Final Results-1

1st Oct 2007 07:01

Hon Hai Precision Industry Co Ld01 October 2007 HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS DECEMBER 31, 2005 AND 2006 -------------------------------------------------------------------------------- For the convenience of readers and for information purpose only, the auditors'report and the accompanying financial statements have been translated intoEnglish from the original Chinese version prepared and used in the Republic ofChina. In the event of any discrepancy between the English version and theoriginal Chinese version or any differences in the interpretation of the twoversions, the Chinese-language auditors' report and financial statementsshall prevail. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders: Hon Hai Precision Industry Co., Ltd. We have audited the accompanying consolidated balance sheets of Hon HaiPrecision Industry Co., Ltd. and its subsidiaries as of December 31, 2005 and2006, and the related consolidated statements of income, of changes instockholders' equity and of cash flows for the years then ended, expressed inthousands of New Taiwan dollars. These consolidated financial statements arethe responsibility of the Company's management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits. We did not audit the financial statements of certain consolidatedsubsidiaries and Premier Image Technology Corporation (Premier Corp.) asdescribed in the fourth paragraph, which statements reflect total assets of$127,148,987,000 and $146,778,501,000 (US$34,784,979), constituting 26.36% and23.42% of the respective consolidated total assets as of December 31, 2005 and2006, and total revenue of $241,478,126,000 and $337,701,607,000(US$11,009,072,388), constituting 25.46% and 25.58% of the consolidated totaloperating revenue for the years then ended, respectively. Those statements wereaudited by other auditors, whose reports thereon have been furnished to us, andour opinion expressed herein, insofar as it relates the amounts included forthese subsidiaries and Premier Corp., is based solely on the reports of theother auditors. We conducted our audits in accordance with the "Rules Governing theExamination of Financial Statements by Certified Public Accountants" andgenerally accepted auditing standards in the Republic of China. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits and the reports ofother auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Hon Hai Precision Industry Co.,Ltd. and its subsidiaries as of December 31, 2005 and 2006, and the results oftheir operations and their cash flows for the years then ended in conformitywith the "Rules Governing the Preparation of Financial Statements bySecurities Issuers", "Business Entity Accounting Law", "Regulation onBusiness Entity Accounting Handling" and accounting principles generallyaccepted in the Republic of China. As explained in Notes 3 (1) and 10 (5) to the consolidated financial statements,the Company merged with Premier Corp. on December 1, 2006. The merger wasaccounted for under the pooling of interests method. The consolidated financialstatements as of and for the year ended December 31, 2005 have been restated toinclude Premier Corp. for comparative purposes. As a result, total assetsincreased by $23,323,053,000, constituting 4.84% of the consolidated totalassets as of December 31, 2005, and net income increased by $36,732,272,000,constituting 3.87% of the consolidated net income for the year then ended. As explained in Notes 3 (2) and 10 (1) to the consolidated financial statements,the Company adopted the R.O.C. Statements of Financial Accounting Standards No.34 and 36 on Accounting for Financial Instruments effective January 1, 2006.Certain accounts on December 31, 2005 have been reclassified based on itsholding purposes and abilities in accordance with such standards. As a result ofthese changes, total assets and total stockholders' equity increased by$18,548,993,000 as of December 31, 2006. However, these changes had nosignificant impact on the consolidated net income and earnings per share for theyear ended December 31, 2006. The consolidated financial statements of Hon Hai Precision Industry Co., Ltd.and its subsidiaries as of and for the year ended December 31, 2006 expressed inUS dollars are presented solely for the convenience of the readers and weretranslated from the New Taiwan dollar financial statements using the exchangerate prevailing at December 31, 2006 (US$1.00: NT$32.6). This basis fortranslation is not in accordance with generally accepted accounting principlesin the Republic of China. PricewaterhouseCoopers Taipei, Taiwan April 20, 2007 The accompanying consolidated financial statements are not intended topresent the financial position and results of operations and cash flows inaccordance with accounting principles and practices generally accepted incountries and jurisdictions other than the Republic of China. The standards,procedures and practices in the Republic of China governing the audit of suchconsolidated financial statements may differ from those generally accepted incountries and jurisdictions other than the Republic of China. Accordingly, theaccompanying consolidated financial statements and report of the independentaccountants are not intended for use by those who are not informed about theaccounting principles or auditing standards generally accepted in the Republicof China, and their applications in practice. For the convenience of readers,the auditors' report and the accompanying financial statements have beentranslated into English from the original Chinese version prepared and used inthe Republic of China. In the event of any discrepancy between the Englishversion and the original Chinese version or any differences in theinterpretation of the two versions, the Chinese-language auditors'report andfinancial statements shall prevail. HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (EXPRESSED IN THOUSANDS OF DOLLARS) 2005 2006 2006 New Taiwan Dollars US DollarsASSETS (Restated) (Unaudited) (Note 2)Current AssetsCash and cash equivalents (Note 4 (1)) $ 61,001,559 $ 86,170,078 $ 2,643,254Financial assets at fair value through profit orloss-current (Note 4 (2)) 2,571,092 3,139,571 96,306Available-for-sale financial assets - current (Note 40,201 933,754 28,6434 (3))Notes receivable - third parties, net (Note 4 (4)) 4,332,086 1,091,566 33,484Accounts receivable - third parties, net (Notes 4 192,445,345 206,603,690 6,337,536(5))Accounts receivable - related parties, net (Note 5) 5,124,746 12,364,644 379,283Other receivables (Note 5) 4,630,549 3,795,265 116,419Inventories, net (Notes 4 (6)) 87,518,213 126,334,573 3,875,294Prepayments 1,827,657 3,281,546 100,661Deferred income tax assets - current (Note 4 (11)) 726,271 1,354,456 41,548 360,217,719 445,069,143 13,652,428Funds and Investments Available-for-sale financial assets - non-current (Note 4 (3)) 2,055,841 18,709,717 573,918 Financial assets carried at cost - non-current 5,050,958 2,094,176 64,238(Note 4(7)) Long-term equity investments accounted for underthe equity method (Note 4 (8)) 9,508,273 15,179,332 465,624 Prepaid long-term investment (Note 4(8)) 814,023 87,219 2,675 17,429,095 36,070,444 1,106,455Other Financial Assets - Non-Current (Note 6) 435,095 492,201 15,098Property, Plant and Equipment (Notes 4 (9), 5 and 6) Cost Land 3,414,528 3,939,374 120,840 Buildings and improvements 26,860,906 38,208,563 1,172,042 Machinery 67,289,346 90,797,486 2,785,199 Molding equipment 3,925,983 3,256,427 99,890 Testing equipment 6,353,634 9,228,432 283,081 Furniture and fixtures office equipment 6,328,716 7,627,006 233,957 Tooling equipment 1,383,163 1,715,190 52,613 Miscellaneous equipment other equipment 5,884,536 11,913,844 365,455Cost and revaluation increments 121,440,812 166,686,322 5,113,077Less: Accumulated depreciation ( 36,942,466) ( 48,769,788) ( 1,496,006)Accumulated impairment loss ( 863,811) ( 527,802) ( 16,190)Prepayments for equipment and construction in 12,784,676 15,146,432 464,615progress 96,419,211 132,535,164 4,065,496Intangible AssetsGoodwill 2,222,786 2,265,910 69,506Other intangible assets 2,266,564 5,405,364 165,809 4,489,350 7,671,274 235,315Other AssetsDeferred charges 2,244,777 3,386,654 103,885Other assets - other (Note 6) 1,056,077 1,377,269 42,248 3,300,854 4,763,923 146,133TOTAL ASSETS $482,291,324 $626,602,149 $ 19,220,925 (continued) HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31, (EXPRESSED IN THOUSANDS OF DOLLARS) 2005 2006 2006 New Taiwan Dollars US Dollars (Restated) (Unaudited) (Note 2)LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities Short-term loans (Note 4 (10)) $ 24,188,798 $ 40,793,836 $ 1,251,345 Financial liabilities at fair value through profit orloss - current (Note 4(2)) - 22,114 678 Accounts payable - third parties 170,249,359 196,859,941 6,038,648 Accounts payable - related parties (Note 5) 11,937,479 11,526,678 353,579 Income tax payable (Note 4 (11)) 4,945,849 8,002,041 245,461 Accrued expenses 23,826,944 29,985,865 919,812 Other payables (Note 5) 5,883,626 8,069,982 247,547 Current portion of long-term liabilities (Note 4 (12)) 10,803,471 - - Other current liabilities 5,251,736 8,656,645 265,541 257,087,262 303,917,102 9,322,611Long-term Liabilities Bonds payable (Note 4 (12)) 12,128,749 28,361,558 869,986 Long-term loans (Note 4 (13)) 104,121 99,127 3,041 12,232,870 28,460,685 873,027Other Liabilities Reserve for retirement plan (Note 4 (14)) 904,068 892,728 27,384 Deferred income tax liabilities (Note 4 (11)) 3,887,576 6,981,270 214,150 Other liabilities - other 874,920 933,990 28,650 5,666,564 8,807,988 270,184Total liabilities 274,986,696 341,185,775 10,465,822Stockholders' EquityStockholders' Equity of Parent Company Capital stock (Note 4 (15)) Common stock 42,082,796 51,681,388 1,585,319 New share entitlement certificates 558,980 - - Capital Reserve (Note 4 (16) and 10) Paid-in capital in excess of par value 21,669,160 20,221,815 620,301 Capital reserve from conversion of convertible bonds 16,345,350 18,482,483 566,947 Capital reserve from long-term investments 9,835,797 11,191,456 343,296 Capital reserve from stock warrants (Note 4 (12)) 1,195,200 36,663 Retained earnings (Note 4 (17)) Legal reserve 13,056,938 17,273,084 529,849 Special reserve 1,325,658 - - Unappropriated earnings 87,231,120 120,838,282 3,706,696 Other adjustments of stockholders' equity Unrealized gain or loss on financial instruments ( 85,462) 18,463,531 566,366 Cumulative translation adjustments 1,143,906 3,831,336 117,526 Treasury stock ( 18,901) ( 18,901) ( 580) Stockholder's equity of parent company 193,145,342 263,159,674 8,072,383Minority interest 14,159,286 22,256,700 682,720Total stockholders' equity 207,304,628 285,416,374 8,755,103Commitments and Contingent Liabilities (Note 7)Subsequent Events (Note 9)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $482,291,324 $626,602,149 $ 19,220,925 The accompanying notes are an integral part of these consolidated financial statements. See report of independent accountants dated April 20, 2007. HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, (EXPRESSED IN THOUSANDS OF DOLLARS, EXCEPT EARNINGS PER SHARE) 2005 2006 2006 New Taiwan Dollars US Dollars (Restated) (Unaudited) (Note 2)Operating revenuesSales (Note 5) $ 949,775,910 $1,321,886,572 $ 40,548,668Sales returns ( 864,764) ( 552,009) ( 16,933)Sales discounts ( 405,516) ( 959,137) ( 29,421)Net operating revenues 948,505,630 1,320,375,426 40,502,314Operating costsCost of goods sold (Note 5) ( 850,418,019) ( 1,191,430,876) ( 36,546,959)Gross profit 98,087,611 128,944,550 3,955,355Operating expenses (Note 4 (19))Selling expenses ( 16,631,789) ( 20,862,108) ( 639,942)Management and general expenses ( 19,895,854) ( 22,062,419) ( 676,761)Research and development expenses ( 9,566,252) ( 10,656,036) ( 326,872)Total Operating Expenses ( 46,093,895) ( 53,580,563) ( 1,643,575)Operating income 51,993,716 75,363,987 2,311,780Non-operating Income Interest income 900,819 1,261,013 38,681 Gain on valuation of financial assets - 21,372 656 (Note 4 (2)) Gain on valuation of financial liabilities - 371,282 11,389 (Note 4 (2)) Investment income recognized under the 1,831,621 3,392,195 104,055equity method (Note 4 (8)) Dividend income 173,772 228,692 7,015 Gain on disposal of investments 1,117,200 412,242 12,645 Exchange gain - net 725,009 398,971 12,239 Income from sales of scrapped inventory 1,608,869 1,626,750 49,900 Other income 1,540,500 2,985,493 91,580 7,897,790 10,698,010 328,160Non-operating Expenses Interest expenses ( 1,546,212) ( 2,595,197) ( 79,607) Other investment loss (Note 4 (7)) ( 1,356,016) ( 13,189) ( 8,516) Loss on valuation of financial assets ( 318,886) ( 277,628) ( 405) Provision for slow-moving inventories ( 1,193,988) ( 1,276,246) ( 39,149) Other losses ( 1,045,023) ( 738,946) ( 22,667) ( 5,460,125) ( 4,901,206) ( 150,344)Income from continuing operations before income tax 54,431,381 81,160,791 2,489,596Income tax expense (Note 4 (11)) ( 8,817,023) ( 14,884,437) ( 456,578)Consolidated net income $ 45,614,358 $ 66,276,354 $ 2,033,018Attributable to: Equity holders of the Company $ 42,359,318 $ 59,862,728 $ 1,836,280 Minority interest 3,255,040 6,413,626 196,737 $ 45,614,358 $ 66,276,354 $ 2,033,017 Before After Before After Before After income income income income income income tax tax tax tax tax taxEarnings per common share (in dollars) (Note 4(18))Basic earnings per shareNet Income from continuing operations $10.83 $ 9.07 $15.71 $12.83 $ 0.48 $ 0.39Minority interest ( 0.70) ( 0.65) ( 1.36) ( 1.24) ( 0.04) ( 0.04)Net Income $10.13 $ 8.42 $14.35 $11.59 $ 0.44 $ 0.35Full-diluted earnings per common shareNet Income from continuing operations $10.62 $ 8.90 $15.54 $12.70 $ 0.48 $ 0.39Minority interest ( 0.67) ( 0.63) ( 1.34) ( 1.23) ( 0.04) ( 0.04)Net Income $ 9.95 $ 8.27 $14.20 $11.47 $ 0.44 $ 0.35 The accompanying notes are an integral part of these consolidated financial statements. See report of independent accountants dated April 20, 2007. HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (EXPRESSED IN THOUSANDS OF DOLLARS) Capital Stock Retained Earnings Common New share Capital Legal Special Unappropriated stock entitlement reserve reserve Reserve earnings certificates 2005 - New Taiwan Dollars (Restated) Balance at January 1, $33,986,757 $- $21,816,909 $ 9,979,708 $ - $ 66,324,7862005 Appropriations of 2004 earnings Legal reserve - - - 3,077,230 - (3,077,230) Special reserve - - - - 1,325,658 (1,325,658) Cash dividends - - - - - (8,857,814) Stock dividends 6,519,054 - 78,483 (6,597,537) Employees' stock bonus 721,271 - 51,229 - - ( 772,500) Employees' bonus and - - - - - ( 576,091)directors' and supervisor' remuneration Capital surplus 16,294 - ( 16,294) - - -transferred to common stock Common stock issued for 886,534 558,980 16,342,094 - - -bonds conversion Change in capital - - 9,776,024 - - (91,721)reserve and retained earnings due to changes in equities of long-term investments Consolidated net income - - - - - 42,359,318for 2005 Cumulative translation - - - - - -adjustment Decerease in treasury (47,114) - ( 198,138) - - ( 154,433)stock Change in minority - - - - - -interests Balance at December 31, $42,082,796 $558,980 $47,850,307 $13,056,938 $1,325,658 $ 87,231,1202005 2006 - New Taiwan Dollars Balance at January 1, $42,082,796 $558,980 $47,850,307 $13,056,938 $1,325,658 $ 87,231,1202006 Appropriations of 2005 earnings Legal reserve - - - 4,216,146 - (4,216,146) Special reserve - - - - (1,325,658) 1,325,658 Cash dividends - - - - - ( 13,168,761) Stock dividends 8,216,903 - 40,931 - - (8,257,834) Employees' stock bonus 731,394 - 75,606 - - ( 807,000) Employees' bonus and - - - - - (1,089,588)directors' and supervisor' remuneration Capital surplus 33,992 - ( 33,992) - - -transferred to common stock Common stock issued for 616,303 ( 558,980) 576,861 - - -bonds conversion Stock warrants for - - 1,195,200 - - -domestic convertible bonds issue Change in capital - - 1,386,041 - - (41,895)reserve and retained earnings due to changes in equities of long-term invesments Consolidated net income - - - - - 59,862,728for 2006 Unrealized gain or loss - - - - - -on financial instruments Cumulative translation - - - - - -adjustment Change in minority - - - - - -interests Balance at December 31, $51,681,388 $- $51,090,954 $17,273,084 $ - $120,838,2822006 (Continued) Unrealized gain Cumulative Treasury Minority Total or loss on financial translation stock interests instruments adjustments 2005 - New Taiwan Dollars (Restated) Balance at January 1, 2005 ($160,910) ($1,164,748) ($418,586) $ 3,453,281 $133,817,197 Appropriations of 2004 earnings Legal reserve - - - - - Special reserve - - - - - Cash dividends - - - - (8,857,814) Stock dividends - - - - - Employees' stock bonus - - - - - Employees' bonus and - - - - ( 576,091)directors' and supervisor' remuneration Capital surplus - - - - -transferred to common stock Common stock issued for - - - - 17,787,608bonds conversion Change in capital 75,448 9,759,751reserve and retained earnings due to changes in equities of long-term investments Consolidated net income - - - 3,255,040 45,614,358for 2005 Cumulative translation - 2,308,654 - - 2,308,654adjustment Decerease in treasury - - 399,685 - -stock Change in minority - - - 7,450,965 7,450,965interests Balance at December 31, ($ 85,462) $1,143,906 ($ 18,901) $14,159,286 $207,304,6282005 2006 - New Taiwan Dollars Balance at January 1, 2006 ($ 85,462) $1,143,906 ($ 18,901) $14,159,286 $207,304,628 Appropriations of 2005 earnings Legal reserve - - - - - Special reserve - - - - - Cash dividends - - - - ( 13,168,761) Stock dividends - - - - - Employees' stock bonus - - - - - Employees' bonus and - - - - (1,089,588)directors' and supervisor' remuneration Capital surplus - - - - -transferred to common stock Common stock issued for - - - - 634,184bonds conversion Stock warrants for - - - - 1,195,200domestic convertible bonds issue Change in capital 12,457,588 - - - 13,801,734reserve and retained earnings due to changes in equities of long-term invesments Consolidated net income - - - 6,413,626 66,276,354for 2006 Unrealized gain or loss 6,091,405 - - - 6,091,405on financial instruments Cumulative translation - 2,687,430 - - 2,687,430adjustment Change in minority - - - 1,683,788 1,683,788interests Balance at December 31, $18,463,531 $3,831,336 ($ 18,901) $22,256,700 $285,416,3742006 HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) (EXPRESSED IN THOUSANDS OF DOLLARS) Capital Stock Retained Earnings Common New share Capital Legal Special Unappropriated stock entitlement reserve reserve Reserve earnings certificates 2006 - US Dollars (Unaudited-Note 2) Balance at January 1, 2006 $1,290,883 $ 17,147 $1,467,800 $400,520 $40,664 $ 2,675,801 Appropriations of 2005 earnings Legal reserve - - - - ( 129,329) 129,329 Special reserve - - - - ( 40,664) 40,664 Cash dividends - - - - - ( 403,950) Stock dividends 252,052 - 1,256 - - ( 253,308) Employees' stock bonus 22,435 - 2,319 - - (24,754) Employees' bonus and - - - - - (33,423)directors' and supervisor' remuneration Capital surplus transferred 1,043 - (1,043) - - -to common stock Common stock issued for bond 18,905 ( 17,147) 17,695 - - -conversion Stock warrants for domestic - - 36,663 - - -convertible bonds issue Change in capital reserve - - 42,517 - - (1,285)and retained earnings due to changes in equities of long-term invesments Consolidated net income for - - - - - 1,836,280 2006 Unrealized gain or loss on - - - - - -financial instruments Cumulative translation - - - - - -adjustment Change in minority interests - - - - - - Balance at December 31, 2006 $1,585,318 $ - $1,567,207 $529,849 $- $ 3,706,696 Unrealized gain Cumulative Treasury Minority Total or loss on financial translation stock interests instruments adjustments 2006 - US Dollars (Unaudited-Note 2) Balance at January 1, 2006 ($ 2,622) $35,089 ($ 580) $434,334 $6,359,036 Appropriations of 2005 earnings Legal reserve - - - - - Special reserve - - - - - Cash dividends - - - - ( 403,950) Stock dividends - - - - - Employees' stock bonus - - - - - Employees' bonus and - - - - (33,423)directors' and supervisor' remuneration Capital surplus transferred to - - - - -common stock Common stock issued for bond - - - - 19,453conversion Stock warrants for domestic - - - - 36,663convertible bonds issue Change in capital reserve and 382,135 - - - 423,367retained earnings due to changes in equities of long-term invesments Consolidated net income for - - - 196,737 2,033,0172006 Unrealized gain or loss on 186,853 - - - 186,853financial instruments Cumulative translation - 82,437 - - 82,437adjustment Change in minority interests - - - 51,650 51,650 Balance at December 31, 2006 $566,366 $ 117,526 ($ 580) $682,721 $8,755,103 The accompanying notes are an integral part of these consolidated financialstatements. See report of independent accountants dated April 20, 2007. HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (EXPRESSED IN THOUSANDS OF DOLLARS) 2005 2006 2006 New Taiwan Dollars US DollarsCASH FLOWS FROM OPERATING ACTIVITIES (Restated) (Unaudited) (Note 2)Consolidated net income $ 45,614,358 $ 66,276,354 $ 2,033,017Adjustments to reconcile consolidated net income to net cashprovided by operating activities:Provision for doubtful accounts 204,862 640,452 19,646Depreciation 10,620,975 15,026,807 460,945Amortization of intangible and other assets 2,507,058 2,597,463 79,677Provision for slow-moving inventories 1,193,988 1,276,246 39,149Loss on disposal of property, plant and equipment, net 318,886 277,628 8,516Loss on (recovery of) impairment of property, plant 278,419 ( 72,705) ( 2,230)and equipmentAmortization of deferred bond issuance cost 37,636 - -Investment income accounted for under the equity method ( 1,831,621) ( 3,392,195) ( 104,055)Cash dividends of long-term investments accounted for under 89,310 1,519,733 46,618the equity methodGain on disposal of short-term and long-term investments ( 1,117,200) ( 412,242) ( 12,645)Loss on other investment 1,356,016 13,189 405Effect of change in revaluation on bonds payable and 416,593 5,435 167accrued premiumsExpense from employee stock warrants 645,845 - -Amortization of the discount of convertible bonds payable - 56,758 1,741Changes in assets and liabilities: Notes receivable - third parties ( 1,876,386) 3,228,320 99,028 Accounts receivable - third parties ( 86,585,375) ( 13,719,189) ( 420,834) Accounts receivable - related parties ( 2,065,798) ( 4,789,403) ( 146,914) Inventories ( 21,091,830) ( 39,147,019) ( 1,200,829) Other receivables ( 1,043,060) 861,138 26,415 Prepayments 745,692 ( 1,422,689) ( 43,641) Accrued expenses 8,521,276 6,077,352 186,422 Other payables and other current liabilities 3,337,614 3,910,824 119,964 Accounts payable - related parties 8,111,991 ( 410,801) ( 12,601) Accounts payable - third parties 72,206,680 26,610,582 816,276 Income tax payable 2,851,435 3,056,192 93,748 Accrued pension liabilities 75,132 ( 11,340) ( 348) Deferred income tax 689,108 2,465,509 75,629Net cash provided by operating activities 44,211,604 70,522,399 2,163,266 (Continued ) HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, (EXPRESSED IN THOUSANDS OF DOLLARS) 2005 2006 2006 New Taiwan Dollars US Dollars (Restated) (Unaudited) (Note 2)CASH FLOWS FROM INVESTING ACTIVITIESFinancial assets at fair value through profit or loss ($ 9,794) ($ 2,482,037) ($ 76,136)Acquisition of financial assets carried at cost ( 1,056,615) ( 398,779) ( 12,232)Acquisition of available-for-sale financial assets ( 993,760) ( 593,615) ( 18,209)Increase in long-term equity investments ( 814,023) ( 2,265,265) ( 69,487)Proceeds from disposal of funds and investments 1,983,063 3,491,687 107,107Increase in other financial assets-non current ( 389,311) ( 57,106) ( 1,752)Acquisition of land use right ( 705,508) ( 3,621,900) ( 111,101)Acquisition of property, plant and equipment ( 46,421,218) ( 53,133,952) ( 1,629,876)Proceeds from disposal of property, plant and equipment 2,547,125 3,183,135 97,642Increase in intangible assets and other assets-other ( 2,718,768) ( 3,785,232) ( 116,111)Net cash used in investing activities ( 48,578,809) ( 59,663,064) ( 1,830,155)CASH FLOWS FROM FINANCING ACTIVITIESDecrease (increase) in short-term loans, net ( 11,104,652) 16,021,396 491,453Increase in long-term loans 44,274,870 - -Payment of long-term loans ( 39,476,183) ( 5,808,465) ( 178,174)Decrease (increase) in other liabilities - others, net ( 278,557) 59,070 1,812Increase in bonds payable 11,500,000 18,000,000 552,147Payment in bonds payable - ( 5,000,000) ( 153,374)Distribution of cash dividends ( 8,857,814) ( 13,168,761) ( 403,950)Payment of directors' ad supervisors' remuneration ( 7,000) ( 7,000) ( 215)Payment of employees' bonus - ( 1,082,588) ( 33,208)Increase in minority interest 15,902,313 1,683,788 51,650Net cash provided by financing activities 11,952,977 10,697,440 328,141Effect of changes in foreign currency exchange rates 980,555 2,472,555 75,845Changing consolidated entities with no cash flow affection 3,471,113 1,139,189 34,944Increase in cash and cash equivalents 12,037,440 25,168,519 772,041Cash and cash equivalents at beginning of year 48,964,119 61,001,559 1,871,213Cash and cash equivalents at end of year $ 61,001,559 $ 86,170,078 $ 2,643,254Supplemental disclosures of cash flow information:Cash paid during the period for:Interest $ 1,736,278 $ 2,269,633 $ 69,621Income taxes $ 5,405,527 $ 9,245,272 $ 283,547Cash paid for the acquisition of property, plant and equipmentIncrease in property, plant and equipment $ 47,225,912 $ 54,762,051 $ 1,679,818Add: Payable - beginning 1,410,178 2,226,848 68,308Less: Payable - ending ( 2,226,848) ( 3,851,062) ( 118,131)Effect of changes in foreign currency exchange rates 11,976 ( 3,885) ( 119) $ 46,421,218 $ 53,133,952 $ 1,629,876Financing activities not involving cash flows:Adjustment for change in value of available for sales Unrealized gain on financial instruments $ - $ 18,548,993 $ 568,988Bonds payable converted into capital and other paid-in capital Bonds payable converted into capital $ 1,445,514 $ 57,323 $ 1,758 Bonds payable converted into other paid-in capital 16,342,094 576,861 17,695 The converted amounts $ 17,787,608 $ 634,184 $ 19,453Stock warrants issued for domestic convertible bonds $ - $ 1,195,200 $ 36,663 The accompanying notes are an integral part of these consolidated financialstatements. See report of independent accountants dated April 20, 2007. HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2006 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT AS OTHERWISE INDICATED) (THE NOTES FOR 2005 HAVE BEEN RESTATED) 1. HISTORY AND ORGANIZATION 1) Hon Hai Precision Industry Co., Ltd. (the Company) was established onFebruary 20, 1974. The Company was listed in the Taiwan Stock Exchange in June1991. The Company merged with Premier Image Technology Corporation (PremierCorp.) on December 1, 2006. The main activities of the Company are themanufacture, processing and sales of connectors, cable, enclosures, wired/wireless communication products, optics products, power supply modules,assemblies for use in the IT, communications, automotive equipment, precisionmolding, automobile, and consumer electronics industries. As of December 31,2006, the Company and its subsidiaries had 382,000, employees.2) Consolidated subsidiaries A. Main activities of the subsidiaries and ownership of the Company: Relationship Ownership Names of with the Percentage (%) subsidiaries Company Main operating activities 2005.12.31 2006.12.31 Foxconn (Far Wholly-owned Investments in Mainland China and 100% 100% East) Ltd. and subsidiary Hong Kong electronics subsidiaries manufacturers Foxconn Holding Wholly-owned Investments in Asia Pacific and North 100% 100% Ltd. and subsidiary America hi-tech companies subsidiaries Hyield Venture Majority- Venture capital investments holding 98% 98% Capital Co., Ltd. owned company and subsidiaries subsidiary Bao Shin Wholly-owned Investments in R.O.C. companies 100% 100% International subsidiary Investment Co., Ltd. Hon Yuan Wholly-owned Investments in R.O.C. companies 100% 100% International subsidiary Investment Co., Ltd. Relationship Ownership Names of with the Percentage (%) subsidiaries Company Main operating activities 2005.12.31 2006.12.31 Hon Chi Wholly-owned Investments in R.O.C. companies 100% 100% International subsidiary Investment Co., Ltd. Lin Yih Wholly-owned Investments in R.O.C. company 100% 100% International subsidiary Investment Co., Ltd. Hon Hai/ Wholly-owned Logistics company 100% 100% Foxconn subsidiary Logistics California LLC. Hon Hai/ Wholly-owned Logistics company 100% 100% Foxconn subsidiary Logistics Texas LLC. Ambit Wholly-owned Investments in Mainland China 100% 100% Microsystems subsidiary companies Holding Corp. and subsidiaries Ambit Wholly-owned Investments in Mainland China 100% 100% International subsidiary companies Ltd. and subsidiaries Unique Wholly-owned A Mainland China trading company 100% 100% Logistics subsidiary Ltd. Ambit Wholly-owned A US after-sales service company 100% - Microsystems subsidiary Inc. Foxconn Wholly-owned A marketing company 100% 100% Singapore subsidiary (Pte) Ltd. and subsidiaries Relationship Ownership Names of with the Percentage (%) subsidiaries Company Main operating activities 2005.12.31 2006.12.31 Foxconn Wholly-owned A R&D company 100% 100% International subsidiary Inc. Altus Technology Wholly-owned Manufacturing and designing of cellular 42% 100% Inc. subsidiary Phone and camera lens and marketing of sensors Premier Image Majority- Manufacturing and sales of camera 98% 98% Technology owned -Hong Kong subsidiary Limited and subsidiaries Premier Image Majority- Manufacturing, design and sales 88% 88% Technology owned of images, optics products and camera -Japan Limited subsidiary lens Image & Vision Wholly-owned Investment holdings 100% 100% Investment subsidiary Corporation A. The financial statements of consolidated subsidiaries as of and for the yearended December 31, 2006 were audited by independent accounts. B. The relevant information of the indirectly owned subsidiaries of the Company,please see Note 11. C. Changes in the consolidated subsidiaries (1) Ambit Microsystems Inc. was sold in May 2006 and was excluded from theconsolidated financial statements from the disposal date. (2) Altus Technology Inc. was an indirectly owned subsidiary (35%). InDecember 2006, Hon Hai Precision Industry Co., Ltd. acquired the remaining 65%equity of Altus Technology Inc. Altus Technology Inc. was consolidated effectivethe acquisition date. (3) The Company merged with Premier Image Technology Corp. under the poolingof interests method on December 1, 2006 and the consolidated financialstatements for the year ended December 31, 2005 have been restated to conformwith the generally accepted accounting principles in the Republic of China.Please see Notes 3 (1) and 10 (5). 3) Majority-owned subsidiaries that were not included in the consolidated financial statements: None. 4) Adjustments and disposition of the different accounting period adopted by the subsidiaries: None. 5) Special operating risks on the foreign subsidiaries: No significant special operating risks that would affect the financial statements. 6) Significant restriction on remittance of funds for the foreign subsidiaries' financial activities to the Company: None. 7) The Company's common stock owned by its subsidiary: For the years ended December 31, 2005 and 2006, Hon Yiing International Investment Co., Ltd. owned 605,764 shares of the Company's common stock, at a cost of $18,901. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements of the Company and itssubsidiaries (collectively referred herein as the Group) are prepared inaccordance with the "Rules Governing the Preparation of Financial Statementsby Securities Issuers", Business Entity Accounting Law, "Regulation onBusiness Entity Accounting Handling" and accounting principles generallyaccepted in the Republic of China. The Group's significant accountingpolicies are summarized below: 1) Basis for preparation of consolidated financial statements A. Effective January 1, 2005, all majority-owned subsidiaries and controlledentities are included in the consolidated financial statements. B. For the subsidiaries owned (disposed) before the end of the accounting year,the income or loss of the controlled subsidiaries is included in (excluded from)the consolidated financial statements effective on the acquisition (disposal)date. C. Significant inter-company transactions and assets and liabilities arisingfrom inter-company transactions are eliminated 2) Translation of financial statements of foreign subsidiaries into New TaiwanDollars Assets and liabilities of foreign subsidiaries are translated into New Taiwandollars using the exchange rates at the balance sheet date. Equity accounts aretranslated at historical rates except for beginning retained earnings, which arecarried forward from prior year's balance. Dividends are translated at therates prevailing at the date of declaration. Profit and loss accounts aretranslated at weighted-average rates of the year. The resulting translationdifferences are included in "cumulative translation adjustments" understockholders' equity. 3) Criteria for classifying assets and liabilities as current or non-currentitems A. Assets that meet one of the following criteria are classified as currentassets; otherwise they are classified as non-current assets: 1) Assets arising from operating activities that are expected to be realizedor 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 thebalance sheet date; 4) Cash and cash equivalents, excluding restricted cash and cash equivalentsand those that are to be exchanged or used to pay off liabilities more thantwelve months after the balance sheet date. B. Liabilities that meet one of the following criteria are classified ascurrent liabilities; otherwise they are classified as non-current liabilities: 1) Liabilities arising from operating activities that are expected to be paidoff 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 balancesheet date; 4) Liabilities for which the repayment date cannot be extended unconditionallyto more than twelve months after the balance sheet date. 4) Use of estimates The preparation of financial statements in conformity with R.O.C. generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities as at the date of the financialstatement and the amount of revenue and expenses reported during the period.Actual results could differ from those assumptions and estimates. 5) Foreign currency transactions A. The Group maintains its accounts in New Taiwan dollars. Transactionsdenominated in foreign currencies are translated into New Taiwan dollars at thespot exchange rates prevailing at the transaction dates. B. Receivables, other monetary assets and liabilities denominated in foreigncurrencies are translated at the spot exchange rates prevailing at the balancesheet date. Exchange gains or losses are recognized in profit or loss. C. When a gain or loss on a non-monetary item is recognized directly in equity,any exchange component of that gain or loss shall be recognized directly inequity. Conversely, when a gain or loss on a non-monetary item is recognized inprofit or loss, any exchange component of that gain or loss shall be recognizedin profit or loss. However, non-monetary items that are measured on ahistorical cost basis are translated using the exchange rate at the date of thetransaction. 6) Cash equivalents Cash equivalents represent short-term, highly liquid investments, which includeshort-term commercial paper and bonds purchased with a resale agreement with amaturity period of less than three months. 7) Financial assets and financial liabilities at fair value through profit orloss A. Equity investments are recognized using trade date accounting. Debtinstruments, beneficial certificates and derivative financial instruments arerecognized and derecognized using settlement date accounting. All are recognizedinitially at fair value. B. These financial instruments are subsequently remeasured and stated at fairvalue, and the gain or loss is recognized in profit or loss. The fair value oflisted stocks, OTC stocks and closed-end mutual funds is based on latest quotedfair prices of the accounting period. The fair value of open-end and balancedmutual funds is based on the net asset value at the balance sheet date. C. Derivatives not qualified for hedge accounting but under the method of optiontransaction are recognized at fair value on the trade date; derivatives notunder the method of option transaction are recognized at zero fair value on thetrade date. D. The accounting policies before December 31, 2005 are described in Note 3. 8) Available-for-sale financial assets A. Equity investments are recognized using trade date accounting. Financialassets and financial liabilities at fair value through profit or loss for bondsare recognized and derecognized using settlement date accounting and arerecognized initially at fair value plus transaction costs that are directlyattributable 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 and closed-end mutual funds is based on latest quoted fair prices ofthe accounting period. The fair value of open-end and balanced mutual funds isbased on the net asset value at the balance sheet date. C. If there is any objective evidence that the financial asset is impaired, thecumulative loss that had been recognized directly in equity shall be removedfrom equity and recognized in profit or loss. Impairment losses recognizedpreviously in profit or loss for an investment in an equity instrument shall notbe reversed through profit or loss, and if, subsequently, the fair value of adebt instrument increases and the increase can be objectively related to anevent occurring after the impairment loss was recognized in profit or loss, theimpairment loss shall be reversed, with the amount of the reversal recognized inprofit or loss. D. The accounting policies before December 31, 2005 refer to Note 3. 9) Financial assets carried at cost A. Investment in unquoted equity instruments is recognized using trade dateaccounting and is recognized initially at its fair value plus transaction coststhat are directly attributable to the acquisition of the financial asset. B. If there is any objective evidence that the financial asset is impaired, theimpairment loss is recognized in profit or loss. Such impairment loss cannot bereversed. C. The accounting policies before December 31, 2005 are described in Note 3. 10) Settlement date accounting If an entity recognizes financial assets using settlement date accounting, anychange in the fair value of the asset to be received during the period betweenthe trade date and the settlement date is not recognized for assets carried atcost or amortized cost. For financial asset or financial liability classifiedas at fair value through profit or loss, the change in fair value is recognizedin profit or loss. For available-for-sale financial assets, the change in fairvalue is recognized directly in equity. 11) Allowance for doubtful accounts Allowance for doubtful accounts is provided based on past experience and theevaluation of the collectibles of accounts, notes and other receivables takinginto account the aging analysis of receivables. 12) Inventories Inventories are stated at the lower of cost or market value. Inventory cost isdetermined using the weighted-average cost method. The aggregate value methodis used to determine the lower of cost or market value. The market value forraw materials is determined based on current replacement cost while the marketvalue for work in process and finished goods inventories are determined based onnet realizable values. Provision for obsolescence is based on the specificidentification method. 13) Long-term equity investments accounted for under equity method A. Long-term equity investments in which the Company holds more than 20% of theinvestee company's voting shares or has the ability to exercise significantinfluence on the investee's operational decisions are accounted for under theequity method. The excess of the initial investment cost over the acquired netasset value of the investee attributable to goodwill is no longer amortized.Retrospective adjustment of the amount of goodwill amortized in previous yearsis 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 investmentcost is allocated proportionately and applied as a reduction to the book valuesof identifiable non-current assets, and any remaining amount of such excessafter this allocation is credited to extra-ordinary gains. However, negativegoodwill acquired prior to December 31, 2005 is continuously amortized. B. For foreign investments accounted for under the equity method, the Company'sproportionate share of the investee company's cumulative translation adjustment,resulting from translating the foreign investee Company's financialstatements into New Taiwan Dollars, is recognized by the Company and included as"cumulative translation adjustments" under stockholders' equity. 14) Property, plant and equipment A. Fixed assets are stated at cost. Interest costs incurred on the loans usedto bring the assets to the condition and location necessary for their intendeduses are capitalized. Significant renewals or betterments are capitalized.Maintenance and repairs are charged to expense as incurred. B.Depreciation is provided on the straight-line method using the service lifeguidelines prescribed by the R.O.C. Government, which approximate the usefullives of the assets. Fully depreciated assets still in use are depreciatedbased on the residual values over the remaining useful lives. The useful livesof fixed assets are 2 to 8 years, except for buildings that are 45 to 55 years. 15) Intangible assets Patent rights are stated at cost and amortized over the estimated period ofeconomic benefits to be derived from the patents using the straight-line method. 16) Deferred charges and other assets The costs of telephone network installation charges, computer software, moldingand tooling equipment costs are recorded as deferred expenses and are amortizedover their estimated economic lives on a straight-line basis. 17) Impairments of non-financial assets The Group recognizes impairment loss when there is indication that therecoverable amount of an asset is less than its carrying amount. The recoverableamount is the higher of the fair value less costs to sell and value in use. Thefair value less costs to sell is the amount obtainable from the sale of theasset in an arm's length transaction after deducting any direct incrementaldisposal costs. The value in use is the present value of estimated future cashflows to be derived from continuing use of the asset and from its disposal atthe end of its useful life. When the impairment no longer exists, the impairmentloss recognized in prior years shall be recovered. However, impairment loss ofgoodwill is not recoverable. 18) Warranty obligation Warranty obligation is recognized at the time of sale based on an estimate ofthe warranty cost per unit based on the number of units sold during the period. 19) Pension plan Under the defined benefit pension plan, net periodic pension costs arerecognized in accordance with the actuarial calculations. Net periodic pensioncosts include service cost, interest cost, expected return on plan assets, andamortization of unrecognized net transition obligation and gains or losses onplan assets. Unrecognized net transition obligation is amortized on astraight-line basis over 15 years. Under the defined contribution pension plan,net periodic pension costs are recognized as incurred. 20) Bonds payable A. For the bonds payable issued after January 1, 2006, the issuer of a financialinstrument shall classify the instrument, or its component parts, on initialrecognition as a financial liability, a financial asset or an equity instrumentin accordance with the substance of the contractual arrangement and thedefinitions of a financial liability, a financial asset and an equityinstrument. These bonds are accounted for as follows: (1) The fair value of the liability portion of a convertible bond is determinedusing a market interest rate for an equivalent non-convertible bond. Thisamount is recorded as a liability on an amortized cost basis until conversionperiod or the maturity of the bond. (2) The value of any derivative features (such as a call option and put option)embedded in the compound financial instrument is recognized as "financialassets and financial liabilities at fair value through profit or loss". At thematurity of redemption period, if the fair value of common stock exceeds theredemption price, the fair value of the derivative is recognized as "paid-incapital"; however if the fair value of common stock is lower than the redemptionprice, the fair value of the derivative is recognized as "gain or loss". (3) A conversion option embedded in the bonds issued by the Company, which isconvertible to an equity instrument, is recognized and included in "capitalreserve from stock warrants", net of income tax effects. When a bondholderexercises the conversion right, the liability component of the bonds (includingcorporate bonds and embedded derivatives) is revalued, and the resultingdifference shall be recognized as "gain or loss" in the current period. Thebook value of the common stock issued due to the conversion shall be based onthe adjusted book value of the above-mentioned liability component plus the bookvalue of the stock warrants. B. Bonds payable issued before December 31, 2005 are accounted for as follows: (1) The cost method is adopted when the investors exercise their conversionrights, i.e. the book value of the bonds is credited to common stock for theamount equal to the par value of the stock and to the capital reserve for theexcess; no gain or loss is recognized on bond conversion. (2) The related issuance costs for convertible bonds are recorded as deferredcharges, and are amortized over the life of the bonds. The unamortized bondissuance costs relating to the bonds converted or redeemed before the maturitydate are charged to expense upon conversion or redemption. (3) For convertible bonds with redemption rights, the excess of statedredemption price over the par value are amortized over the redemption periodusing the effective interest method. When bonds are converted, the unamortizedissuance costs, unpaid interest, and provision for early redemption, are chargedto current operations. The excess of amounts over the par value of the stock isincluded in capital reserve and no gain or loss is recognized on bondconversion. (4) The put and call options embedded in bonds payable issued before December31, 2005 were not separated in accordance to EITF 95-078. 21) Income Tax A. Income tax expense is provided based on accounting income after adjusting forpermanent differences. The provision for income tax includes deferred incometax for the expected future tax consequences of events that have been includedin different periods for financial or tax reporting purposes. Deferred incometax assets and liabilities are determined using enacted tax rates in effect forthe year(s) in which the differences are expected to reverse. Valuationallowance for deferred income tax assets is recognized to the extent that it ismore likely than not that the income tax benefit will not be realized. Over orunder provision of income tax from the previous years is recorded as adjustmentto the current years' income tax expense. According to the ROC Income TaxLaw, the company's undistributed income is subject to an additional 10%corporate income tax. The tax is charged to income tax expense after theappropriation 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 purchasesof equipment or technology, expenditures for research and development, trainingand development of employees and investment in qualified stocks are charged todeferred income tax assets and credited to income tax expense in the period thetax credits arise. C. Effective January 1, 2006, the Company adopted the Income Basic Tax Act (the"Act"). Under the Act, the income tax payable would be the higher of thebasic tax and the regular income tax in accordance with the Income Tax Law andother relevant laws. 22) Treasury Stock A. The Company adopted the R.O.C. SFAS No. 30 "Accounting for Treasury Stocks"to account for the treasury stock. B. When the treasury shares are reissued, the treasury stock account is creditedand the difference between the proceeds received and the cost is treated as anadjustment of stockholders' equity. Any excess of the proceeds over the costof the treasury stock reissued is recognized as an increase in additionalpaid-in capital from the treasury stock transaction and if the proceeds are lessthan the cost, the deficit is charged to the additional paid-in capital account. Should the additional paid-in capital balance be insufficient to absorb thedeficit, 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 treasurystock. 23) Earnings per share Basic earnings per share is calculated by dividing net income by theweighted-average number of shares outstanding during the period. Dilutedearnings per share is calculated by taking into account the potentially dilutivesecurities which are assumed to have been converted to common stock at thebeginning of the period. 24) Revenue and expenses Revenue is recognized when the earning process is substantially completed andrealized or realizable. Expenses, including research and development costs, arerecognized as incurred. 25) Business combination The Company uses the pooling of interest method to account for the businesscombination with Premier Image Technology Corporation. The Company used the bookvalue of net assets of the merged company to account for the businesscombination. In accordance to R.O.C. GAAP, income of the merged company beforethe combination date is included in the current income. When applying thepooling of interest method, the prior year's financial statements arerestated retroactively to include the merged company. 26) Convenience translation into US dollars (Unaudited) The Company maintains its accounting records and prepares its financialstatements in New Taiwan dollars. The United States dollar amounts disclosed inthe 2006 financial statements are presented solely for the convenience of thereaders and were translated into US dollars using the exchange rate prevailingon December 31, 2006 of US$1:NT$32.60. Such translation amounts are not inaccordance with the generally accepted accounting principle and should not beconstrued as representation that the New Taiwan dollar amounts represent, orhave been or could be converted into United States dollars at that or any otherrate. 3. CHANGES IN ACCOUNTING PRINCIPLES 1) Merger The Company merged with Premier Image Technology Corp. on December 1, 2006. Themerger was accounted for under the pooling of interests method. Theconsolidated financial statements as of and for the years ended December 31,2005 have been restated to include Premier Image Technology Corp. forcomparative purposes. As a result, consolidated total assets increased by$23,323,053, constituting 4.84% of the consolidated total assets as of December31, 2005, and the consolidated net income increased by $36,732,272, constituting3.87% of the consolidated net income for the year then ended. See Note 10 (5). 2) Financial instruments (A)Effective January 1, 2006, the Company adopted the R.O.C. SFAS No. 34 , "Accounting for Financial Instruments" and No. 36, "Disclosure andPresentation of Financial Instruments". The Company has properly reclassifiedcertain accounts on December 31, 2005 based on its holding purposes andabilities in accordance with such standards and the "Rules Governing thePreparation of Financial Statements of Securities Issuers". (B) The accounting policies before December 31, 2005 (included) were as follows: (1) Forward currency option contracts Premiums or discounts on option contracts are recorded at liabilities orassets at cost and are amortized over the contract period on a straight linebasis and are included in current net income. Outstanding put options at balancesheet date are accounted for at their fair values with the differences includedin the current net income. (2) Forward exchange contracts Forward exchange contracts entered into for hedging purpose are recordedusing the spot rate on the contract date. Discounts or premiums on forwardcontracts are amortized over the period of the contract. Gains or losses onforward contacts are determined by the difference between the spot rate at thebalance sheet date and the spot rate at the date of inception of the contract.Exchange gains or losses are included in current net income. (3) Short-term investments Short-term investments are stated at the lower of cost or market value.Cost is determined by the weighted-average method. Any excess of aggregate costover the market value is recorded as unrealized loss and reported as other lossin the income statement. Subsequent recoveries in market value are recorded as again to the extent of original cost of the investment. The market values oflisted securities are determined based on the average closing prices of the lastmonth of the period. The market value of open-end fund is based on the net assetvalue at the balance sheet date. (4) Long-term investments under cost method Long-term investments in which the Company holds less than 20% of thevoting shares of the investees and has no ability to exercise significantinfluence on the investees' operational decisions are stated at the lower ofcost or market value if the investee company is listed, and under the costmethod if the investee company is not listed. Unrealized loss on the decline inmarket value is accounted for as a deduction of the stockholders' equity.Where the decline in the investment value is permanent and the possibility ofshare price recovery is remote, an investment loss is recognized and chargedagainst current income. (C) As a result of the adoption of SFAS No. 34 and No. 36, total assets andtotal stockholders' equity increased by $18,548,993 as of December 31, 2006.However, these changes had no significant impact on the consolidated net incomeand earnings per share for the year ended December 31, 2006. 3) Impairment of assets The Group adopted the R.O.C. SFAS No. 35, "Accounting for Asset Impairment".As a result of the adoption of SFAS No. 35, an impairment loss of $78,000 wasrecognized in the restated income statement for the year ended December 31, 2005relative to the merger with Premier Image Technology Corp. This change inaccounting principle had no significant effect on the earnings per share. 4) Goodwill Effective January 1, 2006, the Group adopted the amended R.O.C. SFAS No. 1, No.5, No. 7, No. 25 and No. 35 and accordingly has discontinued the amortization ofgoodwill. The adoption of these accounting principles had no significant impacton the consolidated financial statements as of and for the year ended December31, 2006. 4.DETAILS OF SIGNIFICANT ACCOUNTS (1)Cash and cash equivalents December 31, 2005 2006Cash on hand $ 2,087,393 $ 6,283,367Checking deposits 1,811,773 3,564,566Savings deposits 12,428,642 13,109,495Time deposits 33,466,859 44,590,181 49,794,667 67,547,609Cash equivalents 11,206,892 18,622,469 $ 61,001,559 $ 86,170,078 (2)Financial assets and liabilities at fair value through profit or loss December 31, 2005 2006 Book Value Contract amount Book Value Contract amountFinancial asset heldfor trading Forward exchange $ 12,715 RMB(SELL) 193,454 $ - - Contracts USD(BUY) 10,600 USD(SELL) 20,000 GBD(SELL) 500 JPY(BUY)1,833,563 Futures contracts 47,233 - 52,056 -Open-end funds 2,511,144 - 3,087,515 - $2,571,092 $3,139,571Financial liabilitiesheld for trading Forward exchange contracts $ 21,876 USD(SELL) 47,142 ERU(SELL) 2,000 SWAP JPY(BUY)5,217,541 238 EUR 500,000 $ 22,114 1) For the year ended December 31, 2006, the Company recognized a net gain of$409,529 (including gain on valuation of financial assets and liabilities-net of$392,654 and exchange gain of $16,875.) 2) For the year ended December 31, 2005, the Company recognized a net loss of$104,604 (including exchange losses of $107,871 and futures contracts gain of$3,267 (shown as "Other income"). (3) Available-for-sale financial assets December 31, 2005 2006Current items: Listed stocks $ 66,421 $ 62,389 Adjustment of available-for-sale financial assets ( 26,220) 871,365 $ 40,201 $ 933,754Non-current items: Listed stocks $ 2,146,926 $ 4,854,454 Adjustment of available-for-sale financial assets ( 91,085) 13,855,263 $ 2,055,841 $ 18,709,717 The fair value of available-for-sale financial assets increased by $18,548,993(including $12,457,588 from subsidiaries and long-term investments accounted forunder the equity method) and is shown under stockholders' equity adjustmentitems-unrealized gain or loss on financial instruments. (4)Notes receivable-third parties December 31, 2005 2006Notes receivable $ 4,406,683 $ 1,178,363Less: allowance for doubtful accounts ( 74,597) ( 86,797) $ 4,332,086 $ 1,091,566 (5)Accounts receivable-third parties December 31, 2005 2006Accounts receivable $193,375,830 $208,048,630Less: allowance for doubtful accounts ( 930,485) ( 1,444,940) $192,445,345 $206,603,690 (6)Inventories December 31, 2005 2006Raw materials and supplies $ 31,553,853 $ 44,641,936Work in process 12,974,019 19,602,086Finished goods 35,362,480 54,864,010Inventory in transit 10,105,766 10,176,676 89,996,118 129,284,708Less: allowance for loss on obsolescence ( 2,477,905) ( 2,950,135) $ 87,518,213 $126,334,573 (7) Financial assets carried at cost December 31,Name of investee company 2005 2006 InnoLux Display Corp. $ 2,814,160 $ - Taiwan Fixed Network Co., Ltd. 522,368 522,368 Diamondhead Ventures Ltd. 318,645 410,397 Global Strategic Investment Inc. 290,585 290,585 Globaltop Partner I Venture Corp. 200,000 - Others 905,200 870,826 $ 5,050,958 $ 2,094,176 1) The common shares of the Company's original investee company, InnoLuxDisplay Corp., were approved to be listed on the stock exchange in October 2006;accordingly, the Company reclassified those shares to "Available-for-salefinancial assets non-current". 2) The Company recognized impairment loss amounting to $13,189 and $1,356,016(shown as other investment loss) in 2006 and 2005 for its investment accountedfor under the cost method, because of the permanent impairment in value and thechance of recovery is minimal. 3) The investments in these investee companies were measured at cost since itsfair value cannot be measured reliably. (8)Long-term equity investments accounted for under the equity method December 31, 2006 Ownership December 31, Investee Company percentage (%) 2005 2006Foxconn Technology Co., Ltd. 31 $ 4,597,570 $ 9,297,098Pan International Industrial Corporation 27 2,150,328 3,439,791Foxconn Advanced Technology, Inc.-Cayman 43 - 1,605,046Foxconn Advanced Technology, Inc. - 1,458,346 -Foxsemicon Integrated Technology Inc. 21 395,278 218,759Altus Technology, Inc. - 190,402 -Others 716,349 618,638 9,508,273 15,179,332Add: prepaid long-term investment 814,023 87,219 $10,322,296 $ 15,266,551 1) The Company held 43% ownership in Foxconn Advanced Technology, Inc.-Cayman(FAT) through its subsidiary and acquired all of the shares of Foxconn AdvancedTechnology, Inc. due to reorganization in 2006. The reorganization had nosignificant effect on the Company's consolidated shareholding in FoxconnAdvanced Technology, Inc. 2) The Company originally held 35% ownership in Altus Technology, Inc. throughits subsidiary. In December 2006, the Company acquired 65% shares of AltusTechnology, Inc. As of December 31, 2006, the Company's consolidatedsharesholding in Altus Technology, Inc. was 100% and was consolidated fromacquisition date. See Note 1(2)3. (9)Property, plant and equipment December 31, 2005 Original cost Accumulated Net Depreciation Book value Land $ 3,414,528 $ - $ 3,414,528Buildings and improvements 26,860,906 ( 5,112,470) 21,748,436Machinery 67,289,346 ( 21,012,664) 46,276,682Molding equipment 3,925,983 ( 2,195,389) 1,730,594Testing equipment 6,353,634 ( 2,803,915) 3,549,719Furniture and fixtures 6,328,716 ( 2,706,934) 3,621,782Tooling equipment 1,383,163 ( 658,360) 724,803Miscellaneous equipment 5,884,536 ( 2,452,734) 3,431,802Prepayments for equipment and 12,784,676 - 12,784,676 construction in progress $ 134,225,488 ($ 36,942,466) 97,283,022Less: Accumulated impairment ( 863,811) $96,419,211 December 31, 2006 Original cost Accumulated Net Depreciation Book value Land $ 3,939,374 $ - $ 3,939,374Buildings and improvements 38,208,563 ( 6,751,878) 31,456,685Machinery 90,797,486 ( 26,688,770) 64,108,716Molding equipment 3,256,427 ( 2,561,577) 694,850Testing equipment 9,228,432 ( 4,179,836) 5,048,596Furniture and fixtures 7,627,006 ( 3,731,732) 3,895,274Tooling equipment 1,715,190 ( 837,195) 877,995Miscellaneous equipment 11,913,844 ( 4,018,800) 7,895,044Prepayments for equipment and 15,146,432 - 15,146,432 construction in progress $ 181,832,754 ($ 48,769,788) 133,062,966Less: Accumulated impairment ( 527,802) $132,535,164 The Company recognized a net gain on the recovery of impairment loss of $72,705(shown as "Other income") in 2006 (net of impairment loss of $5,295 andrecovery gain of $78,000) and impairment loss of $278,419 in 2005 (shown as "Other loss"). (10)Short-term loans December 31, 2005 2006Credit loans $ 24,188,798 $ 40,793,836Interest rates per annum 0.43% - 5.96% 1.62% - 6.07% (11)Income tax 1) Income tax expense and income tax payable are reconciled as follows: December 31, 2005 2006 Income tax expense $ 8,817,023 $ 14,884,437 Changes in deferred income tax ( 1,068,260) ( 2,465,509) Changes in deferred income tax due to 302,582 - change in equities of long-term investments and cumulative translation adjustment Add: Under provision of prior years' income tax 14,710 50,000 Less: Prepaid income tax and income tax withheld ( 3,012,464) ( 4,356,884) Effect of tax rate different from the U.S. branch ( 69,778) ( 65,164) (Over) under provision of prior years' income tax ( 51,596) ( 44,839) Income tax payable (net) $ 4,932,217 $ 8,002,041 Income tax payable $ 4,945,849 $ 8,002,041 Income tax receivable (shown as "Other Receivable") ( 13,632) - $ 4,932,217 $ 8,002,041 2) As of December 31, 2005 and 2006, the deferred income tax assets and liabilities were as follows: December 31, 2005 2006 Deferred income tax assets $ 1,363,853 $ 1,859,220 Deferred income tax liabilities ($ 4,440,355) ($ 7,486,034) Allowance for-Deferred income tax assets ($ 84,803) $ - 3) The temporary differences and related amounts of deferred tax assets (liabilities) are listed as follows: December 31, 2005 2006 Amount Tax effect Amount Tax effect Current items: Allowance for doubtful accounts $ 227,802 $ 56,950 $ 322,014 $ 80,503 Reserve for unrealized loss 1,066,975 272,586 2,349,994 587,499 on inventory obsolescence Unrealized exchange losses 532,926 133,232 815,316 203,829 Product warranty 630,770 157,693 1,375,829 343,957 Difference for depreciation 149,636 35,507 - - Investment tax credit - - 133,256 33,314 Loss carry forward - - 291,922 72,981 Others 232,498 80,655 129,491 32,373 $ 2,840,607 736,623 $ 5,417,822 1,354,456 Less: Valuation allowance ( 10,352) - 726,271 1,354,456 Non - current items: Reserve for pension cost $ 852,840 $ 213,210 $ 774,109 $ 193,527 Loss carry forward 1,039,776 295,543 329,748 82,437 Reserve for unrealized loss 215,368 41,704 - - on inventory obsolescence Investment tax credit 307,092 76,773 - - Foreign investment income ( 17,486,096) ( 4,294,440) ( 34,488,072) ( 7,486,034) accounted for under the equity method Difference for depreciation ( 313,852) ( 87,284) 44,003 11,001 Others ( 94,954) ( 58,631) 871,195 217,799 ($15,479,826) ( 3,813,125) ($32,469,017) ( 6,981,270) Less: Valuation allowance ( 74,451) - ( 3,887,576) ( 6,981,270) Total ($3,161,305) ($5,626,814) 4) Tax exemption related to expansion of manufacturing facility by capital increases are listed below: Year of capital increase Law relevant Duration of tax exemption 1999 Statute for the establishment and 2003 2006 administration of Science- Based Industrial Park 2001 Statute for upgrading industries 2003 20075) As of December 31, 2006, the Company's and the Premier income tax returns have been approved by the R.O.C. Tax Authority through 2003 and 2001, respectively. (12)Bonds payable December 31, 2005 2006Domestic convertible bonds payable $ - $ 18,000,000Add: Discount on bonds payable - ( 1,138,442) - 16,861,558Domestic unsecured bonds payable (CBI) 5,000,000 -Domestic unsecured bonds payable (CBII) 11,500,000 11,500,000Foreign currency convertible bonds payable 657,267 -Add: Revaluation on foreign currency ( 28,518) - 628,749 -Total 17,128,749 28,361,558Less: Current portion ( 5,000,000) -Bonds Payable - long term $ 12,128,749 $ 28,361,558 1) Domestic convertible bonds payable (CB I) A. On September 1, 2006, following the approval from the SFB, the Company issueddomestic unsecured bonds in the amount of $18,000,000. These convertible bondscover a period of five years (from November 10, 2006 to November 10, 2011). B. The conversion price is adjustable based on the terms of the convertiblebonds. As of December 31, 2006, the convertible bonds are not redeemed, andconversion price was $307.9 (in dollars) per share. C. Under the term of the convertible bonds, all bonds (redeemed, matured andconverted) are retired and not to be re-issued. D. Under the term of the convertible bonds, the rights and obligations of thenew shares converted form convertible bonds are the same as the issued andoutstanding common stock. 2) Domestic unsecured bonds payable (ECB I) On November 30, 2001, following the approval from the SFB, the Company issueddomestic unsecured bonds in the amount of $5,000,000. As of December 31, 2006,the unsecured bonds were all deemed. The issuance and terms of domesticunsecured bonds are summarized as follows:Type of bonds Issuance date Period Amount Nominal Payment term interest rateBond Aa to Af December, 2001 5 years $ 300,000 2.5500% Principal is due at maturity. Interest is paid annually at simple interest rate.Bond Ag to Ah December, 2001 5 years $ 400,000 2.5500% "Bond Ba to Bh December, 2001 5 years $ 300,000 2.5339% Principal is due at maturity. Interest is paid semi-annually at compounded interest rate. 3) Domestic unsecured bonds payable (ECB II) On September 14, 2005, following the approval from the SFB, the Company issueddomestic unsecured bonds in the amount of $11,500,000. The issuance and terms ofdomestic unsecured bonds are summarized as follows:Type of bonds Issuance date Period Amount Nominal Payment term interest rate Bond Aa to Af September, 2005 5 years $ 500,000 1.9800% Principal is due at maturity. Interest is paid annually at simple interest rate.Bond Ba to Bf September, 2005 5 years $ 500,000 1.9703% Principal is due at maturity. Interest is paid semi- annually at compounded interest rate.Bond Ca to Cf September, 2005 7 years $ 500,000 2.2500% Principal is due at maturity. Interest is paid annually at simple interest rate.Bond Da to De September, 2005 10 years $ 500,000 2.3700% 4) The Company issued domestic first unsecured bonds payable in 2006. The fairvalue of convertible option in the amount of $1,195,200 was separated from bondspayable at issuance date, and was recognized in "Capital reserve from stockwarrants" in accordance with SFAS No. 36. 5) As of March 31, 2006, all foreign currency convertible bonds were redeemed. (13)Long-term loans Institution 2005 2006 China Agricultural Bank $ 2,725,990 $ -China Bank 1,872,450 -Others 1,309,152 99,127 5,907,592 99,127Less:Current portion ( 5,803,471) - $ 104,121 $ 99,127 (14)Retirement plan 1) The Company has a non-contributory and funded defined benefit pensionplan in accordance with the Labor Standard Law, covering all regular employees.The Company contributes monthly an amount equal to 2.1% of the employees'monthly salaries and wages to the retirement fund deposited with Central Trustof China, the trustee, under the name of the independent retirement fundcommittee. A) In 2005 and 2006, the related actuarial assumptions used to calculate thepension liability were as follows: 2005 2006Discount rate 3.75% 3.75%Rate of increase in compensation 3.50% 3.50%Expected return rate on plan assets 2.75% 2.75% B) Reconciliation of funded status: December 31, 2005 2006Benefit obligation: Vested benefit obligation ($ 101,526) ($ 105,075) Non-vested benefit obligation ( 682,843) ( 644,097) Accumulated benefit obligation ( 784,369) ( 749,172) Additional benefits based on future salary increases ( 423,870) ( 357,465) Projected benefit obligation ( 1,208,239) ( 1,106,637)Fair value of plan assets 437,607 453,379Funded status ( 770,632) ( 653,258)Unrecognized transition obligation 27,486 15,300Unrecognized net pension gain ( 109,694) ( 136,151)Accrued pension cost ($ 852,840) ($ 774,109)Vested benefit $ 133,419 $ 125,393 C) In 2005 and 2006, the details of net pension cost were as follows: December 31, 2005 2006 Service cost $ 127,033 $ 50,879 Interest cost 45,753 44,558 Expected return on plan assets ( 11,085) ( 12,713) Unrecognized pension gain ( 2,164) ( 2,805) Amortization of unrecognized transition obligation - 2,513 Amortization of unrecognized 1,184 - pension loss Curtailment gain ( 60,356) ( 88,259) Net periodic pension cost (gain) $ 100,365 ($ 5,827) 2) In accordance with the Labor Pension Act, the Company has a definedcontribution employee retirement plan, covering all domestic employees. TheCompany contributes monthly an amount based on 6% of employees' monthlysalaries and wages to employees' personal pension accounts with the Bureau ofLabor Insurance. The pension expenses under this plan amounted to $78,836 and$164,851 for the years ended December 31, 2005 and 2006, respectively. 3)The subsidiaries in mainland China have defined contribution pension plan andcontribute an amount monthly based on 8%9% of employees' monthly salaries andwages to an independent fund administered by a government agency. 4)The Company and its overseas subsidiaries recognized pension expenses of$808,798 and 1,494,551 for the years ended December 31, 2005 and 2006,respectively. (15)Capital stock 1) As of December 31, 2006 the authorized capital of the Company amounted to5,700,000 thousand shares (including 200,000 thousand shares reserved for stockwarrants or bonds issued with detachable warrants) and the issued andoutstanding common stocks were 5,168,139 thousand shares at $10 (in dollars),par value, per share. 2) In June 2006, the Company's shareholders adopted a resolution to increasethe authorized capital to 5,700,000 thousand shares and issue common stocks atpar value amounting to $8,899,907 (including $700,000 as stock dividends). 3) The merger between the Company and Premier Image Technology Corp. wasresolved by the Board of Directors in June 2006 with the Company as thesurviving company. The Company issued 178,195,000 of common stock for themerger. 4) As of December 31, 2005, resulting from the bondholder's conversionrequirement, the Company issued 61,630,000 shares (including 55,898,000 sharesissued for bond conversion). 5) Pursuant to the resolution adopted at the stockholders' meeting held on June1, 1999, and after obtaining approval from the SFC, the Company issued 25million units of global depository receipts (GDRs) in Europe, Asia and the USA,which are represented by 50 million shares of common stock (Deposited Shares).The main terms and conditions of the 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 ofdirectors or supervisors. A holder or holders together holding at least 51% ofthe GDRs outstanding at the relevant record date of the stockholders' meetingcan instruct the Depositary to vote in the same direction in respect of one ormore 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 bewithdrawn by holders of GDRs commencing three months after the initial issue ofGDRs. A holder of a GDR may, provided that the Company has delivered to thecustodian physical share certificates in respect of the Deposited Shares,request the Depositary to sell or cause to be sold on behalf of such holder theshares represented by such GDRs. C. Dividends GDR holders are entitled to receive dividends to the same extent as the holdersof common stock subject to the terms of the Deposit Agreement and applicablelaws of the R.O.C. D. As of December 31, 2006, 124,357,000 units of GDRs were outstanding, whichare represented by 248,715 thousand shares of common stock. (16)Capital reserve 1) Under the R.O.C. Company Law, the capital reserve can only be used to offsetlosses and/or to increase capital. 2) Under the R.O.C. SFB regulations, the Company may apply, once a year, tocapitalize the capital reserves arising from paid-in capital in excess of par onthe issuance of stocks for cash. The application should be made after the yearof the issuance, and the amount to be capitalized should not exceed theprescribed amount. 3) Under the pooling of interest method, the balance of common stocks from theeliminated company, less the par value of equity securities issued for themerger, is classified as capital reserve. 4) Please see Note 4 (12) for information about "Capital reserve from stockwarrants". (17)Legal reserve and retained earnings 1) Under the Company's Articles of Incorporation, the current year's earnings,if any, shall first be used to pay all taxes and offset prior year's operatinglosses and then 10% of the remaining amount shall be set aside as legal reserve.Appropriation of the remainder shall be proposed by the Board of Directors andresolved by the stockholders. Bonus distributed to the employees should accountfor 8%, of the total distributed amount. The Company is growing and has plans ofexpansion in the future. In view of this, the future expenditure budget andcapital requirements are being considered in the distribution of earnings andthat not more than 50% of total dividends declared shall be in the form ofstock. However, the distributable ratio of cash dividends may be adjusteddepending on the year's results of operations and funding requirements withthe approval of the board of directors and shareholders. 2) The detail of the undistributed earnings balances were as follows: December 31, 2005 2006Before new tax system adopted $ 2,163,509 $ 2,163,509After new tax system adoptedImposed on additional 10% corporate income tax 42,862,726 58,812,045Not imposed on additional 10% corporate income tax 42,204,885 59,862,728 $ 87,231,120 $ 120,838,282 3) The details of imputation system were as follows: December 31, 2005 2006Balance of stockholders deductible $ 6,161,807 $ 9,760,393 tax accountTax deductible rate of earnings distribution 11.25% 12.57% 4) As of the reporting date, the distribution of 2005 earnings had not beenapproved by the board of directors. The earnings distribution information willbe posted on the "Marketable Observation Post System" of the TECS. 5) The actual distribution of employees' bonuses of $1,889,588 and directors'and supervisors' of 7,000 ($1,082,588 in cash and $807,000 in commonstock) were in accordance with the resolution of the board of directors. TheCompany issued 73,139,000 shares of common stock for employee bonuses, whichrepresented 1.74% of the outstanding common stock shares on December 31, 2005.For the year ended December 31, 2005, the original earnings per common sharewere $9.93 (in dollars). Taking into the effect of employee bonuses anddirectors' and supervisors' remuneration, the pro forma earnings per sharewas $9.49 (in dollars). 6) According to the resolutions adopted by the shareholders during its meetings,the Company paid cash dividends of $2.5 (in dollars) and $3.0 (in dollars) pershare, and stock dividends of $2.0 (in dollars) and $2.0 (in dollars) per sharein 2005 and 2006, respectively. (18)Earnings per common share 2005 Amount Number of Earnings per common share Income before shares (in Income income tax Net income thousands) before Net income tax incomeBasic earnings per share: Consolidated net $54,431,381 $45,614,358 5,028,294 $10.83 $ 9.07 income Minority interests ( 3,501,157) ( 3,255,040) ( 0.70) ( 0.65) Equity holders of the $50,930,224 $42,359,318 $10.13 $ 8.42 CompanyDilutive earnings per share: Consolidated net $54,431,381 $45,614,358 $10.53 $ 8.83 income Minority interests ( 3,501,157) ( 3,255,468) ( 0.67) ( 0.63)Dilutive effect of stock ( 478,040) 358,530 139,091 0.09 0.07 equivalent: Convertible Bonds Equity holders of the $51,408,264 $42,717,420 5,167,385 $ 9.95 $ 8.27 Company 2006 Amount Number of Earnings per common share Income before shares (in Income before income tax Net income thousands) Net income tax incomeBasic earnings per share: Consolidated net $81,160,791 $66,276,354 5,166,010 $ 15.71 $ 12.83 income Minority interests ( 7,014,269) ( 6,413,626) ( 1.36) ( 1.24) Equity holders of the $74,146,522 $59,862,728 $ 14.35 $ 11.59 CompanyDilutive earnings per share: Consolidated net $81,160,791 $66,276,354 $ 15.53 $ 12.69 income Minority interests ( 7,014,269) ( 6,413,626) ( 1.34) ( 1.23)Dilutive effect of stock 56,758 42,569 58,776 0.01 0.01 equivalent: Convertible Bonds Equity holders of the $74,203,280 $59,905,297 5,224,786 $ 14.20 $ 11.47 Company Note: The number of shares has been retroactively adjusted by the stockdividends and the stock bonus to the employees as of December 31, 2006. (19)Personnel, depreciation and amortization expenses For the year ended December 31, 2005 2006Cost of sales Personnel expenses Salaries $ 19,027,583 $ 33,650,105 Labor and health insurances 942,890 1,575,214 Pension 664,996 1,110,958 Others 513,742 673,002 $ 21,149,211 $ 37,009,279 Depreciation $ 8,776,124 $ 11,931,533 Amortization $ 1,740,821 $ 1,772,354Operating expenses Personnel expenses Salaries $ 11,138,510 $ 16,746,073 Labor and health insurances 572,455 956,357 Pension 323,003 539,617 Others 230,956 161,020 $ 12,264,924 $ 18,403,067 Depreciation $ 1,844,851 $ 3,095,274 Amortization $ 766,237 $ 825,109 5.RELATED PARTY TRANSACTIONS 1) Names of related parties and the relationship with the Company Names of related parties Relationship with the Company Foxconn Technology Co., Ltd. and subsidiaries Investee company accounted for under the equity (FTCS) method Pan International Industrial Corporation and " subsidiaries (PIICS) Altus Technology, Inc. (Altus) " Foxconn Advanced Technology, Ltd. Cayman An indirectly-owned investee company accounted for under the equity method Foxconn Advanced Technology, Inc. and " subsidiaries (FATS) Foxsemicon Integrated Technology and " subsidiaries (FITI) Cheng Uei Precision Industry Co., Ltd. Chairman is a brother of the Company's chairman (CUPC) InnoLux Display Co., Ltd. and subsidiaries Common major shareholder (InnoLuxS) a) Altus Technology Inc. was acquired (65% ownership) by Hon Hai PrecisionIndustry Co., Ltd in December 2006 and consolidated share holding was at 100%,thus the income or loss of the controlled subsidiaries is included in theconsolidated financial statements after the acquisition date. Before acquisitiondate, transactions with Altus and The Company and subsidiaries were not writingoff. b) Except for transactions with the above related parties, there were no othermaterial transactions between related parties and the Company for the six-monthperiod ended December 31, 2006. The names of the other related parties andrelationship with the Company are disclosed in Note 11. 2) Significant transactions with related parties A. Sales 2005 2006 FTCS $ 11,208,892 $ 25,443,710 Altus 1,943,572 5,999,597 InnoLuxS 3,123,721 5,295,185 PIICS 532,755 497,214 Others 833,904 1,219,009 $ 17,642,844 $ 38,454,715 Sales terms to related parties are under regular terms.B. Purchases 2005 2006 FTCS $ 11,547,651 $ 16,861,959 FATS-Cayman - 10,708,227 FATS 5,972,707 - Altus 3,832,726 8,878,445 PIICS 7,017,841 5,809,969 InnoLuxS 666,576 3,295,023 CUPS 1,359,972 1,425,609 Others 15,416 49,247 $ 30,412,889 $ 47,028,479 Purchases are at market prices and payment terms are similar to those with third parties.C. Accounts receivable - related parties December 31, 2005 2006 FTCS $ 2,004,271 $ 10,076,361 InnoLuxS 1,284,276 2,008,727 Altus 1,618,560 - Others 251,137 426,850 5,158,244 12,511,938 Less: Allowance for doubtful accounts ( 33,498) ( 147,294) $ 5,124,746 $ 12,364,644 D. Other receivables The Company and its subsidiaries purchased materials on behalf of FTCS and FITI. As of December 31, 2005 and 2006, the amounts of other receivables are$554,016 and $392,200, respectively. E. Accounts payable - related parties December 31, 2005 2006 FTCS $ 3,067,080 $ 4,289,367 FATS-Cayman - 3,940,032 FATS 2,964,170 - PIICS 2,792,118 2,095,005 CUPC 786,183 606,640 ALTUS 1,946,761 - Others 381,167 595,634 $ 11,937,479 $ 11,526,678 F. Property transactions For the year ended December 31, 2005 Counterparty Transaction Sales / Gain Receivables / (payables) purchase price on disposal at December 31, 2005InnoLuxS and FTCS Sale of fixed $ 462,861 $ 791 $ 180,475 assetsOthers Purchase of fixed 115,158 - ( 18,737) assets For the year ended December 31, 2006 Counterparty Transaction Sales / Gain Receivables / (payables) purchase price on disposal at December 31, 2005InnoLuxS Sale of fixed $ 327,403 $ 8,005 $ 21,307 assetsFITI and FTCS Purchase of fixed 291,058 - ( 11,479) assets 6.PLEDGED ASSETS As of December 31, 2005 and 2006, the assets pledged as collateral for loans were as follows: December 31, 2005 2006 Assets Nature Book value Book valueFixed deposits and cash Bond deposit as security for court $ 435,095 $ 492,201 (shown as other proceedings, security deposit for financial assets employment of foreign laborers non-current) and Custom's deposits.Property, plant and equipment -Land and Buildings Short-term and long-term loans 536,431 150,053 -Machinery Short-term loans 292,493 -Other Asset Refundable " - 113,231Deposit $1,264,019 $ 755,485 7.COMMITMENTS AND CONTINGENT LIABILITIES As of December 31, 2006, the Company's significant contingent liabilities wereas follows: 1) The Company entered into several contracts for the acquisitions of themachinery and for the construction of research center with total valueapproximately $3,185 million. As of December 31, 2006, the unpaid balance onthese contracts amounted to $2,307 million. 2) As of December 31, 2006, future minimum lease payments for a factory andemployees' apartment were approximately $1,295.36 million as follows: Year In millions of New Taiwan Dollars 2007 $ 625.58 2008 295.66 2009 175.75 2010 and there after 198.37 $ 1,295.36 3) In 2003, the US IRS initiated an investigation on the Company's taxwithholding on the issuance of stock bonus for the employees of its U.S.subsidiaries. The Company agreed to pay a US$20 million settlement with the IRSin March 2007. As of December 31, 2006, the Company had provided a reserve forthe said amount in the Company's financial statements. 4) The Company is a defendant against A1 Electronics, Inc. and UCPS, Inc. fordefault of contracts and assurance responsibilities. The case was settled inJuly 2006. 8.SIGNIFICANT CATASTROPHE None. 9.SUBSEQUENT EVENTS Excepted for Note7(3), None. 10.OTHERS 1) Financial statement presentation: Certain accounts in the December 31, 2005 consolidated financial statements havebeen reclassified to conform to the December 31, 2006 consolidated financialstatement presentation. 2) Fair value of financial instruments December 31, 2005 Fair ValueNon-derivative financial Book Value Quotation Estimated using Note instruments in an active a valuation market Assets: Financial assets with fair values $267,534,285 $ - $267,534,285 Aequal to book values Open-end fund 2,511,144 2,511,144 - Available-for-sale financial 2,096,042 3,970,454 - Bassets Financial assets carried at cost- - - Cnon-current 5,050,958 Refundable deposits 284,132 - 281,263 D Liabilities: Financial liabilities with fair 257,087,262 - 257,087,262 Avalues equal to book values Bonds payable 12,128,749 - 12,128,749 E Derivative financial instruments Assets: Futures contracts 47,233 - 47,233 F Forward exchange 12,715 - 20,433 F December 31, 2006 Fair ValueNon-derivative financial Book Value Quotation Estimated using Note instruments in an active a valuation market Assets: Financial assets with fair values $310,025,243 $ - $310,025,243 Aequal to book values Open-end fund 3,087,515 3,087,515 - Available-for-sale financial 19,643,471 - Bassets 19,643,471 Financial assets carried at cost- 2,094,176 - - Cnon-current Refundable deposits 242,284 - 237,126 D Liabilities: Financial liabilities with fair 303,894,988 - 303,894,988 Avalues equal to book values Bonds payable 28,361,558 - 28,361,558 E Derivative financial instruments Liabilities: Futures contracts 52,056 - 52,056 F Forward exchange 238 - 238 F Swap 21,876 21,876 F The methods and assumptions used to estimate the fair values of the abovefinancial instruments are summarized below: A. For short-term instruments, the fair values were determined based on theircarrying values because of the short maturities of the instruments. This methodwas applied to Cash and cash equivalents, notes and accounts receivables, otherreceivables, other financial assets-current, short-term loans, notes andaccounts payable, accrued expenses, income tax payable, other payable and othercurrent liabilities. B. Available for sale financial instruments is regarded as quoted in an activemarket if quoted prices are readily and regularly available from an exchange,dealer, broker industry group, pricing service or regulatory agency, and thoseprices represent actual and regularly occurring market transactions on an arm's-length basis. If the market for a financial instrument is not active, anentity establishes fair value by using a valuation technique. The fair values ofavailable-for-sale financial assets are based on the quotation in the activemarkets at December 31, 2005 and 2006. C. As financial assets carried at cost are not quoted in an active market, itsfair value cannot be measured reliably. D. The fair value of refundable deposits and other financial assets-non-currentare based on the discounted value of expected future cash inflow, and thediscount rate is based on the fixed rate of the one year time deposit given bythe Post Office at December 31, 2006 and 2005, respectively. E. The fair value of bonds payable includes stated redemption price and interestpayable. F. The fair values of derivative financial instruments which include unrealizedgain or losses on unsettled contracts were determined based on the amounts to bereceived or paid assuming that the contracts were settled as of the reportingdate. 3) Financial Risk Controls A.The Group employs a comprehensive risk management and control system toclearly identify, measure and control the various kinds of financial risk thatthey face, including market risk, credit risk, liquidity risk and cash flowrisk. Except for market risk, which is controlled by outside factors, theremainder of the foregoing types of risk can be controlled internally or removedfrom business processes. Therefore, the goal in managing each of these risks isto reduce them to zero. As for market risk, the goal is to protect its overall position through strictrecommendation, execution and audit processes, and proper consideration of a)long-term trends in the external economic/financial environment, b) internaloperating conditions, and c) the actual effects of market fluctuations. B.The risk management and control system of the Group is administered within aframework of stratified responsibility: The board of directors formulates andapproves handling procedures; the senior officers designated by the board makeregular and unscheduled assessments of management procedures, organizationalstructure, transaction flows, and whether there are any abnormal circumstances;the legal department reviews and examines transaction agreements; the accountingdepartment makes recommendations with regard to transactions and is responsiblefor carrying them out; and the audit department undertakes audits. Under thisframework, with its strict adherence to proper segregation of duties andadequate internal control procedures, the Group seeks to minimize the potentialadverse effects on the Group's financial performance. 4)Material Financial Risk Information A.Market risk (1) Foreign exchange risk: The Group's major purchase and sale transactions are conducted in USD. Thechange of fair value will be caused by foreign exchange rate fluctuations,however, the amounts and periods of the Group's accounts receivable andaccounts payable are equivalent, so the market risk could be offset. If the gapis raised, the Group would adopt the forward contract to hedge the risk, so theGroup estimates there would be no material risk. (2) Price risk: The Group is exposed to equity securities price risk because of investments heldby the Group and classified on the consolidated balance sheet either asavailable-for-sale or at fair value through profit or loss. The Group setslimits to control the transaction volume and stop-loss amount of derivatives toreduce its market risk. (3) Futures market risk: The Group is exposed to price risk because of investments in futures marketinstruments, which have the fair value in the active market. The Group setslimits to control the transaction volume and stop-loss amount of derivatives toreduce its market risk. (4) Interest rate risk: The long-term bonds issued by the Group all have fixed interest rates, so thereis no interest rate risk. B.Credit risk (1) Receivables: With respect to receivables of the Group, most of the debtors are well-knowninternational companies with very good credit standing. Moreover, the adequacyof the allowance for doubtful accounts is assessed regularly, so there is nomaterial credit risk. (2) Financial market: The long-term exchange rate and futures transactions engaged in by the Group aredone with financial institutions with very good credit standing. Consequently,the likelihood that credit risk would occur is low. (3) Asset transactions: The Company and its subsidiaries have investments in available-for-salefinancial assets and financial assets that are measured at cost. Although thepotential for credit risk does arise, there is an open, active market foravailable-for-sale financial assets. For financial assets measured at cost, theCompany does regular impairment testing. Moreover, the counterparties in thetransactions had already had their credit standing evaluated, so thesetransactions 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 internationalcompanies with very good credit standing. There have been no overdue receivableswith maturities under one year. Therefore, there is no material liquidity risk. (2) Financial assets: For the available-for-sale financial assets held by the Group, there is anactive market that allows there investments to be readily converted into certainamount of cash approximate to their fair values. The liquidity risk exposure islow. As for financial assets measured at cost, the liquidity risk is high asthere is no active market. However, since the shareholding percentages are nothigh, they do not constitute major investments. Therefore, no material liquidityrisk is expected. (3) Foreign exchange transactions: For forward foreign exchange transactions engaged in by the Group, the targetsof the transactions are all currencies traded on international foreign exchangemarkets with large trading volumes and high number of traders bidding. Tradingis active with high liquidity. Therefore, no material liquidity risk isexpected. (4) Futures transactions: For futures transactions engaged in by the Group, orders are placed in the NewYork or Chicago futures exchanges. The numbers of available futures targets andinternational market participants are adequate to facilitate easy entry andexit. Therefore, no liquidity risk is expected. (5) Fund allocation: The Group has sufficient operating funds with good credit standing. There is nofund allocation liquidity risk from breach of contractual obligations on accountof an inability to raise funds. D. Cash flow risk from movements in interest rates (1) Long-term liabilities: The Group does not have long-term financial assets and liabilities that areaffected by interest rate changes. Therefore, there should be no material cashflow risk from movements in interest rates. (2) Foreign exchange transactions: The forward foreign currency transactions engaged in by the Group are for thepurpose of hedging against short-term gaps in positions after offsetting foreigncurrency assets and liabilities. As such, the amounts in the transactions areminimal and their duration is short. Moreover, because of opposite foreigncurrency outflows and inflows, a significant need for foreign funds is notexpected. Therefore, no material foreign exchange-type cash flow risk isexpected from movements in interest rates. (3) Financial Assets As the investments of the Group are not interest-rate type products. There is nocash flow risk from movements in interest rates. 5) Merger Information As of December 1, 2006, the merge date, the Company issued new shares inexchange of the shares of Premier Image Technology Corporation (Premier) at theswap ratio of 1: 0.627. This merger was accounted for under the pooling ofinterests method. As of the consolidated date (from January1 to November 30,2006), the financial information as follows: A. Non-consolidated financial information from January to November 30, 2006: The Company Premiera)Net operating revenue $ 773,673,391 $ 38,007,937b)Stockholders' equity $ 222,112,988 $ 12,214,281 c)Major accounts in the balance sheet (on November 30, 2006) Premier Cash and cash equivalent $ 2,677,971 Notes receivable and accounts receivable 7,518,765 Inventories 466,668 Other current assets 158,887 Funds and Investments 3,442,129 Property, plant and equipment 3,589,829 Other assets 30,065 Current liabilities ( 5,417,417) Other liabilities ( 252,616) Net assets $ 12,214,281 Original common stock of Premier $ 6,073,452 New shares for merger ( 1,781,946) Capital reserve $ 4,291,506 B.Consolidated financial information from January 1 to December 31, 2006: The Company Premiera) Net operating revenue $ 911,773,358 $ 36,732,272b) Net income $ 43,971,384 $ 1,642,974c) Stockholder's equity $ 182,142,883 $ 11,214,847 d) Major accounts in the balance sheet (on December 31, 2005) Premier Cash and cash equivalent $ 2,573,409 Notes receivable and accounts receivable 7,057,735 Inventories 4,091,849 Other current assets 344,666 Funds and Investments 57,536 Property, plant and equipment 8,913,799 Other assets 284,059 Current liabilities ( 11,862,895) Other liabilities ( 245,311) Net assets $ 11,214,847 For the year ended December 31, 2005 Transactions Companies Amounts1) Elimination of long- Hyield Venture Capital Co., Ltd. $ 102,952,275 term investments Foxconn Holding Ltd. and stockholders' Foxconn (Far East) Ltd. equity Bao Shin International Investment Co., Ltd. Hon Chi International Investment Co., Ltd. Hon Yuan International Investment Co., Ltd. Hon Hai/Foxconn Logistics California LLC. Hon Hai/Foxconn Logistics Texas LLC. Foxconn Singapore (PTE) Ltd. Ambit Microsystems Holding Corp. Ambit International Ltd. Unique Logistics Ltd. Ambit Microsystems Inc. Foxconn International Inc. Lin Yih International Investment Co., Ltd. Image & Vision Investment Corp. Premier Image Technology (H.K), Limited Premier Image Technology (Japan), Limited2) Elimination of intercompany receivables, payables and prepayments A. Accounts Foxconn Holding Ltd. 22,353,345 receivable, Foxconn (Far East) Ltd. accounts payable Hon Hai/Foxconn Logistics California LLC. and other Hon Hai/Foxconn Logistics Texas LLC. receivables/ Foxconn Singapore (PTE) Ltd. payables Ambit Microsystems Inc. Ambit International Ltd. Unique Logistics Ltd. Premier Image Technology (H.K), Limited B. Prepayments Foxconn (Far East) Ltd. 971,377 Foxconn Holding Ltd. 6) Elimination of intercompany transactions For the year ended December 31, 2005 Transactions Companies Amounts3) Elimination of profit and loss A. Sales and Foxconn (Far East) Ltd. $ 89,502,345 purchases Foxconn Holding Ltd. Ambit Microsystems Inc. Foxconn Singapore (PTE) Ltd. Hyield Venture Capital Co., Ltd. Unique Logistics Ltd. Ambit International Ltd. Premier Image Technology (H.K), Limited B. Logistics Foxconn (Far East) Ltd. 1,424,251 expenses Hon Hai/Foxconn Logistics California LLC. Hon Hai/Foxconn Logistics Texas LLC. C. Processing Foxconn (Far East) Ltd. 56,981,537 revenue and expenses D. Unrealized Foxconn (Far East) Ltd. 616,275 intercompany Foxconn Holding Ltd. gross profit E. Commission Foxconn Singapore (PTE) Ltd. 108,079 expenses Foxconn Holding Ltd. F. Patent right Amortizing expense Foxconn (Far East) Ltd. 100,749 For the year ended December 31, 2006 Transactions Companies Amounts1) Elimination of long- Hyield Venture Capital Co., Ltd. $ 164,381,047 term investments Foxconn Holding Ltd. and stockholders' Foxconn (Far East) Ltd. equity Bao Shin International Investment Co., Ltd. Hon Chi International Investment Co., Ltd. Hon Yuan International Investment Co., Ltd. Hon Hai/Foxconn Logistics California LLC. Hon Hai/Foxconn Logistics Texas LLC. Foxconn Singapore (PTE) Ltd. Ambit Microsystems Holding Corp. Ambit International Ltd. Unique Logistics Ltd. Foxconn International Inc. Lin Yih International Investment Co., Ltd. Image & Vision Investment Corp. Premier Image Technology (H.K) Limited Premier Image Technology (Japan) Limited2) Elimination of intercompany receivables, payables and prepayments A. Accounts Foxconn Holding Ltd. 33,394,850 receivable, Foxconn (Far East) Ltd. accounts payable Hon Hai/Foxconn Logistics California LLC. and other Hon Hai/Foxconn Logistics Texas LLC. receivables/ Foxconn Singapore (PTE) Ltd. payables Ambit International Ltd. Unique Logistics Ltd. Premier Image Technology (H.K) Limited B. Prepayments Foxconn (Far East) Ltd. 4,874,219 Hon Hai/Foxconn Logistics Texas LLC. Logistics Texas LLC. Hon Hai/Foxconn Logistics California LLC. Foxconn Holding Ltd. For the year ended December 31, 2006 Transactions Companies Amounts3) Elimination of profit and loss A. Sales and Foxconn (Far East) Ltd. $ 152,742,145 purchases Foxconn Holding Ltd. Foxconn Singapore (PTE) Ltd. Hyield Venture Capital Co., Ltd. Unique Logistics Ltd. Amb Logistics Ltd. Ambit International Ltd. Premier Image Technology (H.K) Limited B. Logistics Foxconn (Far East) Ltd. 1,445,301 expenses Hon Hai/Foxconn Logistics California LLC. Hon Hai/Foxconn Logistics Texas LLC. C. Processing Foxconn (Far East) Ltd. 77,524,218 revenue and expenses D. Unrealized Foxconn (Far East) Ltd. 1,054,610 intercompany gross Foxconn Holding Ltd. profit Premier Image Technology (H.K) Limited This information is provided by RNS The company news service from the London Stock Exchange

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