      2,133      439      —        4,682

Depreciation

     1,734,903      7,758      6,472      3,600      1,752,733

Taxes and dues

     5,009      2,170      169      200      7,548
                                  
   (Won) 2,217,068    (Won) 67,126    (Won) 31,686    (Won) 55,641    (Won) 2,371,521
                                  

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

22. Segment Information

The Company operates only one segment, the TFT-LCD division. Export sales represent about 92% of total sales for the year ended December 31, 2006.

The following is a summary of operations by country based on the location of the customers for the years ended December 31, 2006 and 2005:

 

(in millions of Korean won)

Sales

   Domestic    Taiwan    Japan    America    China    Europe    Others    Total

2006

   (Won) 845,693    (Won) 1,973,185    (Won) 1,148,192    (Won) 967,723    (Won) 2,979,621    (Won) 1,796,180    (Won) 490,066    (Won) 10,200,660
                                                       

2005

   (Won) 776,520    (Won) ,791,830    (Won) 890,655    (Won) 787,329    (Won) 4,442,763    (Won) 1,055,853    (Won) 145,205    (Won) 8,890,155
                                                       

23. Supplemental Cash Flow Information

Significant transactions not affecting cash flows for the years ended December 31, 2006 and 2005, are as follows:

 

(in millions of Korean won)

   2006    2005

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

   (Won) 740,048    (Won) 1,077,932
             

24. Operating Results for the Final Interim Period

Significant operating results for the three-month period ended December 31, 2006, are as follows :

 

 

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

Sales

   (Won)  2,967,139

Cost of sales

     3,003,570

Operating loss

     150,838

Net loss

     174,345

Loss per share

     487

Diluted loss per share

     487

 

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LG. Philips LCD Co., Ltd.

Notes to Non-Consolidated Financial Statements

December 31, 2006 and 2005

 

25. Approval of Non-Consolidated Financial Statements

The December 31, 2006 non-consolidated financial statements of the Company were approved at the Board of Directors’ meeting on January 16, 2007.

26. Subsequent Events

On January 16, 2007, the Board of Directors appointed Mr. Young Su Kwon to replace Mr. Bon Joon Koo as the Joint Representative Director of the Company. This appointment will be ratified by the shareholders during the 22nd Shareholders’ Meeting scheduled to be held on February 28, 2007.

In February 2007, the Company and certain of its officers and directors have been named as defendants in a federal class action in the United States by the shareholders of the Company alleging violations of the U.S. Securities Exchange Act of 1934, as amended, by the Company and certain of its officers and directors in connection with possible anti-competitive activities in the LCD industry. The Company and the officers and directors intend to defend themselves vigorously in this matter.

In February 2007, Anvik Corporation filed a patent infringement case against the Company, along with other LCD manufacturing companies, in connection with the usage of photo-masking equipments manufactured by Nikon Corporation.

 

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The English translation of the report of independent accountants’ review of internal accounting control system is intended for reference only. The reader is advised to refer to the original report in Korean.

Report of Independent Accountants’

Review of Internal Accounting Control System

To the President of

LG.Philips LCD Co., Ltd.

We have reviewed the accompanying management’s report on the operations of the Internal Accounting Control System (“IACS”) of LG.Philips LCD Co., Ltd.(the “Company”) as of December 31, 2006. The Company’s management is responsible for designing and operating IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review the management’s report on the operations of the IACS and issue a report based on our review. The management’s report on the operations of the IACS of the Company states that “based on its assessment of the operations of the IACS as of December 31, 2006, the Company’s IACS has been designed and is operating effectively as of December 31, 2006, in all material respects, in accordance with the IACS standards established by the Internal Accounting Control System Operations Committee (IACSOC) of the Korea Listed Companies Association.”

Our review was conducted in accordance with the IACS review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the operations of the IACS to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s IACS and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit.

A company’s IACS is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Republic of Korea. Because of its inherent limitations, IACS may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Based on our review, nothing has come to our attention that causes us to believe that management’s report on the operations of the IACS, referred to above, is not presented fairly, in all material respects, in accordance with the IACS standards established by IACSOC.

Our review is based on the Company’s IACS as of December 31, 2006, and we did not review management’s assessment of its IACS subsequent to December 31, 2006. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in Korea and may not be appropriate for other purposes or for other users.

Samil PricewaterhouseCoopers

February 13, 2007

 

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Report on the Operations of the Internal Accounting Control System

To the Board of Directors and Auditor (Audit Committee) of

LG.Philips LCD Co., Ltd.

I, as the Internal Accounting Control Officer (“IACO”) of LG.Philips LCD Co., Ltd. (“the Company”), assessed the status of the design and operations of the Company’s internal accounting control system (“IACS”) for the year ended December 31, 2006.

The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed whether the IACS has been effectively designed and is operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of establishing the reliability of financial reporting and the preparation of financial statements for external purposes. I, as the IACO, applied the IACS standard for the assessment of design and operations of the IACS.

Based on the assessment on the operations of the IACS, the Company’s IACS has been effectively designed and is operating as of December 31, 2006, in all material respects, in accordance with the IACS standards.

January 16, 2007

 

Ron H. Wirahadiraksa

Internal Accounting Control System Officer

Bon Joon Koo

Chief Executive Officer or President

 

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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: February 20, 2007   By:  

/s/ Ron H. Wirahadiraksa

    (Signature)
  Name:   Ron H. Wirahadiraksa
  Title:  

Joint Representative Director/President &

Chief Financial Officer