Annual Financial Report Part 3

1) Names of related parties and their relationship with the Company

All the transactions with subsidiaries had been eliminated when preparing consolidated financial statements.Except for transactions with the above related parties, there were no other material transactions between related parties and the Company for the years ended December 31, 2007, 2008 and 2009. Information on transactions with subsidiaries is disclosed in Note 11.

2) Significant transactions and balances with related parties

A. Sales

 

1)The sales prices and credit terms to related parties were not significantly different from sales to third parties. For other particular related party transactions, prices and terms were determined in accordance with mutual agreements. The credit term is disclosed in Note 11(1) G.

2)The Group sold materials to the above related parties for processing and repurchased finished goods from them. The sales amount of materials and repurchasing price of finished goods were offset against each other and shown in the net amount in the financial statements.

B. Purchases

The purchase prices and payment terms to related parties were not significantly different from purchases from third parties. For other particular related party transactions, prices and terms were determined in accordance with mutual agreements. The common payment term is around 30 to 90 days.

C. Accounts receivable - related parties

D. Prepayment

 

 

 

E. Other receivables

The Group purchased materials on behalf of FTCS and FITI, etc.As of December 31, 2007, 2008 and 2009, other receivables amounted to $698,535, $1,441,541 and $763,638, respectively.

F. Accounts payable - related parties

As of December 31, 2009, accounts payable to FICS in the amount of $4,779,334

pertains to the purchase of materials made by FICS on behalf of the Group.

G. Property transactions

 

 

 

 

H. Guarantees

In July 2008, the Company’s subsidiary, Foxconn (Far East) Ltd., 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.

I. The following sets forth the salaries/rewards information of key management, such as directors, supervisors, general manager, vice general manager, etc:

(A) Salaries and bonuses include regular wages, special responsibility allowances, pensions, severance pay, various bonuses, rewards, etc.

(B) Service execution fees include travel or transportation allowances, special expenditures, various allowances, housing & vehicles offering, etc.

(C) Directors’ and supervisors’ remuneration and employees’ bonus were those amounts estimated and accrued in the statement of income for the current year.

(D) Share-based payment expenses were the compensation costs accounted for under R.O.C SFAS No.39.

(E) The relevant information above is shown in the Company’s annual report.

As of December 31, 2006, 2007 and 2008, the assets pledged as collateral were as follows:

 

 

 

 

 

As of December 31, 2009, the Group's significant commitments and contingent liabilities were as follows:

1) The Company entered into several contracts for the acquisition of machinery and construction of research center with total value of approximately $20,947 million. As of December 31, 2009, the unpaid balance on these contracts amounted to $2,752 million.

2) As of December 31, 2009, future minimum lease payments for factories and employees' dormitory were approximately $874 million as follows:

 

3) The Group entered into an agreement with Qualcomm Incorporated regarding mobile phone use right.Under the agreement, the Group shall pay royalties based on sales volume of the related products.

4) In December 2007, Mondis Technology Ltd. filed a lawsuit and an injunction with the U.S. District Court for the Eastern District of Texas against the Company, alleging infringement, among others, of its patent on panel display and claimed indemnities for its losses. The Company has appointed a legal counsel to attend to this case.On November 30, 2009, the Company also sued its suppliers - Lite-on, Tatung and TPV, seeking fulfillment of their liability for the case above.On January 15, 2010, Mondis added TV product into part of the scope of the litigation.The ultimate outcome of the lawsuit and the damages that may incur cannot be reasonably estimated as the litigation is still under trial and investigation.

5) In November 2008, Spansion Inc. requested the U.S. International Trade Commission (the “ITC”), to conduct an investigation, alleging patent infringement in Samsung flashing IC was assembled into the Company’s products.Spansion Inc. requested the U.S. ITC to issue an injunction to ban the Company’s export of related products to the United States. Spansion Inc. has made an out-of-court settlement with Samsung on March 3, 2009. However, in March 1, 2009, Spansion Inc. filed for bankruptcy in the United States, and the bankruptcy court refused to approve their settlement. Therefore, the litigation is sill under trial by the court now.

6) In March 2009, O2 Micro Int’l Ltd. filed a lawsuit against the Company and Ampower Holding Ltd., an investee company indirectly owned by the Company and accounted for under the equity method, and claimed indemnities for its losses.O2 Micro Int’l Ltd. alleged that the Company and Ampower Holding Ltd. failed to comply with the out-of-court settlement relating to previous patent dispute litigation. Based on the opinion of the Company’s legal counsel, the ultimate outcome of the lawsuit and the damages that the Company may incur cannot be reasonably estimated as the litigation is still under trial and investigation under the authority of the United States.

In April 2009, the Group’s plants in Mexico caught on fire with no casualties. All damages caused by the fire will be compensated by the insurance company. There was no significant effect on the Company’s business operations and financial conditions, since the supply chain was properly supported by nearby plants.

1) On January 19, 2010, an approval was obtained from the SFB for the Company to issue its first Unsecured Euro Convertible Zero Coupon Bonds in the amount up to USD $1 billion.

2) In January 2010, the Group acquired part of the manufacturing facilities in Mexico from Sony Corporation and 90% shares of Sony Baja California, S.A. De C.V, the legal entity that established the facility.

 

3) The Company’s subsidiary, PCE Paragon Solutions Kft., has signed a share purchase agreement with Dell Global B.V. and Dell International Holding VIII B.V. in December 2009 and expects to pay the purchase price and transfer the legal title of the shares in the second half of 2010.

4) In March 2010, the Company’s board of directors has resolved for Foxconn Singapore Pte. Limited, a subsidiary of the Company, to acquire 90.1% shareholding of Sony Slovakia, SPOL. S.R.O, a subsidiary of Sony Corporation.

1) Financial statement presentation:

Certain accounts in the 2007 and 2008 consolidated financial statements were reclassified to conform with the 2009 consolidated financial statement presentation.

2) Fair value of financial instruments

 

 

 

 

The methods and assumptions used to estimate the fair values of the above financial instruments are summarized below:

A. For short-term instruments, the fair values were determined based on their carrying values because of the short maturities of the instruments. This method was applied to cash and cash equivalents, notes and accounts receivable, other receivables, short-term loans, notes and accounts payable, accrued expenses, current portion of long-term liabilities, other payables and other current liabilities.

B. For Open-ended funds, the fair values were determined based on the funds’ net asset at December 31, 2007, 2008 and 2009.

C. Available-for-sale financial assets are regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s-length basis. If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. The fair values of available-for-sale financial assets are based on the quotation in the active markets at December 31, 2007, 2008 and 2009.

D. As financial assets carried at cost are not quoted in an active market and their fair value cannot be measured reliably, they are measured at cost.

E. The fair value of refundable deposits is based on the present value of expected future cash inflow, and the discount rate is based on the fixed rate of the one year time deposit given by the Post Office at December 31, 2007, 2008 and 2009.

F. The fair value of convertible bonds issued after December 31, 2005 is based on the present value of expected cash flow amount. The discount rate is the effective interest rate of convertible bonds in the current market, whose contractual terms are similar to those of convertible bonds issued by the Company.

G. The fair values of derivative financial instruments which include unrealized gain or loss on unsettled contracts were determined based on the amounts to be received or paid assuming that the contracts were settled as of the reporting date.

H. The fair value of guarantees was based on the contract amounts.

3) Credit risk of off-balance sheet financial instruments

Please see Note 5. 2) H.

4) Financial risk control

A. The Group employs a comprehensive risk management and control system to clearly identify, measure and control the various kinds of financial risk it faces, including market risk, credit risk, liquidity risk and cash flow risk.

Except for market risk, which is controlled by outside factors, the remainder of the foregoing types of risk can be controlled internally or removed from business processes. Therefore, the goal in managing each of these risks is to reduce them to zero.

As for market risk, the goal is to protect its overall position through strict, recommendation, execution and processes, and proper consideration of a) long-term trends in the external economic/financial environment, b) internal operating conditions, and c) the actual effects of market fluctuations.

B. The risk management and control system of the Group is administered within a framework of stratified responsibility:

 

(1) The board of directors formulates and approves the procedures; the senior officers designated by the board make regular and unscheduled assessments of management procedures, organizational structure, transaction flows, and whether there are any abnormal circumstances;

(2) The legal department reviews and examines transaction agreements;

(3) The financing department makes recommendations with regard to transactions and is

responsible for carrying them out;

(4) The accounting department manage the accounts;

(5) The audit department undertakes audits.

Under this framework, with its strict adherence to proper segregation of duties and adequate internal control procedures, the Group seeks to minimize the potential adverse effects on the Group’s financial performance.

A. Market risk

(1) Foreign exchange risk:

The Group’s major purchase and sale transactions are conducted in USD. The change of fair value will be caused by foreign exchange rate fluctuations. However, the amounts and periods of the Group’s accounts receivable and accounts payable are equivalent, so the market risk could be offset. If the temporary gap is raised, the Group would adopt the forward contract to hedge the risk. Accordingly, the Group estimates there would be no material risk as a whole.

(2) Price risk:

The Group is exposed to equity securities price risk because of investments held by the Group and classified on the consolidated balance sheet either as available-for-sale or at fair value through profit or loss. The Group sets limits to control the transaction volume and stop-loss amount of derivatives to reduce its price market risk.

(3) Futures market risk:

The Group is exposed to price risk because of investments in futures market instruments, which have fair value in the active market. The Group sets limits to control the transaction volume and stop-loss amount of derivatives to reduce its futures market risk. As a result, there no significant future market risk.

(4) Interest rate risk:

The long-term bonds issued by the Group all have fixed interest rates, so there is no interest rate risk.

(5) Stock exchange market:

i. The domestic convertible bonds issued by the Company are compound instruments, which include the conversion right, call option, put option. Except that the fair value of the bonds would be changed due to changes in market interest rate, their fair value is mainly subject to the changes in the Company’s stock price. The Company could exercise the call option to mitigate its stock market risk adequately.

ii. Furthermore, the call option has expired on November 10, 2009, three years after the issuing date, thus no related risk is involved.

B. Credit risk

(1) Receivables:

With respect to receivables of the Group, most of the debtors are well-known international companies with very good credit standing. Moreover, the adequacy of the allowance for doubtful accounts is assessed regularly, so there is no material credit risk.

(2) Financial market:

i. The long-term exchange rate and futures transactions entered into by the Group are done with financial institutions with very good credit standing. Consequently, the likelihood that credit risk would occur is low.

ii.Convertible bond payable of the Company were issued on the primary market, so that the Company is not exposed to credit risk may arising on transaction counterparties on the secondary market.

(3) Asset transactions:

The Group has investments in available-for-sale financial assets and financial assets that are measured at cost. Although the potential for credit risk does arise, there is an open, active market for available-for-sale financial assets. For financial assets measured at cost, the Group performs impairment test regularly. Moreover, the counterparties in the transactions had their credit standing evaluated, so these transactions are not expected to lead to material credit risk.

C. Liquidity risk

(1) Receivables:

As for receivables of the Group, the main debtors are well-known international companies with very good credit standing. There are no overdue receivables with maturities over one year. Therefore, there is no material liquidity risk.

(2) Financial assets:

i. For available-for-sale financial assets held by the Group, there is an active market that allows these investments to be readily converted into certain amount of cash approximate to their fair values. The liquidity risk exposure is low.

ii.As for financial assets measured at cost, the liquidity risk is high as there is no active market. However, since the shareholding percentages are relatively low, they do not constitute major investments. Therefore, no material liquidity risk is expected.

(3) Foreign exchange transactions:

For forward foreign exchange transactions entered into by the Group, the targets of the transactions are all currencies traded on international foreign exchange markets with large trading volumes and high number of traders bidding. Trading is active with high liquidity. Therefore, no material liquidity risk is expected.

(4) Futures transactions:

For futures transactions entered into by the Group, orders are placed in the New York or Chicago or London futures exchanges. The numbers of available futures targets and international market participants are adequate to facilitate easy entry and exit. Therefore, no material liquidity risk is expected.

(5) Working capital:

The Group has good operating and credit conditions, and has sufficient working capital, so it expects no significant liquidity risk arising from insufficient capital to meet contract obligations.

(6) Convertible bonds:

i. Under the terms of the domestic convertible bonds issued by the Company, the bondholders have the right to require the Company to redeem any bonds at face value on November 10, 2009 after holding the security for three years.

ii. A total of $5,960,600 convertible bonds had been redeemed. The Company expects no significant liquidity risk would arise as it has sufficient working capital to meet the funding requirements for bonds redemption even if all bonds outstanding are redeemed.

iii. The outstanding convertible bonds in the amount of $12,039,400 will be redeemed on the maturity date, November 10, 2011.

D. Cash flow risk from movements in interest rates

(1) Long-term liabilities:

i. The Group does not have long-term financial assets and liabilities that are affected by interest rate changes. Therefore, there should be no material cash flow risk from movements in interest rates.

ii.As to the domestic bond payable issued by the Company, there should be no material cash flow risk from movements in interest rates due to the zero interest rate on bond.

(2) Foreign exchange transactions:

The forward foreign currency transactions entered into by the Group are for the purpose of hedging against short-term gaps in positions after offsetting foreign currency assets and liabilities. As such, the amounts in the transactions are minimal and their duration is short. Moreover, because of opposite foreign currency outflows and inflows, a significant need for foreign funds is not expected. Therefore, no material foreign exchange-type cash flow risk is expected from movements in interest rates.

(3) Financial assets:

As the investments of the Group are not interest-rate type products, there is no cash flow risk from movements in interest rates.