CHUNG HSING BILLS FINANCE CORPORATION · - 2 - Letter to Shareholders Economic and Financial Conditions According to the World Bank’s report on the outlook for the global economy

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CHUNG HSING BILLSFINANCE CORPORATION

2002Annual Report

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INTEGRITY SOLIDITY SERVICE EFFICIENCY INNOVATION DEVELOPMENT

(1) Head Office F3~7, 123 Chunghsiao East Road, Section 2, TaipeiTel: (02)23569988(02)23918255 (22 Lines)

Kaohsiung Branch F3, 420 Cheng Kung First Road, KaohsiungTel:(07)2825171(5 Lines)Fax:(07)2151887

Tainan Branch F4, 28 Chung Yi Road, Section 2, TainanTel:(06)2283131(5 Lines)Fax:(06)2293654

Chiayi Branch F2, 153 Lin Sen West Road, ChiayiTel:(05)2237071(5 Lines)Fax:(05)2238213

Taichung Branch F4, 142 Chung Cheng Road, TaichungTel:(04)22202176(5 Lines)Fax:(04)22225424

Hsinchu Branch F3, 307 Pei Ta Road, HsinchuTel:(03)5266022(5 Lines)Fax:(03)5245544

Taoyuan Branch F3, 32 Cheng Kung Road, Section 1, TaoyuanTel:(03)3358877(5 Lines)Fax:(03)3336137

Panchiao Branch F3, 69 Chung Cheng Road, PanchiaoTel:(02)29652836(5 Lines)Fax:(02)29652819

Sanchung Branch F4, 192 Chung Yang Road, Section 3, SanchungTel:(02)29811931(5 Lines)Fax:(02)29811895

(2) Organization handling the stock transfer affairs: Yuanta Core Pacific Securities Co., Ltd.F4, 225 Sec. 3, Nanking E. Rd. Taipei, Taiwan, R.O.C.Tel: (02)27177777

(3) For copies of the Corporation's most recent financial statements, please contact:

Andrew H. Lee, C.P.A. and Anna Wang, C.P.A.T.N. Soong & Co., Certified Public AccountantsF12, 156 Minsheng East Rd., Sec. 3, TaipeiTel: (02)25459988

(4) Spokesman and Deputy Spokesman for the Corporation:

Spokesman:Jung-hsiung LuExecutive Vice PresidentTel: (02)23955566Deputy Spokesman:Shao-sheng KuoGeneral ManagerTel: (02)23570808

(5) Credit rating organization: Taiwan Ratings Co. Ltd.F23, 100 Roosevelt Rd. Sec. 2, Taipei, Taiwan, R.O.C.Tel: (02)23688277

(6) Web Site: http://www.chbfc.com.tw

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Contents

Letter to Shareholders 2

Profile of the Corporation 5

Business Operations 11

Business and Funding Plan 21

Financial Statements 25

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Letter to Shareholders

Economic and Financial Conditions

According to the World Bank’s report on the outlook for the global economy published inDecember 2002, the projected economic growth rate for the world as a whole for the year 2002was only 1.7%. Furthermore, the earlier forecast of this growth rate for the world economy for2003 of 3.6% was revised downwards to 2.5%. As the forecasts for the global economic growthrate were reappraised, the World Bank also pointed out that uncertainty surrounded anypossibility of the world economy recovering in the short-term, and warned that there would beno noticeable recovery in global economic conditions until at least 2004.

Looking back over the last year, domestic macroeconomic indicators by and large exhibiteda marked improvement over the previous year. According to the Directorate-General of Budget,Accounting and Statistics, the domestic economy broke loose from the negative growth rate of2.18% recorded in the previous year, and the growth rate increased with each quarter, reaching4.77% for the 3rd quarter. It is predicted that the overall rate of economic growth for the year asa whole will reach 3.27%. Imports and exports, private investment, and private consumption alsorecovered from their very low levels and started to exhibit a rising trend. However, animprovement in economic conditions is no guarantee of a stable economy leading to recovery.During the past year, the local stock market fell by almost 20 percent, the New Taiwan/U.S.dollar exchange rate came close to reaching a historic low, domestic unemployment problemscontinued to worsen, and private investor confidence remained weak, reflecting an ongoingdecline in private sector profitability and an inability to attract new investments. Privateconsumption was affected by the falling stock market, an unemployment rate that remained highas well as the uncertain outlook for the economy, with the result that it increased only slightly by2.27% for the year. Fortunately, the growth rate of exports remained strong, reaching 11.86% inthe 3rd quarter of last year, and helping bring about an improvement in conditions. Thesignificant increase in exports to the Chinese mainland played a key role in reversing thedeclining trend.

As for the outlook for this year, it needs to be stressed that the Taiwan economy continuesto face many uncertainties. First of all, from the perspective of the international economy, theWorld Bank reports that a U.S.-led war with Iraq will give rise to three major risks in relation tothe global economic outlook, namely, high oil prices, turbulent financial markets inindustrialized countries, and a reversal of inflows of funds into emerging markets, all of whichwill adversely affect both the global economic recovery and financial markets. Furthermore, themajor industrialized countries are to varying degrees being confronted with economic difficulties.The U.S. economy, for instance, is presently facing structural adjustment problems. In particular,its information and telecommunications industries have been over-investing for more than tenyears now, and it has become necessary for large-scale adjustments to be made that will seriouslyrestrict the future growth of the economy. The Japanese economy has also not been able toextricate itself from an ongoing recession or escape from the threat of a tighter currency. TheEuropean Union countries have in addition been too preoccupied with their own problems tohave the strength to lead the global economic recovery. All of these developments have had anunfavorable impact on Taiwan’s exports and economic growth. As for the domestic economy, itis generally believed that the growth of domestic demand, including private consumption andinvestment, will be able to maintain its gradual upward trend that began in the second half of lastyear. In particular, the government’s measures to encourage investment as well as the LegislativeYuan’s being about to pass regulations providing five-year tax breaks on new investments shouldcertainly have an effect in terms of stimulating private investment. In addition, plans are in placeto implement many other measures to invigorate the economy this year. If their implementation

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proceeds smoothly, they will positively contribute to the expansion of domestic demand, as wellas further speed up the process of economic growth.

In addition, at a meeting of its boards of directors and supervisors on December 26 of lastyear, Taiwan’s Central Bank decided not to adjust the current discount rate, and determined thatit would maintain its relaxed monetary policy. In forecasting an annual growth rate of 3.43% forthe economy as a whole and an annual rate of increase in the consumer price index of 0.35% forTaiwan for this year, the Central Bank stated that the economic growth rate, interest rates,currency values and inflation would all remain at their current low levels throughout 2003. Tosum up, as the Taiwan economy has over the past year gradually pulled itself out of the reallyadverse circumstances which engulfed it last year, even though there are many internal andexternal variables that need to be taken into account, there is still a good chance that it willslowly recover over the course of the next year.

The Operating Environment and Important PoliciesWith the domestic economy over the past year affected by the weak international

environment, overall demand has declined. Nevertheless, as the U.S. Federal Reserve in itsefforts to rescue the U.S. economy adopted a succession of policies to lower interest rates thatdirectly led to a fall in interest rates around the world, Taiwan’s Central Bank followed suit bylowering its own interest rates. This gave rise to a favorable environment guided by a relaxedmonetary policy, which in turn caused both the bills and bond markets to remain bullishthroughout the year. By being able to accurately analyze and appraise trends in the bullishmarket for bonds, the Corporation was able to generate very substantial profits. For the year as awhole, the net profit realized on bonds amounted to NT$4,181,000,000, and gave rise to asurplus of funds that could actively be used to improve credit quality. A total ofNT$1,342,000,000 in bad debts were written off during the year, and increases in provisionsamounted to NT$3,228,000,000, which resulted in the Corporation having an operating structurethat was far more sound that most other firms within the same industry. In addition, in order torespond to ongoing financial developments and related government policies, following thegovernment’s passing in 2001 of 「the Financial Holding Company Act」 and 「the LawGoverning Bills Finance Business」, the Corporation actively evaluated its plans in relation to itsmedium- and long-term development. For instance, in August of last year based on its goal tocontinue to develop on a long-term basis and to benefit both its shareholders and employees inthe future, it chose to become a part of the Mega Holdings financial holding company by meansof a share exchange. It also established the Corporation’s “Organizational and BusinessIntegration and Development Committee” to actively research and formulate corporate operatingstrategies as part of the financial group. The operations of the corporation of the future will onthe one hand result in lower operating costs, while on the other hand the business interactionsamong the various subsidiary companies under the umbrella of the holding company willactively expand client resources to create a corporation that is even more profitable and whichbrings its shareholders higher returns.

Business PerformanceDuring the past year, the Corporation’s focus of attention was on the various kinds of

dealing in bills and bonds, investing and effectively controlling credit risk, in order to generatethe highest profits for the Corporation ever recorded. As a result of its research, dealing activitiesand management of risk, the Corporation’s net income for the year was still slightly higher thanthat for the previous year. Particularly worth noting are the following: � The Corporation’s net profits for the year amounted to NT$3,252,000,000, reflecting a

growth rate of 0.97% over the previous year. These were the highest net profits recorded inthe history of the Corporation.

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� Total revenue amounted to NT$8,123,000,000, of which the net profit on bonds amounted toNT$4,181,000,000.

� Total expenses amounted to NT$4,138,000,000. In order to speed up the process of writingoff bad debts, the total set aside in the form of provisions for these amounted toNT$3,228,000,000.

� Purchases of bills and bonds in the primary market amounted to NT$1,808,300,000,000.� Transactions in bills and bonds in the secondary market totaled NT$13,830,200,000,000.� Guaranteed issues of commercial paper outstanding amounted to NT$161,000,000,000.

Outlook for the FutureAlthough the Corporation continued to be faced with a precarious operating environment

throughout the whole of the year, it was fortunate that under the holding company’sdistinguished leadership and the diligent efforts of all of our staff we were still able to achievethe profit targets set for 2002, while also being able to provide the reserves necessary to ensure asound operating structure. In November last year, the Taiwan Ratings Corporation upgraded ourlong-term rating from “twA” to “twA+” (indicating that the Corporation continues to have astrong ability to honor its financial pledges), and confirmed our short-term rating of “twA-2,”with the outlook for the future being revised upwards from “positive” to “stable”. This overallimprovement in our credit rating reflects the superior quality of the Corporation’s operations, itssoundness financially, as well as the increased investor confidence on the part of bondholdersfollowing the Corporation’s becoming a part of the financial holding company, all of which arebeneficial to our long-term development. However, as for the outlook for the future, andfollowing Taiwan’s accession into the World Trade Organization, financial institutions as awhole will be confronted with even greater competitive pressures. How to control operating riskand grasp the opportunities to further develop in a rapidly-changing operating environment willbe the challenges facing the Corporation in the years to come. As all of our staff continue to holdfast to our operational concepts of “integrity, solidity, service, efficiency, innovation anddevelopment” in contributing to the Corporation’s ongoing success, it is our hope that, with thecontinued support and encouragement of all of our shareholders, we will together create a brightand promising future for the Chung Hsing Bills Finance Corporation.

Chairman PresidentL.S. Wang K.L. Tseng

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Profile of the Corporation

1. History of the Corporation

1976May 20 The Corporation was established with a capital of NT$200 million and

with Mr. T.K. Chang as Chairman and Mr. L.S. Lin as President.1978

May 11 Mr. C.T. Chang assumed the office of President.1979

March The Corporation's capital was increased from NT$200 million to NT$250million.

April 1 Mr. C.T. Chang assumed the office of Chairman, and concurrently servedas President until his successor was appointed.

August 10 Mr. Chia-Ching Mok assumed the office of President.October 26 The Corporation's Kaohsiung Branch was established.

1980March The Corporation’s capital was increased from NT$250 million to

NT$300 million.November 11 The Taichung Branch was established.

December The Corporation's capital was increased from NT$300 million to NT$400million.

1981January 5 The Corporation’s Head Office was relocated to Nanking East Road,

Section 2, Taipei.December 16 Mr. K.C. Tan assumed the office of Chairman.

December The Corporation’s capital was increased from NT$400 million toNT$500 million.

1982July The Corporation's capital was increased from NT$500 million to NT$600

million.December 4 The Hsinchu Branch was established.

1983June 6 The Tainan Branch was established.

June The Corporation's capital was increased from NT$600 million to NT$768million.

1984May 31 Mr. L.S. Wang assumed the office of President.

July The Corporation’s capital was increased from NT$768 million toNT$900 million.

1985December The Corporation's capital was increased from NT$900 million to NT$1

billion.1986

May 20 On the 10th anniversary of its establishment, the Corporation purchased

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the 5th floor of the building in which its Head Office is located. Inaddition, it published a collection of papers to commemorate the first tenyears since the establishment of the money market.

July The Corporation’s capital was increased from NT$1 billion to NT$1.1billion.

December 1 The Taichung Branch was relocated to Chung Cheng Road, Taichung.1987

July The Corporation’s capital was increased from NT$1.1 billion toNT$1.254 billion.

1988January 5 Mr. C.W. Wang assumed the office of Chairman.

August The Corporation's capital was increased from NT$1.254 billion toNT$1.5 billion

1989May The Corporation’s capital was increased from NT$1.5 billion to NT$1.8

billion.August The Corporation’s capital was increased from NT$1.8 billion to NT$2.05

billion.September 12 The Panchiao Branch was established, in premises purchased by the

Corporation.1990

January 4 The Kaohsiung Branch was relocated to premises purchased by theCorporation in Cheng Kung 1st Road, Kaohsiung.

April The Corporation’s capital was increased from NT$2.05 billion to NT$2.3billion.

June 26 The Corporation’s shares were listed.August 31 The Taoyuan Branch was established.December The Corporation’s capital was increased from NT$2.3 billion to

NT$2.8795 billion.1991

September The Corporation’s capital was increased from NT$2.7895 billion toNT$4.2 billion.

1992January 10 The Sanchung Branch was established, in premises purchased by the

Corporation.1993

March 8 The Hsinchu Branch was relocated to premises purchased by theCorporation in Pei Ta Road, Hsinchu.

April The Corporation’s capital was increased from NT$4.2 billion toNT$6.302 billion.

August 1 Mr. L.S. Wang assumed the office of Chairman and Mr. K.L. Tsengassumed the office of President.

October The Corporation’s capital was increased from NT$6,302,000,000 toNT$8,284,780,000.

1994January 17 The Chiayi Branch was established.

April 11 The Taoyuan Branch was relocated to premises purchased by the

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Corporation in Cheng Kung Road, Section 1, Taoyuan.September The Corporation’s capital was increased from NT$8,284,780,000 to

NT$10,122,331,600.1995

September The Corporation’s capital was increased from NT$10,122,331,600 toNT$12,170,340,870.

1996August The Corporation’s capital was increased from NT$12,170,340,870 to

NT$14,385,080,630.1997

October The Corporation’s capital was increased from NT$14,385,080,630 toNT$19,357,255,370.

1998July The Corporation’s capital was increased from NT$19,357,255,370 to

NT$21,815,197,470.1999

May The Corporation completed purchase of the Chung-Shing TextilesBuilding.

August The Corporation reinvested in Hong Hwa Securities Co., Ltd.November The Corporation’s capital was increased from NT$21,815,197,470 to

NT$26,715,442,290.2000

February 28 The Corporation’s Head Office relocated to the Chung Hsing BillsFinance Building situated in Chung Hsiao E. Rd., Section 2, Taipei.

May The Corporation’s capital was increased to NT$28,114,410,840.August The Corporation’s reinvested subsidiary Hung-Hua Securities Co., Ltd.

was reorganized and renamed Chung Hsing Securities Co., Ltd.2001

July The Corporation subscribed to and acquired additional shares in ChungHsing Securities Co., Ltd. amounting in total to NT$2,284,760,000 aspart of its cash-to-capital increase.

December 10 Convened the second extraordinary meeting of the 9th Board of Directorsat which it was agreed that a memorandum expressing intent to becomepart of the Bank of Communications holding company through a shareexchange would be signed with the Bank of Communications.

2002June 12 A resolution was passed at the Corporation’s 2002 Annual General

Meeting for the Corporation to become a part of the Bank ofCommunications’ financial holding company by means of a shareconversion.

August 22 This was the base day on which the shares of the Corporation as asubsidiary of the Bank of Communications’ financial holding companywere converted.

December 2 At the 1st Extraordinary General Meeting of the Corporation’s reinvestedsubsidiary, Chung Hsing Securities Co. Ltd., convened in 2002, it wasresolved that the entire operations and assets of this subsidiary beacquired by Barits International Securities Co. Ltd., which would

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subsequently take charge of the subsidiary.December 31 The name of the parent company, the Bank of Communications’ financial

holding company, was changed to the Mega Holdings financial holdinigcompany.

2003January 30 The Corporation's reinvested company, Chung Hsing Securities Co., Ltd,

was dissolved.March 29 Mr. Kuo Hisung Chuang assumed the office of Chairman.

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2. Organization Chart

Stockholders’ Meeting

Board of Directors

Auditing Department

President

Kaohsiung Branch

Control and PlanningDepartment

Guarantee Department

Bills Department

Bonds Department

Treasury Department

General AffairsDepartment

Data ProcessingDepartment

Tainan Branch

Taichung Branch

Chiayi Branch

Hsinchu Branch

Taoyuan Branch

Panchiao Branch

Sanchung Branch

Chairman of the Board

Board of Supervisors

Resident Supervisor

Chief Senior VicePresident

Executive VicePresident

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3.Directors and SupervisorsMarch 29, 2003

TITLE NAME REPRESENTATIVE OFChairman Kuo Hsiung ChuangDirector & President K.L. TsengDirector Feng-Yi HuangDirector Justin HuangDirector Leon L. ShenDirector Jung-Hsiung LuDirector Mckinney Y. T. TsaiDirector C. C. KaoDirector Yu-Lin ChouDirector Lindy ChernSupervisor Jui-Yun LinSupervisor ED.M.S. LIUSupervisor Yung-Ming Chen

Mega Financial Holding Comany

4. Profile of Senior ManagementMarch 29, 2003

TITLE NAMEPresident K.L. TsengExecutive Vice President Jung-Hsiung LuExecutive Vice President Ho Jing FuExecutive Vice President Sen-Shin HuangChief Senior Vice President and Head of Control andPlanning Department

Yun-Teng Huang

Chief Senior Vice President and Head of GuaranteeDepartment

Tien-Tsuen Kuo

Chief Senior Vice President and Head of Bills Department Ching-Wen WuHead of Bonds Department Chun-Chang LeeHead of Treasury Department Shao-Sheng KuoHead of General Affairs Department Yi-Sen WangHead of Data Processing Department Benjamin YouGeneral Manager of Kaohsiung Branch Yao-Kuang TsaiGeneral Manager of Tainan Branch Tsung-Chung LinGeneral Manager of Chiayi Branch Jung-Kun WuGeneral Manager of Taichung Branch Chi-Fu LinGeneral Manager of Hsinchu Branch Cheng-Hsiu WuGeneral Manager of Taoyuan Branch Chin-Sheng HuangGeneral Manager of Panchiao Branch Chi-Cheng TsaiGeneral Manager of Sanchung Branch Kuei-Yaw Chien

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Business Operations

(A) Business Profile

1. Business Scope(1) Acting as a broker and trading on own account in respect of short-term debt

instruments.(2) Acting as a certifier and underwriter of commercial paper.(3) Acting as a broker and trading on own account in respect of bank debentures.(4) Acting as a certifier and underwriter of bank debentures.(5) Acting as a guarantor or endorser of short-term debt instruments.(6) Acting as a broker for interbank call loans.(7) Providing consulting services to customers on financial matters, and analyzing and

reporting on money market activities.(8) Trading in government bonds on the Corporation’s own account.

2. Major Types of Business and Respective Shares(1) In terms of guaranteed issues of commercial paper, the total amount of guaranteed

commercial paper for all bills finance companies combined outstanding atDecember 31, 2002 was NT$517,921,000,000. Of this total, the Corporationaccounted for NT$161,024,000,000, or a market share of 31.09%.

(2) In terms of the volume of business in the primary market, purchases of commercialpaper for all bills finance companies together amounted to NT$6,930,917,000,000.The total for the Corporation came to NT$1,760,705,000,000, or a market share of25.40%.

(3) In terms of trading in the secondary market, total trading in commercial paper in2002 for all bills finance companies combined amounted toNT$34,144,313,000,000, of which the total for the Corporation wasNT$6,911,943,000,000, or a market share of 20.24%.

(4) Respective shares of business for each of the last three years are as follows:

In Thousands of NT dollars

Net Gain on Sale of Investments inBills and Bonds

Commissions Item

YearAmount

Share of TotalRevenue

AmountShare of Total

Revenue

2000 4,399,643 73% 1,019,365 17%

2001 6,709,866 74% 1,583,238 17%

2002 5,577,086 69% 1,721,995 21%

3. Plans to Develop New Products(1) In order to hedge the risk arising from excessive fluctuations in interest rates in

relation to financial product positions held, and in order to increase the number ofbusiness categories, enlarge the scale of operations, and satisfy the funding needs ofthe investing public, the Corporation in accordance with Article 4 of the RulesGoverning the Bills Finance Companies’ Engagement in Financial Derivatives

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Transactions (MOF directive No. 0914000119), that was promulgated by theMinistry of Finance on April 23, 2002, formulated its own Procedures for HandlingTransactions in Financial Derivative Products, which were approved by its board ofdirectors. In the future, the Corporation’s trading in financial derivatives productson behalf of its customers or on its own account, that presently includes interest rateswaps and forward rate agreements, will be expanded to include interest rateoptions and other products approved by the competent authority. If all goes well, itis expected that the Corporation will be able to start handling interest rate futures bythe end of the year.

(2) In view of the competent authority’s having promulgated the Rules Governing theBonds Investment for Bills Finance Companies on April 2, 2002, which now allowsbills finance companies to invest in convertible bonds, the Corporation has inaccordance with the above regulation formulated its own operating guidelines forinvesting in such bonds, and these have already been approved by its board ofdirectors. In the future, the Corporation will seek to obtain from the competentauthority further relaxations of the limits to investing in convertible bonds. It willalso engage in convertible bond asset swaps and repurchase agreements business.By engaging in outright sales of convertible bonds, as well as integrated trading inoptions and interest-rate sways involving convertible bonds, the Corporation willsell convertible bonds that provide regular sources of earnings and options toinvestors with different needs, in order to enlarge the scope of its business, diversifyoperating risk and increase the Corporation’s profits from bond investments.

(B) Market Situation and Business Conditions

1. Major Business Operating AreasThe Corporation, in addition to its Head Office in Taipei, currently has eight business

locations. These comprise branches in Panchiao, Sanchung, Taoyuan, Hsinchu, Taichung,Chiayi, Tainan and Kaohsiung, all of which are located in the most important areas ofTaiwan.

2. Market ConditionsThroughout the year 2002, as the world economy remained in a state of recession

following the tragic September 11, 2001 terrorist attacks, the Taiwan economy wassimilarly affected, as evidenced by a declining trade surplus, falling asset prices in its stockand real estate markets, an ever-increasing unemployment rate, and declining wealth andincomes. Domestic demand also exhibited a downward trend. Although the Central Bankbeginning in 2000 lowered interest rates on a total of fourteen occasions, because of theincrease in bad assets, the growth rate of loans extended by financial institutions frequentlydeclined to very low levels. As a result, the money multiplier could not have its intendedeffect, and its impact in terms of invigorating economic activity became extremely limited.In addition, as local firms continued to invest on the Chinese mainland, the local demandfor investment funds remained flat, and financial institutions also became very conservativein their lending.

Nevertheless, as the U.S. Federal Reserve successively lowered interest rates torescue the U.S. economy and precipitated a decline in interest rates around the world,Taiwan’s Central Bank followed suit by lowering interest rates, and this resulted in very

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relaxed monetary conditions that were favorable to the economic environment. Thesefavorable conditions gave rise to the bullish bond market activity in recent years, anddealers in bills were able to reap what can only be described as huge profits. Conversely,losses from loan guarantee business were also reduced. On the other hand, in order toimprove the overall financial environment and increase competition within the financialsector, the Ministry of Finance actively introduced various financial reforms, of which thepassing of 「the Law Governing Bills Finance Business」and「the Financial HoldingCompany Act」had the most profound effect on the bills finance industry. Besides formallyraising the legal status of bills finance companies, and providing them with reinvestmentopportunities, the Ministry of Finance made it more possible for them to integrate theiractivities through strategic alliances with other financial sector companies operating withindifferent domains.

Currently, several bills finance companies have already organized their own financialholding companies or else have become a part of other financial holding companies. Forthis reason, in the coming year, as financial institutions actively continue to write off baddebts and financial groups begin to demonstrate their effectiveness, it can be expected thatthe structure of the financial industry will gradually be strengthened, and the disparitiesbetween the strong and the weak players will become more evident. In relation to the billsfinance companies, in spite of the competent authority’s policies to limit their guaranteebusiness, the increasingly fierce market competition that they face and the very low interestrate levels, which have all increased their operating risk, as new kinds of business andhedging instruments become more popular, and the global economy begins to slowlyrecover, the future remains full of new opportunities and hope. 3. Favorable and Unfavorable Factors in the Industry’s Development over the Long

Term(1) Favorable Factors

a. Recent financial reforms provide bills finance companies with reinvestmentopportunities

The criticism most commonly voiced with regard to the local financialenvironment is that there are too many financial institutions, giving rise tovicious competition and wastage of funds, and resulting in the financial chaosthat has occurred again and again over the last few years, not to mention theever-increasing pastdue loan ratios. However, with the implementation of theLaw Governing Mergers of Financial Institutions, an effective mechanism forpromoting integration has been provided that allows under-performing financialinstitutions to withdraw from the market. At the same time, the reforms go evendeeper to allow for the establishment of asset management companies, therebyspeeding up the process by which financial institutions deal with their poor-quality assets. With the competent authority requiring that every effort be madeto write off bad debts, the structure of financial institutions is becoming moresound. On June 27, 2001 at an extraordinary session of the Legislative Yuan, sixfinancial laws were passed, of which 「the Law Governing Bills FinanceBusiness」and「the Financial Holding Company Act」 not only enable billsfinance companies to enlarge the scope of their operations and open up newchannels through which they can obtain long-term funding accommodation, butat the same time, in view of the rapid changes that will take place in the

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financial environment in the future, also help to make the local bills financeindustry more competitive. In addition, they also provide bills financecompanies with a very good opportunity to reinvest, so that they may combinethe bills and bonds business they are currently involved in with other relatedfinancial business activities and thereby create a better profitability base.

b. Restrictions on raising money market funds will be lifted, which will assistthe Central Bank in effectively executing its monetary policy

The competent authority is about to lift the restrictions on raising moneymarket funds. Because such funds rely on money market instruments to serve asinvestment targets, they can help correct the distortion in monetary policyindicators brought about by current holdings of bond funds. They can alsoincrease the riskless investment channels in addition to bank deposits availableto small investors. All of this will positively help the development of thesecondary bills market.

c. Long-term interest rates will remain at their low levels, which will help bothbills and bonds business

As uncertainties over the anti-terrorist campaign and the impending threat ofa U.S.-Iraqi war persist, the pace of the global economic recovery shows nosigns of speeding up. There is also little scope for interest rates to recover, thedomestic political situation continues to be engulfed in turmoil and cross-Straiteconomic and political issues remain unresolved. Thus, domestic investmentand consumption will likely be affected, economic growth will remain at its lowlevel, monetary policy will continue to be relaxed, and it will be normal forinterest rates to fluctuate around their low levels over the long term. This will bebeneficial to the Corporation as it repurchases bonds and engages in yielding, inthat the hidden profits on its overall bond positions have been increased.

d. The government has allowed the bills finance industry to handle moreinterest-bearing financial products.

Although bills finance companies were permitted to deal in bank debenturesin 2001, following the promulgation by Presidential decree of the FinancialAssets Securitization Statute on July 24, 2002, financial institutions are alsoactively preparing to enter the market. Besides being able to increase theliquidity of financial institutions’ ownership of liabilities, this new developmentwill also positively help enhance the liquidity of asset markets. Furthermore,because the risk in relation to such products is relatively more diversified thanthat in relation to corporate bonds in general, provided that the competentauthority gives its consent, the new regulation can provide bills financecompanies with better hedging tools and higher returns. In the future asfinancial markets continue to be liberalized, it can be expected that thesecompanies will be able to trade in superior-quality interest-bearing bondsincluding corporate bonds, which should infuse new vitality into the market. Atthe same time, various kinds of interest rate futures will be researched anddeveloped, which should provide those engaged in this business with morehedging channels.

(2) Unfavorable Factorsa. The future of litigation regarding the tax deducted from interest paid on

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bonds remains uncertain. As to the way in which the interest income earnedon these bonds is recognized and taxed changes, it is feared that the scopefor profiting from yielding will be restricted, which will increase the chancesof interest rates suddenly rebounding

Because the outcome of the legal action taken through government channelsas to whether the withholding taxes on interest income from bonds pertaining toformer purchasers of those bonds should be declared as a tax refund is stillunclear, and the tax authority would like to view repurchase agreementtransactions in relation to bonds as financing behavior, dealers will need torecognize the interest income from yielding as comprising interest income frombills and interest expenditure in relation to repurchase agreements, which willlead to higher interest rates on bond repurchase agreements. In addition, fromthis year onwards, if there are no refunds in respect of withholding taxesdeducted from interest income, it is feared the this will affect the willingness ofinvestors to buy both government bonds and corporate bonds, the costs ofyielding in relation to these bonds will thus increase, and there will be lessscope to profit from yielding.

b. The ceiling on guarantee business as reflected by a multiple of net worthwill probably be reduced, thereby limiting the development of loan business

Because the competent authority’s policies with regard to the kinds ofbusiness engaged in by bills finance companies are becoming clearer, as thesepolicies are introduced, further reductions in the multiple of net worth whichlimits the size of a bills finance company’s guarantee business will become aninevitable trend. In addition, due to the deterioration in economic performanceboth locally and globally in recent years, traditional business activities havedeclined, and this has made it difficult for loan business to grow significantly.This will significantly affect the profits that bills finance companies generatefrom their bills business.

c. Interest rates have reached very low levels, making it difficult for traders toprofit from trading in bonds outright

In order to stimulate domestic economic activity, the Central Bank haslowered interest rates on a total of fourteen occasions since the end of the year2000. This has resulted in the bond market exhibiting bullish tendencies forthree successive years, with transactions volumes reaching new heights, andbills finance companies making huge profits. However, since the ongoingdecline in interest rates is gradually coming to an end and there are signs of animpending economic recovery, with the additional government publicexpenditure to invigorate the economy increasing the issues of governmentbonds, there is limited scope for further reductions in interest rates, thuscompounding the difficulties of bills finance companies engaged in this line ofbusiness. For this reason, how to accurately forecast interest rates in order tomaintain the levels of profitability of the past will indeed pose a majorchallenge from now on.

4. Business TargetsBusiness targets for the year 2003 are as follows:(1) Dealing in Bills: NT$5,810,357,000,000.

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(2) Dealing in Government Bonds: NT$6,604,006,000,000.(3) Dealing in Bank Debentures: NT$90,213,000,000.(4) Underwriting and Purchasing Bills: NT$1,496,865,000,000.(5) Purchases of Government Bonds in the Primary Market: NT$10,150,000,000.(6) Purchases of Bank Debentures in the Primary Market: NT$2,000,000,000.(7) Certifying Commercial Paper: NT$1,434,446,000,000.(8) Guaranteeing Commercial Paper: NT$1,188,492,000,000.

5. Utilization of Major ProductsThe bills finance business is one aspect of the broader financial services industry.

In responding to the needs of economic development and in line with the government’sestablishment of the money market, specialized finance corporations were set up toassist in the promotion of financial policies, make it easier for businesses to managetheir short-term funds, and to enable these funds to be used more efficiently. It isthrough these activities that the goals of improving the performance of the domesticeconomy and speeding up the process of economic growth have been achieved. Billsfinance companies’ clients include financial institutions, industrial enterprises,government institutions, individuals and funding groups. Enterprises that are in need offunds may have their commercial paper guaranteed by a bills finance company, in orderto obtain the funds they need for their daily operations. Investors may also purchasegood quality bills and that are safe and liquid through a bills finance company. A billsfinance company serves as one of the investor’s best wealth instruments.

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6. Operating Conditions for the Last Two Years(1) Purchases of Bills in the Primary MarketClassification by Bills In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Commercial Paper I 3,373,233 0.16 2,447,357 0.14

Commercial Paper II 2,008,110,014 97.61 1,760,705,000 97.37

Bankers’ Acceptances 3,084,844 0.15 4,054,209 0.22

Negotiable Certificates of Deposit 26,177,500 1.27 14,360,000 0.79

Treasury Bills 3,000,000 0.15 7,500,000 0.41

Government Bonds 13,626,000 0.66 12,494,000 0.69

Bank Debentures 0 0.00 5,680,000 0.31

Corporate Bonds 0 0.00 1,100,000 0.06

Total 2,057,371,591 100.00 1,808,340,566 100.00

Classification by Customers In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Banks 26,293,500 1.28 14,372,000 0.79

Private Enterprises 1,895,307,091 92.12 1,705,842,566 94.33

Public Enterprises 135,771,000 6.60 88,126,000 4.87

Total 2,057,371,591 100.00 1,808,340,566 100.00

(2) Underwriting of Commercial PaperClassification by Guaranteeing Institution In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Banks 102,120,850 5.09 59,784,000 3.40

Investment and Trust Companies 26,474,760 1.32 3,546,000 0.20

Non-Guarantee 142,445,000 7.09 68,630,000 3.90

Chung-Hsing Bills Finance Corporation 1,737,069,404 86.50 1,628,745,000 92.51

Total 2,008,110,014 100.00 1,760,705,000 100.00

Classification by Issuing Institution In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Private General Enterprises 1,586,181,587 78.99 1,515,875,800 86.09

Private Small and Medium-sized Enterprises 302,783,427 15.08 182,777,200 10.38


Total 2,008,110,014 100.00 1,760,705,000 100.00

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Classification by Maturities In Thousands of NT dollars

2001 2002Item

Amount % Amount %

30 days 1,181,433,600 58.83 1,016,292,700 57.72

90 days 646,648,354 32.20 607,363,500 34.50

180 days 166,618,680 8.30 125,687,600 7.14

360 days 13,409,380 0.67 11,361,200 0.65

Total 2,008,110,014 100.00 1,760,705,000 100.00

(3) DealingClassification by Bills─Purchases In Thousands of NT dollars

2001 2002Item

Amount % Amount %





Treasury Bills 3,420,000 0.02 52,859,500 0.38

Government Bonds 3,782,776,900 23.66 3,440,089,940 24.87

Bank Debentures 0 0.00 20,989,200 0.15

Corporate Bonds 0 0.00 385,000 0.00

Total 8,355,159,900 52.26 7,244,074,955 52.38

Classification by Bills─Sales In Thousands of NT dollars

2001 2002Item

Amount % Amount %





Treasury Bills 0 0.00 53,065,600 0.38

Government Bonds 3,778,035,140 23.63 3,437,152,380 24.85

Bank Debentures 0 0.00 19,609,200 0.14

Total 7,631,635,463 47.74 6,586,094,375 47.62

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Classification by Customers─Purchases In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Banks 2,460,598,372 15.39 2,001,069,413 14.47

Bills Finance Companies 460,643,801 2.88 462,821,900 3.35


Insurance Companies 54,972,041 0.34 95,284,017 0.69

Public Enterprises 34,757,700 0.22 3,612,318,420 26.12

Private Enterprises 4,075,733,489 25.49 104,860,255 0.76

Government Institutions 109,975,000 0.69 7,500,000 0.05

Foundations 349,407,009 2.19 370,490,985 2.68

Farmers’ and Fishermen’s Associations 31,887,765 0.20 47,140,989 0.34

Individuals 752,361,354 4.71 506,138,364 3.66

Total 8,355,159,900 52.26 7,244,074,955 52.38

Classification by Customers─Sales In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Banks 3,026,028,476 18.93 2,316,449,212 16.75

Bills Finance Companies 887,451,390 5.55 883,195,048 6.39


Insurance Companies 76,079,125 0.48 116,812,033 0.84


Private Enterprises 2,305,674,600 14.42 2,085,561,685 15.08

Government Institutions 1,977,500 0.01 4,371,700 0.03

Foundations 486,541,868 3.04 526,828,940 3.81

Farmers’ and Fishermen’s Associations 40,750,652 0.25 59,788,490 0.43

Individuals 753,972,797 4.72 505,880,032 3.66

Total 7,631,635,463 47.74 6,586,094,375 47.62

(4) BrokeringClassification by Customers─Purchases In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Banks 58,860,000 50.00 19,000,000 50.00

Total 58,860,000 50.00 19,000,000 50.00

Classification by Customers─Sales In Thousands of NT dollars

2001 2002Item

Amount % Amount %

Banks 58,860,000 50.00 19,000,000 50.00

Total 58,860,000 50.00 19,000,000 50.00

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(C) Major Litigious or Non-litigious Matter

(1) Major Litigious or Non-litigious Matter Pertaining to the Corporation:The Corporation’s income tax returns through 1999 have been examined by the

tax authority. However, the tax authority considers that the 10% withholding taxes oninterest income from bonds pertaining to former purchasers, amounting to $234,316,$267,326, $288,132, $379,574, $485,654, and $455,299 for the years ended December31, 1994, 1995, 1996, 1997, 1998, and 1999, respectively, should not be declared as atax credit or tax refund. Since the Corporation considered that there was no definitiveregulation in respect of the foregoing issue, it filed an appeal on the foregoing issue andplaced with the NTAT a deposit of $460,471. Besides, the Corporation has declared$407,459 and $425,693 in withholding taxes on interest income from bonds for 2000and 2001, which has not been examined, and estimates the corresponding figure to be$433,204 for 2002.

The Corporation lost the appeal for the year ended December 31, 1994 on April 2,2002 ruled by the High Court but filed to the Supreme Court on April 19, 2002. TheCorporation won the appeal for the year ended December 31, 1996 and 1997 onOctober 8, 2002 ruled by the Supreme Court and requested the National TaxAdministration of Taipei dealing by the principal of taxing and related laws.

The Corporation considers that there are no proclaimed laws or regulationsforbidding the withholding taxes on the interest income pertaining to former purchasersfrom being refundable. Besides, if the former purchasers are profit-seekingenterprises, the interest income pertaining to their holding period should have beencounted in their taxable income. Under these circumstances, if the Corporation werenot able to declare the withholding taxes on the interest income pertaining to theseformer purchasers as a tax credit or tax refund, double taxation would result.Nevertheless, on the conservatism principle, the Corporation had estimated andrecognized $2,535,000 in reserves for withholding taxes on interest income from bondsfor those pertaining to former purchasers who are individual investors.

(2) Major Litigious or Non-litigious Matter Pertaining to the Directors, Supervisors,President and Major Shareholders and their Subsidiaries (with combinedshareholdings in excess of 1%): (none)

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Business and Funding Plan

(A) 2003 Business and Funding Plan

1. Operating Targets for 2003With the Financial Holding Company Act mechanism now in place, and as

Taiwan’s financial sector is gradually being transformed, financial institutions arebecoming larger in size and more diversified. In this new environment, the Corporationhas experienced some major breakthroughs in business areas besides dealing in billsand bonds, as it continues to operate as a going concern on a long-term basis.Following its formally becoming part of the Mega Holdings financial holding companylast year, it is hoped that, by combining together with financial institutions operating indifferent areas, the Corporation can enlarge the scale of its operations, and through thecomplementary nature of these different business activities, effectively lower costs andbring about a sizeable gain in efficiency, thereby generating even higher profits for theCorporation and its shareholders. In addition, the Corporation will continue to focus itsefforts on current business activities in order to establish a firmer base for its operations,and will continue to implement various internal reforms to strengthen its operatingstructure. As a means to achieving the above objectives, the Corporation’s operatingtargets for 2003 are as follows:(1) Actively complying with the business integration and risk management policies of

Mega Holdings and its subsidiaries, and speeding up the process of theCorporation’s internal restructuring, in order to effectively grasp the concept ofintegrated selling and develop new business opportunities for the Corporation.

(2) In responding to the possibility that its guarantee business will be curtailed, theCorporation will be extra cautious with regard to the development of its loanbusiness in the future, in order to maintain the soundness of its assets.

(3) In order to provide a greater variety of channels through which these funds can bedeployed, the Corporation will, based on its rich experience in determining interestrate trends, carefully consider the most appropriate time to issue corporate bonds,thereby lowering its cost of funds.

(4) As economic conditions stabilize both locally and globally, and local interest rates,now at extremely low levels in response to Central Bank policies, no longer followtheir downward trend, the Corporation will need to very carefully study interest ratetrends to maintain profitability in this area, as well as further sharpen its bills andbonds handling skills.

(5) To respond to the financial reforms taking place and enhance its competitiveness,the Corporation is actively planning various forms of staff training to increase thedegree of professionalism among staff.

2. Year 2003 Plan(1) In view of the sluggish behavior of the domestic economy, and as the traditional

industries remain in the doldrums, as firms in difficulty request further reductions ininterest rates, it is estimated that over the next year time deposits and holdings ofbills and bonds will increase. However, because interest rates are already at verylow levels, annual income from interest received, commissions and gains on sales in

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respect of investments in bills and bonds will be less than that for 2002. Therefore,in order to strengthen their financial structures and make adequate provision for baddebts, The Corporation will wait for an opportunity to offload a portion of theirgovernment bonds, using their realized gains to deal with their losses.

(2) Now that Mega Holdings has been brought under the International CommercialBank of China and ChungKuo Insurance, the year 2003 constitutes the beginning ofthe “Mega era.” The Corporation will make every effort, through joint salesmeetings with the holding company’s subsidiaries, to research and discuss jointbusiness development, in order to always be fully aware of our clients’ needs, sothat we can specifically design appropriate financial products. To this end, we willfully integrate each subsidiary’s resources, and will thus reduce vicious pricecompetition, thereby increasing the scope for making profits. As we engage inbonds business, we will establish a model for trading in financial derivativesproducts and a risk management system, and together we will keep track ofrelationships between the spot prices of underlying products and the prices offinancial derivatives products, in order to seek out arbitrage or hedgingopportunities.

(B) Plans to Dispose of or Acquire Real Estate or Long-term Investments in20031. Plans to Dispose of or Acquire Real Estate: none2. Plans to Dispose of or Acquire Long-term Investments in 2002: In line with the

integration of securities business under the newly-formed Mega Holdings financialholding company, the whole of the business operations and assets and liabilities of theCorporation’s reinvested company, Chung Hsing Securities Co., Ltd., were as a resultof a resolution passed at that company’s board of directors meeting held on December24, 2002 transferred to Barits International Securities Co. Ltd., and Chung HsingSecurities Co., Ltd. was thereupon dissolved.

(C) Research and Development

Following the Corporation’s coming under the umbrella of the Mega Holdingsfinancial holding company, the key to the Corporation’s development in the future will beto utilize the huge resources it has at present and actively work together with the financialholding company to develop a multi-faceted and international financial services group.Because larger and larger financial institutions will be an inevitable trend in the future, andconfrontations between financial groups will increase, how to engage in research anddevelopment and product innovation when business at present is mostly confined tohandling bills and bonds, enlarge the scale of operations, and lower operating costs andincrease profitability, are all important issues that will need to be resolved by theCorporation as it redefines its financial strategy for the future.

1. Promoting Cross-selling Business Activities within the Mega Holdings Financial Group

Following the Corporation’s becoming a part of the Mega Holdings group, and inline with the development of cross-selling activities among the subsidiaries of holdingcompanies, the Corporation will combine its activities with those of the holdingcompany’s subsidiaries, so that they can together firmly grasp client resources and

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channels in order to promote cross-selling activities, expand the number of productlines and provide a greater variety of services, in the hope of achieving furthereconomies of scale, lowering operating costs, enhancing mutual effectiveness, andincreasing competitiveness and returns to shareholders.

2. Further Developing New Financial Products and Distribution MethodsThe Corporation plans to continue to increase the promotion of its services

through advertising space and to encourage small investors to process orders over theInternet, in order to strengthen its business of handling orders for government bondsover the Internet. On the other hand, following the enactment of the Rules Governingthe Bills Finance Companies’ Engagement in Financial Derivatives Transactions andthe Rules Governing the Bonds Investment for Bills Finance Companies, theCorporation is researching and developing new interest rate-related financial products,and cautiously investing in various kinds of bonds approved by the competent authorityand engaging in interest rate futures business being handled by the Taiwan FuturesExchange. These are all important items that will be further studied and implemented inthe future.

3. Actively Engaging in Internal RestructuringFollowing the Corporation’s becoming a part of the Mega Holdings holding

company, how to integrate the holding company’s most important core concepts,disseminate them among all employees and actually implement them in practice is theCorporation’s most pressing concern at present. If it is not possible for these newconcepts to be assimilated into the Corporation’s culture and they remain on the outside,the Corporation’s ability to exhibit its effectiveness will be extremely limited. It is forthis reason that the Corporation needs to internally reform its operations, strengthen thefunction of education and training, and constantly dialogue and exchange experienceswith each of the holding company’s subsidiaries to reshape our employees’ valuejudgments. This will not only smooth the process of engaging in the promotionalactivities of the financial holding company, but at the same time this will be the aspectof the Corporation’s long-term development that it will least be able to neglect.

(D) Funding Utilization Plan

1. The contents of the plan to expand the Corporation’s business, the acquisition of otherfinancial institutions or reinvestments in other companies, the enlargement or revisionof the contents of the fixed assets plan, the sources of funds, the uses of funds andprojected benefits: None

2. The previous cash-to-capital increase and the plan to issue corporate bonds, theprevious capital increase and the plan to issue corporate bonds before that have still notbeen completed, and the projected benefits from the funding utilization plan for the lasttwo years that have not yet been realized are as follows:The previous cash-to-capital increase plan:(1) The Corporation’s cash-to-capital increase in 1999 amounted to NT$2 billion,

with each share issued at NT$11.50 per share. A total of NT$2.3 billion wasraised by November of that year through a public offering.

(2) The funds raised were used to enlarge the scale of business operations, and toincrease operating funds and reduce interest expenditures. The plan to increasecapital was in accordance with the budgeted targets for the fourth quarter of 1999and the whole of 2000.

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Financial Statements

English Translation of a Report Originally Issued in Chinese

Independent Auditors’ Report

The Board of Directors and the ShareholdersChung Hsing Bills Finance Corporation

We have audited the accompanying balance sheets of Chung Hsing Bills Finance Corporation(“the Corporation”) as of December 31, 2002 and 2001 and the related statements of income,changes in shareholders’ equity, and cash flows for the years then ended. These financialstatements are the responsibility of the Corporation’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Regulations for Audit of Financial Statements ofFinancial Institutions by Certified Public Accountants and generally accepted auditing standardsin the Republic of China. Those standards require that we plan and perform the audit to obtainreasonable 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 inthe financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,the financial position of Chung Hsing Bills Finance Corporation as of December 31, 2002 and2001 and the results of its operations and cash flows for the years then ended, in conformity withthe Guidelines for Securities Issuers’ Financial Reporting and generally accepted accountingprinciples and related regulations in the Republic of China.

T N Soong & CoAn Associate Member Firm of Deloitte Touche TohmatsuTaipei, TaiwanThe Republic of China

January 13, 2003Notice to Readers

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

English Translation of Financial Statements Originally Issued in Chinese

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CHUNG HSING BILLS FINANCE CORPORATION

BALANCE SHEETSDecember 31, 2002 and 2001

(In Thousands of New Taiwan Dollars, Except Par Value)

2002 2001 2002 2001 A S S E T S Amount % Amount % LIABILITIES AND SHAREHOLDERS’ EQUITY Amount % Amount %

CASH (Note 3) $ 1,018,842 2 $ 1,788,234 4 LIABILITIESBank overdrafts and call loans (Notes 14 and 19) $ 2,038,000 5 $ - -

DUE FROM BANKS (Notes 4 and 19) - - 1,500,000 4 Payable and other liabilities (Notes 2 and 15) 531,978 1 565,959 2Reserves for withholding taxes (Note 15) 829,616 2 829,616 2

INVESTMENTS IN BILLS AND BONDS - NET Reserves for losses on guarantees (Notes 2 and 21) 4,336,657 10 2,562,162 7(Notes 2, 5, 19 and 21) 14,680,311 34 14,319,503 37 Reserves for trading losses (Note 2) 200,000 - 200,000 -

Accrued pension liabilities (Notes 2 and 16) 44,716 - 34,908 -RECEIVABLES - NET (Notes 2 and 6) 1,040,345 2 2,601,879 7 Total Liabilities 7,980,967 18 4,192,645 11

PREPAID EXPENSES AND OTHER CURRENT SHAREHOLDERS’ EQUITY (Note 17)ASSETS (Notes 2, 7 and 15) 669,376 2 750,682 2 Capital stock- $10 par value

Authorized and issued - 2,811,441 thousandLONG-TERM STOCK INVESTMENTS - NET shares 28,114,411 64 28,114,411 72(Notes 2 and 8) 4,923,987 11 5,037,494 13 Capital surplus:

Paid-in capital in excess of par value 313,069 1 313,069 1INVESTMENTS IN LONG-TERM BONDS Gain on sale of property and equipment - - 653 -(Notes 2 and 9) 1,495,146 4 - - Equity in investees’ capital surplus 9,589 - 9,589 -

Retained earnings:PROPERTY AND EQUIPMENT (Notes 2 and 10) Legal reserve 4,137,937 10 3,171,544 8Cost Special reserve 3,601 - 3,237 -

Land 2,460,829 6 2,460,829 6 Unappropriated earnings 3,265,207 7 3,231,764 8Buildings 770,276 2 770,276 2 Unrealized loss on decline in market value of Transportation equipment 23,404 - 22,602 - long-term stock investments ( 2,770 ) - ( 511 ) -Miscellaneous equipment 135,218 - 139,252 1 Total Shareholders’ Equity 35,841,044 82 34,843,756 89

3,389,727 8 3,392,959 9Less - accumulated depreciation 199,606 1 176,947 1 COMMITMENTS AND CONTINGENCIESNet Property and Equipment 3,190,121 7 3,216,012 8 (Notes 2 and 21)

PLEDGED ASSETS (Notes 19 and 20) 12,786,712 29 6,824,762 17

REFUNDABLE DEPOSITS (Note 11) 2,069,637 5 1,912,543 5

OVERDUE ACCOUNTS RECEIVABLE - NET(Notes 2 and 12) 1,808,168 4 868,105 2

OTHER ASSETS (Notes 2, 13 and 15) 139,366 - 217,187 1

TOTAL ASSETS$43,822,011 100

$39,036,401 100 TOTAL LIABILITIES AND SHAREHOLDERS’EQUITY $43,822,011 100

$39,036,401 100

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


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STATEMENTS OF INCOMEFor the Years Ended December 31, 2002 and 2001

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2002 2001 Amount % Amount %

REVENUESGain on sale of investments in bills and bonds - net (Note 2) $5,577,086 69 $6,709,866 74Commissions 1,721,995 21 1,583,238 17Interest (Note 19) 617,237 8 584,439 6Investment income under the equity method (Note 2) - - 106,499 1Other (Note 19) 206,696 2 133,920 2Total Revenues 8,123,014 100 9,117,962 100

EXPENSES AND LOSSESProvisions for losses on investments in bills and bonds, accounts receivables, overdue accounts receivable and guarantees (Note 2) 3,227,999 40 1,708,037 19Provisions for withholding taxes on interest income from bonds (Note 15) - - 2,535,000 28Selling and administrative expenses (Note 19) 681,658 8 720,581 8Interest (Note 19) 145,517 2 385,675 4Investment losses under the equity method (Note 2) 69,718 1 - -Other 13,530 - 11,813 -Total Expenses and Losses 4,138,422 51 5,361,106 59

INCOME BEFORE INCOME TAX 3,984,592 49 3,756,856 41

INCOME TAX (Notes 2 and 15) 732,099 9 535,545 6

NET INCOME $3,252,493 40 $3,221,311 35

2002 2001 Income Income BeforeIncome Net

BeforeIncome Net

Tax Income Tax Income

PRIMARY EARNINGS PER SHARE (Note 18) $ 1.42 $ 1.16 $ 1.34 $ 1.15



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STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYFor the Years Ended December 31, 2002 and 2001

(In Thousands of New Taiwan Dollars, Except Par Value)

UNREALIZED LOSS ON

DECLINE IN CAPITAL SURPLUS (Notes 2 and 17) MARKET

CAPITAL STOCK Paid-in Gain on Equity in VALUE OF $10 PAR VALUE Capital in Sale of Investees’ RETAINED EARNINGS (Note 17) LONG-TERM TREASURY TOTAL Authorized and Issued Excess of Property and Capital Legal Special Unappropriated STOCK STOCK SHAREHOLDERS’

Shares Amount Par Value Equipment Surplus Total Reserve Reserve Earnings Total INVESTMENTS (Note 17) EQUITY

BALANCE, JANUARY 1, 2001 2,811,441,084 $ 28,114,411 $312,824 $653 $8,367 $321,844 $ 2,230,642 $3,090 $3,144,933 $ 5,378,665 ( $ 147 ) ( $3,405 ) $ 33,811,368

Appropriation of prior years’ earningsLegal reserve - - - - - - 940,902 - ( 940,902 ) - - - -Special reserve - - - - - - - 147 ( 147 ) - - - -Dividends - 3.7% - - - - - - - - ( 1,040,233 ) ( 1,040,233 ) - - ( 1,040,233 )Bonuses to shareholders - 3.7% - - - - - - - - ( 1,040,233 ) ( 1,040,233 ) - - ( 1,040,233 )Remuneration of directors and supervisors - - - - - - - - ( 3,200 ) ( 3,200 ) - - ( 3,200 )Bonuses to employees - - - - - - - - ( 109,765 ) ( 109,765 ) - - ( 109,765 )

Balance after appropriation 2,811,441,084 28,114,411 312,824 653 8,367 321,844 3,171,544 3,237 10,453 3,185,234 ( 147 ) ( 3,405 ) 31,617,937Net income for 2001 - - - - - - - - 3,221,311 3,221,311 - - 3,221,311Reversal of unrealized loss on long-term stock investments - - - - - - - - - - 147 - 147Unrealized loss on decline in market value of long- term stock investments - - - - - - - - - - ( 511 ) - ( 511 )Equity in investees’ capital surplus - - - - 1,222 1,222 - - - - - - 1,222Treasury stock sold - - 245 - - 245 - - - - - 3,405 3,650

BALANCE, DECEMBER 31, 2001 2,811,441,084 28,114,411 313,069 653 9,589 323,311 3,171,544 3,237 3,231,764 6,406,545 ( 511 ) - 34,843,756

Appropriation of prior years’ earningsLegal reserve - - - - - - 966,393 - ( 966,393 ) - - - -Special reserve - - - - - - - 364 ( 364 ) - - - -Dividends - 3.8% - - - - - - - - ( 1,068,348 ) ( 1,068,348 ) - - ( 1,068,348 )Bonuses to shareholders - 3.8% - - - - - - - ( 1,068,348 ) ( 1,068,348 ) - - ( 1,068,348 )Remuneration of directors and supervisors - - - - - - - - ( 3,000 ) ( 3,000 ) - - ( 3,000 )Bonuses to employees - - - - - - - ( 113,250 ) ( 113,250 ) - - ( 113,250 )

Balance after appropriation 2,811,441,084 28,114,411 313,069 653 9,589 323,311 4,137,937 3,601 12,061 4,153,599 ( 511 ) - 32,590,810Net income for 2002 - - - - - - - - 3,252,493 3,252,493 - - 3,252,493Reclassification of capital surplus from gain on sale of property and equipment to unappropriated earnings - - - ( 653 ) - ( 653 ) - - 653 653 - - -Unrealized loss on decline in market value of long- term stock investments - - - - - - - - - - ( 2,259 ) - ( 2,259 )

BALANCE, DECEMBER 31, 2002 2,811,441,084 $ 28,114,411 $313,069 $ - $9,589 $322,658 $ 4,137,937 $3,601 $3,265,207 $ 7,406,745 ( $2,770 ) $ - $ 35,841,044



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STATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2002 and 2001

(In Thousands of New Taiwan Dollars)

2002 2001

CASH FLOWS FROM OPERATING ACTIVITIESNet income $ 3,252,493 $ 3,221,311Adjustments to reconcile net income with net cash provided by operating activities:

Provisions for losses on investments in bills and bonds, accounts receivables, overdue accounts receivable and guarantees 3,227,999 1,708,037Provisions for withholding taxes on interest income from bonds - 2,535,000Depreciation and amortization 70,973 69,365Amortization of premium on long-term bonds 1,766 12Provision for accrued pension liabilities 9,808 13,034Net (gain) loss on sale of property and equipment - net 1,810 ( 195 )Investment (income) losses under the equity method - net 69,718 ( 106,499 )Cash dividends received from equity-accounted investee 69,635 -Deferred income taxes ( 2,452 ) ( 758 )Changes in operating assets and liabilities:

Investments in bills and bonds ( 360,808 ) 7,192,548Receivables ( 2,487,083 ) ( 2,609,213 )Prepaid expenses and other current assets 81,306 ( 573,827 )Overdue accounts receivable 1,672,275 65,272Payable and other liabilities ( 33,981 ) 44,877

Net Cash Provided by Operating Activities 5,573,459 11,558,964

CASH FLOWS FROM INVESTMENT ACTIVITIES(Increase) decrease in due from banks 1,500,000 ( 1,500,000 )(Increase) decrease in long-term bonds ( 1,496,912 ) 37,000Acquisition of long-term stock investments ( 28,105 ) ( 2,434,760 )Acquisition of property and equipment ( 11,752 ) ( 13,272 )Proceeds from sale of property and equipment 162 349(Increase) decrease in pledged assets ( 5,961,950 ) 165,772Increase in refundable deposits ( 157,094 ) ( 21,341 )(Increase) decrease in other assets 27,746 ( 47,564 )Net Cash Used in Investment Activities ( 6,127,905 ) ( 3,813,816 )

(Forward)


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2002 2001

CASH FLOWS FROM FINANCING ACTIVITIESIncrease (decrease) in bank overdraft and call loans $ 2,038,000 ( $ 4,579,632 )Bonus paid to employees and remuneration of directors and supervisors ( 116,250 ) ( 112,965 )Cash dividends paid ( 2,136,696 ) ( 2,080,466 )Proceeds from sale of treasury stock - 3,650Net Cash Used in Financing Activities ( 214,946 ) ( 6,769,413 )

NET INCREASE (DECREASE) IN CASH ( 769,392 ) 975,735

CASH, BEGINNING OF YEAR 1,788,234 812,499

CASH, END OF YEAR $ 1,018,842 $ 1,788,234

SUPPLEMENTARY INFORMATIONCash paid for

Interest $ 145,327 $ 388,753Income tax $ 779,394 $ 998,435



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NOTES TO FINANCIAL STATEMENTSDecember 31, 2002 and 2001

(Amounts in Thousands of New Taiwan Dollars)

1. GENERAL

Chung Hsing Bills Finance Corporation (“the Corporation”) was established on May 3, 1976. Ittrades treasury bills, negotiable certificates of deposit, bankers’ acceptances, trade acceptances,commercial paper, bank debentures and government bonds. In addition, it (i) acts as registraror/and underwriter of commercial paper and bank debentures, (ii) acts as guarantor or endorser ofcommercial paper, (iii) brokers short-term negotiable instruments and bank call loans, and (iv) actsas financial consultant.

The common stock of the Corporation has been listed on the Taiwan Stock Exchange since June1990. Effective August 22, 2002, the Corporation’s shares ceased to be traded over the TaiwanStock Exchange because of the incorporation of the Corporation into Mega Financial HoldingCompany (Mega Holdings, formerly named Chiao Tung Bank Financial Holding Company)through a share swap. With its stockholders’ approval on June 12, 2002, the Corporation wasincorporated into Mega Holdings. For this incorporation, the Corporation exchanged 1.39 of itsown shares for one share of Mega Holdings.

2. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Corporation, which conform to generally acceptedaccounting principles and related regulations in the Republic of China, are summarized below:

Investments in bills and bonds

This account includes investments in short-term bills, bank debentures and government bonds.Investments in bills and bonds are stated at cost, and the cost of investments sold is determinedusing the specific identification method. As of the balance sheet dates, these investments arecarried at cost less allowances for decline in market value.

Investments in long-term bonds

Bonds are stated at their face values. The difference between the face value and acquisition costis recognized as premium or discount. The premium or discount is amortized over the term of thebonds using the straight-line method. The cost of bonds sold is determined using the specificidentification method.

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Bills and bonds sold or purchased under agreements to repurchase or resell

In accordance with the practice of the bills finance industry, the transactions on bills and bondssold or purchased under agreements to repurchase (RP) or resell (RS) are considered real sales orpurchases. On trading days, these transactions are recorded using memo entries, which arereversed on the agreed days of repurchase or resale.

Long-term stock investments

Investments in companies in which the Corporation owns over 20% of the investees’ voting stockand exercises significant influence on the investees are accounted for by the equity method.Under the equity method, the investment is initially stated at cost and subsequently adjusted for theCorporation’s proportionate share in the net income or net loss. Cash dividends received arereflected as a reduction in the carrying value of the investments. The difference between theinvestment cost or the carrying value of the investment and the Corporation’s proportionate equityin the net assets of the investee company at the time of the acquisition or at the time of the adoptionof the equity method of accounting is amortized over 5 years.

Other long-term equity investments are accounted for by cost method. Cash dividends receivedare recognized as investment income while stock dividends received are treated only as increasesin the number of shares held.

Investments in listed stocks are carried at cost less allowances for declines in their market valueswith the related provision charged to shareholders’ equity.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Major additions,replacements and betterments are capitalized, while maintenance and repairs are expensedcurrently.

Depreciation is computed using the straight-line method over these estimated service lives:buildings - 60 years; transportation equipment - 5 years; and miscellaneous equipment - 5 to 13years. Fully depreciated properties still being used by the Corporation are depreciated over theirnewly estimated service lives.

When assets are retired or disposed of, their costs and related accumulated depreciation areremoved from the accounts, and any resulting gain or loss is presented as nonoperating income andexpense. Any such gain occurred before 2000 less applicable income tax is transferred to capitalsurplus at the end of the year.

Reserves for loss on investments in bills and bonds, accounts receivable, overdue accounts receivable and guarantees

The reserves for the estimated possible losses on the investments in bills and bonds, accountsreceivable, overdue accounts receivable and guarantees are based on the review of the realizabilityof related balances as of the balance sheet dates.

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Provision for trading losses

The Corporation recognizes provision for trading losses, as required under existing regulations, atan amount equal to 10% of the net gain on sales of securities. Provisions are recognized until theaccumulated balance of the related reserves aggregates to $200,000. The related reserve fortrading losses can only be debited for actual losses incurred on operations related to dealings insecurities.

Pension cost

Pension costs are actuarially determined. Unrecognized prior service cost and unrecognized netgains or losses on the pension plan are amortized using the straight-line method over the remainingaverage service years of the employees. Unrecognized net transition obligation is amortizedusing the straight-line method over 23 years.

Income tax

The Corporation has adopted the inter-period income tax allocation method. Tax effects oftaxable temporary differences are recognized as deferred income tax liabilities, and the tax effectsrelated to deductible temporary differences, unused loss carryforwards and investment tax creditsare recognized as deferred income tax assets. A valuation allowance is recognized for deferredincome tax assets that are not certain to be realized. Deferred income tax assets or liabilities areclassified as current or noncurrent items according to the classification of related assets orliabilities.

Income tax of the Corporation is estimated and recognized based on the taxable income of the year.It also includes separate taxes on income from trading bills.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s taxprovision.

Income tax (10%) on undistributed earnings is recorded as expense when the shareholders haveresolved that the earnings are to be retained.

3. CASH 2002 2001

Checking accounts $ 520,209 $ 681,876Time deposits 490,000 1,090,000Demand deposits 7,818 15,543Petty cash 815 815

$1,018,842 $1,788,234

Time deposits as of December 31, 2002 and 2001 bear annual interest rates ranging from 1.80% to2.45% and from 2.80% to 5.40%, respectively, and all mature within one year.

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4. DUE FROM BANKS

December 31, 2002: None

Annual December 31, 2001 Rate (%) Period Amount

Citibank 2.285 01/12/31 - 02/01/02 $ 400,000Taipei Bank 2.25 01/12/31 - 02/01/02 400,000Shanghai Commercial and Savings Bank 2.275 01/12/31 - 02/01/02 300,000United World Chinese Commercial Bank 2.25 01/12/31 - 02/01/02 200,000Hongkong and Shanghai Banking Corporation 2.285 01/12/31 - 02/01/02 100,000China Development Industrial Bank 2.20 01/12/31 - 02/01/02 100,000

$1,500,000

5. INVESTMENTS IN BILLS AND BONDS 2002 2001

Commercial paper $11,378,828 $11,038,900Bank debentures 2,230,000 -Negotiable certificates of deposit 840,729 127,554Government bonds 115,777 55,315Bankers’ acceptances 81,659 151,809Treasury bills 33,318 2,945,925

$14,680,311 $14,319,503

6. RECEIVABLES 2002 2001

Interest receivable $ 519,436 $ 392,884Accounts receivable 411,720 2,188,273Notes receivable 156,000 34,254Revenue receivable 36,952 9,548Other receivables 1,641 8,920

1,125,749 2,633,879Less: Allowance for bad debts 85,404 32,000

$1,040,345 $2,601,879

Accounts receivable consist of the payments made by the Corporation based on guaranteeing thosecommercial papers that are unredeemed at maturity, which are less than three months overdue.

According to regulation No. 90720080 issued by the Ministry of Finance (MOF) on September 11,2001, where there has been continuous and normal payment of interest by the clients, as well astime expended in withdrawing the collateral seized, the commercial paper guaranteed and issuedby the Corporation, to which the real estate was mortgaged but sued for by third parties and seizedby the court during the duration of the guarantee and issuance, is debited to notes receivable atmaturity. However, it should be transferred to accounts receivable if the clients are unable tofinish withdrawing the collateral within three months of its being seized.

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The Corporation seeks to collect the receivables as soon as possible. Besides acquiring sufficientcollateral, the Corporation makes adequate allowance for bad debts to cover possible losses.

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS 2002 2001

Creditable withholding income tax (Note 15) $ 499,365 $ 480,651Funds received for guarantees for short-term negotiable instruments issued 91,259 180,252Deferred income taxes (Note 15) 68,550 68,550Prepaid expenses 1,430 1,707Others 8,772 19,522

$ 669,376 $ 750,682

8. LONG-TERM STOCK INVESTMENTS 2002 2001 % of % of

Carrying Share- Carrying Share- Value holding Value holding

Equity method:Non-listed

Chung Hsing Securities Co., Ltd. $4,150,720 99.583 $4,261,968 98.952Cost method:

ListedFuhwa Financial Holding Co., Ltd. (formerly Fuh Hwa Securities Finance Co., Ltd.) 8,037 0.020 8,037 0.037

Non-listedCore Pacific City Corporation 600,000 5.000 600,000 5.000Taiwan Asset Management Co., Ltd. 100,000 0.568 100,000 0.568Taiwan Financial Asset Services Co., Ltd.

50,000 3.333 50,000 3.333Taiwan Futures Exchange Co., Ltd. 10,250 0.513 10,250 0.513Taiwan Securities Central Depository Co., Ltd. 6,850 0.685 6,850 0.685Agora Garden Co., Ltd. 900 0.030 900 0.030

4,926,757 5,038,005Less: Allowance for decline in value 2,770 511

$4,923,987 $5,037,494

The carrying value of the investment in Chung Hsing Securities Co., Ltd. and the proportionateshare in its net income as of December 31, 2002 and 2001 that are accounted for by the equitymethod are based on the audited financial statements for the same period.

Fuh Hwa Securities Finance Co., Ltd. was renamed Fuhwa Financial Holding Co., Ltd. through ashare swap on February 4, 2002. As a result, the Corporation’s ownership interest in FuhwaFinancial Holding Co., Ltd. decreased from 0.037% to 0.020%. The market values of FuhwaFinancial Holding Co., Ltd., calculated using the average closing prices for the month of Decemberpublished by Taiwan Securities Exchange Co., Ltd., were $5,267 in 2002 and $7,526 in 2001.

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With its Board of Directors’ approval on July 30, 2002, the Corporation acquired the shares ofChung Hsing Securities Co., Ltd. from other stockholders for $28,105. As a result, theCorporation’s ownership interest in Chung Hsing Securities Co., Ltd. rose from 98.952% to99.583% on December 31, 2002. Chung Hsing Securities Co., Ltd. will sell all of its assets andliabilities to International Securities Co., Ltd. for $4,222,296 on January 30, 2003.

The total assets and total revenues of Chung Hsing Securities Co., Ltd. are less than 10% of theCorporation’s total assets or total revenues. Thus, the Corporation did not prepare consolidatedfinancial statements.

9. INVESTMENTS IN LONG-TERM BONDS 2002 2001

Investments in long-term bonds $1,485,000 $ -Add: Unamortized bond premium 10,146 -

$1,495,146 $ -

10. PROPERTY AND EQUIPMENT

Accumulated depreciation consisted of:

2002 2001

Buildings $ 100,491 $ 85,534Transportation equipment 13,409 11,444Miscellaneous equipment 85,706 79,969

$ 199,606 $ 176,947

11. REFUNDABLE DEPOSITS 2002 2001

Government bonds placed with the Central Bank of China - required as a dealer of short-term negotiable instruments $1,400,982 $1,406,044Government bonds placed with the National Tax Administration of Taipei (NTAT) - required as the deposit of income tax claims of 1998, 1997, 1996, 1995 and 1994 (Note 15) 460,471 300,009Government bonds placed with the R.O.C. OTC Securities Exchange - required as settlement clearing deposits 91,183 91,596Certificates of time deposit and government bonds placed with the Trust Department of the Bank of Taiwan - required as a dealer of bonds 89,694 90,000Government bonds placed with the Chia-Yi, Tainan and Shi-Lin District Courts - required as the deposit of foreclosure proceedings 11,484 3,860Government bonds placed with the Taipei District Court - required as the deposit for lawsuit proceedings - 5,000Other deposits 15,823 16,034

$2,069,637 $1,912,543

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12. OVERDUE ACCOUNTS RECEIVABLE 2002 2001

Accounts receivable $1,983,986 $ 985,547Less: Allowance for losses 175,818 117,442

$1,808,168 $ 868,105

Overdue accounts receivable consist of the payments made by the Corporation based onguaranteeing commercial paper that is unredeemed at maturity, and which is more than threemonths overdue or less than three months overdue. The Corporation has already initiated theappropriate legal procedures against the issuers of such commercial paper to recover the amountsalready paid on their behalf. Management has evaluated the amount realizable from the foregoingaccounts and, after taking into account the value of the related collateral and the overall financialcondition of the issuers, believes that the allowance is adequate to cover the possible losses.

13. OTHER ASSETS 2002 2001

Other deferred charges $ 82,740 $ 116,299Deferred income taxes (Note 15) 56,179 53,727Collaterals assumed - 46,714Miscellaneous 447 447

$ 139,366 $ 217,187

14. BANK CALL LOANS - UNRELATED PARTIESInterest(%)

Period Amount

December 31, 2002

Bank overdraftRelated party (Note 19) 3.500 From 91/12/30 $1,138,000

Bank call loans Related party (Note 19) 1.550-

1.62591/12/24-92/01/08 900,000

$2,038,000

December 31, 2001: None

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15. INCOME TAX

a. The Corporation’s income tax expense as of 2002 and 2001 consists of:

2002 2001

Income tax expense on income before income tax at the statutory rate (25%) $996,148 $939,214Tax effect on the following adjustments:

Tax-exempt income ( 971,884 ) ( 858,581 )Gain on sale of investments in bills already subjected to 20% income tax ( 349,142 ) ( 645,785 )Permanent differences 21,964 33,061Temporary differences 429,191 532,091

Income tax expense - current $126,277 $ -

b. Income tax expense

Income tax expense - current $126,277 $ -Tax at 20% on gain on sale of investments in bills 284,467 518,314Adjustment of prior year’s income tax 19,879 36Income tax expense (benefit) - deferred

Employee benefits realized - current - 2,500Reserve for retirement benefits unrealized - noncurrent ( 2,452 ) ( 3,258 )

Income taxes (10%) on undistributed earnings 303,928 17,953

Income tax expense $732,099 $535,545

c. Deferred income tax assets as of December 31, 2002 and 2001 consisted of:

2002 2001 Current (Note 7)

Bad debts $740,531 $216,138Allowance ( 671,981 ) ( 147,588 )

68,550 68,550Noncurrent (Note 13)

Retirement expenses 56,179 53,727

$124,729 $122,277

d. Imputed tax credit

Balance of creditable tax account $470,766 $ 93,122

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The estimated creditable tax rate as of December 31, 2002 and the actual creditable tax raterelated to earnings as of December 31, 2001 were 14.42% and 6.02%, respectively. Thecreditable tax, which the Corporation can attribute to its shareholders, is calculated based onthe balance of the creditable tax account on the date the earnings are distributed. As such,when the Corporation distributes earnings generated as of December 31, 2002 to itsshareholders, the applicable creditable tax rate must be adjusted with all possible creditable taxthat would be generated according to the regulations of the Income Tax Law on the earningsdistribution day.

e. The balance of unappropriated earnings as of December 31, 2002 includes unappropriatedearnings of $998 generated as of December 31, 1997 and earnings of $3,264,209 generatedthereafter.

f. The effective income tax rate used in calculating the deferred income tax for 2002 and 2001 is25%.

g. When the Corporation repurchases bonds between two interest payment dates, the Corporationpays the accrued interest income pertaining to the former bondholders and debits it to interestreceivable. On the interest payment dates, the Corporation receives after-tax interest incomepertaining to the period before and after the purchase dates between the two interest paymentdates. However, the National Tax Administration of Taipei (NTAT) holds that since not all ofthe related interest income of the creditable withholding taxes pertains to the Corporation, thewithholding taxes on interest income pertaining to the former purchasers should be part of thepurchasing costs instead of being refundable.

The Corporation’s income tax returns through 1999 have been examined by the tax authority.However, the tax authority considers that the 10% withholding taxes on interest income frombonds pertaining to former bondholders, amounting to $234,316, $267,326, $288,132,$379,574, $485,654, and $455,299 for the years ended December 31, 1994, 1995, 1996, 1997,1998, and 1999, respectively, should not be declared as a tax credit or tax refund. Since theCorporation considered that there was no definitive regulation in respect of the foregoing issue,it filed an appeal on the foregoing issue and placed with the NTAT a deposit of $460,471 (Note11). Besides, the Corporation has declared $407,459 and $425,693 in withholding taxes oninterest income from bonds for 2000 and 2001, which has not been examined, and estimates thecorresponding figure to be $433,204 for 2002.

The Corporation lost the appeal for the year ended December 31, 1994 ruled by the High Courton April 2, 2002, but filed with the Supreme Court on April 19, 2002. The Corporation wonthe appeal for the years ended December 31, 1996 and 1997 ruled by the Supreme Court onOctober 8, 2002, and requested the NTAT deal with the case in accordance with the principle oftaxing and related laws.

The Corporation considers that there are no proclaimed laws or regulations forbidding thewithholding taxes on the interest income pertaining to former bondholders from beingrefundable. Besides, if the former bondholders are profit-seeking enterprises, the interestincome pertaining to their holding period should have been counted in their taxable income.Under these circumstances, if the Corporation were not able to declare the withholding taxes onthe interest income pertaining to these former bondholders as a tax credit or tax refund, doubletaxation would result. Nevertheless, based on the conservatism principle, the Corporation hadestimated and recognized $2,535,000 in reserves for withholding taxes on interest income frombonds for those pertaining to former bondholders who are individual investors.

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16. RETIREMENT PLAN

The Corporation has a retirement plan for all of its regular employees. The Corporationcontributes monthly to a retirement fund an amount equal to 8% of salaries. Benefits under thisplan are based on years of service, salary, meal allowances, overtime wages and other regularpayments in accordance with the Labor Standards Law. The highest total basic points are limitedto 61 points.

Pension information is summarized as follows:

a. Net periodic pension cost

2002 2001

Service cost $19,195 $19,640Interest cost 13,961 22,614Actual return on plan assets ( $ 6,835 ) ( $11,352)Loss on plan assets ( 4,902 ) ( 6,327 )Projected return on plan assets ( 11,737 ) ( 17,679 )Amortization of prior period service cost, gain or loss on pension plan and net transition obligation 2,819 2,819

$24,238 $27,394

The pension costs recognized for the years ended December 31, 2002 and 2001 were $24,238and $27,394, respectively.

b. Reconciliation of pension fund contributions and accrued pension liabilities is as follows:

2002 2001 Benefit obligation

Vested benefit obligation( $115,377)

( $125,028)

Nonvested benefit obligation ( 158,914 ) ( 146,453 )Accumulated benefit obligation ( 274,291 ) ( 271,481 )Effects on employees’ future salary level ( 69,606 ) ( 85,048 )Projected benefit obligation ( 343,897 ) ( 356,529 )

Fair value of plan assets 288,392 293,685Unfunded projected benefit obligation ( 55,505 ) ( 62,844 )Unrecognized net transition obligation 3,478 3,696Unrecognized prior service cost 36,699 39,300Unrecognized net gain or loss ( 29,388 ) ( 15,060 )

Accrued pension liabilities ( $ 44,716 ) ( $ 34,908 )

c. As of the end of 2002 and 2001, vested benefit $153,510 $165,428

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2002 2001

d. Actuarial assumptions for pension obligation:

Discount rate 3.50% 4.00%Incremental rate for employees’ future salary level 2.50% 3.00%Expected rate of return on plan assets 3.50% 4.00%

e. Changes in the retirement fund and reserve are summarized as follows:

2002 2001 Retirement fund

Balances, beginning of year $293,484 $280,484Contributions 14,430 14,360Income 6,840 11,533Benefits paid ( 26,558 ) ( 12,893 )

Balances, end of year $288,196 $293,484

17. SHAREHOLDERS’ EQUITY

In accordance with the Securities and Exchange Law, the Corporation had repurchased its ownstock shares in 2000 and held 500,000 treasury stock shares as of December 31, 2000. Accordingto the resolution made at the 11th of the 9th series of meetings of the board of directors on January30, 2001, and the “Rules Regarding Repurchasing & Transferring the Corporation’s shares to theEmployees” previously drawn up by the Corporation, the Corporation transferred the treasurystocks mentioned above to its employees at $7.3 per share on March 1, 2001, which resulted in$245 of paid-in capital in excess of par value.

The changes in the treasury stock are as follows:Unit: Thousand Shares

Beginning Ending

Purpose of Repurchase Balance Increase Decrease Balance

2001

Sales of treasury stock to employees 500 - 500 -

The number of its own shares of stock that the Corporation is allowed to repurchase should, inaccordance with Article 28-2 of the Securities and Exchange Law, be less than 10% of the numberof issued shares, and the total value of the repurchased shares should be less than the total amountof retained earnings, paid-in capital in excess of par value, and realized paid-in capital. Inaddition, the shares of stock repurchased should not be pledged, and before they are transferred tothe employees, the Corporation does not exercise any of the rights of a shareholder while holdingits own shares. The highest number of treasury shares the Corporation held in 2001 was 500thousand shares, while the highest balance of the total acquisition cost was $3,405. The numberof shares and the amount mentioned above are in compliance with the Securities and Exchange

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Law.

Pursuant to the related laws and regulations, capital surplus resulting from long-term stockinvestments evaluated by the equity method should not be used. Other capital surplus should onlybe transferred to offset the deficit. However, paid-in capital in excess of par value resulting fromthe issuance of stock may be transferred to capital once a year within the prescribed limit, startingfrom the year following the issuance of such shares. The transfer of capital surplus to capital mayonly be performed once a year and at a fixed ratio.

The Corporation’s Articles of Incorporation require that 30% of the annual net income, afterdeducting income tax paid and any deficit, if any, be provided as legal reserve (limited to thesituation where the legal reserve is less than the capital). Secondly, in accordance with laws andregulations, the remainder should be appropriated to a special reserve if required. Finally, theremaining annual net income and the previously accumulated undistributed earnings shouldbecome distributable earnings. The board of directors should propose that the shareholders’meeting resolve the distribution of these earnings, of which up to 1% may be for the remunerationof directors and supervisors, and 3% to 5% for bonuses to employees.

The distribution must be resolved by the shareholders in the following year and given effect to inthe financial statements of that year.

Under the Company Law, appropriation for the legal reserve is made until the reserve equals theaggregate par value of the outstanding capital stock of the Corporation. The reserve may be usedto offset a deficit; also, when the balance of the reserve reaches 50% of the aggregate par value ofthe outstanding capital stock of the Corporation, up to 50% of the balance of the reserve may betransferred to capital in the form of stock dividend.

The Corporation recognizes a special reserve from net income of the current year or fromundistributed earnings of the prior years in order to restrict the distribution of earnings, for whichthe amount of the special reserve is equivalent to the debit balance of any account in thestockholders’ equity other than the deficit. The special reserve may be used without restriction todistribute earnings based on the reverse of the debit balance of the stockholders’ equity mentionedabove.

Although the Corporation operates within a mature industrial environment, there are still plenty ofopportunities for the Corporation to expand its business. As a result, concerning the investmentopportunities available to the Corporation or the ratio of capital requirements, the allocation ofdividends distributed by the Corporation is 50% in cash and 50% in the form of stock shares (the“50%-50% dividend policy”) in principle, but the foregoing policy could be adjusted depending onthe requirements of investment opportunities available to the Corporation, the status of the stockmarket, and other related factors.

When the Corporation appropriates the earnings generated starting from January 1, 1998 onwards,the shareholders are allowed an imputed credit that is calculated based on the ratio of the balanceon the Imputed Credit Account (ICA) to undistributed earnings at the date of appropriation.However, none of the credit is allowed when the Corporation appropriates the earnings generatedprior to January 1, 1998.

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The shareholders, at the meeting held on June 12, 2002, resolved the distribution of earnings for2001 as follows:

a. Appropriating legal reserve of $966,393;b. Appropriating special reserve of $364;c. Allocating cash dividends of $1,068,348;d. Appropriating bonuses of $1,068,348 to shareholders;e. Appropriating remuneration of $3,000 to directors and supervisors;f. Appropriating bonuses of $113,250 to employees.

Had the bonus to employees and remuneration to directors and supervisors been expensed in 2001instead of being accounted for as earnings distributions, the pro forma primary earnings per shareof net income of 2001 would have decreased from $1.15 to $1.10. Information regardingemployee bonuses and remuneration to directors and supervisors may be obtained by referring tothe Market Observation Post System.

The shareholders also approved on June 12, 2002 the reclassification of capital surplus from gainon disposals of property, plant and equipment of $653, generated prior to 2000, to unappropriatedearnings.

18. EARNINGS PER SHARE

The numerators and denominators for calculating earnings per share (EPS) were as follows:

Amounts (Numerator) EPS Income IncomeBefore Shares BeforeIncome Net (Denominator) Income Net

Tax Income (in Thousands) Tax Income2002

Primary EPSNet income for common shareholders $3,984,592 $3,252,493 2,811,441 $ 1.42 $ 1.16

2001

Primary EPSNet income for common shareholders $3,756,856 $3,221,311 2,811,358 $ 1.34 $ 1.15

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19. RELATED-PARTY TRANSACTIONS

The Corporation had significant transactions with the following related parties:

Related Party Relationship with the Corporation

a. After August 22, 2002

Mega Financial Holding Company (MFH) Parent company United Microelectronics Corp. (UMC) The director and supervisor of MFHChung Hua Post (CHP) The director of MFHYu-Chi Investment Co., Ltd. (YCI) The director of MFHChan Lo Investment Co., Ltd. (CLI) The director of MFHHong Tai Electric Industrial Co., Ltd. (HTE) The director of MFH (resigned in

November 2002)Central Investment Holding Co. (CIH) The director of MFH (resigned in

October 2002)The International Commercial Bank of China (ICBC) A wholly-owned subsidiary of MFHChiao Tung Bank (CTB) A wholly-owned subsidiary of MFHInternational Securities Co., Ltd. (ISC) A wholly-owned subsidiary of MFHBarits Securities Corporation (BSC) A wholly-owned subsidiary of MFHChung Kuo Insurance Co. (CKI) A wholly-owned subsidiary of MFHChung Hsing Securities Co., Ltd. (CHSC) Subsidiary Chung Hsing Securities Investment Services Co., Ltd. (CHSIS)

Subsidiary of CHSC

Chung Hsing Securities Investment Trust Co., Ltd. (CHSIT)

Subsidiary of CHSC

b. Until August 22, 2002

Central Investment Holding Co. (CIH) Director and supervisor Bank of Taiwan (BOT) Director and supervisor Land Bank of Taiwan (LBOT) Director Shanghai Commercial and Savings Bank (SCSB) Director Hualon Microelectronics Co. (HMC) Director First Commercial Bank (FCB) Director (resigned in October 2001)Hua-Nan Commercial Bank (HNCB) Supervisor Taiwan Business Bank (TBB) Supervisor Taiwan Tea Co. (TTC) Supervisor Chung Hsing Securities Co., Ltd. (CHSC) Subsidiary

Other related-party transactions are those with the directors, supervisors, the General Manager(GM), the vice-general manager, the senior managers, and the department managers directly underthe GM, the spouses of the directors, the supervisors, and the GM, and the relationships within thesecond-degree of consanguinity with the chairman and the GM.

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The significant transactions and balances with the foregoing parties are summarized as follows:

a. Due from banks

MaximumBalance Year-end Interest

During the Year Balance Rate % Amount 2002

ICBC $ 500,000 $ - 1.875 $ 77CTB 500,000 - 2.270 31SCSB 300,000 - 2.275 19

$ - $ 1272001

SCSB $ 500,000 $300,000 2.275-2.950 $ 59FCB 200,000 - 2.400 53

$300,000 $ 112

b. Bank overdrafts and call loans:


During the Year Balance Rate % Amount 2002

Bank overdraftsBOT $ 2,647,000 $1,138,000 3.500-6.975 $ 47,691SCSB 18,103 - 7.170 1

Bank call loansLBOT 3,000,000 500,000 1.550-2.100 19,096CTB 1,500,000 350,000 1.550-2.375 9,310BOT 2,260,000 50,000 1.625-2.325 3,574TBB 5,100,000 - 1.600-2.350 12,587CHP 3,200,000 - 1.675-2.450 2,556ICBC 2,000,000 - 1.600-2.000 1,351HNCB 1,500,000 - 1.550-2.000 1,848SCSB 1,350,000 - 1.925-1.975 1,889

$2,038,000 $ 99,9032001

Bank overdraftsBOT $ 1,710,443 $ - 7.040-7.450 $ 42,467SCSB 90,188 - 7.948 20

Bank call loansBOT 4,500,000 - 2.400-5.000 42,293TBB 3,200,000 - 2.410-4.700 10,659

(Forward)

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During the Year Balance Rate % Amount

FCB $ 2,000,000 $ - 2.380-5.050 $ 39,722HNCB 2,000,000 - 2.450-6.000 11,619SCSB 1,800,000 - 3.975-4.550 1,484LBOT 1,600,000 - 2.450-4.900 8,849

$ - $157,113

c. Sale of investments in bills and bonds:

2002 2001

BOT $ 432,976,132 $ 475,248,554LBOT 233,192,396 459,247,615CHP 136,975,685 -ICBC 60,880,057 -UMC 45,324,433 -HNCB 44,976,468 122,217,273CTB 28,566,705 -SCSB 21,192,482 47,756,509TBB 16,058,317 165,128,969BSC 14,132,096 -CIH 12,148,302 6,003,348CHSC 9,185,201 25,578,261CKI 3,653,625 -MFH 2,300,000 -HTE 1,923,288 -ISC 894,120 -

CHSC 166,878 -

CLI 34,858 -YCI 25,417 -

FCB - 107,172,416TTC - 610,034Others 563,654 536,894

$1,065,170,114 $1,409,499,873

The terms of the above transactions are similar to those with unrelated parties.

d. Guarantees for short-term negotiable instruments issued

2002 2001

TTC $2,516,000 $2,387,000CIH 2,300,000 1,840,000

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HMC 90,000 55,000

$4,906,000 $4,282,000

e. Collaterals pledged for bank call loans

The collateral was as follows:

Lender Description 2002 2001

BOT Certificates of time deposit, trust deposits, negotiable certificates of deposit, government bonds, and corporate bonds

$4,282,747 $4,235,162

TBB Certificates of time deposit 200,000 200,000SCSB Certificates of time deposit 100,000 100,000FCB Certificates of time deposit - 2,060,000

$4,582,747 $6,595,162

f. Professional service fees

2002 2001 % ofPro-

fessionalService

% ofPro-

fessionalService

Amount Fees Amount Fees

CHSIS $ 1,200 12.87 $ - -

g. Rental revenue

2002 2001 % of

Rental% of

Rental Amount Revenue Amount Revenue

CHSC $ 20,708 20.91 $ 20,708 20.69MFH 2,033 2.05 - -

$ 22,741 $ 20,708

The Corporation leases a portion of its office building to CHSC and MFH under agreementscovering the periods from June 2000 to May 2003 and from August 2002 to August 2007,respectively. The rental is payable monthly and seasonally. The Corporation has received$5,177 from CHSC and $1,663 from MFH as rent deposit.

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20. PLEDGED ASSETS

Deposits used as security for bank overdrafts and call loans are as follows:

2002 2001

Certificates of time deposit and trust deposits $ 5,100,000 $ 5,460,000Negotiable certificates of deposit 4,502,826 -Government bonds 3,083,886 1,164,762Corporate bonds 100,000 200,000

$ 12,786,712 $ 6,824,762

Please refer to Note 19 for assets pledged to related parties.

21. COMMITMENTS AND CONTINGENCIES

Commitments and contingencies as of the balance sheet dates, which arose from the Corporation’snormal course of business, consisted of:

2002 2001

Investments in bills and bonds sold under agreements to repurchase $191,179,861 $220,690,974Guarantees and endorsements for short-term negotiable instruments 161,023,600 181,497,100Investments in bills and bonds purchased under agreements to resell 11,437,727 28,768,202

$363,641,188 $430,956,276

22. DISCLOSURE OF FINANCIAL INSTRUMENTS

a. The information on the book value and fair value of financial instruments is as follows:

2002 2001 Nonderivative Financial Instruments Book Value Fair Value Book Value Fair Value

Assets

Cash $ 1,018,842 $ 1,018,842 $ 1,788,234 $ 1,788,234Due from banks - - 1,500,000 1,500,000Investments in bills and bonds - net 14,680,311 14,680,311 14,319,503 14,319,503Receivables and overdue accounts receivable - net 2,290,484 2,290,484 3,058,632 3,058,632

(Forward)

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2002 2001 Non-derivative Financial Instruments Book Value Fair Value Book Value Fair Value

Funds received to guarantee short-term negotiable instruments $ 91,259 $ 91,259 $ 180,252 $ 180,252Long-term stock investments 4,923,987 4,923,987 5,037,494 5,037,494Investments in long-term bonds 1,495,146 1,494,840 - -Pledged assets 12,786,712 12,786,712 6,824,762 6,824,762Refundable deposits 2,069,637 2,069,637 1,912,543 1,912,543

Liabilities

Bank overdrafts and call loans 2,038,000 2,038,000 - -Payable and other liabilities 531,978 531,978 565,959 565,959

The bases for fair values are as follows:

1) Short-term financial instruments (including cash, due from banks, funds received toguarantee short-term negotiable instruments, bank overdrafts and call loans, and payableand other liabilities) - book value. Since the maturity dates of these instruments are closeto the balance sheet dates, the use of their carrying value is reasonable.

2) Investments in bills and bonds, investments in long-term bonds, pledged assets andrefundable deposits - market value if available, otherwise, book value.

3) Long-term stock investments - market value if available. Otherwise, carrying value isconsidered the fair value, if no permanent impairment in the value is expected.

4) Receivables and overdue accounts receivable - expected retrievable amounts (net ofallowance for bad debts).

b. Financial instruments with off-balance-sheet credit risk

One of the Corporation’s primary operations is acting as a guarantor or as an endorser ofcommercial paper. These contracts are ordinarily expired within one year. The outstandingperiods of time for commercial paper are usually from 10 to 180 days, and the expiry dates arenot concentrated in one specific period of time.

The amounts of guarantee contracts with off-balance-sheet credit risk as of December 31, 2002and 2001 were $320,548 million and $347,293 million, respectively, of which $161,024 millionin 2002 and $181,497 million in 2001 were already used.

The potential cash requirement related to the guarantees made by the Corporation is only equalto the amount of commercial paper not actually redeemed by the clients. Accordingly, theactual cash requirement may be lower than the amount of the guarantees made. Themaximum of the Corporation’s potential exposure or credit risk is equal to the total amount ofthe guarantees made without considering the value of the collateral.

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When acting as a guarantor or endorser of commercial paper, the Corporation strictly evaluatesits clients’ credit standing and requires collateral when necessary. As of December 31, 2002and 2001, about 57% and 60%, respectively, of the total amount of guaranty made by theCorporation was covered by the related value of the collateral. The collateral may includereal estate, marketable securities and other properties. The Corporation has the right toenforce on collateral if necessary as consignors breach the contracts.

c. Information about significant concentrations of credit risk

The following are the significant concentrations of credit risk (shown by industry and inmillions of New Taiwan dollars) related to guarantees and endorsements of commercial papermade by the Corporation:

2002 2001 Amount % Amount %

Finance and insurance $ 42,586 26.4 $ 45,737 25.2Real estate 26,837 16.7 26,929 14.8Electric/Machinery 9,018 5.6 14,703 8.1Textiles 8,413 5.2 10,126 5.6Services 8,396 5.2 10,567 5.8Retailing 7,886 4.9 10,540 5.8Other - total of individual industries included are less than 5% of the total commitment balance at the year-end 57,888 36.0 62,895 34.7

$161,024 100.0 $181,497 100.0

23. ADDITIONAL DISCLOSURES

The following are the additional disclosures required by the SFC for investees:

a. Financing provided: Unavailable, except due from banks by regulation No. 86810288 issuedby the Ministry of Finance (MOF) on September 23, 1997.

b. Endorsement/guarantee provided: Company’s business.

c. Marketable securities held: Table 1 (attached).

d. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or20% of the paid-in capital: Table 2 (attached).

e. Acquisition of individual pieces of real estate at costs of at least NT$100 million or 20% of thepaid-in capital: None.

f. Disposal of individual pieces of real estate at prices of at least NT$100 million or 20% of thepaid-in capital: None.

g. Total purchases from or sales to related parties amounting to at least NT$100 million or 20% ofthe paid-in capital: Note 19.

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h. Receivables from related parties amounting to at least NT$100 million or 20% of the paid-incapital: None.

i. Names, locations, and related information of investees over which the Company exercisessignificant influence: Table 3 (attached).

j. Derivative financial transactions: None.

k. Investment in Mainland China

1) Investee company name, the description of the primary business activity and products,issued capital, nature of the relationship, capital inflow or outflow, ownership interest, gainor loss on investment, amounts received on investment, and the limitation on investment:None.

2) Significant direct or indirect transactions with the investee company, prices, payment terms,and unrealized gain or loss: None.

24. SEGMENT INFORMATION

The Corporation engages in the bills and bonds finance industry only.

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TABLE 1CHUNG HSING BILLS FINANCE CORPORATION AND ITS SUBSIDIARY

MARKETABLE SECURITIES HELDDecember 31, 2002


December 31, 2002Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement

Account Shares CarryingValue

Percentage ofOwnership

Market Value or NetAsset Value (Note 1)

Chung Hsing Bills Finance Stock

Co., Ltd. Chung Hsing Securities Co., Ltd. Investee accounted for by equity method Long-term stock investment 414,664,542 $4,150,720 99.583 $4,148,547Core Pacific City Corporation Investee accounted for by cost method Long-term stock investment 60,000,000 600,000 5.000 -Taiwan Futures Exchange Co., Ltd. Investee accounted for by cost method Long-term stock investment 1,025,000 10,250 0.513 -Fuhwa Financial Holding Co., Ltd. (Note 2) Investee accounted for by cost method Long-term stock investment 552,178 8,037 0.020 5,267Taiwan Securities Central Depository Co., Ltd. Investee accounted for by cost method Long-term stock investment 1,696,530 6,850 0.685 -Agora Garden Co., Ltd. Investee accounted for by cost method Long-term stock investment 21,090 900 0.030 -Taiwan Asset Management Co., Ltd. Investee accounted for by cost method Long-term stock investment 10,000,000 100,000 0.568 -Taiwan Financial Asset Services Co., Ltd. Investee accounted for by cost method Long-term stock investment 5,000,000 50,000 3.333 -

Corporate bondsChina Airlines Ltd. 1st unsecured bonds Investments in long-term

bonds - 305,829 - 305,829

Taiwan Power Company 2002 4th unsecured bonds Investments in long-termbonds

- 600,000 - 599,989

Hua Nan Financial Holdings Co., Ltd. 2002 1stunsecured sub-order bonds

Investments in long-termbonds

- 500,000 - 499,976

Taiwan Cellular Corp. 2nd unsecured bonds Investments in long-termbonds

- 89,317 - 89,046

Yuan Ding Construction Co., Ltd. 2nd assured bonds Pledged assets - 100,000 - 100,000

Chung Hsing Securities Stock Co., Ltd. Taiwan Futures Exchange Co., Ltd. Investee accounted for by cost method Long-term stock investment 360,000 3,600 0.18 -

Taiwan III Venture Capital Co., Ltd. Investee accounted for by cost method Long-term stock investment 5,000,000 50,000 5.00 -Top Taiwan IV Venture Capital Co., Ltd. Investee accounted for by cost method Long-term stock investment 5,000,000 50,000 5.00 -Chung Hsing Securities Investment Trust Co., Ltd. Investee accounted for by equity method Long-term stock investment 6,000,000 61,133 20.00 -Chung Hsing Securities Investment Services Co., Ltd. Investee accounted for by equity method Long-term stock investment 9,996,580 110,477 99.97 -

FundsCentral International Diamond Bond Fund Short-term investment 18,570,964.30 200,000 - 200,470KGI Victory Fund Short-term investment 6,924,180.23 70,000 - 70,163Truswell Bond Fund Short-term investment 4,175,539.70 50,000 - 50,116Jih Sun Bond Fund Short-term investment 5,467,852.93 70,000 - 70,170Prudential Financial Bond Fund Short-term investment 3,277,017.20 45,000 - 45,104Prufunds Well Pool Bond Fund Short-term investment 8,461,883.40 100,000 - 100,000

(Forward)

- 52 -

December 31, 2002Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement

Account Shares CarryingValue

Percentage ofOwnership

Market Value or NetAsset Value (Note 1)

Sheng Hua 2008 Chinese Enterprises Fund Short-term investment 3,000,000.00 $ 30,000 - $ 20,100Tai-Yu Hightech Fund Short-term investment 1,265,822.80 10,000 - 6,240Shinkong Great China Fund Short-term investment 1,000,000.00 10,000 - 9,310Central Diamond Fund Short-term investment 1,669,449.10 10,000 - 7,830ING CHB Global Brands Fund Short-term investment 2,000,000.00 20,000 - 20,240Waterland Vision Fund Short-term investment 1,000,000.00 10,000 - 9,350Cathay Technology Fund Short-term investment 8,000,000.00 80,000 - 72,240Central Chiao-Tung Hi-Tech Fund Short-term investment 20,000,000.00 200,000 - 182,200Fuhwa Fund Short-term investment 7,610,350.10 50,000 - 50,380Fuhwa II Fund Short-term investment 9,541,984.70 50,000 - 50,095Franklin Templeton First Taiwan First Fund Short-term investment 20,000,000.00 200,000 - 199,000

Note 1: The market values are calculated according to the yield/price conversion announced by the OTC. Without the market values, they are calculated according to the cost of the marketable securities.

Note 2: Fuh-Hwa Securities Finance Co., Ltd. was renamed as Fuhwa Financial Holding Co., Ltd. through a share swap on February 4, 2002. As a result, the Corporation’s ownership interest in Fuhwa FinancialHolding Co., Ltd. increased from 542,784 shares to 552,178 shares and decreased from 0.037% to 0.020%.

- 53 -

TABLE 2

CHUNG HSING BILLS FINANCE CORPORATION AND ITS SUBSIDIARY

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

For the Year Ended December 31, 2002


Beginning Balance Acquisitions Disposals Ending BalanceCompany Name Marketable Securities Type and Name Financial Statement

Account Counter-party Nature of Relationship Shares Amount Shares Amount Shares Amount CarryingValue

Gains (Losses)on Disposal Shares Amount

Chung Hsing BillsFinance Co., Ltd.

Corporate bonds

China Airlines Ltd. 1st unsecured bonds Investments in long-termbonds

- - $ - - $ 307,282 - $ - $ 1,453(Note 1)

$ - - $ 305,829

Taiwan Power Company 2002 4thunsecured bonds


- - - - 600,000 - - - - - 600,000

Hua Nan Financial Holdings Co., Ltd.2002 1st unsecured sub-order bonds


- - - - 500,000 - - - - - 500,000

Yuan Ding Construction Co., Ltd. 2ndassured bonds

Pledged assets - - 200,000 - - - 100,000(Note 2)

100,000(Note 2)

-(Note 2)

- 100,000

Chung Hsing Funds Securities Co., Ltd. Sheng Hua 1699 Bond Fund Short-term investment - 16,803,155.46 190,000 157,786,551.84 1,810,000 174,589,707.30 2,004,442 2,000,000 4,442 - -

Prufunds Well Pool Bond Fund Short-term investment - 11,304,839.30 130,000 86,792,806.14 1,010,000 89,635,762.04 1,042,324 1,040,000 2,324 8,461,883.40 100,000Shinkong Chi-Shin Fund Short-term investment - 3,043,144.18 40,000 25,539,345.93 340,000 28,582,490.11 380,784 380,000 784 - -Union Bond Fund Short-term investment - 4,495,342.81 50,012 18,743,811.83 210,009 23,239,154.64 260,561 260,021 540 - -B.B. Bond Fund Short-term investment - 6,761,913.04 70,000 42,999,782.57 450,000 49,761,695.61 521,207 520,000 1,207 - -Polaris De-Li Fund Short-term investment - 4,684,713.10 65,003 34,557,820.60 485,010 39,242,533.70 551,017 550,013 1,004 - -FuhHwa Albatross Fund Short-term investment - 4,906,675.00 50,000 56,259,907.15 580,000 61,166,582.15 631,506 630,000 1,506 - -Home Run Fund Short-term investment - 7,790,892.50 100,000 3,884,671.90 50,000 11,675,564.40 150,183 150,000 183 - -The Forever Fund Short-term investment - 3,782,949.38 50,005 48,426,178.64 650,000 52,209,128.02 701,470 700,005 1,465 - -Jih Sun Bond Fund Short-term investment - 4,011,526.86 50,011 53,739,783.65 680,018 52,283,457.58 661,387 660,029 1,358 5,467,852.93 70,000UBS Taiwan Bond Fund Short-term investment - 3,653,117.05 50,009 10,184,256.59 140,018 13,837,373.64 190,405 190,027 378 - -Transcend Fortune Bond Fund Short-term investment - 4,496,160.30 50,000 79,731,386.30 900,000 84,227,546.60 952,130 950,000 2,130 - -Safe Income Fund Short-term investment - 4,464,418.60 60,000 46,943,608.40 640,000 51,408,027.00 701,581 700,000 1,581 - -ABN AMRO Bond Fund Short-term investment - 4,332,693.06 60,000 23,637,963.78 330,018 27,970,656.84 390,805 390,018 787 - -Barits Bond Fund Short-term investment - 3,585,161.00 40,000 61,701,822.20 700,000 65,286,983.20 741,299 740,000 1,299 - -United Bond Fund Short-term investment - 2,512,078.91 30,000 21,477,126.56 260,000 23,989,205.47 290,481 290,000 481 - -Central International diamond Bond

FundShort-term investment - 6,680,026.72 70,000 128,354,353.61 1,370,000 116,463,416.03 1,242,969 1,240,000 2,969 18,570,964.30 200,000

NITC Bond Fund Short-term investment - - - 793,927.20 120,000 793,927.20 120,124 120,000 124 - -Truswell Bond Fund Short-term investment - - - 55,449,847.60 655,060 51,274,307.90 606,002 605,060 942 4,175,539.70 50,000Asia Pacific Bond Fund Short-term investment - - - 32,104,696.36 380,000 32,104,696.36 380,718 380,000 718 - -Phoenix Fund Short-term investment - - - 27,251,889.30 380,000 27,251,889.30 380,849 380,000 849 - -Grand Cathay Bond Fund Short-term investment - - - 27,908,549.00 300,000 27,908,549.00 300,279 300,000 279 - -Ta Chong Bond Fund Short-term investment - - - 17,342,018.40 210,000 17,342,018.40 210,437 210,000 437 - -KGI Victory Fund Short-term investment - - - 41,769,253.30 420,000 34,845,073.07 350,744 350,000 744 6,924,180.23 70,000Prudential Financial Bond Fund Short-term investment - - - 10,951,456.90 150,000 7,674,439.70 105,141 105,000 141 3,277,017.20 45,000Central Chiao-Tung Hi-Tech Fund Short-term investment - - - 20,000,000.00 200,000 - - - - 20,000,000.00 200,000Franklin Templeton First Taiwan First

FundShort-term investment - - - 20,000,000.00 200,000 - - - - 20,000,000.00 200,000

Note 1: The decrease in the investments in long-term bonds is because of the amortization of premium.

Note 2: The decrease in the pledged assets is because the bonds matured. The selling prices are equal to the face values of the bonds and the disposal incomes or losses are equal to the differences between the face values and the costs of the bonds.

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TABLE 3

CHUNG HSING BILLS FINANCE CORPORATION AND ITS SUBSIDIARY

NAMES, LOCATIONS, AND OTHER INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCEFor the Year Ended December 31, 2002


Initial Investment Costs Balance as of December 31, 2002

Investor Company Investee Company Location Main Businesses andProducts

EndingBalance of

2002

EndingBalance of

2001Shares Percentage of

OwnershipCarrying

Value

Net Income(Losses) ofthe Investee

InvestmentGains

(Losses)Note

Chung Hsing BillsFinance Co., Ltd.

Chung Hsing Securities Co., Ltd. 5F, 125 Nanking E. Rd.,Sec. 2, Taipei, Taiwan,R.O.C.

Underwriting, dealingand brokering ofsecurities

$4,233,290 $4,205,185414,664,542

99.583% $4,150,720 ( $ 65,332 ) ( $ 69,718 ) (Note)

Chung HsingSecurities Co., Ltd.

Chung Hsing Securities InvestmentServices Co., Ltd.

12F, 125 Nanking E. Rd.,Sec. 2, Taipei, Taiwan,R.O.C.

Investment consultingand services ofsecurities

117,525 117,525 9,996,580 99.970% 110,477 3,367 1,236 (Note)

Chung Hsing Securities InvestmentTrust Co., Ltd.

19F, 123 Chung-Hsiao E.Rd., Sec. 2, Taipei,Taiwan, R.O.C.

Issuing beneficiarycertificates and raisingsecurities investmenttrust funds

60,000 60,000 6,000,000 20.000% 61,133 8,665 1,733

Note: The investment income (losses) are recognized by the Corporation and include the differences, which are amortized over five years, between the investment costs and the net asset values.

Documents

CHUNG HSING BILLS FINANCE CORPORATION · - 2 - Letter to Shareholders Economic and Financial Conditions According to the World Bank’s report on the outlook for the global economy