Annual Financial Report Part 2

1) Hon Hai Precision Industry Co., Ltd. (the Company) was established on February 20, 1974. The Company was listed on the Taiwan Stock Exchange in June 1991. The Company merged with Premier Image Technology Corporation (Premier Corp.) on December 1, 2006. The Company’s issued and outstanding capital was $85,789,319. The main activities of the Company are the manufacture, processing and sales of connectors, cable, enclosures, wired/wireless communication products, optics products, power supply modules, and assemblies for use in the IT, communications, automotive equipment, precision molding, automobile, and consumer electronics industries. As of December 31, 2009, the Company and its subsidiaries had approximately 611,000 employees.

2) Consolidated subsidiaries

Main activities of the subsidiaries and ownership of the Company:

A. The financial statements of consolidated subsidiaries as of and for the year ended December 31, 2007, 2008 and 2009 were audited by independent accountants.

B. For the relevant information on indirectly owned subsidiaries of the Company. Please refer to Note 11.

C. Changes in the consolidated subsidiaries

(1) In March 2008, the Company established a holding company, Foxconn SA B.V., which is engaged in export processing business investments in Russia, and was accordingly included in the consolidated financial statements.

(4) In June 2008, the Company disposed its 100% share ownership of Unique Logistics Ltd. due to reorganization; as a result, Unique Logistics Ltd.’s shares were 100% directly held by Foxconn (Far East) Ltd. The reorganization in substance had no accounting effect and therefore did not generate profit or loss.

(5) In September 2008, Ambit Microsystems Holding Corp. disposed its subsidiary’s 100% share ownership due to reorganization; as a result, the subsidiary of Ambit Microsystems Holding Corp.’s shares were 100% directly held by Foxconn (Far East) Ltd. Ambit Microsystems Holding Corp. has completed liquation procedure on September 2008.

3) Majority-owned subsidiaries that were not included in the consolidated financial statements:

None.

4) Adjustments for subsidiaries with different balance sheet dates: None.

5) Special operating risks of the foreign subsidiaries: No significant special operating risks that would affect the financial statements.

6) Significant restriction on remittance of funds from the foreign subsidiaries to the Company: None.

7) The Company’s common stock owned by its subsidiary:

For the years ended December 31, 2007, 2008 and 2009, Hon Jin International Investment Co., Ltd. owned the Company’s common stock, at a cost of $18,901.

8) Information on new issuance of convertible bonds and common stock by subsidiaries: None.

 

The accompanying consolidated financial statements of the Company and its subsidiaries (collectively referred herein as the Group) are prepared in accordance with the “Rules Governing the Preparation of Financial Statements by Securities Issuers” and accounting principles generally accepted in the Republic of China. The Group’s significant accounting policies are summarized below:

A. All majority-owned subsidiaries and controlled entities are included in the consolidated financial statements. Effective January 1, 2008, the Company prepares consolidated financial statements on a quarterly basis.

B. The income (loss) of the subsidiaries is included in (excluded from) the consolidated statement of income effective on the date the Company gains (loses) control over the subsidiaries.

The financial statements are stated in New Taiwan Dollars. Translation of the 2009 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers, using the Federal Reserve Bank of New York exchange rate on March 31, 2010 of NT$31.73 to US$1 uniformly applied for all the financial statements accounts. Such translation amounts are unaudited and should not be construed as representations that the New Taiwan Dollars amounts represent, have been, or could be converted into U.S. dollars at this rate or any other rate of exchange.

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars using the exchange rates at the balance sheet date. Equity accounts are translated at historical rates except for beginning retained earnings, which is carried forward from prior year’s balance. Dividends are translated at the rates prevailing at the date of declaration. Profit and loss accounts are translated at weighted-average rates of the year. The resulting translation differences are included in “cumulative translation adjustments” under stockholders’ equity.

A. Assets that meet one of the following criteria are classified as current assets; otherwise they are classified as non-current assets:

1) Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle;

2) Assets held mainly for trading purposes;

3) Assets that are expected to be realized within twelve months from the balance sheet date; and

4) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date.

B. Liabilities that meet one of the following criteria are classified as current liabilities; otherwise they are classified as non-current liabilities:

1) Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle;

2) Liabilities arising mainly from trading activities;

3) Liabilities that are to be paid off within twelve months from the balance sheet date; and

4) Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date.

The preparation of financial statements in conformity with R.O.C. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the amounts of revenues and expenses reported during the period.Actual results could differ from those assumptions and estimates.

 

Cash equivalents represent short-term, highly liquid investments which can be readily converted into fixed amount of cash and with a maturity period of less than three months. The statements of cash flows is compiled under the cash and cash equivalents basis.

A. Equity investments are recognized using trade date accounting. Debt instruments, beneficiary certificates and derivative financial instruments are recognized and derecognized using settlement date accounting.All are recognized initially at fair value.

B. These financial instruments are subsequently remeasured and stated at fair value, and the gain or loss is recognized in profit or loss. The fair value of listed stocks, OTC stocks, closed-end mutual funds and deposit receipts is based on latest quoted fair prices of the accounting period.The fair value of open-end and balanced mutual funds is based on the net asset value at the balance sheet date.

C. For derivatives that do not qualify for hedge accounting, if the derivative is an option, then thetransaction is recognized at fair value on the trade date, and if the derivatives is not an option, then the transaction is recognized at zero fair value on the trade date.

D. The derivative features (such as call options and put options) embedded in bonds payable issued by the Company is described in Note 2 (22).

A. Equity investments are recognized using trade date accounting. Bond investments arerecognized and derecognized using settlement date accounting and are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. Available-for-sale financial assets are remeasured and stated at fair value, and the gain or loss is recognized in equity.The fair value of listed stocks, OTC stocks, closed-end mutual funds and deposit receipts is based on latest quoted fair prices of the accounting period.The fair value of open-end and balanced mutual funds is based on the net asset value at the balance sheet date.

C. If there is any objective evidence that the financial asset is impaired, the cumulative loss that had been recognized directly in equity shall be removed from equity and recognized in profit or loss. Impairment losses recognized previously in profit or loss for an investment in an equity instrument shall not be reversed through profit or loss, and if, subsequently, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

A. Investment in unquoted equity instruments is recognized using trade date accounting and is recognized initially at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. If there is any objective evidence that the financial asset is impaired, the impairment loss is recognized in profit or loss.Such impairment loss cannot be reversed.

If an entity recognizes financial assets using settlement date accounting, any change in the fair value of the asset to be received during the period between the trade date and the settlement date / balance sheet date is not recognized for assets carried at cost or amortized cost.For financial asset or financial liability classified as at fair value through profit or loss, the change in fair value is recognized in profit or loss.For available-for-sale financial assets, the change in fair value is recognized directly in equity.

Accounts receivable are claims resulting from the sale of goods or services.The fair value of accounts receivable is calculated based on the imputed interest rate.Accounts receivable which are collectible within one year, and where the difference between the fair value and the value at maturity is insignificant are measured at carrying value.

Allowance for doubtful accounts is provided based on past experience and the evaluation of the collectibility of accounts, notes and other receivables, taking into account the aging analysis of receivables.

Effective January 1, 2009, the Group adopted the amendments to R.O.C. SFAS No. 10, “Accounting for Inventories”. The perpetual inventory system is adopted for inventory recognition. Inventories are stated at cost. The cost is determined using the weighted-average method. At the end of period, inventories are evaluated at the lower of cost or net realizable value, and the individual item approach is used in the comparison of cost and net realizable value. The calculation of net realizable value is based on the estimated selling price in the normal course of business, net of estimated costs of completion and estimated selling expenses.

As the value of raw materials declines and the cost of finished goods is over the net realizable value, the net realizable value of raw materials is determined based on current replacement cost. Prior to 2009, the aggregate value method is used to determine the lower of cost or market value. The market value for raw materials is determined based on current replacement cost while the market value for work in process and finished goods inventories is determined based on net realizable value. Provision for obsolescence is based on the specific identification method.

A. Long-term equity investments in which the Group holds more than 20% of the investee company’s voting shares or has the ability to exercise significant influence on the investee’s operational decisions are accounted for under the equity method. The excess of the initial investment cost over the acquired net asset value of the investee attributable to goodwill is no longer amortized from 2006.Retrospective adjustment of the amount of goodwill amortized in previous years is not required. Goodwill is subject to tests of impairment on an annual basis. The excess of acquired net asset value of investee over the initial investment cost is allocated proportionately and applied as a reduction to the book values of identifiable non-current assets, and any remaining amount of such excess after this allocation is credited to extraordinary gains.

B. Long-term investment in which the Group holds more than 50% of the investee company’s voting shares or has the ability to control the investee’s operational decisions are accounted for under the equity method and included in the consolidated financial statements on a quarterly basis.

C. For foreign investments accounted for under the equity method, the Group’s proportionate share of the investee company’s cumulative translation adjustment, resulting from translating the foreign investee company’s financial statements into New Taiwan Dollars, is recognized by the Group and included as “cumulative translation adjustments” under stockholders' equity.

A. Property, plant and equipment are stated at cost.Interest costs incurred on the loans used to bring the assets to the condition and location necessary for their intended uses are capitalized. Significant servicing or betterments capable of generating future economic benefits are capitalized and depreciated accordingly.Maintenance and repairs are expensed as incurred.

B. Depreciation is provided on the straight-line method using the service life guidelines prescribed by the R.O.C. Government, which approximate the useful lives of the assets plus one year as residual value.Fully depreciated assets still in use are depreciated based on the residual values over the remaining useful lives.The useful lives of property, plant and equipment are 2 to 8 years, except for buildings which are 45 to 55 years.

A. The excess of the initial acquisition cost over the fair value of the acquired identifiable tangible and intangible assets is attributable to goodwill.

B. Other intangible assets, mainly customer relationship, are stated at cost and amortized on a straight-line basis over 3 years.

A. The costs of telephone network installation charges, computer software, molding and tools equipment are recorded as deferred charges and amortized over their estimated economic lives on a straight-line basis.

B. Land use rights are stated at cost and amortized over the lease period using the straight-line method.

The Group recognizes impairment loss when there is indication that the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of the asset in an arm’s length transaction after deducting any direct incremental disposal costs. The value in use is the present value of estimated future cash flows to be derived from continuing use of the asset and from its disposal at the end of its useful life. When the impairment no longer exists, the impairment loss recognized in prior years shall be recovered. The recoverable amount of goodwill shall be evaluated periodically.Impairment loss will be recognized whenever there is indication that the recoverable amount of these assets is less than their respective carrying amount.Impairment loss of goodwill recognized in prior years is not recoverable in the following years.

Warranty obligation is recognized based on the estimated warranty cost per unit and the number of units sold during the period.

Under the defined benefit pension plan, net periodic pension costs are recognized in accordance with the actuarial calculations. Net periodic pension costs include service cost, interest cost, expected return on plan assets, and amortization of unrecognized net transition obligation and gains or losses on plan assets. Unrecognized net transition obligation is amortized on a straight-line basis over 15 years. Under the defined contribution pension plan, net periodic pension costs are recognized as incurred.

For bonds issued with embedded conversion, put, or call option feature after January 1, 2006, the issuer shall bifurcate the issuance price based on the substance of the contractual arrangement on initial recognition, and recognized the elements separately as a financial asset, financial liability, or an equity instrument.

These bonds are accounted for as follows:

A. The difference between the issue price and face value of convertible corporate bonds is accounted for as premium or discount which is required to be amortized over the period from the date of issuance to maturity date using the interest method and is recorded as “interest expense”.

B. The value of any derivative features (such as a call option and put option) embedded in the compound financial instrument is recognized as “financial assets or financial liabilities at fair value through profit or loss”.These derivative features are subsequently remeasured and stated at fair value on each balance sheet date, and the gain or loss is recognized in “gain or loss on valuation of financial assets or financial liabilities”.At the maturity of the redemption period, if the fair value of common stock exceeds the redemption price, the fair value of the put option is recognized as “capital reserve”; however, if the fair value of common stock is lower than the redemption price, the fair value of the put option is recognized as “gain or loss”.

C. A conversion right embedded in the bonds issued by the Company, which is convertible to an equity instrument, is recognized in “capital reserve from stock conversion option”.When a bondholder exercises his/her conversion rights, the liability component of the bonds (including corporate bonds and embedded derivatives) shall be revalued at fair value on the conversion date, and the resulting difference shall be recognized as “gain or loss” in the current period.The book value of the common stock issued due to the conversion shall be based on the adjusted book value of the above-mentioned liability component plus the book value of the stock conversion option.

D. Costs incurred on issuance of convertible bonds are proportionately charged to the liabilities and equities of the underlying instruments based on initial recognition amount.

E. In the event that the bondholders may exercise put options within the following year, the underlying bonds payable shall be reclassified to current liabilities. The bonds payable whose put options are unexercised during the exercisable period shall be reclassified to non-current liabilities.

A. Income tax expense is provided based on accounting income after adjusting for permanent differences.The provision for income tax includes deferred income tax for the expected future tax consequences of events that have been included in different periods for financial or tax reporting purposes.Deferred income tax assets and liabilities are determined using enacted tax rates in effect for the year(s) in which the differences are expected to reverse.Valuation allowance on deferred income tax assets is recognized to the extent that it is more likely than not that the income tax benefits will not be realized. Over or under provision of income tax from the previous years is recorded as adjustment to the current year’s income tax expense. In accordance with the ROC Income Tax Law, the company’s undistributed income is subject to an additional 10% corporate income tax.The tax is charged to income tax expense after the appropriation of earnings is approved by the stockholders in the following year.

B. Income tax credits are provided for in accordance with R.O.C. SFAS No. 12 "Accounting for Income Tax Credits".Income tax credits arising from acquisitions of equipment or technology, expenditures for research and development, training and development of employees and investments in qualified stocks are charged to deferred income tax assets and credited to income tax expense in the period the related expenditures are incurred.

C. Effective January 1, 2006, the Company adopted the Income Basic Tax Act (the “Act”).Under the Act, the income tax payable shall be the higher of the basic tax and the regular income tax in accordance with the Income Tax Law and other relevant laws.

D. As a result of the amendment of the Income Tax Law, the Company recalculated its deferred tax assets and liabilities and recorded the resulting difference in the current year income tax benefit or expense.

A. When shares are bought back by the Company, the treasury stock is accounted for as a deduction of the equity.

B. Any excess of the proceeds over the cost of the treasury stock reissued is recognized as an increase in additional paid-in capital from the treasury stock transaction and if the proceeds are less than the cost, the deficit is charged to the additional paid-in capital account.Should the paid-in capital in excess of par value of common stock balance be insufficient to absorb the deficit, the balance is charged to retained earnings.

C. Treasury stock cost is determined using the weighted-average cost method.

D. The Company's common stock owned by its subsidiaries is treated as treasury stock.

Based on the employee stock options and the share-based payment agreements, the Company shall measure the services received during the vesting period by reference to the fair value of the equity instruments granted and account for those amounts as payroll expenses during that period.

Effective January 1, 2008, pursuant to EITF 96-052 of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007, “Accounting for Employees’ Bonuses and Directors’ and Supervisors’ Remuneration”, the costs of employees’ bonuses and directors’ and supervisors’ remuneration are accounted for as expenses and liabilities, provided that such recognition is required under legal or constructive obligation and the amounts can be estimated reasonably. However, if the accrued amounts for employees’ bonuses and directors’ and supervisors’ remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their annual stockholders’ meeting subsequently, the differences shall be recognized as gain or loss in the following year. In addition, according to EITF 97-127 of the Accounting Research and Development Foundation, R.O.C., dated March 31, 2008, “Criteria for Listed Companies in Calculating the Number of Shares of Employees’ Stock Bonus”, the Company calculates the number of shares of employees’ stock bonus based on the closing price of the Company's common stock at the previous day of the stockholders’ meeting held in the year following the financial reporting year, after taking into account the effects of ex-rights and ex-dividends.

 

 

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by taking into account the potentially dilutive securities which are assumed to have been converted to common stock at the beginning of the period.

Revenues are recognized when the earning process is substantially completed and are realized or realizable. Related costs are recognized to match the timing of revenue recognition. Expenses, including research and development costs, are recognized as incurred.

Effective January 1, 2008, the Group adopted EITF 96-052 of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007.As a result of the adoption of EITF 96-052, consolidated net income decreased by $2,995,170 and earnings per share decreased by $0.40 for the year ended December 31, 2008.

Cash equivalents include the Sweep Fund and short-term commercial paper and bonds purchased with resale agreements with maturity less than three months.

 

 

 

 

 

 

1) For the year ended December 31, 2007, the Group recognized a net gain of $43,913 including unrealized loss of $3,026.

2) For the year ended December 31, 2008, the Group recognized a net gain of $751,691 including unrealized loss of $238,403.

3) For the year ended December 31, 2009, the Group recognized a net loss of $270,817 including unrealized loss of $24,266.

 

The fair value of available-for-sale financial assets increased by $17,443,465, decreased by $31,179,943 and increased by $12,175,864 for the years ended December 31, 2007, 2008 and 2009, respectively, and is shown as an adjustment to stockholders’ equity as unrealized gain or loss on financial instruments.Transfers from this equity account to profit and loss amounted to $97, $0 and $762,525 (shown as “gain on disposal of investment”) for the years ended December 31, 2007, 2008 and 2009, respectively.

 

 

 

1.The Group factored its accounts receivable to certain financial institutions without recourse. Under the agreement, the Group is not required to bear uncollectible risk of the underlying accounts receivable, but is liable for the losses incurred on any business dispute. As the Group did not provide any collateral, these accounts receivable meet the derecognition criteria for financial assets. The Group has derecognized the accounts receivable sold to financial institutions, net of the losses estimated for possible business disputes.

As of December 31, 2007, 2008 and 2009, the relevant information of accounts receivable factored but unsettled were as follows:

 

 

2. For the years ended December 31, 2007, 2008 and 2009, the financing charges (expenses) incurred from accounts receivable factoring were $309,426, $987,199 and $15,197 (shown as “financing charges”), respectively.

Expenses and loss incurred on inventories for the years ended December 31, 2007, 2008 and 2009 were as followed:

 

(1) The Group recognized impairment loss in the amounts of $0, $957,730 and $0 (shown as “impairment loss”) for the years ended December 31, 2007, 2008 and 2009, respectively, for its investment accounted for under the cost method.

(2) Under the approval of the Fair Trade Commission, Executive Yuan, R.O.C. in April 2007, Taihsing International Telecommunications Co., Ltd. tendered offers for the acquisition of the shares of Taiwan Fixed Network Co., Ltd. The Group disposed 119,000 shares of Taiwan Fixed Network Co., Ltd. due to participation in the tender offers resulting in a gain on disposal in the amounts of $508,737.

(3) The common shares of the Group’s original investee company, Entire Technology Co., Ltd., were approved to be listed on the stock exchange in August, 2009; accordingly, the Group reclassified those shares to “Available-for-sale financial assets - non-current”.

(4) The investments in these investee companies were measured at cost since its fair value cannot be measured reliably.

(1) The Company’s indirect subsidiary, Ampower Holding Limited-Cayman, increased cash capital by issuing new shares in the fourth quarter of 2008. As the Company did not subscribe for the new shares, the Company’s shareholding percentage of Ampower Holding Limited-Cayman dropped to 45.4% and the Company lost control over the subsidiary.The income (loss) of Ampower Holding Limited-Cayman was excluded from the consolidated statement of income effective the date on which the Company lost control over the subsidiary.The relevant information is described in Note 1(2)C.

(2) The Group recognized impairment loss in the amounts of $539,213 and $64,490 (shown as “impairment loss”) in 2008 and 2009, respectively on its investment accounted for under the equity method.

(3) For the years ended December 31, 2007, 2008 and 2009, the investment income recognized under the equity method amounted to $3,644,203, $1,600,428 and $2,841,913, respectively, which was based on the investees’ audited financial statements.

(4) For the years ended December 31, 2007, 2008 and 2009, cash dividends declared by the investee companies accounted for under the equity method amounted to $1,211,788, $1,151,931 and $922,585, respectively, and were shown as a reduction to the book value of long-term investments accounted for under the equity method.

 

 

 

 

 

 

 

 

 

 

 

The Group recognized impairment loss of $ 52,193, $1,665,758 and $1,026,453 (shown as “impairment loss”) in 2007, 2008 and 2009, respectively.

 

 

 

 

 

 

 

(1)Goodwill

A.The above amount mainly represent goodwill arising from the acquisition of Chi Mei Communication System, Inc. by a subsidiary of the Company in the year of 2005.

B.The Company’s subsidiary recognized impairment loss on its goodwill amounting to $945,935 (shown as “impairment loss”) in the year of 2009.

(2)Other intangible assets - customer relationship

In February 2008, the Company’s subsidiary, Foxteq Holding Inc.-Cayman, signed an asset purchase agreement with Sanmina-SCI Corporation, Sanmina- SCI USA Inc., SCI Technology, Inc., Sanmina- SCI Systems De Mexico S.A. De C.V., Sanmina- SCI Hungary Electronics Manufacturing LLC. and Sanmina- SCI Australia Pty Ltd. for the acquisition of certain assets by cash and by assuming certain liabilities of these companies.The acquisition cost was US$70 million.The assets acquisition effective date was set on July 7, 2008.The intangible assets - customer relationship resulting from the above acquisitions, which were appraised by the Company and experts, amounted to $965,100.The changes in the intangible assets - customer relationship for the year ended December 31, 2008 and 2009 are set forth below:

 

 

For the year ended of December 31, 2007, 2008 and 2009, the changes in land use rights were as follows:

The Employees’ bonuses payable is described in Note 4(21).

1) Income tax expense and income tax payable are reconciled as follows:

 

 

 

 

 

2) As of December 31, 2007, 2008 and 2009, the deferred income tax assets and liabilities were as follows:

3) The temporary differences and related amounts of deferred tax assets (liabilities) are listed as follows:

4) As of December 31, 2009, the Company’s and Premier’s income tax returns have been approved by the R.O.C. Tax Authority through 2007 and 2006, respectively.

1) 2006 1st domestic convertible bonds payable

A. On September 1, 2006, following the approval from the SFB, the Company issued zero coupon domestic unsecured bonds in the amount of $18,000,000. These convertible bonds cover a period of five years from November 10, 2006 to November 10, 2011.

B. The conversion price shall be adjusted based on the terms of the convertible bonds. As of December 31, 2009, the convertible bonds have not been redeemed.The conversion price was adjusted to $182.01 (in dollars) per share based on the resolution approved at the stockholders’ meeting in 2009.

C. Under the terms of the convertible bonds, all bonds (redeemed, matured and converted) are retired and not to be re-issued.

F. The effective interest rate of the bonds was 2.32%.

G. The discount on convertible bonds is amortized during the expected outstanding period of 3 years, using the interest methods. From November 10,2009, the bonds no longer have outstanding discount.

H. The fair value of conversion right in the amount of $1,195,200 was separated from bonds payable at issuance date, and was recognized in “Capital reserve from stock conversion option” in accordance with SFAS No. 36.

2) First unsecured corporate bonds issue in 2005

A) On September 14, 2005, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $11,500,000. The issuance and terms of domestic unsecured bonds are summarized as follows:

B) First unsecured corporate bonds issue in 2005-Bond Aa to Af and Bond Ba to Bf had been reclassified to “Current liabilities” in the third quarter of 2009.

3) First unsecured corporate bonds issue in 2008

On December 9, 2008, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $5,180,000. The issuance and terms of domestic unsecured bonds are summarized as follows:

4) First debenture issuing of 2009

On January 12 , 2009, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $6,820,000. The issuance and terms of domestic unsecured bonds are summarized as follows:

 

 

 

 

 

1) The Company’s subsidiary entered into a syndicated credit facility agreement with Mizuho Corporate Bank Ltd. as the lead bank and obtained a credit line in the amount of US$1,035,000 thousand.The Company is the guarantor of the loan.

2) As the contract period of the loan is over twelve months, it was recognized as long-term loan.

3) Throughout the term of the syndicated term loan agreement, the Group shall maintain the following financial ratios, to be tested semi-annually and annually on an audited consolidated basis:

A. The current ratio shall not be less than one hundred percent (100%).

B. The ratio of total net debt to consolidated tangible net assets ratio shall not exceed seventy percent (70%).

C. The interest coverage (income before income tax plus depreciation plus amortization plus interest expense divided by net interest expense) shall not be less than five hundred percent (500%).

D. Net debt means debt minus cash and cash equivalents.

E. The consolidated tangible net assets means the consolidated total assets of the Group minus goodwill acquired through merger and acquisition.

F. Net interest expense means interest expense minus interest income.

The Company has not breached any of the above ratios as required under the syndicated loan agreement.

1) The Company participates in defined benefit pension plan in accordance with the Labor Standards Law, covering all regular employees for services provided prior to July 1,2005, and employees who choose to remain in the benefit pension plan subsequent to the enforcement of the Labor Pension Act on July 1, 2005. The Company contributes on a monthly basis an amount equal to 2.1% of the employees’ monthly salaries and wages to the retirement fund deposited with Bank of Taiwan, the trustee, under the name of the independent retirement fund committee.

A) In 2007, 2008 and 2009, the related actuarial assumptions used to calculate the pension liability were as follows:

 

 

 

 

 

 

B) Reconciliation of funded status:

C) In 2007, 2008 and 2009, the details of net pension cost were as follows:

2) In accordance with the Labor Pension Act, the Company has a defined contribution employee retirement plan covering all domestic employees. The Company contributes monthly an amount based on 6% of employees’ monthly salaries and wages to the employees’ personal pension accounts with the Bureau of Labor Insurance.Employees may choose to receive pension on a monthly basis or as lump sum payment upon retirement in which the amount is the account balance plus accumulated investment gains.The pension expenses under this plan amounted to $199,117, $230,239 and $229,080 for the years ended December 31, 2007, 2008 and 2009, respectively.

3) The subsidiaries in mainland China have defined contribution pension plans and contribute an amount monthly based on 8%~9% of employees’ monthly salaries and wages to an independent fund administered by a government agency. The plan is administered by the government of mainland China and the subsidiaries do not have further pension liabilities.

 

 

4) As of December 31, 2007, 2008 and 2009, according to the local laws, the subsidiaries which participated in defined contribution pension plans recognized reserve for retirement plan in the amount of $202,026, $209,191 and $223,711, respectively. Pension expenses in the amount of $2,817,566, $3,875,630 and $3,469,281 were recognized for the years ended December 31, 2007, 2008 and 2009, respectively.

1) As of December 31, 2009, the Company’s authorized capital amounted to 9,300 million shares (including 200 million shares reserved for stock warrants or bonds issued with detachable warrants) and the issued and outstanding common stocks were 8,578,932 thousand shares with a par value of $10 (in dollars) per share.

2) On April 16, 2009, the Company’s shareholders adopted a resolution to increase the authorized capital to 9,300 million shares and issue common stock at par value amounting to $11,121,935 from the appropriation of retained earnings.

3) On April 16, 2009, the Company’s shareholders approved employees’ stock bonus amounting to $3,969,589 for 2008. The employees’ stock bonus in the amount of 52,115 thousand shares was determined based on the closing price of $76.17(in dollars) on April 15, 2009, the day before the date of the 2009 shareholders’ meeting, after taking into accounts the effects of ex-rights and ex-dividends.

4) Pursuant to the resolution adopted at the stockholders' meeting held on June 1, 1999, and after obtaining approval from the SFC, the Company issued 25 million units of global depository receipts (GDRs) in Europe, Asia and the USA, comprising 50 million shares of common stock (Deposited Shares). The issuance amounted USD 347,250,000, the main terms and conditions of GDRs are as follows:

A. Voting

Holders of GDRs have no right to directly exercise voting rights or attend theCompany’s stockholders' meeting, except when a motion is on the election of directors or supervisors. A holder or holders together holding at least 51% of the GDRs outstanding at the relevant record date of the stockholders' meeting can instruct the Depositary to vote in the same direction in respect of one or more resolutions to be proposed at the meeting.

B. Sale and withdrawal of GDRs

Under the current R.O.C. law, shares represented by the GDRs may not be withdrawn by holders of GDRs commencing three months after the initial issue of GDRs. A holder of a GDR may, provided that the Company has delivered to the custodian physical share certificates in respect of the Deposited Shares, request the Depositary to sell or cause to be sold on behalf of such holder the shares represented by such GDRs.

C. Dividends

GDR holders are entitled to receive dividends to the same extent as the holders of common stock subject to the terms of the Deposit Agreement and applicable laws of the R.O.C.

D. As of December 31, 2009, 134,469,000 units of GDRs were outstanding, which represents

268,939 thousand shares of common stock.

1) Pursuant to the R.O.C. Company Law, for the capital reserve arising from donations and from paid-in capital in excess of par value on issuance of common stocks, an amount equal to up to 10% of the contributed capital can be capitalized, provided that there is no accumulated deficit, and the remainder is restricted to cover deficit. Further, accumulated deficit shall be first covered by retained earnings before capital reserve can be used to cover any accumulated deficit.

2) Under the R.O.C. SFB regulations, the Company may apply, once a year, to capitalize the capital reserves arising from paid-in capital in excess of par on the issuance of stocks for cash. The application shall be made after the year of the issuance, and the amount to be capitalized shall not exceed the prescribed amount.

 

3) According to rules of regulatory agency, capital reserve arising from long-term equity investments accounted for under the equity method can not be capitalized.

4) Please see Note 4 (15) for information on “Capital reserve from conversion right”.

1) In accordance with the Company’s Articles of Incorporation, current year’s earning must be distributed in the following order:

A. offsetting accumulated deficits

B. Setting aside as legal reserve equal to 10% of current year’s net income after tax and distribution pursuant to clause (A);

C. Setting aside a special reserve in accordance with applicable legal and regulatory requirement;

D. 8% as bonuses to employees; qualified employees includes employees of affiliates per criteria set by Board of Director; and

E. the remainder shall be distributed pursuant to the proposal of the board of directors in accordance with the Company’s dividend policy.

The Company’s dividend policy requires the board of directors to consider the Company’s budget for future capital expenditures and funding needs when proposing the undistributed earnings. The proposal should be resolved in the Meeting of the Stockholders. Dividends may be distributed in the form of cash or shares, or a combination of both; provided, however, that cash dividends distributed in respect of any fiscal year shall not exceed 90 percent of total dividends to stockholders.

2) The details of the undistributed earnings were as follows:

3) The details of imputation system were as follows:

 

4) The appropriation of 2006, 2007 and 2008 earnings had been resolved at the Meetings of Stockholders on June 8, 2007, June 2, 2008 and April 16, 2009, respectively. Details are summarized below: