UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One)
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o
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________________ to
________________
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Commission
file number: 001-31335
HIMAX TECHNOLOGIES,
INC.
(Exact
name of Registrant as specified in its charter)
Not
Applicable
(Translation
of Registrant’s name into English)
CAYMAN
ISLANDS
(Jurisdiction
of incorporation or organization)
NO. 26, ZIH LIAN ROAD, FONGHUA VILLAGE
SINSHIH TOWNSHIP, TAINAN COUNTY 74445
TAIWAN, REPUBLIC OF CHINA
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Ordinary
Shares, par value $0.0001 per ordinary share
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The
Nasdaq Global Select Market Inc.*
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*
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Not
for trading, but only in connection with the listing on the Nasdaq Global
Select Market, Inc. of American Depositary Shares representing such
Ordinary Shares
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act: None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report.
191,979,691 Ordinary Shares.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP
x International
Financial Reporting Standards as issued by the International Accounting
Standards Board o Other
o
If “Other”
has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to
follow. o Item
17 o Item
18
If this is
an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
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This
annual report on Form 20-F contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Although these forward-looking statements, which may include statements
regarding our future results of operations, financial condition, or business
prospects, are based on our own information and information from other sources
we believe to be reliable, you should not place undue reliance on these
forward-looking statements, which apply only as of the date of this annual
report. The words “anticipate,” “believe,” “expect,” “intend,” “plan,”
“estimate” and similar expressions, as they relate to us, are intended to
identify a number of these forward-looking statements. Our actual results of
operations, financial condition or business prospects may differ materially from
those expressed or implied in these forward-looking statements for a variety of
reasons, including, among other things and not limited to, our anticipated
growth strategies, our future business developments, results of operations and
financial condition, our ability to develop new products, the expected growth of
the display driver markets, the expected growth of end-use applications that use
flat panel displays, particularly TFT-LCD panels, development of alternative
flat panel display technologies, and other factors. For a discussion of these
risks and other factors, please see “Item 3.D. Key Information—Risk
Factors.”
Except as
discussed in the next two sentences, all translations from U.S. dollars to NT
dollars in this annual report were made at a rate of $1.00 to NT$32.43, the noon
buying rate in The City of New York for cable transfers in NT dollars per U.S.
dollar as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2007. NT dollar amounts relating to the estimated fair value per
share of all share-based compensation issued to employees and consultants (as
described in “Item 5A. Operating Results—Critical Accounting Policies and
Estimates—Share-Based Compensation Expenses”) have been calculated based on
historical exchange rates used for our accounting purposes. No representation is
made that the NT dollar amounts referred to herein could have been or could be
converted into U.S. dollars at any particular rate or at all. On June 19, 2008,
the noon buying rate was $1.00 to NT$30.39. Any discrepancies in any table
between totals and sums of the amounts listed are due to rounding.
Unless
otherwise indicated, in this annual report,
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•
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the
terms “we,” “us,” “our company,” “our,” and “Himax” refer to Himax
Technologies, Inc., its predecessor entities and
subsidiaries;
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•
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the
term “Himax Taiwan” refers to Himax Technologies Limited, our wholly owned
subsidiary in Taiwan and our
predecessor;
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•
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“shares”
or “ordinary shares” refers to our ordinary shares, par value $0.0001 per
share;
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•
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“RSUs”
refers to restricted share units;
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•
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“ADSs”
refers to our American depositary shares, each of which represents one
ordinary share;
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•
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“ADRs”
refers to the American depositary receipts that evidence our
ADSs;
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•
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“ROC”
or “Taiwan” refers to the island of Taiwan and other areas under the
effective control of the Republic of
China;
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•
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“PRC”
or “China” for purposes of this annual report refers to the People’s
Republic of China, excluding Taiwan and the special administrative regions
of Hong Kong and Macau;
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•
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“AMOLED”
refers to active matrix organic light-emitting
diode;
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“IC”
refers to integrated circuit;
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•
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“LCOS”
refers to liquid crystal on
silicon;
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•
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“LTPS”
refers to low temperature poly
silicon;
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“OLED”
refers to organic light-emitting
diode;
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“TFT-LCD”
refers to amorphous silicon thin film transistor liquid crystal display,
or “a-Si TFT-LCD;”
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“processed
tape” refers to polyimide tape plated with copper foil that has a circuit
formed within it, which is used in tape-automated bonding
packaging;
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“semiconductor
manufacturing service providers” refers to third-party wafer fabrication
foundries, gold bumping houses and assembly and testing
houses;
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“large-sized
panels” refers to panels that are typically ten inches and above in
diagonal measurement;
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“small-
and medium-sized panels” refers to panels that are typically less than ten
inches in diagonal measurement;
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all
references to “New Taiwan dollars,” “NT dollars” and “NT$” are to the
legal currency of the ROC; and
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•
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all
references to “dollars,” “U.S. dollars,” and “$” are to the legal currency
of the United States.
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Not
applicable.
Not
applicable.
The
selected consolidated statement of income data and selected consolidated cash
flow data for the years ended December 31, 2005, 2006 and 2007 and the selected
consolidated balance sheet data as of December 31, 2006 and 2007 are derived
from our audited consolidated financial statements included herein, which were
prepared in accordance with U.S. GAAP. The selected consolidated balance sheet
data as of December 31, 2003, 2004 and 2005 and the selected consolidated
statement of operations data and consolidated cash flow data for the years ended
December 31, 2003 and 2004 have been derived from our audited consolidated
financial statements that have not been included herein and were prepared in
accordance with U.S. GAAP. Our consolidated financial statements include the
accounts of Himax Technologies, Inc. and its subsidiaries as if we had been in
existence for all years presented. As a result of our reorganization, 100% of
our outstanding ordinary shares immediately prior to our initial public offering
were owned by former shareholders of Himax Taiwan. See “Item 4.A. History and
Development of the Company.” In presenting our consolidated financial
statements, the assets and liabilities, revenues and expenses of Himax Taiwan
and its subsidiaries are included in our consolidated financial statements at
their historical amounts for all periods presented. Our historical results do
not necessarily indicate results expected for any future periods. The selected
financial and operating data set forth below should be read in conjunction with
“Item 5. Operating and Financial Review and Prospects” and the consolidated
financial statements and the notes to those statements included
herein.
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Year
Ended December 31,
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2003
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2004
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2005
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2006
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2007
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(in
thousands, except per share data)
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Consolidated
Statements of Operations Data:
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Revenues
from third parties, net
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$ | 29,050 | $ | 109,514 | $ | 217,420 | $ | 329,886 | $ | 371,267 | ||||||||||
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Revenues
from related parties, net
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102,793 | 190,759 | 322,784 | 414,632 | 546,944 | |||||||||||||||
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Costs
and expenses(1):
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Cost
of revenues
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100,102 | 235,973 | 419,380 | 601,565 | 716,163 | |||||||||||||||
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Research
and development
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21,077 | 24,021 | 41,278 | 60,655 | 73,906 | |||||||||||||||
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General
and administrative
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4,614 | 4,654 | 6,784 | 9,762 | 14,903 | |||||||||||||||
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Sales
and marketing
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2,669 | 2,742 | 4,762 | 6,970 | 9,334 | |||||||||||||||
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Operating
income
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$ | 3,381 | $ | 32,883 | $ | 68,000 | $ | 65,566 | $ | 103,905 | ||||||||||
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Net
income (loss)(2)
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$ | (581 | ) | $ | 36,000 | $ | 61,558 | $ | 75,190 | $ | 112,596 | |||||||||
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Earnings
(loss) per ordinary share(2) and per ADS(3):
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Basic
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$ | (0.00 | ) | $ | 0.21 | $ | 0.35 | $ | 0.39 | $ | 0.57 | |||||||||
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Diluted
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$ | (0.00 | ) | $ | 0.21 | $ | 0.34 | $ | 0.39 | $ | 0.57 | |||||||||
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Weighted-average
number of shares used in earnings per share computation:
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Basic
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116,617 | 169,320 | 176,105 | 192,475 | 196,862 | |||||||||||||||
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Diluted
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116,617 | 173,298 | 180,659 | 195,090 | 197,522 | |||||||||||||||
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Cash
dividends declared per ordinary share(4)
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$ | 0.00 | $ | 0.00 | $ | 0.08 | $ | 0.00 | $ | 0.20 | ||||||||||
____________
Note:
(1)
The amount
of share-based compensation included in applicable costs and expenses categories
is summarized as follows:
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Year Ended
December 31,
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2003
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2004
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2005
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2006
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2007
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(in
thousands)
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Cost
of revenues
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$ | 827 | $ | 291 | $ | 188 | $ | 275 | $ | 422 | ||||||||||
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Research
and development
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11,666 | 4,288 | 6,336 | 11,806 | 15,393 | |||||||||||||||
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General
and administrative
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2,124 | 721 | 848 | 1,444 | 2,182 | |||||||||||||||
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Sales
and marketing
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1,349 | 537 | 1,241 | 1,625 | 2,324 | |||||||||||||||
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Total
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$ | 15,966 | $ | 5,837 | $ | 8,613 | $ | 15,150 | $ | 20,321 | ||||||||||
In 2007,
of the $20.3 million in share-based compensation, $14.4 million was settled in
cash.
(2)
Under the
ROC Statute for Upgrading Industries, we are exempt from income taxes for income
attributable to expanded production capacity or newly developed technologies. If
we had not been exempt from paying this income tax, net income and basic and
diluted earnings per share would have been $52.4 million, $0.30 and $0.29,
respectively, for the year ended December 31, 2005, $59.2 million, $0.31 and
$0.30, respectively, for the year ended December 31, 2006, and $85.6 million,
$0.43, and $0.43, respectively, for the year ended December 31, 2007. A portion
of these tax exemptions expires on March 31, 2009, December 31, 2010 and
December 31, 2012, respectively.
(3)
Each ADS
represents one ordinary share.
(4)
In
November 2005, we distributed a special cash dividend of approximately $0.075
per share in respect of our performance prior to our initial public offering.
This special cash dividend should not be considered representative of the
dividends that would be paid in any future periods or our dividend
policy.
The
following table presents our selected consolidated balance sheet data as of
December 31, 2003, 2004, 2005, 2006 and 2007 and selected consolidated cash flow
data for the years ended December 31, 2003, 2004, 2005, 2006 and
2007:
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As of December
31,
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2003
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2004
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2005
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2006
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2007
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(in
thousands)
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Consolidated
Balance Sheet Data:
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Cash
and cash equivalents(1)
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$ | 2,529 | $ | 5,577 | $ | 7,086 | $ | 109,753 | $ | 94,780 | ||||||||||
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Accounts
receivable, net
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12,543 | 27,016 | 80,259 | 112,767 | 88,682 | |||||||||||||||
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Accounts
receivable from related parties, net
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22,893 | 39,129 | 69,587 | 116,850 | 194,902 | |||||||||||||||
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Inventories
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21,088 | 54,092 | 105,004 | 101,341 | 116,550 | |||||||||||||||
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Total
current assets
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88,245 | 144,414 | 300,056 | 466,715 | 538,272 | |||||||||||||||
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Total
assets
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96,159 | 157,770 | 327,239 | 518,794 | 652,762 | |||||||||||||||
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Accounts
payable
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22,901 | 38,649 | 105,801 | 120,407 | 147,221 | |||||||||||||||
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Total
current liabilities
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43,613 | 52,157 | 160,784 | 153,279 | 185,599 | |||||||||||||||
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Total
liabilities
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43,870 | 52,246 | 160,784 | 153,471 | 190,364 | |||||||||||||||
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Ordinary
shares
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17 | 18 | 18 | 19 | 19 | |||||||||||||||
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Total
stockholders’ equity (1)
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52,289 | 104,860 | 165,831 | 363,927 | 451,309 | |||||||||||||||
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Consolidated
Cash Flow Data:
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||||||||||||||||||||
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Net
cash provided by (used in) operating activities
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(1,593 | ) | (8,688 | ) | 12,464 | 29,696 | 77,162 | |||||||||||||
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Net
cash provided by (used in) investing activities
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(28,915 | ) | 11,001 | (25,363 | ) | (8,927 | ) | (25,019 | ) | |||||||||||
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Net
cash provided by (used in) financing activities
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30,341 | 735 | 14,404 | 81,886 | (67,241 | ) | ||||||||||||||
____________
Note:
(1)
Cash and
cash equivalents at December 31, 2006 increased significantly as compared to
December 31, 2005. This increase was primarily due to net proceeds of $147.4
million received from our initial public offering in April 2006, which also
caused the increase in our stockholders’ equity by the same
amount.
Exchange
Rate Information
The
following table sets forth the average, high, low and period-end noon buying
rates between NT dollars and U.S. dollars for the periods
indicated:
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Noon
Buying Rate
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||||||||||||||||
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Average(1)
|
High
|
Low
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Period-end
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|||||||||||||
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(NT
dollars per U.S. dollar)
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Period
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2003
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34.40 | 34.98 | 33.72 | 33.99 | ||||||||||||
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2004
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33.37 | 34.16 | 31.74 | 31.74 | ||||||||||||
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2005
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32.13 | 33.77 | 30.65 | 32.80 | ||||||||||||
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2006
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32.51 | 33.31 | 31.28 | 32.59 | ||||||||||||
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2007
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32.85 | 33.41 | 32.26 | 32.43 | ||||||||||||
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First
quarter
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32.92 | 33.13 | 32.38 | 33.01 | ||||||||||||
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Second
quarter
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33.13 | 33.41 | 32.74 | 32.83 | ||||||||||||
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Third
quarter
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32.93 | 33.10 | 32.67 | 32.67 | ||||||||||||
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Fourth
quarter
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32.43 | 32.61 | 32.26 | 32.43 | ||||||||||||
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2008
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January
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32.36 | 32.49 | 32.15 | 32.15 | ||||||||||||
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February
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31.36 | 32.03 | 30.90 | 30.92 | ||||||||||||
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March
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30.58 | 31.09 | 29.99 | 30.37 | ||||||||||||
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April
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30.36 | 30.52 | 30.24 | 30.47 | ||||||||||||
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May
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30.59 | 30.99 | 30.36 | 30.37 | ||||||||||||
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June
(through June 19)
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30.36
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30.44
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30.15
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30.39
|
||||||||||||
____________
Source:
Federal Reserve Bank of New York.
Note: (1)
Determined
by averaging the rates on each business day.
Not
applicable.
Not
applicable.
Risks
Relating to Our Financial Condition, Business and Industry
We
derive substantially all of our net revenues from sales to the TFT-LCD panel
industry, which is highly cyclical and subject to price fluctuations. Such
cyclicality and price fluctuations could negatively impact our business or
results of operations.
In 2006
and 2007, approximately 97.6% and 97.4% of our revenues, respectively, were
attributable to display drivers that were incorporated into TFT-LCD panels. We
expect to be substantially dependent on sales to the TFT-LCD panel industry for
the foreseeable future. The TFT-LCD panel industry is intensely competitive and
is vulnerable to cyclical market conditions. The average selling prices of
TFT-LCD panels could decline for numerous reasons, including the
following:
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·
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a
surge in manufacturing capacity due to the ramping up of new fabrication
facilities and/or improvements in production
yields;
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·
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manufacturers
operating at high levels of capacity utilization in order to reduce fixed
costs per panel; and
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·
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lower-than-expected
demand for end-use products that incorporate TFT-LCD
panels.
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An
oversupply of large-sized TFT-LCD panels in 2006 resulted in downward pricing
pressure on TFT-LCD panel manufacturers which, in turn, resulted in similar
downward pricing pressure on us. We could not sufficiently reduce costs to
completely offset the revenue losses from such downward pricing pressure.
Moreover, we were required to extend the payment terms we offered to certain of
our customers, which also negatively impacted our cash flows. There have been industry reports of a
possible oversupply of TFT-LCD panels starting from the fourth quarter of 2008, which could result in downward pricing
pressure on TFT-LCD panel manufacturers similar to the situation in 2006 and we
cannot assure you that we will be able to reduce costs to offset such downward pricing pressure
in the future. During periods of declining
average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers may also
decrease capacity utilization and sell fewer panels, which could depress demand
for our display drivers. As a result, the cyclicality of the TFT-LCD panel
industry could adversely affect our revenues, cost of revenues and results of
operations.
Our
strategy of expanding our product offerings to non-driver products may not be
successful.
We have
devoted, and intend to continue to devote, financial and management resources to
the development, manufacturing and marketing of non-driver products, including,
among others, timing controllers, TFT-LCD television and monitor chipsets, LCOS
microdisplays, and power management ICs. For
example in January 2008 we announced a strategic alliance with 3M to
commercialize LCOS mobile projectors, of which our LCOS microdisplays are a key
component. We devoted, and intend to continue to devote, financial and
management resources to the development, manufacturing and marketing of LCOS
products as we believe end products utilizing LCOS technology could potentially
be a large market. LCOS technology, however, is at a relatively early stage of
commercialization and the producing LCOS products at acceptable yields has
proven difficult. Therefore we cannot assure you that there will be market
acceptance of these LCOS products, or that this strategic alliance with 3M will
be successful.
Developing
of each of our non-driver products requires a significant amount of management,
engineering and monetary resources. Numerous uncertainties exist in developing
new products and we cannot assure you that we will be able to develop our
non-driver products successfully. The
failure or delay in the development of any of these non-driver products or the
low market acceptance of either our products or the end devices using our
products may adversely affect our results of operations and growth
prospects.
We
face numerous challenges relating to our growth.
The scope
and complexity of our business has grown significantly since our inception. Our
growth has placed, and will continue to place, a strain on our management,
personnel, systems and resources. If we are unable to manage our growth
effectively, we may not be able to take advantage of market opportunities,
execute our business plan or respond to competitive pressures. To successfully
manage our growth, we believe we must effectively:
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hire,
train, integrate and manage additional qualified engineers, senior
managers, sales and marketing personnel and information technology
personnel;
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implement
additional, and improve existing, administrative and operations systems,
procedures and controls;
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expand
our accounting and internal audit team, including hiring additional
personnel with U.S. GAAP and internal control
expertise;
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continue
to expand and upgrade our design and product development
capabilities;
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manage
multiple relationships with semiconductor manufacturing service providers,
customers, suppliers and certain other third parties;
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continue to develop and
commercialize non-driver products, including, among others, timing controllers, TFT-LCD
television and monitor chipsets, LCOS microdisplays, and power management
ICs;
and
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manage
our financial condition.
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Moreover,
if our allocation of resources does not correspond with future demand for
particular products, we could miss market opportunities, and our business and
financial results could be materially and adversely affected. Therefore, we
cannot assure you that we will be able to manage our growth effectively in the
future.
We do not expect
to sustain our recent growth rates in revenues or net income, so you should not
rely on the results of recent periods as
an indication of future revenues or net income growth.
Our
revenues and net income have grown significantly since our inception in 2001.
Our annual revenues increased by 37.8% to $744.5 million in 2006 and further
increased by 23.3% to $918.2 million in 2007. Our net income increased from
$61.6 million in 2005 to a net income of $75.2 million in 2006 and then further
increased to a net income of $112.6 million in 2007. We do not expect similar
growth rates in our revenues and net income in future periods. Accordingly, you
should not rely on the results of any prior quarterly or annual periods as
indicative of our future revenues or net income growth or financial
results.
Our
quarterly revenues and operating results are difficult to predict, and if we do
not meet quarterly financial expectations, our ADS price will likely
decline.
Our
quarterly revenues and operating results are difficult to predict. They have
fluctuated in the past from quarter to quarter and may continue to do so in the
future. Our operating results may in some quarters fall below market
expectations, likely causing our ADS price to decline. Our quarterly revenues
and operating results may fluctuate because of many factors,
including:
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our
ability to accurately forecast shipments, average selling prices, cost of
revenues, operating expenses, non-operating income/loss, and tax
rates;
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our
ability to successfully design, develop and introduce in a timely manner
new or enhanced products acceptable to our
customers;
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changes
in the relative mix in the unit shipments of our products, which have
significantly different average selling prices and cost of revenues as a
percentage of revenues;
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changes
in share-based compensation;
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the
loss of one or more of our key
customers;
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decreases
in the average selling prices of our
products;
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our
accumulation of inventory;
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the
relative unpredictability in the volume and timing of customer
orders;
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the
risk of cancellation or deferral of customer orders in anticipation of our
new products or product enhancements, or due to a reduction in demand of
our customers’ end product;
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changes
in our payment terms with our customers and our
suppliers;
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our
ability to negotiate favorable prices with customers and
suppliers;
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changes
in the available capacity of semiconductor manufacturing service
providers;
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the
rate at which new markets emerge for new products under
development;
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the
evolution of industry standards and
technologies;
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product
obsolescence and our ability to manage product
transitions;
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increase
in cost of revenues due to
inflation;
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our
involvement in litigation or other types of
disputes;
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general
economic conditions;
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income
tax regulation changes; and
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natural
disasters, particularly earthquakes and typhoons, or outbreaks of disease
affecting countries where we conduct our business or where our products
are manufactured, assembled or
tested.
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The
factors listed above are difficult to foresee, and along with other factors,
could seriously harm our business. We anticipate the rate of new orders may vary
significantly from quarter to quarter. Our operating expenses and inventory
levels are based on our expectations of future revenues, and our operating
expenses are relatively fixed in the short term. Consequently, if anticipated
sales and shipments in any quarter do not occur when expected, operating
expenses and inventory levels could be disproportionately high, and our
operating results for that quarter and, potentially, future quarters may be
negatively impacted. Any shortfall in our revenues would directly impact our
business. Our operating results are volatile and difficult to predict;
therefore, you should not rely on the operating results of any one quarter as
indicative of our future performance. Our operating results in future quarters
may fall below the expectations of securities analysts and investors. In this
event, our ADS price may decline significantly.
We
depend primarily on eight foundries to manufacture our wafers, and
any failure to obtain sufficient foundry capacity or loss of any of the
foundries we use could significantly delay our ability to ship our products,
causing us to lose revenues and damage our customer relationships.
Access to
foundry capacity is crucial to our business because we do not manufacture our
own wafers, instead relying primarily on eight third-party foundries. The
ability of a foundry to manufacture our semiconductor products is limited by its
available capacity. Access to capacity is especially important due to the
limited availability of the high-voltage CMOS process technology required for
the manufacture of wafers used in display drivers. Although we are in
negotiations with our third-party foundries to enter into long-term supply
arrangements that would guarantee us access to sufficient foundry capacity, we
currently have such arrangements with only one of the foundries. As a result, if
the primary third-party foundries that we rely upon were not able to meet our
required capacity, or if our business relationships with these foundries were
adversely affected, we would not be able to obtain the required capacity from
these foundries and would have to seek alternative foundries, which may not be
available on commercially reasonable terms, or at all, or which may expose us to
risks associated with qualifying new foundries, as further discussed below. Our
results of operations and business prospects could be adversely affected as a
result of the foregoing.
We place
our orders on the basis of our own customers’ purchase orders and sales
forecasts; however, any of the foundries we use can allocate capacity to other
foundry customers and reduce deliveries to us on short notice. It could be that
other foundry customers are larger and better financed than we are, or have
supply agreements or better relationships with the foundries we use, and could
induce these foundries to reallocate our capacity to them. The loss of any of
the foundries we use or any shortfall in available foundry capacity could impair
our ability to secure our inputs, which could significantly delay our ability to
ship our products, causing a loss of revenues and damages in our customer
relationships.
The recent
increase in the prices of certain metals, chemicals, and gasoline and the recent
volatility of foreign exchange rates may have increased costs for the foundries
and semiconductor service providers. This increase in costs could limit their
ability to continue to make the research and development investments needed to
keep up with technological advances. Any increase in costs for foundries and
semiconductor service providers we use could lead to an increase in our cost and
revenue and could limit our ability to lower our costs of revenues. We cannot
assure you that we will be able to continue to reduce our costs and maintain our
profit margins.
Taiwan
Semiconductor Manufacturing Company, or TSMC, and Vanguard International
Semiconductor Corporation, or Vanguard, have historically manufactured
substantially all of our wafers. In order to diversify our foundry sources, we
have begun to use Macronix International Co., Ltd., or Macronix, Lite-on
Semiconductor Corp., or Lite-on, Chartered Semiconductor Manufacturing Ltd., or
Chartered, United Microelectronics Corporation, or UMC, Maxchip Electronics
Corp., or Maxchip (which was spun off from Powerchip Semiconductor Corp. on
April 1, 2008), and Silicon Manufacturing Partners Pte Ltd., or
Silicon, to manufacture a portion of our products. As a result of outsourcing
the manufacturing of our wafers, we face several significant risks,
including:
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failure
to secure necessary manufacturing capacity, or being able to obtain
required capacity only at higher
cost;
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risks
of our proprietary information leaking to our competitors through the
foundries we use;
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limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs;
and
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the
unavailability of, or potential delays in obtaining access to, key process
technologies.
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In
addition, in order to manufacture our display drivers used in TFT-LCD panels, we
require foundries with high-voltage manufacturing process capacity. Of the
limited number of foundries that offer this capability, some are owned by
integrated device manufacturers which are also our competitors. As a result, our
dependence on high-voltage foundries presents the following additional
risks:
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potential
capacity constraints faced by the limited number of high-voltage foundries
and the lack of investment in new and existing high-voltage
foundries;
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difficulty
in attaining consistently high manufacturing yields from high-voltage
foundries;
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delay
and time required (approximately one year) to qualify and ramp up
production at new high voltage foundries;
and
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price
increases.
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As a
result of these risks, we may be required to use foundries with which we have no
established relationships, which could expose us to potentially unfavorable
pricing, unsatisfactory quality or insufficient capacity allocation. Moreover, a
scarcity in foundry capacity could necessitate us making investments in
foundries in order to secure additional capacity, which would require us to
substantially increase our capital outlays and possibly raise additional
capital, which may not be available to us on satisfactory terms, if at
all.
Shortages
of processed tape used in the manufacturing of our products, increased costs of
manufacturing such tape, or the loss of one of our suppliers of such tape may
increase our costs or limit our revenues and impair our ability to ship our
products on time.
There are
a limited number of companies which supply the processed tape used to
manufacture our semiconductor products, and therefore, from time to time,
shortages of such processed tape may occur. If any of our suppliers experience
difficulties in delivering processed tape, we may not be able to locate
alternative sources in a timely manner. Therefore, if shortages of processed
tape were to occur, or if the costs of manufacturing such tape increases, we
would incur additional costs or be unable to ship our products to our customers
in a timely fashion, all of which could harm our business and our customer
relationships and negatively impact our earnings.
The
loss of, or our inability to secure sufficient capacity from, any of our
third-party assembly and testing houses at reasonable and competitive prices
could disrupt our shipments, harm our customer relationships and reduce our
sales.
Access to
third-party assembly and testing capacity is critical to our business because we
do not have in-house assembly and testing capabilities and instead rely on
third-party service providers. Access to these services is especially important
to our business because display drivers require specialized assembly and testing
services. A limited number of third-party assembly and testing houses assemble
and test substantially all of our current products. We do not have binding
long-term supply arrangements with assembly and testing service providers that
guarantee us access to our required capacity. If the primary assembly and
testing service providers that we rely upon are not able to meet our
requirements in price, quality, and service, or if our business relationships
with these service providers were adversely affected, we would not be able to
obtain the required capacity from such providers and would have to seek
alternative providers, which may not be available on commercially reasonable
terms, or at all. As a result, we do not directly control our product delivery
schedules, assembly and testing costs and quality assurance and control. If any
of these third-party assembly and testing houses experiences capacity
constraints, financial difficulties, suffers any damage to its facilities or if
there is any disruption of its assembly and testing capacity, we may not be able
to obtain alternative assembly and testing services in a timely manner. We
typically procure services from assembly and testing houses on a per-order
basis. Because of the amount of time we usually take to qualify assembly and
testing houses, we may experience significant delays in product shipments if we
are required to find alternative sources. Any problems that we may encounter
with the delivery, quality or cost of our products could damage our reputation
and result in a loss of customers and orders.
Shortages
of other key components for our customers’ products could decrease demand for
our products.
Shortages
of components and other materials that are critical to the design and
manufacture of our customers’ products may limit our sales. These components
include, but are not limited
to, color filters, backlights and glass substrates. In the past,
companies that use our products in their production have experienced delays in
the availability of key components from other suppliers. For example, some
TFT-LCD panel manufacturers experienced a shortage of glass substrates in 2001,
2003 and 2004, as well as color filters in 2003, 2004 and 2007. While shortages of components
and other materials critical to the design and manufacture of our customers’
products have yet to significantly impact our business, such shortages could
cause a slowdown in demand for our products and result in a decrease in sales
for our products.
We
depend on three customers for a substantial majority of our revenues and the
loss of, or a significant reduction in orders from, any of them would
significantly reduce our revenues and adversely impact our operating
results.
Our top three customers, Chi Mei Optoelectronics Corp., or
CMO, Chunghua Picture Tubes Ltd., or CPT, and Shanghai SVA-NEC Liquid
Crystal Display Co. Ltd.,
or SVA-NEC, together with their respective
affiliates, accounted for approximately 58.8%, 7.3% and 8.4%, respectively, of our revenues in
2007. The loss of CMO, CPT or SVA-NEC as our customer or a sharp reduction in
sales to any of these
customers would have a
significant negative impact on our business. As discussed below, our sales to
these customers are made
pursuant to standard purchase orders rather than long-term contracts. Therefore, these customers may cancel or reduce orders
more readily than if we had long-term purchase commitments from them. In the
event of a cancellation,
postponement, or reduction of an order, we would
likely not be able to reduce operating expenses sufficiently so as to minimize
the impact of the lost revenues. In the alternative, we may have excess
inventory that we cannot sell, which would harm our operating
results. We expect our
reliance on sales to CMO, CPT and SVA-NEC and their respective affiliates to
continue in the foreseeable future. Therefore, our operating results will likely
continue to depend on sales to a relatively small number of customers, as well
as on the ability of such
customers to sell products that incorporate our products.
The
concentration of our accounts receivable and the extension of payment terms for
certain of our customers exposes us to increased credit risk and could harm our
operating results and cash flows.
As of December 31, 2007, we had
one customer that represented more than 10% of our
accounts receivable balance. CMO, together with its affiliates, represented approximately 68.4% of our total accounts receivable as of
December 31, 2007. Moreover, we have at times agreed to
extend the payment terms for certain of our third-party and related party
customers. We may also grant requests for the extension of payment terms in the
future. As a result, a default by any such customer, a prolonged delay in the payment of accounts
receivable or the extension of payment terms for our customers could adversely affect our cash flow,
liquidity and our operating results.
Our
close relationship with CMO could limit our potential to do business with CMO’s
competitors, which may cause us to lose opportunities to grow our business and
expand our customer base.
CMO is one
of our largest shareholders and has been our largest customer since our
inception. We expect to continue to maintain various contractual and other
relationships with CMO. Our close relationship with CMO could limit our
potential to do business with CMO’s competitors or other TFT-LCD panel
manufacturers, who may perceive that granting business to us could benefit CMO.
Our close relationship with CMO may result in lost business opportunities or may
prevent us from taking advantage of opportunities to grow our business and
expand our customer base.
An
adverse change to our relationship with CMO could have a material adverse effect
on our business.
CMO is one
of our largest shareholders, beneficially owning approximately 13.0% of our
outstanding shares as of June 1, 2008, and is also our largest customer,
accounting (together with its affiliates) for approximately 58.8% of our
revenues in 2007. Our engineers work closely with CMO’s engineers to design
display drivers used in TFT-LCD panels manufactured by CMO. We have entered into
various transactions with CMO in the past, and we expect to continue to do so in
the future. See “Item 7. Major Shareholders and Related Party Transactions.” If
our relationship with CMO deteriorates for any reason, our business could be
materially and adversely affected.
Failure
to attract new customers may limit our growth prospects.
We face
challenges in attracting new customers for our existing products as well as our
new products. Marketing our display drivers to other TFT-LCD panel manufacturers
that have established relationships with our competitors may be difficult.
Moreover, several TFT-LCD panel manufacturers have in-house design capabilities
and therefore may not need to source semiconductor products from us. To sell new
products, we will likely need to target new market segments and new customers
with whom we do not have current relationships, which may require different
strategies and may present difficulties that we have not encountered before.
Therefore, failure to broaden our customer base and attract new customers may
limit our growth prospects.
Technological
innovation may reduce the number of display drivers typically required for each
panel, thereby reducing the number of display drivers we are able to sell per
panel. If such a reduction in demand is not offset by the general growth of the
industry, growth in our market share or an increase in our average selling
prices, our revenues may decline.
Except for
certain small-sized panels, multiple display drivers are typically required for
each panel to function. We are designing higher-channel display drivers to
reduce the number of display drivers required for each panel while achieving the
same resolution. By developing such innovative and cost-effective display driver
solutions, we hope to grow our market share, attract additional customers,
increase our average selling prices and capture new design wins. We cannot
assure you that developing such display drivers with a higher number of channels
will successfully achieve the aforementioned goals. If we fail to attain those
goals, and the decrease in revenues resulting from a reduction in the number of
display drivers that we sell per panel is not offset by an increase in average
selling prices or unit sales, our revenues may decline. Furthermore, there have
been industry reports on the development of panels which do not require external
gate drivers or any external display drivers at all, as the driving functions
are embedded in the panels. If such technology does become commercially
available, the market for our display drivers will be reduced and we could
experience a decline in revenue and profit.
We
rely on the services of our key personnel, and if we are unable to retain our
current key personnel and hire additional personnel, our ability to design,
develop and successfully market our products could be harmed.
We rely
upon the continued service and performance of a relatively small number of key
personnel, including certain engineering, technical and senior management
personnel. In particular, our engineers and other key technical personnel are
critical to our future technological and product innovations. Competition for
highly skilled engineers and other key technical personnel is intense in the
semiconductor industry in general and in Taiwan’s flat panel semiconductor
industry in particular. Moreover, our future success depends on the expansion of
our senior management team and the retention of key employees such as Jordan Wu,
our president and chief executive officer; Dr. Biing-Seng Wu, our chairman;
Chih-Chung Tsai, our chief technology officer; and Max Chan, our chief financial
officer. We rely on these individuals to manage our company, develop and execute
our business strategies and manage our relationships with key suppliers and
customers. Any of these employees could leave our company with little or no
prior notice and would be free to work with a competitor. We do not have “key
person” life insurance policies covering any of our employees. The
loss of any of our key personnel or our inability to attract or retain qualified
personnel, whether engineers and others, could delay the development and
introduction of new products and would have an adverse effect on our ability to
sell our products as well as on our overall business and growth prospects. We
may also incur increased operating expenses and be required to divert the
attention of other senior executives away from their original duties to
recruiting replacements for key personnel.
If
we fail to forecast customer demand accurately, we may have excess or
insufficient inventory, which may increase our operating costs and harm our
business.
The lead
time required by the semiconductor manufacturing service providers that we use
to manufacture our products is typically longer than the lead time that our
customers provide for delivery of our products to them. Therefore, to ensure
availability of our products for our customers, we will typically ask our
semiconductor manufacturing service providers to start manufacturing our
products based on forecasts provided by our customers in advance of receiving
their purchase orders. However, these forecasts are not binding purchase
commitments, and we do not recognize revenues from these products until they are
shipped to customers. Moreover, for the convenience of our customers, we may
agree to ship our inventory to warehouses located near our customers, so that
our products can be delivered to these customers more quickly. We may from time
to time agree that title and risk of loss do not pass to our customer until the
customer requests delivery of our products from such warehouses. In such cases,
we will not recognize revenues from these products until the title and risk of
loss has passed to our customers based on the
shipping
terms, which is generally when they are delivered to our customers from these
warehouses. As a result, we incur inventory and manufacturing costs in advance
of anticipated revenues. The anticipated demand for our products may not
materialize; therefore, manufacturing based on customer forecasts exposes us to
risks of high inventory carrying costs and increased product obsolescence and
may increase our costs. If we overestimate demand for our display drivers or if
purchase orders are cancelled or shipments delayed, we may incur excess
inventory that we cannot sell, which would harm our financial results.
Conversely, if we underestimate demand, we may not have sufficient inventory and
may lose market share and damage customer relationships, which also could harm
our business. Obtaining additional supply in the face of product shortages may
be costly or impossible, particularly in the short term, which could prevent us
from fulfilling orders. These inventory risks are exacerbated by the high level
of customization of our products, which limits our ability to sell excess
inventory to other customers.
If
we do not achieve additional design wins in the future, our ability to grow will
be limited.
Our future
success depends on our current and prospective customers designing our products
into their products. To achieve design wins, we must design and deliver
cost-effective, innovative and integrated products that are customized for our
customers’ needs. Once a supplier’s products have been designed into a system,
the panel manufacturer may be reluctant to change its source of components due
to the significant costs and time associated with qualifying a new supplier.
Accordingly, our failure to obtain additional design wins with panel
manufacturers and to successfully design, develop and introduce new products and
product enhancements could harm our business, financial condition and results of
operations.
A design
win is not a binding commitment by a customer to purchase our products and may
not result in large volume orders of our products. Rather, it is a decision by a
customer to use our products in the design process of that customer’s products.
Customers can choose at any time to stop using our products in their designs or
product development efforts. Moreover, even if our products were chosen to be
incorporated into a customer’s products, our ability to generate significant
revenues from that customer would depend on the commercial success of those
products. Thus, a design win may not necessarily generate significant revenues
if our customers’ products are not commercially successful.
Some
of our semiconductor products are manufactured at only one foundry. If any
foundry is unable to provide the capacity we need, does not deliver
in a timely manner or the quality or pricing terms are not acceptable to us, we
may experience delays in shipping our products or have to incur additional
costs, which could damage our customer relationships and result in reduced
revenues and higher expenses.
Although
we use several foundries for different semiconductor products, certain of our
products are manufactured at only one of these foundries. If any one of the
foundries that we use for a specific product is unable to provide us with our
required capacity, does not deliver in a timely manner or the quality or pricing
terms are not acceptable to us, we could experience significant delays in
receiving the product being manufactured for us by that foundry or incur
additional costs to obtain substitutes. Also, if any of the foundries that we
use experience financial difficulties, if their operations are damaged or if
there is any other disruption of their foundry operations, we may not be able to
qualify an alternative foundry in a timely manner. If we choose to use a new
foundry or process technology for a particular semiconductor product, we believe
that it will take us several quarters to qualify the new foundry or process
before we can begin shipping such products. If we cannot qualify a new foundry
in a timely manner, we may experience a significant interruption in our supply
of the affected products, which could reduce our revenues, increase our expenses
and damage our customer relationships.
Our
products are complex and may require modifications to resolve undetected errors
or failures in order for them to function with panels at the desired
specifications, which could lead to higher costs, a loss of customers or a delay
in market acceptance of our products.
Our
products are highly complex and may contain undetected errors or failures when
first introduced or as new versions are released. If our products are delivered
with errors or defects, we could incur additional development, repair or
replacement costs, and our credibility and the market acceptance of our products
could be harmed. Defects could also lead to liability for defective products and
lawsuits against us or our customers. We have agreed to indemnify some of our
customers under some circumstances against liability from defects in our
products. A successful product liability claim could require us to make
significant damage payments.
Our
display drivers comprise part of a complex panel manufactured by our customers.
Our display drivers must operate according to specifications with the other
components used by our customers in the panel manufacturing
process.
For example, during the panel manufacturing process, our display drivers are
attached to the panel glass and must interoperate with the glass efficiently. If
other components fail to operate efficiently with our display drivers, we may be
required to incur additional development time and costs to improve the
interoperability of our display drivers with the other components.
Our
highly integrated products are difficult to manufacture without defects. The
existence of defects in our products could increase our costs, decrease our
sales and damage our customer relationships and our reputation.
The
manufacture of our products is a complex process, and it is often difficult for
semiconductor foundries to manufacture our products completely without defects.
Minor deviations in the manufacturing process can cause substantial decreases in
yield and quality. In particular, some of our products are highly integrated and
incorporate mixed analog and digital signal processing and embedded memory
technology, and this complexity makes it even more difficult to manufacture
without defects.
The
ability to manufacture products of acceptable quality depends on both product
design and manufacturing process technology. Defective products can be caused by
design, defective materials or component parts, or manufacturing difficulties.
Thus, quality problems can be identified only by analyzing and testing our
display drivers in a system after they have been manufactured. The difficulty in
identifying defects is compounded by the uniqueness of the process technology
used in each of the semiconductor foundries with which we have subcontracted to
manufacture our products. Failure to achieve defect-free products due to the
increasing complexity of display drivers and the panel system surrounding them
may result in an increase in our costs and delays in the availability of our
products. In addition, if the foundries that we use fail to deliver products of
satisfactory quality in the volume and at the price required, we will be unable
to meet our customers’ demand for our products or to sell those products at an
acceptable profit margin, which could adversely affect our sales and margins and
damage our customer relationships and our reputation.
We
do not have long-term purchase commitments from our customers, which may result
in significant uncertainty and volatility with respect to our revenues and could
materially and adversely affect our results of operations and financial
condition.
We do not
have long-term purchase commitments from our customers; our sales are made on
the basis of individual purchase orders. Our customers may also cancel or defer
purchase orders. Our customers’ purchase orders may vary significantly from
period to period, and it is difficult to forecast future order quantities. In
addition, changes in our customers’ business may adversely affect the quantity
of purchase orders that we receive. For example, one of our customers
substantially reduced the utilization rate of its production facilities in late
2005 in connection with its renovation plans and, as a result, the quantity of
purchase orders that we received from this customer decreased substantially. In
2006, one of our customers merged with another company. As a result of the
merger, certain design-win projects were discontinued, which forced us to write
off the corresponding inventory prepared based on forecasts provided by this
customer. As shown by these examples, we cannot assure you that any of our
customers will continue to place orders with us in the future at the same level
as in prior periods. We also cannot assure you that the volume of our customers’
orders will be consistent with our expectations when we plan our expenditures.
Our results of operations and financial condition may thus be materially and
adversely affected.
We
depend on sales of display drivers used in TFT-LCD panels, and the absence of
continued market acceptance of our display drivers could harm our
business.
In 2006
and 2007, we derived nearly all of
our revenues from the sale of display drivers used in TFT-LCD panels, and we
expect to continue to derive a substantial portion of our revenues from these or
related products. In particular, display drivers used in large-sized panels
represented approximately 86.7% and 81.9% of our revenues in 2006 and 2007,
respectively. Continued market acceptance of our display drivers is therefore
critical to our future success.
Potential
conflicts of interest with CMO may affect our sales decisions and allocations.
Our chairman also holds key management positions at CMO and may not be able to
allocate sufficient time and resources to both companies.
We have a
close relationship with CMO, which is one of our largest shareholders and has
been our largest customer since our inception. In addition, certain of our
directors hold key management positions at CMO. Jung-Chun Lin, our director,
serves on our board and also holds the positions of director, vice president,
chief financial officer and
chief
accounting officer at CMO. Dr. Biing-Seng Wu, our chairman, is also a director,
executive vice president and chief technology officer of CMO. We cannot assure
you that our close relationship with CMO and the resulting potential conflicts
of interest will not affect our sales decisions or allocations or that potential
conflicts of interest with respect to representatives of CMO will be resolved in
our favor. Moreover, Dr. Biing-Seng Wu, who holds key positions with both CMO
and us, may not be able to allocate sufficient time and resources to both
companies.
Our
corporate actions are substantially controlled by officers, directors, principal
shareholders and affiliated entities who may take actions that are not in, or
may conflict with, our or our public shareholders’ interests.
As of June
1, 2008, Jordan Wu and Dr. Biing-Seng Wu (who are brothers) beneficially owned
approximately 6.0% and 16.8% of our ordinary shares, respectively, and CMO
beneficially owned approximately 13.0% of our ordinary shares. For information
relating to the beneficial ownership of our ordinary shares, see “Item 7. Major
Shareholders and Related Party Transactions.” These shareholders, acting
together, could exert substantial influence over matters requiring approval by
our shareholders, including electing directors and approving mergers or other
business combination transactions. This concentration of ownership may also
discourage, delay or prevent a change in control of our company, which could
deprive our shareholders of an opportunity to receive a premium for their shares
as part of a sale of our company and might reduce the price of our ADSs. Actions
may be taken even if they were opposed by our other shareholders.
Assertions
against us by third parties for infringement of their intellectual property
rights could result in significant costs and cause our operating results to
suffer.
The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights and positions, which results in protracted and
expensive litigation for many companies. We have received, and expect to
continue to receive, notices of infringement of third-party intellectual
property rights. We may receive claims from various industry participants
alleging infringement of their patents, trade secrets or other intellectual
property rights in the future. Any lawsuit resulting from such allegations could
subject us to significant liability for damages and invalidate our proprietary
rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us to
do one or more of the following:
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stop
selling products or using technology or manufacturing processes that
contain the allegedly infringing intellectual
property;
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pay
damages to the party claiming
infringement;
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attempt
to obtain a license for the relevant intellectual property, which may not
be available on commercially reasonable terms or at all;
and
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attempt
to redesign those products that contain the allegedly infringing
intellectual property with non-infringing intellectual property, which may
not be possible.
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The
outcome of a dispute may result in our need to develop non-infringing technology
or enter into royalty or licensing agreements. We have agreed to indemnify
certain customers for certain claims of infringement arising out of the sale of
our products. Any intellectual property litigation could have a material adverse
effect on our business, operating results or financial condition.
Our
ability to compete will be harmed if we are unable to protect our intellectual
property rights adequately.
We believe that the protection of our
intellectual property rights is, and will continue to be, important to the
success of our business. We rely primarily on a combination of patent,
trademark, trade secret and copyright laws and contractual restrictions to
protect our intellectual property. These
afford only limited protection. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to obtain, copy or use information that
we regard as proprietary, such as product design and manufacturing process expertise. As of December
31, 2007, we and our subsidiaries had 364 U.S. patent applications pending,
353 Taiwan patent applications pending and
208 patent applications pending in other
jurisdictions, including the PRC, Japan, Korea and Europe. Our pending patent applications and any
future applications may not result in issued patents or may not be sufficiently
broad to protect our proprietary technologies. Moreover, policing any
unauthorized use of our products is difficult and costly, and we cannot be certain that the
measures which we have implemented will prevent
misappropriation or unauthorized use of
our technologies, particularly in
foreign jurisdictions where the laws may not protect our proprietary rights as
fully as the laws of the United States do. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property. Our failure to protect our intellectual
property effectively could harm our business.
We
are subject to a class action complaint alleging that we failed to disclose
certain information in our initial public offering registration statement. If
the class action is successful, it may have an adverse effect on our financial
condition and operating results.
We are subject to a class action
complaint, filed in the United States District Court for the Central District of
California, for alleged violations of U.S. federal securities laws. The lawsuit asserts claims against us,
our Chief Executive Officer
Jordan Wu, our Chief Financial Officer Max Chan, certain of our directors, as
well as CMO, for allegedly failing to disclose in our initial public offering
registration statement and prospectus certain information concerning
CMO’s inventory level prior to our initial public offering.
The complaint seeks
unspecified damages on behalf of purchasers of our stock pursuant and/or
traceable to our initial public offering in March 2006.
We believe that the
allegations in the class action are without merit, and we intend to vigorously
defend ourselves against
the claims. The outcome of
this class action, like other litigation proceedings, is uncertain. Regardless of its merit, litigation and other preparations
undertaken to defend the class action can be costly, and we may incur
substantial costs and
expenses in doing so. It
may also divert the
attention of our management. If the class action against us is
successful, it may result
in substantial monetary liabilities, which may have an adverse effect on our
financial condition and operating results.
We
may undertake acquisitions or investments to expand our business that may pose
risks to our business and dilute the ownership of our existing shareholders, and
we may not realize the anticipated benefits of these acquisitions or
investments.
As part of
our growth and product diversification strategy, we will continue to evaluate
opportunities to acquire or invest in other businesses, intellectual property or
technologies that would complement our current offerings, expand the breadth of
markets we can address or enhance our technical capabilities. For example, on
February 1, 2007, we acquired Wisepal Technologies, Inc., or Wisepal, a fabless
design company located in Taiwan that specializes in TFT-LCD drivers for small
and medium-sized panels. Under the terms of the acquisition, we issued one share
in exchange for 5.26 shares of Wisepal, and we assumed all of the assets,
liabilities and personnel of Wisepal. Acquisitions or investments that we
potentially may make in the future, including our recent acquisition of Wisepal,
entail a number of risks that could materially and adversely affect our
business, operating and financial results, including:
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problems
integrating the acquired operations, technologies or products into our
existing business and products;
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diversion
of management’s time and attention from our core
business;
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adverse
effects on existing business relationships with
customers;
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the
need for financial resources above our planned investment
levels;
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failures
in realizing anticipated synergies;
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difficulties
in retaining business relationships with suppliers and customers of the
acquired company;
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risks
associated with entering markets in which we lack
experience;
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potential
loss of key employees of the acquired
company;
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potential
write-offs of acquired assets;
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potential
expenses related to the depreciation of tangible assets and amortization
of intangible assets; and
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potential
impairment charges related to the goodwill
acquired.
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Our
failure to address these risks successfully may have a material adverse effect
on our financial condition and results of operations. Any such acquisition or
investment may require a significant amount of capital investment, which would
decrease the amount of cash available for working capital or capital
expenditures. In addition, if we use our equity securities to pay for
acquisitions, the value of our ADSs and the underlying ordinary shares may be
diluted. If we borrow funds to finance acquisitions, such debt instruments may
contain restrictive covenants that can, among other things, restrict us from
distributing dividends.
Risks
Related to Our Industry
The
semiconductor industry, in particular semiconductors used in flat panel
displays, is highly competitive, and we cannot assure you that we will be able
to compete successfully against our competitors.
The
semiconductor industry, in particular semiconductors used in flat panel
displays, is highly competitive. Increased competition may result in price
pressure, reduced profitability and loss of market share, any of which could
seriously harm our revenues and results of operations. Competition principally
occurs at the design stage, where a customer evaluates alternative design
solutions that require display drivers. We continually face intense competition
from fabless display driver companies as well as from integrated device
manufacturers. Some of our competitors have substantially greater financial and
other resources than we do with which to pursue engineering, manufacturing,
marketing and distribution of their products. As a result, they may be able to
respond more quickly to changing customer demands or devote greater resources to
the development, promotion and sales of their products than we can. Some of our
competitors have manufacturing capabilities as well as in-house design
operations that may give them significant advantages such as higher research and
development budgets and the ability to attract highly skilled engineers.
Furthermore, some of our
competitors are affiliated with, or are subsidiaries of, our panel manufacturer
customers. These relationships may also give our competitors significant
advantages such as early
access to product roadmaps
and design-in priorities, which would allow them to respond more quickly to
changing customer demands and achieve more design-wins than we can. In addition,
even competitors with no such strategic associations with
panel manufacturers may resort to price competition to maintain their market
share, which may impose pricing pressures on us, reduce our profitability
or decrease our market share. We
cannot assure you that we will be able to increase or maintain our revenues and
market share, or compete successfully against our current or future competitors
in the semiconductor industry.
We
may be adversely affected by the cyclicality of the semiconductor
industry.
The
semiconductor industry is highly cyclical and is characterized by constant and
rapid technological change, product obsolescence and price erosion, evolving
standards, short product life cycles and wide fluctuations in product supply and
demand. The semiconductor industry has, from time to time, experienced
significant downturns, often connected with, or in anticipation of, maturing
product cycles of both semiconductor companies’ and their customers’ products
and declines in general economic conditions. These downturns have been
characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. Any future
downturn may reduce our revenues and result in our having excess inventory.
Furthermore, any upturn in the semiconductor industry could result in increased
competition for access to limited third-party foundry, assembly and test
capacity. Failure to gain access to foundry, assembly and test capacity could
impair our ability to secure the supply of products that we need, which could
significantly delay our ability to ship our products, cause a loss of revenues
and damage our customer relationships.
The
average selling prices of our products could decrease rapidly, which may
negatively impact our revenues and operating results.
The price
of each semiconductor product typically declines over its product life cycle,
reflecting product obsolescence, decreased demand as customers shift to more
advanced products and increased competition as more semiconductor producers are
able to produce similar products in larger quantities. We may experience
substantial period-to-period fluctuations in future operating results if our
average selling prices decline. We may reduce the average unit price of our
products in response to competitive pricing pressures, new product introductions
by us or our competitors and other factors. The TFT-LCD panel market is highly
cost sensitive, which may result in declining average selling prices of the
components comprising TFT-LCD panels. We expect that these factors will create
downward pressure on our average selling prices and operating results. To
maintain acceptable operating results, we will need to develop and introduce new
products and product enhancements on a timely basis and continue to reduce our
costs. If we are unable to offset any reductions in our average selling prices
by increasing our sales volumes and
corresponding
production cost reductions, or if we fail to develop and introduce new products
and enhancements on a timely basis, our revenues and operating results will
suffer.
We
have a lengthy and expensive design-to-mass production cycle.
The cycle
time from the design stage to mass production for display drivers is long and
requires the investment of significant resources with each potential customer
without any guarantee of sales. Our design-to-mass production cycle typically
begins with a three- to twelve-month semiconductor development stage and test
period followed by a three- to twelve-month end product development period by
customers. This fairly lengthy cycle creates the risk that we may incur
significant expenses but will be unable to realize meaningful sales. Moreover,
prior to mass production, customers may decide to cancel the projects or change
production specifications, resulting in sudden changes in our product
specifications, further causing increased production time and costs. Failure to
meet such specifications may delay the launch of our products.
Our
business could be materially and adversely affected if we fail to anticipate
changes in evolving industry standards, fail to achieve and maintain
technological leadership in our industry or fail to develop and introduce new
and enhanced products.
Our
products are generally based on industry standards, which are continually
evolving. The emergence of new industry standards could render our products or
those of our customers unmarketable or obsolete and may require us to incur
substantial unanticipated costs to comply with any such new standards. Likewise,
the components used in the TFT-LCD panel industry are constantly changing with
increased demand for improved features. Moreover, our past sales and
profitability have resulted, to a significant extent, from our ability to
anticipate changes in technology and industry standards and to develop and
introduce new and enhanced products in a timely fashion. If we do not anticipate
these changes in technologies and rapidly develop and introduce new and
innovative technologies, we may not be able to provide advanced display
semiconductors on competitive terms, and some of our customers may buy display
drivers from our competitors instead of from us. Our continued ability to adapt
to such changes and anticipate future standards will be a significant factor in
maintaining or improving our competitive position and our growth prospects. We
cannot assure you that we will be able to anticipate evolving industry
standards, successfully complete the design of our new products, have these
products manufactured at acceptable manufacturing yields, or obtain significant
purchase orders for these products to meet new standards or technologies. If we
fail to anticipate changes in technology and to introduce new products that
achieve market acceptance, our business and results of operations could be
materially and adversely affected.
Risks
Relating to Our Holding Company Structure
Our
ability to receive dividends and other payments from our subsidiaries may be
restricted by commercial, statutory and legal restrictions, and thereby
materially and adversely affect our ability to grow, fund investments, make
acquisitions, pay dividends and otherwise fund and conduct our
business.
We are a
holding company and our assets consist mainly of our 100% ownership interest in
Himax Taiwan. Dividends
and interest on intercompany loans that we receive from our subsidiaries in
Taiwan, if any, will be subject to withholding tax under ROC law. The ability of
our subsidiaries to pay dividends, repay intercompany loans from us or make
other distributions to us is restricted by, among other things, the availability
of funds, the terms of various credit arrangements entered into by our
subsidiaries, as well as statutory and other legal restrictions. In addition,
although there are currently no foreign exchange control regulations that
restrict the ability of our subsidiaries located in Taiwan to distribute
dividends to us, we cannot assure you that the relevant regulations will not be
changed and that the ability of our subsidiaries to distribute dividends to us
will not be restricted in the future. A Taiwan company is generally not
permitted to distribute dividends or to make any other distributions to
shareholders for any year in which it did not have either earnings or retained
earnings (excluding reserves). In addition, before distributing a dividend to
shareholders following the end of a fiscal year, the company must recover any
past losses, pay all outstanding taxes and set aside 10% of its annual net
income (less prior years’ losses and outstanding taxes) as a legal reserve until
the accumulated legal reserve equals its paid-in capital, and may set aside a
special reserve.
Any
limitation on dividend payments by our subsidiaries could materially and
adversely affect our ability to grow, finance capital expenditures, make
acquisitions, pay dividends, and otherwise fund and conduct our
business.
Our
ability to make further investments in Himax Taiwan may be dependent on
regulatory approvals. If Himax Taiwan is unable to receive the equity financing
that it requires, its ability to grow and fund its operations may be materially
and adversely affected.
Since
Himax Taiwan is not a listed company, it generally depends on us to meet its
equity financing requirements. Any capital contribution by us to Himax Taiwan
may require the approval of the relevant ROC authorities such as the Investment
Commission of the Ministry of Economic Affairs of the ROC, or the ROC Investment
Commission. We may not be able to obtain any such approval in the future in a
timely manner, or at all. If Himax Taiwan is unable to receive the equity
financing that it requires, its ability to grow and fund its operations may be
materially and adversely affected.
Political,
Geographical and Economic Risks
Due
to the location of our operations in Taiwan, we and many of our semiconductor
manufacturing service providers, suppliers and customers are vulnerable to
natural disasters and other events outside of our control, which may seriously
disrupt our operations.
Most of
our operations, and the operations of many of our semiconductor manufacturing
service providers, suppliers and customers are located in Taiwan, which is
vulnerable to natural disasters, in particular, earthquakes and typhoons. Our
principal foundries and assembly and testing houses upon which we have relied to
manufacture substantially all of our display drivers are located in Taiwan. In
2007, approximately 85.5% of our revenues were derived from customers
headquartered in Taiwan. As a result of this geographic concentration,
disruption of operations at our facilities or the facilities of our
semiconductor manufacturing service providers, suppliers and customers for any
reason, including work stoppages, power outages, water supply shortages, fire,
typhoons, earthquakes, contagious diseases or other natural disasters, could
cause delays in production and shipments of our products. Any delays or
disruptions could result in our customers seeking to source products from our
competitors. Shortages or suspension of power supplies have occasionally
occurred and have disrupted our operations. The occurrence of a power outage in
the future could seriously hurt our business.
The
manufacturing processes of TFT-LCD panels require a substantial amount of water
and, as a result, the production operations of TFT-LCD panels may be seriously
disrupted by water shortages. Our customers may encounter droughts in areas
where most of their current or future manufacturing sites are located. If a
drought were to occur and our customers or the authorities were unable to source
water from alternative sources in sufficient quantities, our customers may be
required to shut down temporarily or to substantially reduce the operations of
their fabs, which would seriously affect demand for our products. The occurrence
of any of these events in the future could adversely affect our
business.
Disruptions
in Taiwan’s political environment could negatively affect our business and the
market price of our ADSs.
Our
principal executive offices and a substantial amount of our assets are located
in Taiwan, and a substantial portion of our revenues is derived from our
operations in Taiwan. Accordingly, our business, financial condition and results
of operations and the market price of our ADSs may be affected by changes in ROC
governmental policies, taxation, inflation or interest rates, and by social
instability and diplomatic and social developments in or affecting Taiwan that
are outside of our control.
Taiwan has
a unique international political status. Since 1949, Taiwan and the PRC have
been separately governed. The government of the PRC claims that it is the sole
government in China and that Taiwan is part of China. Although significant
economic and cultural relations have been established during recent years
between Taiwan and the PRC, the PRC government has refused to renounce the
possibility that it may at some point use force to gain control over Taiwan.
Furthermore, the PRC government adopted an anti-secession law relating to
Taiwan. Relations between the ROC and the PRC governments have been strained in
recent years for a variety of reasons, including the PRC government’s position
on the “One China” policy and tensions concerning arms sales to Taiwan by the
United States government. Any tension between the ROC and the PRC, or between
the United States and the PRC, could materially and adversely affect the market
prices of our ADSs.
If
the U.S. dollar fluctuates significantly against the NT dollar, our
profitability may be affected.
We have foreign currency exposure, and
are primarily affected by fluctuations in exchange rates between the U.S.
dollar and the NT dollar.
Although 99.7% our revenues and more than 97% of our cost of revenues were denominated
in U.S. dollars in 2007, the majority of our operating expenses (including for
research and development, general and administrative, and sales and marketing expenses) are denominated in
NT dollars. For example, in December 2007, more than 50% of our operating expenses were
denominated in NT dollars, with a small percentage denominated in Japanese Yen, Korean Won
and Chinese Renminbi, and the majority of the remainder in U.S. dollars. From time to
time, we enter into forward contracts to hedge our foreign currency exposure,
but we cannot assure you that this will adequately protect us against the risk of exchange rate
fluctuations and reduce the impact on our results of
operations.
A
decrease in the support of the ROC government may increase our tax expenditures
and decrease our net income.
The ROC
government has been very supportive of Taiwan-incorporated technology companies
such as Himax Taiwan. In particular, Himax Taiwan, like many Taiwan technology
companies, has benefited from substantial tax incentives provided by the ROC
government. The ROC Statute for Upgrading Industries entitles companies to tax
credits for expenses relating to qualifying research and development, personnel
training and purchases of qualifying machinery. This tax credit may be applied
within a five-year period. The amount from the tax credit that may be applied in
any year is limited to 50% of the income tax payable for that year (with the
exception of the final year when the remainder of the tax credit may be applied
without limitation to the total amount of the income tax). Under the ROC Statute
for Upgrading Industries, Himax Taiwan was granted tax credits by the ROC
Ministry of Finance at rates set at a certain percentage of the amount utilized
in qualifying research and development and personnel training expenses. The
balance of unused investment tax credits totaled $9.4 million, $19.4 million and
$32.7 million as of December 31, 2005, 2006 and 2007, respectively. In addition,
the ROC Statute for Upgrading Industries provides to companies deemed to be
operating in important or strategic industries a five-year tax exemption for
income attributable to expanded production capacity or newly developed
technologies. Such expanded production capacity or newly developed technologies
must be funded in whole or in part from either an initial capital investment
made by a company’s shareholders, a subsequent capital increase or a
capitalizing of a company’s retained earnings. Beginning April 1, 2004, January
1, 2006 and January 1, 2008, Himax Taiwan has been entitled to three
preferential tax treatments, each for a period of five years, which expires on
March 31, 2009, December 31, 2010 and December 31, 2012, respectively. As a
result of these preferential tax treatments, income attributable to certain of
our expanded production capacity or newly developed technologies is tax exempt
for the duration of these five-year periods. If the ROC government changed the
laws to terminate, decrease or otherwise adversely change such tax incentives,
our tax expenditures could increase, resulting in a decrease in our net income.
For instance, if we did not have this tax exemption, net income and basic and
diluted earnings per ordinary share would have been $85.6 million, $0.43 and
$0.43 for the year ended December 31, 2007, respectively.
We
face risks related to health epidemics and outbreaks of contagious diseases,
including avian influenza and Severe Acute Respiratory Syndrome, or
SARS.
There have
been recent reports of outbreaks of a highly pathogenic avian influenza, or
avian flu, caused by the H5N1 virus in certain regions of Asia, Europe, the
Middle East and Africa. An outbreak of avian flu in the human population could
result in a widespread health crisis that could adversely affect the economies
and financial markets of many countries, particularly in Asia. Additionally, a
recurrence of SARS, a highly contagious form of atypical pneumonia, similar to
the occurrence in 2003 which affected the PRC, Hong Kong, Taiwan, Singapore,
Vietnam and certain other countries, would also have similar adverse effects.
Since all of our operations and substantially all of our customers and suppliers
are based in Asia (mainly Taiwan), an outbreak of avian flu, SARS or other
contagious diseases in Asia or elsewhere, or the perception that such an
outbreak could occur, and the measures taken by the governments of countries
affected, including the ROC and the PRC, could adversely affect our business,
financial condition or results of operations.
Risks
Related to Our ADSs and Our Trading Market
The
market price for our ADSs may be volatile.
The market
price for our ADSs is likely to be highly volatile and subject to wide
fluctuations in response to various factors, including the
following:
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in financial estimates by securities research
analysts;
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conditions
in the TFT-LCD panel market;
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changes
in the economic performance or market valuations of other display
semiconductor companies;
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announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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the
addition or departure of key
personnel;
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fluctuations
in exchange rates between the U.S. dollar and the NT
dollar;
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litigation
related to our intellectual property and shareholders’ lawsuit;
and
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the
release of lock-up or other transfer restrictions on our outstanding ADSs
or sales of additional ADSs.
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In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our ADSs.
Future
sales or perceived sales of securities by us, our executive officers, directors
or major shareholders may hurt the price of our ADSs.
The market price of our ADSs could
decline as a result of sales of ADSs or shares or the perception that these
sales could occur. As of June 1, 2008, we had 190,905,649 outstanding shares, all of which are freely tradable. If
we, our executive officers, directors or our shareholders sell ADSs or shares,
the market price for our shares or ADSs could decline. Future
sales, or the perception of future sales, of ADSs or shares by us, our executive
officers, directors or existing shareholders could cause the market price of our
ADSs to decline.
The
level of investor interest and trading in our ADSs could be affected by the lack
of coverage by U.S. securities research analysts and the lack of investor
materials in the Chinese language.
Investor
interest in us may not be as strong as in U.S. companies or Taiwan companies
that are listed in Taiwan both because we may not be adequately covered by U.S.
securities research analyst reports and because of the lack of investor
materials in the Chinese language. The lack of coverage could negatively impact
investor interest and the level of trading in our ADSs. The interest of both
existing and prospective Taiwan-based investors to hold and trade in our ADSs
may be impacted by the lack of investor materials in the Chinese language and
the time difference between New York and Taiwan. As a result, the liquidity of
our ADSs and the valuation multiples may be lower than if we were listed on a
Taiwan stock exchange.
Although
publicly traded, the trading market in our ADSs has been substantially less
liquid than the average stock quoted on the Nasdaq Global Select Market, and
this low trading volume may adversely affect the price our our
ADSs.
Although
our ADSs are traded on the Nasdaq Global Select Market, the trading volume of
our ADSs has generally been very low. Reported average daily trading volume in
our ADSs for the three month period ended March 31, 2008 was
approximately 758,364 ADSs. In addition, between November 1, 2007 and March
31, 2008, we repurchased a total of approximately $33.0 million of our ADSs
(equivalent to approximately 7.6 million ADSs) from the open market pursuant to
an authorized share buyback program. The repurchased ADSs and their
underlying ordinary shares were cancelled, thereby reducing the number of
outstanding ADSs by 4%, which could negatively impact the average trading volume
of our ADSs. Limited trading volume will subject our ADSs to greater
price volatility and may make it difficult for you to sell your ADSs at a price
that is attractive to you.
You
may not have the same voting rights as the holders of our ordinary shares and
may not receive voting materials sufficiently in advance to be able
to exercise your right to vote.
Except as
described in the deposit agreement, holders of our ADSs will not be able to
exercise voting rights attaching to the shares evidenced by our ADSs on an
individual basis. Holders of our ADSs will appoint the depositary or its nominee
as their representative to exercise the voting rights attaching to the shares
represented by the ADSs. In certain circumstances, however, the depositary shall
refrain from voting and any voting instructions received from ADS holders shall
lapse. Furthermore, in certain other circumstances, the depositary will give us
a discretionary proxy to vote shares evidenced by ADSs. You may not receive
voting materials sufficiently in advance to instruct the depositary to vote, and
it is possible that you, or persons who hold their ADSs through brokers, dealers
or other third parties, will not have the opportunity to exercise a right to
vote.
You
may not be able to participate in rights offerings and may experience dilution
of your holdings as a result.
We may
from time to time distribute rights to our shareholders, including rights to
acquire our securities. Under the deposit agreement for the ADSs, the depositary
will not offer those rights to ADS holders unless both the rights and the
underlying securities to be distributed to ADS holders are either registered
under the Securities Act, or exempt
from
registration under the Securities Act with respect to all holders of ADSs. We
are under no obligation to file a registration statement with respect to any
such rights or underlying securities or to endeavor to cause such a registration
statement to be declared effective. In addition, we may not be able to take
advantage of any exemptions from registration under the Securities Act.
Accordingly, holders of our ADSs may be unable to participate in our rights
offerings and may experience dilution in their holdings as a
result.
You
may be subject to limitations on transfer of your ADSs.
Your ADSs
represented by the ADRs are transferable on the books of the depositary.
However, the depositary may close its transfer books at any time or from time to
time whenever it deems expedient in connection with the performance of its
duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are
closed, or at any time if we or the depositary deem it necessary or advisable to
do so because of any requirement of law, any government, governmental body,
commission, or any securities exchange on which our ADSs or our ordinary shares
are listed, or under any provision of the deposit agreement or provisions of, or
governing, the deposited securities or any meeting of our shareholders, or for
any other reason.
Your
ability to protect your rights through the United States federal courts may be
limited, because we are incorporated under Cayman Islands law, conduct a
substantial portion of our operations in Taiwan, and all of our directors and
officers reside outside the United States.
We are incorporated in the Cayman Islands. A substantial portion of our
operations is conducted in Taiwan through Himax Taiwan, our wholly owned subsidiary, and
substantially all of our assets are located in Taiwan. All of our directors and officers
reside outside the
United States, and a substantial portion of the
assets of those persons is located outside the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in
the United States in the event that you believe that your
rights have been infringed under the securities laws or otherwise. Even if you
are successful in bringing an action of this kind, the laws of the Cayman
Islands and of Taiwan may render you unable to
enforce a United States judgment against our assets or the
assets of our directors and officers. There is no statutory recognition in the
Cayman Islands of judgments obtained in the United States, although a final and conclusive judgment in the
federal or state courts of
the United States under which a sum of money is payable, other than a sum
payable in respect of multiple damages, taxes, or other charges of a like nature
or in respect of a fine or other penalty, may be subject to enforcement
proceedings as debt in the courts of the Cayman Islands
under the common law
doctrine of obligation, provided that (a) such federal or state
courts of the United States had proper jurisdiction over the parties subject to
such judgment; (b) such federal or state courts of the United States did not contravene the
rules of natural justice of the Cayman Islands; (c) such judgment was not
obtained by fraud; (d) the enforcement of the judgment would not be contrary to
the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is
submitted prior to the rendering of the judgment by the courts of the Cayman
Islands; and (f) there is due compliance with the correct procedures under the
laws of the Cayman Islands.
As a
result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than shareholders of a corporation incorporated in a
jurisdiction in the United States would.
You
may face difficulties in protecting your interests as a shareholder because
judicial precedents regarding shareholders’ rights are more limited under Cayman
Islands law than under U.S. law, and because Cayman Islands law generally
provides less protection to shareholders than U.S. law.
Our
corporate affairs are governed by our memorandum and articles of association,
the Cayman Islands Companies Law and the common law of the Cayman Islands. The
rights of shareholders to take action against directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under
Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law of the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands as well as from
English common law, which has persuasive, but not binding, authority on a court
in the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial precedent in some
jurisdictions in the United States. In particular, the Cayman Islands have a
less developed body of securities law than the United States. In addition, some
U.S. states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate law than the Cayman Islands.
For
example, the Cayman Islands Companies Law differs from laws applicable to United
States corporations and their shareholders in certain material respects which
may affect shareholders’ rights and shareholders’ access to information. These
differences under Cayman Islands Companies Law (as compared to Delaware law)
include, though are not limited to, the following:
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directors who are interested in a
transaction do not have a statutory duty to disclose such interest and
there are no provisions under Cayman Islands Companies Law which render
such director liable to the company for any profit realized pursuant to
such transaction. Our articles of association,
however, contain provisions that require our directors to disclose their
interest in
a
transaction;
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dissenting
shareholders do not have comparable appraisal rights if a
scheme of arrangement is approved by the Grand Court of the Cayman
Islands;
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shareholders may not be able to
bring class action or derivative action suits before a Cayman Islands court except in certain exceptional
circumstances;
and
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unless
otherwise provided under the memorandum and articles of association of the
company, shareholders do not have the right to bring business before a
meeting or call a meeting.
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Moreover,
certain of these differences in corporate law, including, for example, the fact
that shareholders do not have the right to call a meeting or bring business to a
meeting, may have anti-takeover effects, which could discourage, delay, or
prevent the merger or acquisition of our company by means of a tender offer, a
proxy contest or otherwise, which a shareholder may have considered in its best
interest, and prevent the removal of incumbent officers and
directors.
As a
result of all of the above, public shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, members
of the board of directors or controlling shareholders than they would have as
public shareholders of a U.S. company.
Investor
confidence and the market price of our ADSs may be adversely impacted if we or
our independent registered public accountants conclude that our internal
controls over financial reporting are not effective.
The SEC,
as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring public companies to include in their Annual Report on Form 10-K or
Form 20-F, as the case may be, a report of management on the company’s internal
controls over financial reporting that contains an assessment by management of
the effectiveness of the company’s internal controls over financial reporting.
In addition, the company’s independent registered public accounting firm must
report on the company’s internal control over financial reporting. Our
management may conclude that our internal controls over financial reporting are
not effective. Moreover, even if our management does conclude that our internal
controls over financial reporting are effective, if our independent registered
public accounting firm is not satisfied with our internal controls, the level at
which our controls are documented, designed, operated or reviewed, or if our
independent registered public accounting firm interprets the requirements, rules
or regulations differently from us, then it may conclude that our internal
controls over financial reporting are not effective. Furthermore, during the
course of the evaluation, documentation and attestation, we may identify
deficiencies that we may not be able to remedy in a timely manner. If we fail to
achieve and maintain the adequacy of our internal controls, we may not be able
to conclude that we have effective internal controls, on an ongoing basis, over
financial reporting in accordance with the Sarbanes-Oxley Act. Furthermore,
effective internal controls over financial reporting is necessary for us to
produce reliable financial reports and is important to help prevent fraud. As a
result, our failure to achieve and maintain effective internal controls over
financial reporting could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could harm our business
and negatively impact the trading price of our ADSs. In addition, we have
incurred considerable costs and used significant management time and other
resources in our effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.
Himax
Taiwan, our predecessor, was incorporated on June 12, 2001 as a limited
liability company under the laws of the ROC. On April 26, 2005, we established
Himax Technologies Limited, an exempted company with limited
liability
under the Companies Law Cap. 22 of the Cayman Islands, or the Companies Law, as
a holding company to hold the shares of Himax Taiwan in connection with our
reorganization and share exchange. On October 14, 2005, Himax Taiwan became our
wholly owned subsidiary through a share exchange consummated pursuant to the ROC
Business Mergers and Acquisitions Law through which we acquired all of the
issued and outstanding shares of Himax Taiwan, and we issued ordinary shares to
the shareholders of Himax Taiwan. Shareholders of Himax Taiwan received one of
our ordinary shares in exchange for one Himax Taiwan common share. The share
exchange was unanimously approved by shareholders of Himax Taiwan on June 10,
2005 with no dissenting shareholders and by the ROC Investment Commission on
August 30, 2005 for our inbound investment in Taiwan, and on September 7, 2005
for our outbound investment outside of Taiwan. We effected this reorganization
and share exchange to comply with ROC laws, which prohibit a Taiwan incorporated
company not otherwise publicly listed in Taiwan from listing its shares on an
overseas stock exchange. Our reorganization enables us to maintain our
operations through our Taiwan subsidiary, Himax Taiwan, while allowing us to
list our shares overseas through our holding company structure.
The common
shares of Himax Taiwan were traded on the Emerging Stock Board from December 26,
2003 to August 10, 2005, under the stock code “3222.” Himax Taiwan’s common
shares were delisted from the Emerging Stock Board on August 11, 2005. As a
result of our reorganization, Himax Taiwan is no longer a Taiwan public company,
and its common shares are no longer listed or traded on any trading
markets.
On
September 26, 2005, we changed our name to “Himax Technologies, Inc.,” and on
October 17, 2005, Himax Taiwan changed its name to “Himax Technologies Limited”
upon the approval of shareholders of both companies and amendments to the
respective constitutive documents. We effected the name exchange in order to
maintain continuity of operations and marketing under the trade name “Himax
Technologies, Inc.,” which had been previously used by Himax
Taiwan.
In
February 2007, we completed the acquisition of Wisepal, a driver IC company
focusing on small and medium-sized applications. This transaction further
strengthened our competitive position in the small and medium-sized product
areas and broadened our supplier base, thereby securing additional foundry
capacity, optimizing our foundry mix and further diversifying our technology and
product mix.
On October
12, 2007, we formed Himax Media Solutions, Inc., which oversees our
TFT-LCD television and monitor chipset business with a focus on expanding market
share in the global TFT-LCD television and monitor chipset market.
Our principal executive offices are located at No. 26,
Zih Lian Road, Fonghua Village, Sinshih Township, Tainan County 74445, Taiwan, Republic of China. Our telephone
number at this address is +886 (6) 505-0880. Our registered office in the Cayman
Islands is located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT, Georgetown, Grand Cayman, Cayman Islands. Our telephone number at this address
is +(1-345) 949-1040. In addition, we have regional offices in Hsinchu and Taipei, Taiwan; Suzhou, Foshan, Ningbo, Beijing, Shanghai and Shenzhen, China; Yokohama and Matsusaka, Japan; Anyangsi Kyungkido, South Korea; and Irvine, California, USA.
Investor
inquiries should be directed to
our Investor Relations
department, at
+886-2-2370-3999 ext. 22618 or by email to jessie_wang@himax.com.tw. Our website is www.himax.com.tw. The
information contained on our website is not part of this annual report. Our
agent for service of process in the United States is Puglisi & Associates
located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
Our ADSs
have been listed on the Nasdaq Select Global Market since March 31, 2006. Our
ordinary shares are not listed or publicly traded on any trading
markets.
We design,
develop and market semiconductors that are critical components of flat panel
displays. Our principal products are display drivers for large-sized TFT-LCD
panels, which are used in desktop monitors, notebook computers and televisions,
and display drivers for small and medium-sized TFT-LCD panels, which are used in
mobile handsets and consumer electronics products such as digital cameras,
mobile gaming devices and car navigation displays. We also offer display drivers
for panels using OLED technology and LTPS technology. In addition, we are
expanding our product offerings to include non-driver products such as timing
controllers, TFT-LCD television and monitor chipsets, LCOS microdisplays, and
power management ICs. Our customers are panel and television makers. We believe
that our leading design and engineering expertise, combined with our focus on
customer service and close relationships with semiconductor manufacturing
service providers, has contributed to our success.
Industry
Background
We operate
in the flat panel display semiconductor industry. As our semiconductors are
critical components of flat panel displays, our industry is closely linked to
the trends and developments of the flat panel display industry.
Flat
Panel Display Semiconductors
Flat panel
displays require different semiconductors depending upon the display
technologies and the application. Some of the most important ones include the
following:
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Display Driver. The
display driver receives image data from the timing controller and delivers
precise analog voltages or currents to create images on the display. The
two main types of display drivers for a TFT-LCD panel are gate drivers and
source drivers. Gate drivers turn on the transistor within each pixel cell
on the horizontal line on the panel for data input at each row. Source
drivers receive image data from the timing controller and generate voltage
that is applied to the liquid crystal within each pixel cell on the
vertical line on the panel for data input at each column. The combination
determines the colors generated by each pixel. Typically multiple gate
drivers and source drivers are installed separately on the panel. However,
for certain small and medium-sized applications, gate drivers and source
drivers are integrated into a single chip due to space and cost
considerations. Large-sized panels typically have higher resolution and
require more display drivers than small and medium-sized
panels.
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Timing Controller. The
timing controller receives image data and converts the format for the
source drivers’ input. The timing controller also generates controlling
signals for gate and source drivers. Typically, the timing controller is a
discrete semiconductor in large-sized TFT-LCD panels. For certain small
and medium-sized applications, however, the timing controller may be
integrated with display drivers.
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Scaler. For certain
displays, a scaler is installed to magnify or shrink image data in order
for the image to fill the panel.
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Operational Amplifier.
An operational amplifier supplies the reference voltage to source
drivers in order to make their output voltage
uniform.
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Television Chipset.
Television flat panel displays require chipsets that typically contain all
or some of the following components: an audio processor, analog
interfaces, digital interfaces, a video processor, a channel receiver and
a digital television decoder. See “—Products—TFT-LCD Television and
Monitor Semiconductor Solutions—TFT-LCD Television and Monitor Chipsets”
for a description of these
components.
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Others. Flat panel
displays also require multiple general purpose semiconductors such as
memory, power converters and
inverters.
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Characteristics
of the Display Driver Market
Although
we operate in several distinct segments of the flat panel display semiconductor
industry, our principal products are display drivers. Display drivers are
critical components of flat panel displays. As a result, we believe that the
projected growth in the demand for flat panel displays will result in the growth
in demand for display drivers. The display driver market has specific
characteristics, including those discussed below.
Concentration
of Panel Manufacturers
The global
TFT-LCD panel industry consists of a small number of manufacturers,
substantially all of which are based in Asia. In recent years, TFT-LCD panel
manufacturers, in particular Taiwan- and Korea-based manufacturers, have
invested heavily to establish, construct and ramp up additional fab capacity.
The capital intensive nature of the industry often results in TFT-LCD panel
manufacturers operating at a high level of capacity utilization in order to
reduce unit costs. This tends to create a temporary oversupply of panels, which
reduces the average selling price of panels and puts pricing pressure on display
driver companies. Moreover, the concentration of panel manufacturers permits
major panel manufacturers to exert pricing pressure on display driver companies
such as ours. The small number of panel manufacturers intensifies this as
display driver companies, in addition to seeking to expand their customer base,
must also focus on winning a larger percentage of such customers’ display driver
requirements.
Customization
Requirements
Each panel
display has a unique pixel design to meet its particular requirements. To
optimize the panel’s performance, display drivers have to be customized for each
panel design. The most common customization requirement is for the display
driver company to optimize the gamma curve of each display driver for each panel
design. Display driver companies must work closely with their customers to
develop semiconductors that meet their customers’ specific needs in order to
optimize the performance of their products.
Mixed-Signal
Design and High-Voltage CMOS Process Technology
Display
drivers have specific design and manufacturing requirements that are not
standard in the semiconductor industry. Some display drivers require
mixed-signal design since they combine both analog and digital devices on a
single semiconductor to process both analog signals and digital data.
Manufacturing display drivers requires high-voltage complementary metal oxide
semiconductor, or CMOS, process technology operating at 10 to 18 volts for
source drivers and 10 to 45 volts for gate drivers, levels of voltage which are
not standard in the semiconductor industry. For display drivers, the driving
voltage must be maintained under a very high degree of uniformity, which can be
difficult to achieve using standard CMOS process technology. However,
manufacturing display drivers does not require very small-geometry semiconductor
processes. Typically, the manufacturing process for large panel display drivers
requires geometries between 0.13 micron and 1 micron because the physical
dimensions of a high-voltage device do not allow for the economical reduction in
geometries below this range. We believe that there are a limited number of fabs
with high-voltage CMOS process technology that are capable of high-volume
manufacturing of display drivers.
Special
Assembly and Testing Requirements
Manufacturing
display drivers requires certain assembly and testing technologies and equipment
that are not standard for other semiconductors and are offered by a limited
number of providers. The assembly of display drivers typically uses either tape
automated bonding, also known as TAB, or chip-on-glass, also known as COG,
technologies. Display drivers also require gold bumping, which is a process in
which gold bumps are plated onto each wafer to connect the die and the processed
tape, in the case of TAB packages, and the glass, in the case of COG packages.
TAB may utilize tape carrier package, also known as TCP, or chip on film, also
known as COF. The type of assembly used depends on the panel manufacturer’s
design, which is influenced by panel size and application and is typically
determined by the panel manufacturers. Display drivers for large-sized
applications typically require TAB package types and, to a lesser extent COG
package types, whereas display drivers for mobile handsets and consumer
electronics products typically require COG packages. The testing of display
drivers also requires special testers that can support high-channel and
high-voltage output semiconductors. Such testers are not standard in the
semiconductor industry.
Supply
Chain Management
The
manufacturing of display drivers is a complex process and requires several
manufacturing stages such as wafer fabrication, gold bumping and assembly and
testing, and the availability of materials such as the processed tape used in
TAB packaging. We refer to these manufacturing stages and material requirements
collectively as the “supply chain.” Panel manufacturers typically operate at
high levels of capacity utilization and require a reliable supply of display
drivers. A shortage of display drivers, or a disruption to this supply, may
disrupt panel manufacturers’ operations since replacement supplies may not be
available on a timely basis or at all, given the customization of display
drivers. As a result, a display driver company’s ability to deliver its products
on a timely basis at the quality and quantity required is critical to satisfying
its existing customers and winning new ones. Such supply chain management is
particularly crucial to fabless display driver companies that do not have their
own in-house manufacturing capacity. In the case of display drivers, supply
chain management is further complicated by the high-voltage CMOS process
technology and the special assembly and testing requirements that are not
standard in the semiconductor industry. Access to this capacity also depends in
part on display driver companies having received assurances of demand for their
products since semiconductor manufacturing service providers require credible
demand forecasts before allocating capacity among customers and investing to
expand their capacity to support growth.
Need
for Higher Level of Integration
The small
form factor of mobile handsets and certain consumer electronics products
restricts the space for components. Small and medium-sized panel applications
typically require one or more source drivers, one or more gate drivers and one
timing controller, which can be installed as separate semiconductors or as an
integrated single-chip driver. Customers are increasingly demanding higher
levels of integration in order to manufacture more compact panels, simplify the
module assembly process and reduce unit costs. Display driver companies must be
able to offer highly integrated chips that combine the source driver, gate
driver and timing controller, as well as semiconductors such as memory, power
circuit and image processors, into a single chip. Due to the size restrictions
and stringent power consumption constraints of such display drivers, single-chip
drivers are complex to design. For large-sized panel applications, integration
is both more difficult to achieve and less important since size and weight are
less of a priority.
Products
We have
four principal product lines:
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display
drivers and timing controllers;
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TFT-LCD
television and monitor semiconductor
solutions;
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LCOS
products; and
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power
management ICs.
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We
commenced volume shipments of our first source and gate drivers for large-sized
panels in July 2001 and have developed a broad product portfolio of display
drivers and timing controllers for use in large-sized TFT-LCD panels. We
commenced volume shipments of our first display drivers for use in consumer
electronics applications in April 2002, volume shipments of two-chip display
drivers for mobile handsets in August 2003 and volume shipments of single-chip
display drivers for mobile handsets in August 2004. In September 2004, we
commenced volume shipments of our first television semiconductor solutions. We
commenced shipping engineering samples of LCOS products in December 2003 and
started volume shipment in June 2006. We commenced shipping engineering
samples of power management
ICs in October 2006
and started volume
shipments in January 2007.
Display
Drivers and Timing Controllers
Display
Driver Characteristics
Display
drivers deliver precise analog voltages and currents that activate the pixels on
panels. The following is a summary of certain display driver characteristics and
their relationship to panel performance.
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Resolution and Number of
Channels. Resolution refers to the number of pixels per line
multiplied by the number of lines, which determines the level of fine
detail within an image displayed on a panel. For example, a color display
screen with 1,024 x 768 pixels has 1,024 red columns, 1,024 green columns
and 1,024 blue columns for a total of 3,072 columns and 768 rows. The red,
green and blue columns are commonly referred to as “RGB.” Therefore, the
display drivers need to drive 3,072 column outputs and 768 row outputs.
The number of display drivers required for each panel depends on the
resolution. For example, an XGA (1,024 x 768 pixels) panel requires eight
384 channel source drivers (1,024 x 3 = 384 x 8) and three 256 channel
gate drivers (768 = 256 x 3), while a SXGA (1,280 x 1,024 pixels) panel
requires ten 384 channel source drivers and four 256 channel gate drivers.
The number of display drivers required can be reduced by using drivers
with a higher number of channels. For example, a SXGA panel can have eight
480 channel source drivers or four 960 channel source drivers instead of
ten 384 channel source drivers. Thus, using display drivers with a higher
number of channels can reduce the number of display drivers required for
each panel, although display drivers with a higher number of channels
typically have higher unit costs.
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Color Depth. Color
depth is the number of colors that can be displayed on a screen, which is
determined by the number of shades of a color, also known as grayscale,
that can be shown by the panel. For example, a 6-bit source driver is
capable of generating 26 x
26 x
26 =
218,
or 262K colors, and similarly, an 8-bit source driver is capable of
generating 16 million colors. Typically, for TFT-LCD panels currently in
commercial production, 262K and 16 million colors are supported by 6-bit
and 8-bit source drivers,
respectively.
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Operational Voltage. A
display driver operates with two voltages: the input voltage (which
enables it to receive signals from the timing controller) and the output
voltage (which, in the case of source drivers, is applied to liquid
crystals and, in the case of gate drivers, is used to switch on the TFT
device). Source drivers typically operate at input voltages from 3.3 to
1.5 volts and output voltages between 10 to 18 volts. Gate drivers
typically operate at input voltages from 3.3 to 1.5 volts and output
voltages from 10 to 45 volts. Lower input voltage saves power and lowers
electromagnetic interference, or EMI. Output voltage may be higher or
lower depending on the characteristics of the liquid crystal (or diode),
in the case of source drivers, or TFT device, in the case of gate
drivers.
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Gamma Curve. The
relationship between the light passing through a pixel and the voltage
applied to it by the source driver is nonlinear and is referred to as the
“gamma curve” of the source driver. Different panel designs and
manufacturing processes require source drivers with different gamma
curves. Display drivers need to adjust the gamma curve to fit the pixel
design. Due to the materials and processes used in manufacturing, panels
may contain certain imperfections which can be corrected by the gamma
curve of the source driver, a process which is generally known as “gamma
correction.” For certain types of liquid crystal, the gamma curves for RGB
cells are significantly different and thus need to be independently
corrected. Some advanced display drivers feature three independent gamma
curves for RGB cells.
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Driver Interface.
Driver interface refers to the connection between the timing
controller and display drivers. Display drivers increasingly require
higher bandwidth interface technology to address the larger data volume
necessary for video images. Panels used for higher data transmission
applications such as televisions require more advanced interface
technology. The principal types of interface technologies are
transistor-to-transistor logic, or TTL, reduced swing differential
signaling, or RSDS, and mini-low voltage differential signaling, or
mini-LVDS. Among these, RSDS and mini-LVDS were developed as low power,
low noise and low amplitude methods for high-speed data transmission using
fewer copper wires and resulting in lower EMI. In 2005, we introduced two
new display driver interfaces: dual edge TTL, or DETTL, and turbo RSDS.
DETTL enables the interface to function with lower power (below 1.8V),
thus reducing power consumption. Turbo RSDS is an upgraded version of RSDS
which increases the interface frequency from 85MHz to 135MHz, thus
reducing the bus width and panel
costs.
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Package Type. The
assembly of display drivers typically uses TAB and COG package types. COF
and TCP are two types of TAB packages. Customers typically determine the
package type required according to their specific mechanical and
electrical considerations. In general, display drivers for small-sized
panels use COG package type whereas display drivers for large-sized panels
primarily use TAB package types and, to a lesser extent, COG package
types.
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Large-Sized
Applications
We provide
source drivers, gate drivers and timing controllers for large-sized panels
principally used in desktop monitors, notebook computers and televisions.
Display drivers used in large-sized applications feature different key
characteristics, depending on the end-use application. For display drivers for
use in notebook computers, low power consumption is a key feature due to the
portability of notebook computers and the need for long battery life. For
display drivers used in desktop monitors, low cost is more desirable than low
power consumption. For advanced televisions, display drivers must meet the
requirements of larger panels, such as higher data transmission rates, wider
viewing angles, faster response time, higher color depth and better image
performance.
The table
below sets forth the features of our products for large-sized
applications:
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Product
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Features
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TFT-LCD
Source Drivers
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· 384
to 1080 output channels
· 6-bit
(262K colors), 8-bit (16 million colors) or 10-bit (1 billion
colors)
· one
gamma-type driver
· three
gamma-type drivers (RGB independent gamma curve to enhance color
image)
· output
driver voltage ranging from 4.5V to 24V
· input
logic voltage ranging from standard 3.3V to low power 1.5V
· low
power consumption and low EMI
· supports
TCP, COF and COG package
types
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Product
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Features
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· supports
TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized interface
technologies
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TFT-LCD
Gate Drivers
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· 192
to 400 output channels
· output
driving voltage ranging from 10 to 45V
· input
logic voltage ranging from standard 3.3V to low power 1.5V
· low
power consumption
· supports
TCP, COF and COG package types
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Timing
Controllers
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· product
portfolio supports a wide range of resolutions, from VGA (640 x 480
pixels) to Full HD (1,920 x 1,080 pixels)
· supports
TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized output interface
technologies
· input
logic voltage ranging from standard 3.3V to low power 1.5V
· embedded
overdrive function for television applications to improve response
time
· supports
TTL, LVDS and mini-LVDS input interface
technologies
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The
industry trend for large-sized applications is towards low power consumption
notebook computer display drivers, low cost desktop monitor display drivers and
display drivers that can support higher speed interface technologies, have
greater color depth and enhanced color through RGB independent gamma for use in
advanced televisions.
In
December 2007, we introduced Cascade Modulated Driver Interface, or CDMI,
technology, a patented technology for LED notebook panels, benefits of which
include a thin and light form factor, lower material costs and lower power
consumption and supports a resolution of up to 1,920 x 1,200
pixels.
Mobile
Handset Applications
We offer
display drivers for mobile handset displays that combine source driver, gate
driver and other functions into a single chip in various display technologies,
such as TFT-LCD, LTPS LCD and AMOLED. As
mobile handsets become smaller and more compact, customers are increasingly
demanding smaller die sizes and higher levels of integration with source driver,
gate driver, timing controller, as
well as more functional semiconductors such as memory, power circuit and image
processors, integrated into
a single chip. Moreover, mobile handsets must operate for long durations without
recharging the battery. Thus, display drivers with lower power consumption are
desired and we integrated
our proprietary low power driving circuits and Content Adaptive Brightness Control, or CABC, into display drivers in order to extend the battery life. Low
cost is also an important feature as mobile handset manufacturers continue to
reduce cost and customers increasingly seek out cost-effective display
drivers.
The
following table summarizes the features of our products for mobile
handsets:
|
Product
|
Features
|
|
TFT-LCD
Drivers
|
· highly
integrated single chip embedded with the source driver, gate driver, power
circuit, timing controller and memory
· product
portfolio suitable for a wide range of resolutions, including QQVGA (128 x
160 pixels), QCIF (132 x 176 pixels), QCIF+ (176 x 220 pixels), QVGA (240
x 320 pixels), WQVGA (240 x 480 pixels), HVGA (320 x 480 pixels) and a
range of panel sizes from 1.5 to 3.2 inches in diagonal
measurement
· supports 262K colors to 16 million
colors
· supports RGB separated gamma
adjustment
· supports CABC
· supports MDDI (Mobile Display Digital
Interface) or MIPI (Mobile Industry Processor
Interface)
· input
logic voltage ranging from standard 3.3V to low power
1.65V
|
|
Product
|
Features
|
|
· low
power consumption and low EMI
· utilizes
die shrink technology to reduce die size and cost
· slimmer
die for compact module to fit smaller mobile handset designs
· application
specific integrated circuits, or ASIC, can be designed to meet customized
requirements (e.g., drivers without memory or drivers without gate driver
embedded on the chip)
|
|
|
LTPS
Drivers
|
· highly
integrated single chip embedded with the source driver, power circuit,
timing controller and memory
· suitable for a wide range of
resolutions, including from QQVGA (128 x 160)
to WVGA (864 x 480), and a range of panel sizes
from 1.5 to 3.5 inches diagonally
· supports 262K colors to 16 million
colors
· supports RGB separated gamma
adjustment
· supports CABC
· supports CDP, MDDI, or MIPI
· input
logic voltage ranging from standard 3.3V to low power 1.65V
· utilizes
die shrink technology to reduce die size and cost
· slimmer
die for compact module
· ASIC
can be designed to meet customized requirements (e.g.,
gate-less or multi-bank output
driver)
|
The
industry trend for mobile handset display drivers is towards display drivers
that can support high-speed interfaces, have greater color depth and enhanced
image quality as mobile handsets increasingly incorporate multimedia
functions.
Consumer
Electronics Products
We offer
source drivers, gate drivers, timing controllers and integrated drivers for
consumer electronics products such as digital cameras, digital video recorders,
personal digital assistants, mobile gaming devices, portable DVD players and car
navigation displays. We offer an extensive line of display drivers covering
different applications, interfaces and channel output and levels of integration.
Similar to mobile handsets, consumer electronics products are typically compact,
battery-operated devices. Customers are increasingly demanding display drivers
with smaller and more compact die sizes and higher levels of integration with
source driver, gate driver, timing controller, as well as more functional
semiconductors such as memory, power circuit and image processors, integrated
into a single chip. Moreover, display drivers with lower power consumption are
desired in order to extend battery life.
The
following table summarizes the features of our products used in consumer
electronics products:
|
Product
|
Features
|
|
TFT-LCD
Source Drivers
|
· 240
to 1200 output channels
· products
for analog and digital interfaces
· supports
262K colors to 16 million colors
· input
logic voltage ranging from standard 3.3V to low power 2.5V
· low
power consumption and low EMI
|
|
TFT-LCD
Gate Drivers
|
· 96
to 800 output channels
· input
logic voltage ranging from standard 3.3V to low power 2.5V
· output
driving voltage ranging from 10 to 40V
|
|
TFT-LCD
Integrated Drivers
|
· highly
integrated single chip embedded with source driver, gate driver, timing
controller and power circuit
· resolutions
include 480 x 240, 320RGB x 240, 480RGB x 272
|
|
Product
|
Features
|
|
· products
for analog or digital interfaces
· low power
consumption
· CABC function integrated for
backlight power saving
|
|
|
Timing
Controllers
|
· products
for analog or digital interfaces
· supports
various resolutions from 280 x 220 pixels to 1024 x 600
pixels
|
The
industry trend for display drivers used in medium-sized consumer electronics
products is towards higher channels and for the timing controller to be
integrated into the video processor. The trend of display drivers used in
small-sized consumer electronics products is towards single-chip solutions
combining the source driver, gate driver, timing controller and power circuit
into a single chip.
TFT-LCD
Television and Monitor Semiconductor Solutions
Himax
Media Solutions, our subsidiary, provides TFT-LCD television and monitor
semiconductor solutions. Set forth below are the various semiconductor
components that may be utilized in advanced televisions:
TFT-LCD
Television and Monitor Chipsets
Television
chipsets contain numerous components that process video and audio signals and
thus enhance the image and audio qualities of televisions. Advanced televisions
typically require some or all of these components:
|
·
|
Audio Processor/Amplifier.
Demodulates, processes and amplifies sound from television
signals.
|
|
·
|
Analog Interfaces.
Convert analog video signals into digital video signals. Video
decoder and analog-to-digital converter, or ADC, are
included.
|
|
·
|
Digital Interfaces.
Receive digital signals via digital receivers. Digital visual
interfaces, or DVI, and high-definition multimedia interfaces, or HDMI,
are included.
|
|
·
|
Channel Receiver.
Demodulates input signals so that the output becomes compressed bit
stream data.
|
|
·
|
DTV Decoder. Converts
video and audio signals from compressed bit stream data into regular video
and audio signals.
|
|
·
|
Video Processor.
Performs the scaling function that magnifies or shrinks the image
data in order to fit the panel’s resolution; provides real-time processing
for improved color and image quality; converts output video from an
interlaced format to a progressive format in order to eliminate
jaggedness; and supports on-screen display and real-time video format
transformation.
|
We are developing all of the above
components and have shipped our analog TV single-chip solutions in volume. Our
analog TV single-chip
solutions are designed for use in advanced televisions as well as LCOS
applications and our product portfolio includes high-performance chips
that target high-end segments as well as
cost-effective chips which target entry-level segments.
The
following table summarizes the features of our video processors:
|
Product
|
Features
|
|
Analog
TV single-chip solutions
|
· ideal
for LCD TV, MFM TV and LCOS applications
· integrated
with video decoder and 3D comb filter to support worldwide NTSC, PAL and
SECAM standards
· integrated
with VBI Slicer for CC, V-Chip and Teletext functions
· integrated
with TCON and Over-Drive for additional cost-down
· integrated
with high performance scaler, de-interlancer, and ADC
· built-in
HDMI and DVI Receiver
· built-in
Himax 3rd generation video engine which supports variable dynamic video
enhancement features
· output
resolutions range from 640 x 480 up to 1920 x 1080
|
LCOS
Products
LCOS
technology is beginning to migrate into the mass-production stage for some
commercial applications and is expected to be utilized in near-to-eye
applications and mini-projectors. We design our LCOS products at our subsidiary,
Himax Display, which owns and operates a fab for the manufacture of such
products. In January 2008, we announced a strategic alliance with 3M, one of the
world’s leading companies in optics technology, to commercialize LCOS mobile
projectors by combining their proprietary technologies to deliver a complete
mobile projection solution to consumer electronics manufacturers. 3M developed,
and is providing, a miniature LED projection engine that incorporates the
single-panel color filter type LCOS module of Himax Display.
The
following table sets forth the features of our LCOS products:
|
Product
|
Features
|
|
LCOS
modules for near-to-eye, mini and mobile-projector
applications
|
· Color filter type: 0.38"
640 x 360 pixels
(Q720P), 0.44"
VGA and 0.59" SVGA
resolutions
· Color sequential type: 0.38" VGA and
0.59" SVGA
· 8-bit
(16 million colors)
· high
reflectivity and greater than 100:1 contrast ratio
· low
power consumption
|
|
Product
|
Features
|
|
LCOS
modules for projection applications
|
· WXGA
and Full HD resolutions
· 8-bit
(16 million colors)
· high
reflectivity and greater than 1,000:1 contrast
ratio
|
Power
Management ICs
Himax
Analogic, our subsidiary, has three major products: class-D audio amplifiers,
step-up DC-to-DC switching regulators, and white light LED drivers.
|
•
|
Class-D Audio Amplifier.
The audio amplifier receives audio signals from the audio processor
and delivers the amplified audio signals to speaker(s). The input audio
signal is converted into a sequence of pulses with fixed voltage. By means
of a modulated pulse width and an external low-pass filter, the output
audio signal will be “reproduced,” but with larger amplitude. Since a
class-D audio amplifier only switches between on and off instead of
operating in linear mode, there is a very small amount of power consumed
by the amplifier. Therefore, high power efficiency is a class-D audio
amplifier’s major advantage. For those applications that are concerned
about power dissipation, a class-D audio amplifier is an appropriate
choice.
|
|
Product
|
Features
|
|
2.5W/2W
Mono/Stereo Class-D Audio Amp for Portable Devices
|
· 3.3V
to 5.5V input voltage range
· Gain
setting by external resistors or DC voltage
· OCP/OTP/UVL
|
|
9W
Stereo Class-D Audio Amp for TVs and Monitors
|
· 8.5V
to 12.6V input voltage range
· 4
fixed gain selections
· OCP/OT/UVL
|
|
•
|
Step-up
DC-to-DC Switching Regulator. A step-up
DC-to-DC
converter,
also called a
switching
regulator,
integrates an
error
amplifier
and a
pulse width
modulator
(PWM) with a build-in n-channel power MOSFET
(Metal-Oxide-Semiconductor Field-Effect Transistor)
to perform with
high
efficiency and fast transient response in
order to
supply a higher voltage from a lower input voltage
with an
external
inductor and diode.
Electronic devices require
various specific working voltages
on different applications.
However,
there is normally one
or two
common power sources
available. A
step-up
DC-to-DC
converter plays an
important role in
supplying
higher voltage
from lower input voltage
to make
an
electronic
device work
normally. In other words, most
electronic
devices
need a
step-up
DC-to-DC
converter as a
stable working power supplier in various applications.
|
|
Product
|
Features
|
|
TFT-LCD
Step-up DC-to-DC Converter
|
· 2.6V
to 5.5V input voltage range
· Max
boost voltage: 24V
· Programmable
switching frequency
· Programmable
soft-start
|
|
TFT-LCD
DC-to-DC Converter with Operational Amplifiers
|
· 2.6V
to 6.5V input voltage range
· 1.2MHz
current-mode boost regulator
· Linear
regulator controllers for gate driver power supply
· Built-in
14V, 2.4A, 160 mΩ MOSFET
· 5
high-performance operational
amplifiers
|
|
•
|
White Light LED Driver.
The LED driver provides sufficient voltage and current to light up LED
diodes. Moreover, in addition to turning LEDs on, the driver has to keep
the brightness of LEDs uniform and stable. Therefore, voltage boosting and
current sensing are the core functional blocks of a white light LED
driver.
|
|
Product
|
Features
|
|
WLED
Driver for Small/Medium Size Panels
|
Ÿ 2.5V
to 6V input voltage range
|
|
|
Ÿ Built-in
1.3MHz step-up PWM converter
Ÿ Capable
of driving up to 39 LEDs (13 strings of 3 LEDs)
Ÿ Support
200~25KHz PMM dimming control
|
|
WLED
Driver for Notebook Panels
|
Ÿ 4.5V
to 24V input voltage range
Ÿ Built-in
1.3MHz step-up PWM converter (max. boost voltage: 40V)
Ÿ 8
constant current source channels
Ÿ Capable
of driving up to 11 LEDs in serial for each channel
|
Other
Products and Services
We established Himax Imaging Inc., or Himax Imaging, in March 2007 to design, develop and market
semiconductors for CMOS
image sensor applications. To date, Himax Imaging has not generated any revenues.
Core
Technologies and Know-How
Driving System
Technology. Through our collaboration with panel manufacturers, we have
developed extensive knowledge of circuit design, TFT-LCD driving systems,
high-voltage processes and display systems, all of which are important to the
design of high-performance TFT-LCD display drivers. Our engineers have in-depth
knowledge of the driving system technology, which is the architecture for the
interaction between the source driver, gate driver, timing controller and power
systems as well as other passive components. We believe that our understanding
of the entire driving system has strengthened our design capabilities. Our
engineers are highly skilled in designing power efficient and compact display
drivers that enhance the performance of TFT-LCD. We are leveraging our know-how
of display drivers and driving system technology to develop display drivers for
panels utilizing other technologies such as OLED.
High-Voltage CMOS
Circuit Design. Unlike most other semiconductors, TFT-LCD display drivers
require a high output voltage of 10 to 45 volts. We have developed circuit
design technologies using a high-voltage CMOS process that enables us to produce
high-yield, reliable and compact drivers for high-volume applications. Moreover,
our technologies enable us to keep the driving voltage at very high uniformity,
which can be difficult to achieve when using standard CMOS process
technology.
High-Bandwidth
Interfaces. In addition to high-voltage circuit design, TFT-LCD display
drivers require high bandwidth transmission for video signals. We have applied
several high-speed interfaces, including TTL, RSDS, mini-LVDS, DETTL, turbo RSDS
and customized interfaces, in our display drivers. Moreover, we are developing
additional driver interfaces for special applications with optimized speed,
lower EMI and higher system stability.
Die Shrink and
Low Power Technologies. Our engineers are highly skilled in employing
their knowledge of driving technology and high-voltage CMOS circuit design to
shrink the die size of our display drivers while leveraging their understanding
of driving technology and panel characteristics to design display drivers with
low power consumption. Die size is an important consideration for applications
with size constraints. Smaller die size also reduces the cost of the chip. Lower
power consumption is important for many portable devices such as notebook
computers, mobile handsets and consumer electronics products.
Customers
Our customers for display drivers are
primarily panel manufacturers and mobile device module manufacturers, who in
turn design and market their products to manufacturers of end-use products such
as notebook computers, desktop monitors, televisions, mobile handsets and consumer
electronics products. As of December 31, 2007, we sold our products to more than
70 customers. In 2005, 2006 and 2007, CMO
and its affiliates accounted for 58.9%, 55.0% and 58.8% of our revenues,
respectively; CPT and its affiliates accounted for 16.2%, 12.4% and
7.3% of our revenues,
respectively; and SVA-NEC
and its affiliates accounted for 5.6%, 7.3% and 8.4% of our revenues, respectively.
We expect that sales to
CMO, CPT and SVA-NEC and their affiliates will continue to
account for a substantial
majority of our revenues in
the near term.
Set forth below (in alphabetical order)
are our ten largest customers (and their affiliates) based on revenues
for the year ended December 31, 2007:
Chi Lin
Technology Co., Ltd.
Chi Mei
Optoelectronics Corp.
Chunghwa
Picture Tubes, Ltd.
Excel
Asian Taiwan Co., Ltd.
HannStar
Display Corporation
InnoLux
Display Corporation
Perfect
Display Limited
Samsung
Electronics Taiwan Co., Ltd.
Shanghai
SVA-NEC Liquid Crystal Display
TPO
Displays Corporation
Our
customers typically provide us with a long-term (twelve-month) forecast plus
three-month rolling non-binding forecasts and confirm orders with us one month
ahead of scheduled delivery. In general, purchase orders are not cancellable by
either party, although from time to time we and our customers have agreed to
amend the terms of such orders.
Sales
and Marketing
We focus
our sales and marketing strategy on establishing business and technology
relationships principally with TFT-LCD panel manufacturers and increasingly also
with panel manufacturers using LTPS or OLED technologies and also with mobile
display module and mobile handset manufacturers in order to work closely with
them on future semiconductor solutions that align with their product road maps.
Our engineers collaborate with our customers’ engineers to create products that
comply with their specifications and provide a high level of performance at
competitive prices. Our end market for large-sized panels is concentrated around
a limited number of major panel manufacturers. We have also commenced marketing
our products directly to mobile device manufacturers so that our products can be
qualified for their specifications and designed into their
products.
We primarily sell our products
through our direct sales
teams located in Taiwan, China, South Korea and Japan. We also have dedicated sales teams for
certain of our most important current or prospective customers. We have sales
and technical support offices in Tainan, Taiwan. We have regional offices in Hsinchu and Taipei, Taiwan; Suzhou, Shenzhen, Foshan and Ningbo China; Yokohama and Matsusaka,
Japan; Anyangsi Kyungkido, South
Korea; and Irvine, California, USA, all in close proximity to our
customers. For certain
products or regions we may from time to time sell our products
through agents or distributors.
Our sales
and marketing team possesses a high level of technical expertise and industry
knowledge used to support a lengthy and complex sales process. This includes a
highly trained team of field applications engineers that provides technical
support and assistance to potential and existing customers in designing, testing
and qualifying display modules that incorporate our products. We believe that
the depth and quality of this design support are key to improving customers’
time-to-market and maintaining a high level of customer
satisfaction.
Manufacturing
We are a
fabless semiconductor company. We leverage our experience and engineering
expertise to design high-performance semiconductors and rely on semiconductor
manufacturing service providers for wafer fabrication, gold bumping, assembly
and testing. We also rely on third-party suppliers of processed tape used in TAB
packaging. We engage foundries with high-voltage CMOS process technology for our
display drivers and engage assembly and testing houses that specialize in TAB
and COG packages, thereby taking advantage of the economies of scale and the
specialization of such semiconductor manufacturing service providers. Our
fabless model enables us to capture certain financial and operational benefits,
including reduced manufacturing personnel, capital expenditures, fixed assets
and fixed costs. It also gives us the flexibility to use the technology and
service provider most suitable for any given product.
Manufacturing
Stages
The
diagram below sets forth the various stages in manufacturing display drivers
according to the two different types of assembly utilized: TAB or COG. The
assembly type depends on the application of the panel and is determined by our
customers.
Wafer
Fabrication: Based on our design, the foundry
provides us with fabricated wafers. Each fabricated wafer contains many chips,
each known as a die.
Gold
Bumping: After the wafers are fabricated, they are
delivered to gold bumping houses where gold bumps are plated on each wafer. The
gold bumping process uses thin film metal deposition, photolithography and
electrical plating technologies. The gold bumps are plated onto each wafer to
connect the die to the processed tape, in the case of TAB package, or the glass,
in the case of COG package.
Chip Probe
Testing: Each individual die is electrically
tested, or probed, for defects. Dies that fail this test are
discarded.
Assembly and
Testing: Our display drivers use two types of
assembly technology: TAB or COG. Display drivers for large-sized applications
typically require TAB package types and to a lesser extent COG package types,
whereas display drivers for mobile handsets and consumer electronics products
typically require COG package types.
TAB
Assembly
We use two
types of TAB technologies: TCP and COF. TCP and COF packages are both made of
processed tape that is typically 35mm or 48mm wide, plated with copper foil and
has a circuit formed within it. TCP and COF packages differ, however, in terms
of their chip connections. With TCP packages, a hole is punched through the
processed
tape in the area of the chip, which is connected to a flying lead made of
copper. In contrast, with COF packages, the lead is mounted directly on the
processed tape and there is no flying lead.
|
·
|
Inner-Lead
Bonding: The TCP and COF assembly process
involves grinding the bumped wafers into their required thickness and
cutting the wafers into individual dies, or chips. An inner lead bonder
machine connects the chip to the printed circuit processed tape and the
package is sealed with resin at high
temperatures.
|
|
·
|
Final
Testing: The assembled display drivers are
tested to ensure that they meet performance specifications. Testing takes
place on specialized equipment using software customized for each
product.
|
COG
Assembly
COG
assembly connects display drivers directly to LCD panels without the need for
processed tape. COG assembly involves grinding the tested wafers into their
required thickness and cutting the wafers into individual dies, or chips. Each
individual die is picked and placed into a chip tray and is then visually or
auto-inspected for defects. The dies are packed within a tray in an aluminum bag
after completion of the inspection process.
Quality
Assurance
We
maintain a comprehensive quality assurance system. Using a variety of methods
from conducting rigorous simulations during the circuit design process to
evaluating supplier performance at various stages of our products’ manufacturing
process, we seek to bring about improvements and achieve customer satisfaction.
In addition to monitoring customer satisfaction through regular reviews, we
implement extensive supplier quality controls so that the products we outsource
achieve our high standards. Prior to engaging a third party as our supplier, we
perform a series of audits on their operations, and upon engagement, we hold
frequent quality assurance meetings with our suppliers to evaluate such factors
as product quality, production costs, technological sophistication and timely
delivery.
In
November 2002, we received ISO 9001:2000 certification which was renewed in
February 2008 and will expire in February 2011. In February 2006, we received
ISO 14001 certification which was renewed in March 2008 and will expire in 2009.
In addition, in March 2007, we received IECQ QC 080000 and OHSAS 18001
certifications which will expire in 2010.
Semiconductor
Manufacturing Service Providers and Suppliers
Through
our relationships with leading foundries, assembly, gold bumping and testing
houses and processed tape suppliers, we believe we have established a supply
chain that enables us to deliver high-quality products to our customers in a
timely manner.
Access to
semiconductor manufacturing service providers is critical as display drivers
require high-voltage CMOS process technology and specialized assembly and
testing services, all of which are different from industry standards. We have
historically obtained our foundry services from TSMC and Vanguard and have also
recently established relationships with Macronix, Lite-on, Chartered, UMC,
Maxchip and Silicon. These
are among a select number of semiconductor manufacturers that provide
high-voltage CMOS process technology required for manufacturing display drivers.
We engage assembly and testing houses that specialize in TAB and COG packages
such as Chipbond Technology Corporation, ChipMOS Technologies Inc.,
International Semiconductor Technology Ltd., and Siliconware Precision
Industries Co., Ltd.
We plan to
strengthen our relationships with our existing semiconductor manufacturing
service providers and diversify our network of such service providers in order
to ensure access to sufficient cost-competitive and high-quality manufacturing
capacity. We are selective in our choice of semiconductor manufacturing service
providers. It takes a substantial amount of time to qualify alternative
foundries, gold bumping, assembly and testing houses for production. As a
result, we expect that we will continue to rely on limited number of
semiconductor manufacturing service providers for a substantial portion of our
manufacturing requirements in the near future.
The table
below sets forth (in alphabetical order) our principal semiconductor
manufacturing service providers and suppliers:
|
Wafer
Fabrication
|
Gold
Bumping
|
|
Chartered
Semiconductor Manufacturing Ltd.
|
Chipbond
Technology Corporation
|
|
Lite-on
Semiconductor Corp.
|
ChipMOS
Technologies Inc.
|
|
Macronix
International Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
|
Maxchip
Electronics Corp. (which was spun off from Powerchip Semiconductor Corp.
on April 1, 2008)
|
Siliconware
Precision Industries Co., Ltd.
|
|
Silicon
Manufacturing Partners Pte Ltd.
|
|
|
Taiwan
Semiconductor Manufacturing Company Ltd.
|
|
|
United
Microelectronics Corporation
|
|
|
Vanguard
International Semiconductor Corporation
|
|
|
Processed
Tape for TAB Packaging
|
Assembly
and Testing
|
|
Hitachi
Cable Asia, Ltd. Taipei Branch
|
Chipbond
Technology Corporation
|
|
Mitsui
Micro Circuits Taiwan Co., Ltd.
|
ChipMOS
Technologies Inc.
|
|
Samsung
Techwin Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
|
Simpal
Electronics Co. Ltd.
|
Siliconware
Precision Industries Co., Ltd.
|
|
Sumitomo
Metal Mining Package Material Co., Ltd.
|
|
Chip
Probe Testing
|
|
|
Ardentec
Corporation
|
|
|
Chipbond
Technology Corporation
|
|
|
ChipMOS
Technologies Inc.
|
|
|
International
Semiconductor Technology Ltd.
|
|
|
King
Yuan Electronics Co., Ltd.
|
|
|
Siliconware
Precision Industries Co., Ltd.
|
Intellectual
Property
As of December 31, 2007, we held a total
of 231 patents, including 134 in Taiwan, 66 in the United States, 16 in China, 11 in Korea and 4 in Japan. The expiration dates of our patents
range from 2019 to 2027. We also have a total of 353 pending patent applications in
Taiwan, 364 in the United States and 208 in other jurisdictions, including the PRC,
Japan, Korea and Europe. In addition, we have registered
“Himax” and our logo as a trademark and service
mark in Taiwan, China and Japan and the United States.
Competition
The
markets for our products are, in general, intensely competitive, characterized
by continuous technological change, evolving industry standards, and declining
average selling prices. We believe key factors that differentiate among the
competition in our industry include:
|
·
|
customer
relations;
|
|
·
|
product
performance;
|
|
·
|
design
customization;
|
|
·
|
development
time;
|
|
·
|
product
integration;
|
|
·
|
technical
services;
|
|
·
|
manufacturing
costs;
|
|
·
|
supply
chain management;
|
|
·
|
economies
of scale; and
|
|
·
|
broad
product portfolio.
|
We continually face intense competition
from other fabless display
driver companies, including Cheertek Incorporation, DenMOS Technology Inc.,
Fitipower Integrated Technology, Inc., Ili Technology Corp., Leadis Technology, Inc., Novatek
Microelectronics Corp., Ltd., Orise Technology Co., Ltd., Raydium
Semiconductor Corporation,
Sitronix Technology Co., Ltd., SmartASIC Technology, Inc. and Solomon Systech
Limited. We also face competition from integrated device manufacturers, such as
MagnaChip Semiconductor Ltd., Matsushita Electric Works, Ltd., NEC
Electronics Corporation, Oki Electric Industry Co.
Ltd., Renesas Technology Corp., Seiko Epson Corporation and Toshiba Corporation,
and panel manufacturers with in-house semiconductor design capabilities, such as
Samsung Electronics Co., Ltd. and Sharp Corporation. The latter are both our competitors and
customers.
Many of
our competitors, some of which are affiliated or have established relationships
with other panel manufacturers, have longer operating histories, greater brand
recognition and significantly greater financial, manufacturing, technological,
sales and marketing, human and other resources than we do. Additionally, we
expect that as the flat panel semiconductor industry expands, more companies may
enter and compete in our markets.
Our
television semiconductor solutions compete against solutions offered by a
significant number of semiconductor companies including Advanced Micro Devices,
Inc., Broadcom Corporation, Huaya Microelecronics Inc., Mediatek Corp., Micronas
Semiconductor Holding AG, MStar Semiconductor, Inc., Novatek Microelectronics
Corp., NXP Semiconductor, Pixelworks Inc., Realtek Semiconductor Corp.,
STMicroelectronics, Sunplus Technology Co., Trident Microsystems, Inc. and Zoran
Corporation, among others, some of which focus solely on video processors or
digital TV solutions and others that offer a more diversified
portfolio.
For LCOS products, we face competition
primarily from Sony Corporation, Victor Company of Japan, Limited, also known as
JVC, Displaytech Inc., Texas Instruments Incorporated’s digital light processing
technology-based products and Microvision, Inc.’s laser-based products in
mini-projectors and
mobile-projectors.
Insurance
We
maintain insurance policies on our buildings, equipment and inventories covering
property damage and damage due to, among other events, fires, typhoons,
earthquakes and floods. We maintain these insurance policies on our facilities
and on inland transit of inventories. Additionally, we maintain director and
officer liability insurance. We do not have insurance for business
interruptions, nor do we have key person insurance.
Environmental
Matters
The
business of semiconductor design does not cause any significant pollution. Himax
Display maintains a facility for our LCOS products where we have taken the
necessary steps to obtain the appropriate permits and believe that we are in
compliance with the existing environmental laws and regulations in the ROC. We
have entered into various agreements with certain customers whereby we have
agreed to indemnify them, and in certain cases, their customers, for any claims
made against them for hazardous material violations that are found in our
products.
The following chart sets forth our
corporate structure and ownership interest in each of our principal operating
subsidiaries and affiliates
as of June 1,
2008.
The
following table sets forth summary information for our subsidiaries as of June
1, 2008.
|
Subsidiary
|
Main
Activities
|
Jurisdiction
of
Incorporation
|
Total
Paid-in
Capital
|
Percentage
of
Our
Ownership
Interest
|
||||
|
$
(in millions)
|
||||||||
|
Himax
Technologies Limited
|
IC
design and sales
|
ROC
|
81.9
|
100%
|
||||
|
Himax
Technologies Anyang Limited
|
Sales
|
South
Korea
|
0.5
|
100%
|
||||
|
Wisepal
Technologies, Inc.
|
IC
design and sales
|
ROC
|
9.9
|
100%
|
||||
|
Himax
Technologies (Samoa), Inc.
|
Investments
|
Samoa
|
2.5
|
100%(1)
|
||||
|
Himax
Technologies (Suzhou) Co., Ltd.
|
Sales
|
PRC
|
1.0
|
100%(1)
|
||||
|
Himax
Technologies (Shenzhen) Co., Ltd.
|
Sales
|
PRC
|
1.5
|
100%(1)
|
||||
|
Himax
Display, Inc.
|
IC
design, manufacturing and sales
|
ROC
|
23.2
|
88.1%
|
||||
|
Integrated
Microdisplays Limited
|
IC
design and sales
|
Hong
Kong
|
1.1
|
100%(2)
|
||||
|
Himax
Analogic, Inc.
|
IC
design and sales
|
ROC
|
11.2
|
73.7%
|
||||
|
Himax
Imaging, Inc.
|
Investments
|
Cayman
Islands
|
9.5
|
100%
|
||||
|
Himax
Imaging Ltd.
|
IC
design and sales
|
ROC
|
2.1
|
100%
|
||||
|
Himax
Imaging Corp.
|
IC
design and sales
|
California,
USA
|
4.3
|
100%
|
||||
|
Argo
Limited
|
Investments
|
Cayman
Islands
|
9.0
|
100%
|
||||
|
Tellus
Limited
|
Investments
|
Cayman
Islands
|
9.0
|
100%
|
||||
|
Himax
Media Solutions, Inc.
|
TFT-LCD
television and monitor chipset operations
|
ROC
|
34.2
|
80.1%(3)
|
(1)
Indirectly, through our 100% ownership of Himax Technologies
Limited.
(2)
Indirectly, through our 88.1% ownership of Himax Display,
Inc.
(3)
Directly and indirectly,
through our 100% ownership of Himax Technologies Limited which holds
36.2%.
In October 2006, we completed
construction on and relocated our corporate headquarters to a 22,172 square
meter facility within the Tree Valley Industrial Park in Tainan, Taiwan. The facility houses our research and
development, engineering,
sales and marketing, operations and general administrative staff. Construction
for our new headquarters commenced in the fourth quarter of 2005 and was
completed in the fourth quarter of 2006. The total costs amounted to
approximately $25.8 million, of which approximately
$10.2 million was for the land and
approximately $15.6 million was for the construction of the
building and related facilities (which included architect fees, general
contractor fees,
building materials, the purchase and
installation of network,
clean room, and office equipment and other fixtures). We also lease office space in
Taipei and Hsinchu, Taiwan; Suzhou, Shenzhen, Foshan, Beijing, Shanghai and Ningbo, China;
Yokohama and Matsusaka, Japan; Anyangsi Kyungkido, South Korea; and Irvine, California,
USA. The lease contracts may be renewed upon
expiration. Himax Display, our subsidiary, owns and operates a fab with 3,040
square meters of floor space in a building leased from CMO.
Not
applicable.
Overview
We design,
develop and market semiconductors that are critical components of flat panel
displays. Our principal products are display drivers used in desktop monitors,
notebook computers, televisions, mobile handsets and consumer electronics
products such as digital cameras, mobile gaming devices and car navigation
displays. We also offer display drivers for panels utilizing OLED technology and
LTPS technology. We have also expanded our product offerings to include TFT-LCD
television and monitor chipsets, as well as LCOS products and power management
ICs. We primarily sell our display drivers to TFT-LCD panel manufacturers and
mobile device module manufacturers, and we sell our television semiconductor
solutions to television makers.
We
commenced operations through our predecessor, Himax Taiwan, in June 2001. We
must, among other things, continue to expand and diversify our customer base,
broaden our product portfolio, achieve additional design wins and manage our
costs to partially mitigate declining average selling prices in order to
maintain our profitability. Moreover, we must continue to address the challenges
of being a growing technology company, including hiring and retaining
managerial, engineering, operational and financial personnel and implementing
and improving our existing administrative, financial and operations
systems.
We are a
fabless semiconductor company. We leverage our experience and engineering
expertise to design high-performance semiconductors and rely on third-party
semiconductor manufacturing service providers for wafer fabrication, gold
bumping, assembly and testing. We are able to take advantage of the economies of
scale and the specialization of such semiconductor manufacturing service
providers. Our fabless model enables us to capture certain financial and
operational benefits, including reduced manufacturing personnel, capital
expenditures, fixed assets and fixed costs. It also gives us the flexibility to
use the technology and service providers that are the most suitable for any
given product.
As our
semiconductors are critical components of flat panel displays, our industry is
closely linked to the trends and developments of the flat panel display
industry, in particular, the TFT-LCD panel segment. Substantially all of our
revenues in 2007 were derived from sales of display drivers that were eventually
incorporated into TFT-LCD panels. We expect display drivers for TFT-LCD panels
to continue to be our primary products. The TFT-LCD panel industry is intensely
competitive and is vulnerable to cyclical market conditions. The average selling
prices of TFT-LCD panels could decline for numerous reasons, including the
following: a surge in manufacturing capacity due to the ramping up of new
fabrication facilities; manufacturers operating at high levels of capacity
utilization in order to reduce fixed costs per panel; and lower-than-expected
demand for end-use products that incorporate TFT-LCD panels. An oversupply of
large-sized TFT-LCD panels in 2006, resulted in downward pricing pressure on
TFT-LCD panel manufacturers which, in turn, resulted in similar downward pricing
pressure on us. We could not sufficiently reduce costs to completely offset such
downward pricing pressure, and cannot assure you that we will be able to reduce
costs to offset such downward pricing pressure in the future. Moreover, during
periods of declining average selling prices for TFT-LCD panels, TFT-LCD panel
manufacturers may decrease capacity utilization and sell fewer panels, which
could depress demand for our display drivers. As a result, the cyclicality of
the TFT-LCD panel industry could adversely affect our revenues, cost of revenues
and results of operations.
Factors
Affecting Our Performance
Our
business, financial position and results of operations, as well as the
period-to-period comparability of our financial results, are significantly
affected by a number of factors, some of which are beyond our control,
including:
|
·
|
average
selling prices;
|
|
·
|
unit
shipments;
|
|
·
|
product
mix;
|
|
·
|
design
wins;
|
|
·
|
cost
of revenues and cost reductions;
|
|
·
|
supply
chain management;
|
|
·
|
share-based
compensation expenses; and
|
|
·
|
signing
bonuses.
|
Average
Selling Prices
Our performance is affected by the
selling prices of each of
our products. We price our products based on several factors, including
manufacturing costs, life cycle stage of the product, competition, technical
complexity of the product, size of the purchase order and our relationship with
the customer. We typically are able to charge the
highest price for a product when it is first introduced. Although from time to
time we are able to raise our selling prices during times of supply constraints,
our average selling prices typically decline over a product’s life cycle, which may be offset by
changes in conditions in the semiconductor industry such as constraints in
foundry capacity. The general trend in the semiconductor industry is for the
average selling prices of semiconductors to decline over a product’s life cycle due to competition,
production efficiencies, emergence of substitutes and technological
obsolescence. Our cost reduction efforts also contribute to this decline in
average selling prices. See “—Cost of Revenues and Cost
Reductions.” Our
average selling prices are also affected by the cyclicality of the
TFT-LCD panel industry. There have been industry reports of a
possible oversupply of
TFT-LCD panels starting from the fourth quarter of 2008. Any downward pricing pressure on TFT-LCD
panel manufacturers could
result in similar downward pricing pressure on us. During periods of
declining average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers
may also decrease capacity utilization and sell fewer panels, which could
depress demand for our display drivers. Our average selling prices are also
affected by the packaging type our customers choose as well as the level of product
integration. However, the impact of declining average selling prices on our
profitability can be offset or mitigated to a certain extent by increased
volume, as lower prices may stimulate demand and thereby drive
sales.
Unit
Shipments
Our
performance is also affected by the number of semiconductors we ship, or unit
shipments. As our display drivers are critical components of flat panel
displays, our unit shipments depend on our customers’ panel shipments. Our unit
shipments have grown significantly since our inception primarily as a result of
our increased market share with certain major customers and their increased
shipments of large-sized panels. We have also continued to expand our customer
base. Our growth in unit shipments also reflected the significant growth in the
display driver market, as the demand for display drivers grew significantly in
recent years reflecting the strong demand for TFT-LCD panels.
Product
Mix
The
proportion of our revenues that is generated from the sale of different product
types, also referred to as product mix, also affects our average selling prices,
revenues and profitability. Our products vary depending on, among other things,
the number of output channels, the level of integration and the package type.
Variations in each of these specifications could affect the average selling
prices of such products. For example, the trend for display drivers for use in
large-sized panels is towards products with a higher number of channels, which
typically command higher average selling prices than traditional products with a
lower number of channels. However, panels that use higher-channel display
drivers typically require fewer display drivers per panel. As a result, our
profitability will be affected adversely to the extent that the decrease in the
number of display drivers required for each panel is not offset by increased
total unit shipments and/or higher average selling prices for display drivers
with a higher number of channels. The level of integration of our display
drivers also affects average selling prices, as more highly integrated chips
typically have higher selling prices. Additionally, average selling prices are
affected by changes in the package types used
by our customers. For example, the chip-on-glass package type typically has
lower material costs because no processed tape is required.
Design
Wins
Achieving
design wins is important to our business, and it affects our unit shipments.
Design wins occur when a customer incorporates our products into their product
designs. There are numerous opportunities for design wins, including when panel
manufacturers:
|
·
|
introduce
new models to improve the cost and/or performance of their existing
products or to expand their product
portfolio;
|
|
·
|
establish
new fabs and seek to qualify existing or new components suppliers;
and
|
|
·
|
replace
existing display driver companies due to cost or performance
reasons.
|
Design
wins are not binding commitments by customers to purchase our products. However,
we believe that achieving design wins is an important performance indicator. Our
customers typically devote substantial time and resources to designing their
products as well as qualifying their component suppliers and their products.
Once our products have been designed into a system, the customer may be
reluctant to change its component suppliers due to the significant costs and
time associated with qualifying a new supplier or a replacement component.
Therefore, we strive to work closely with current and prospective customers in
order to anticipate their requirements and product road maps and achieve
additional design wins.
Cost
of Revenues and Cost Reductions
We strive
to control our cost of revenues. Our cost of revenues as a percentage of total
revenues for 2005, 2006 and 2007 were 77.6%, 80.8% and 78.0%, respectively. For
the year ended December 31, 2007, as a percentage of Himax Taiwan’s total
manufacturing costs, the cost of wafer fabrication was 49.9%, the cost of
processed tape was 21.6%, and the cost of assembly and testing was 26.8%. As a
result, our ability to manage our wafer fabrication costs, costs for processed
tape and assembly and testing costs is critical to our performance. In addition,
to mitigate declining average selling prices, we aim to reduce unit costs by,
among other things:
|
·
|
improving
product design (e.g., having smaller die size allows for a larger number
of dies on each wafer, thereby reducing the cost of each
die);
|
|
·
|
improving
manufacturing yields through our close collaboration with our
semiconductor manufacturing service providers;
and
|
|
·
|
achieving
better pricing from semiconductor manufacturing service providers and
suppliers, reflecting our ability to leverage our scale, volume
requirements and close relationships as well as our strategy of sourcing
from multiple service providers and
suppliers.
|
Supply
Chain Management
Due to the
competitive nature of the flat panel display industry and our customers’ need to
maintain high capacity utilization in order to reduce unit costs per panel, any
delays in the delivery of our products could significantly disrupt our
customers’ operations. To deliver our products on a timely basis and meet the
quality standards and technical specifications our customers require, we must
have assurances of high-quality capacity from our semiconductor manufacturing
service providers. We therefore strive to manage our supply chain by maintaining
close relationships with our key semiconductor manufacturing service providers
and strive to provide credible forecasts of capacity demand. Any disruption to
our supply chain could adversely affect our performance and could result in a
loss of customers as well as potentially damage our reputation.
Share-Based
Compensation Expenses
Our
results of operations have been affected by, and we expect our results of
operations to continue to be affected by, our share-based compensation expenses.
Our share-based compensation expenses include charges taken relating to grants
of (i) nonvested shares to employees, (ii) treasury shares to employees and
(iii) shares to non-employees. We have since discontinued our practice of the
above-mentioned share-based compensation.
We adopted
a long-term incentive plan in October 2005 which permits the grant of options or
RSUs to our employees and non-employees where each unit represents one ordinary
share. The actual awards will be determined by our compensation committee. We
recorded share-based compensation expenses under the long-term incentive plan
totaling $2.8 million, $14.5 million and $20.1 million in 2005, 2006 and 2007,
respectively. See “—Critical Accounting Policies and Estimates—Share-Based
Compensation Expenses.” Of the total share-based compensation expenses
recognized, $0, $0 and $14.4 million in 2005, 2006 and 2007, respectively, were
settled in cash. We have applied SFAS No. 123 (revised 2004), Share-Based
Payment, or SFAS No. 123R, to account for our share-based compensation plans.
SFAS No. 123R requires companies to measure and recognize compensation expense
for all share-based payments at fair value.
Set forth
below is a summary of our historical share-based compensation plans as reflected
in our consolidated financial statements.
Nonvested Shares Issued to
Employees. In June 2001, November 2001 and January 2002, Himax Taiwan
granted nonvested shares of common shares to certain employees for their future
service. The shares vest five years after the grant date. Employees leaving
Himax Taiwan before completing the five-year service period would be required to
sell these shares back to Himax Taiwan at NT$1.00 ($0.03) per share. The
forfeiture of such nonvested shares is limited to the original number of shares
granted and does not apply to the shares received for stock splits and
dividends. Since none of these shares has vested, we did not record a capital
increase at the time the shares were issued. Share-based compensation expenses
in relation to these nonvested shares are recognized on a straight-line basis
over the five-year service period with a corresponding increase to stockholders’
equity. As of December 31, 2006, the total compensation cost related to the
actual number of nonvested shares that vested had been fully
recognized.
Treasury Shares Issued to Employees.
In 2002 and 2003, treasury shares were issued to employees with a
three-year vesting period. The forfeiture of treasury shares issued to employees
is based on the original number of shares granted and does not include the
shares received for stock splits and dividends. We recognized the difference
between the fair value of these shares and the amount that an employee paid for
treasury shares as share-based compensation expenses on a straight-line basis
over the three-year service period with a corresponding increase to
stockholders’ equity. As of December 31, 2006, the total compensation cost
related to the actual number of treasury shares that vest has been fully
recognized.
Restricted Share Units (RSUs).
We adopted a long-term incentive plan in October 2005. We committed to
pay a bonus to our employees to settle the accrued bonus payable in respect of
their service provided in 2004 and the ten months ended October 31, 2005, which
was satisfied through a grant of 990,220 RSUs on December 30, 2005. We accrued
share-based compensation expenses of approximately $4.1 million and $3.6 million
in 2004 and the ten months ended October 31, 2005, respectively, in connection
with this commitment. All RSUs granted to employees as a bonus vested
immediately on the grant date. The share-based compensation expenses accrued
represents the portion of compensation to employees for their service in 2004
and the ten months ended October 31, 2005 and has been recorded as a liability
and compensation expense reflected in our results of operations for 2004 and the
ten months ended October 31, 2005, respectively.
We made an
additional grant of 1,297,564 RSUs to our employees on December 30, 2005. The
vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested
immediately on the grant date, and a subsequent 25% vested on each of September
30, 2006 and September 26, 2007, with the remainder vesting on September 30,
2008, subject to certain forfeiture events.
We also
made a grant of 20,000 RSUs to our independent directors on December 30, 2005.
The vesting schedule for this RSU grant is as follows: 25% of the RSU grant
vested immediately on the grant date, and a subsequent 25% vested on each of
June 30, 2006 and 2007, with the remainder vesting on June 30, 2008, subject to
certain forfeiture events. No RSUs were granted to our independent directors in
2006 or 2007.
We made a grant of 3,798,808 RSUs to our
employees on September 29,
2006. The vesting schedule
for this RSU grant is as follows: 47.29% of the RSU grant vested immediately on
the grant date, and a subsequent
17.57% vested on September
26, 2007, with the remainder vesting
equally on each of September 30, 2008 and 2009, subject to certain forfeiture
events.
We made a grant of 6,694,411 RSUs to our employees on September
26, 2007. The vesting schedule for this RSU grant is
as follows: 54.55% of the RSU grant vested
immediately and was settled by cash in the amount
of $14.4
million on the grant date,
with the remainder vesting equally on each of September 30, 2008, 2009 and 2010, which will be settled by our ordinary
shares, subject to certain
forfeiture events.
The amount
of share-based compensation expense with regard to the RSUs granted to our
directors and employees on December 30, 2005 was determined based on an
estimated fair value of $8.62 per ordinary share of the ordinary shares
underlying the RSUs. The fair value of our ordinary shares was determined based
on a third-party valuation conducted by an independent third-party appraiser.
The amount of share-based compensation expense with regard to the RSUs granted
to our employees on September 29, 2006 and September 26, 2007 was $5.71 and
$3.95 per ordinary share, respectively, which was based on the trading price of
our ADSs on that day.
RSUs issued in connection with the
acquisition of Wisepal. We made a grant of 418,440 RSUs to former Wisepal
employees in exchange for the unvested stock options held by such employees in
Wisepal. Wisepal’s unvested stock option where each RSU represents one of our
ordinary shares. The vesting schedule for this RSU grant is as follows: 30% of
the RSUs granted vested immediately, and a subsequent 10% vested on September
30, 2007, with the remaining 33% and 27% of the RSU grant vesting on each of
September 30, 2008 and 2009, respectively. The vested portion of the RSUs
granted was included in the purchase cost of Wisepal while the unvested portion
is treated as post-combination compensation expense, the value of which amounted
to $0.9 million.
Determining
the fair value of our ordinary shares prior to our initial public offering
requires making complex and subjective judgments regarding projected financial
and operating results, our business risks, the liquidity of our shares and our
operating history and prospects. We used the discounted cash flow approach in
conjunction with the market value approach by assigning a different weight to
each of the approaches to estimate the value of the Company when the RSUs were
granted. The discounted cash flow approach involves applying appropriate
discount rates to estimated cash flows that are based on earnings forecasts. The
market value approach incorporates certain assumptions including the market
performance of comparable companies as well as our financial results and growth
trends to derive our total equity value. The assumptions used in deriving the
fair value are consistent with our business plan. These assumptions include: no
material changes in the existing political, legal, fiscal and economic
conditions in Taiwan; our ability to retain competent management, key personnel
and technical staff to support our ongoing operation; and no material deviation
in industry trends and market conditions from economic forecasts. These
assumptions are inherently uncertain. The risks associated with achieving our
forecasts were assessed in selecting the appropriate discount rate. If a
different discount rate were used, the valuation and the amount of share-based
compensation would have been different because the fair value of the underlying
ordinary shares for the RSUs granted would be different.
Signing
Bonuses
To
complement our share-based compensation scheme, Himax Taiwan adopted a signing
bonus system for newly recruited employees in the second half of
2006.
Employees
are entitled to receive signing bonuses upon (i) the expiration of their
probationary period and a satisfactory review by their supervisor, and (ii)
execution of a formal “retention and signing bonus agreement.” If an employee
leaves within 18 months (for any reason at all) of having commenced employment
with Himax Taiwan, 100% of the signing bonus will be returned. If an employee
leaves after 18 months but prior to 36 months after commencing employment with
Himax Taiwan, 50% of the signing bonus will be returned.
We believe
that under such a system, we will be better able to retain our employees. The
system is applicable to all newly recruited employees irrespective of their
function or position and is based on a prescribed formula.
For the years ended December 31, 2006 and 2007,
Himax Taiwan paid $3.4 million and $2.6 million,
respectively, in signing
bonuses which was charged to earnings.
Besides Himax Taiwan, signing bonuses were adopted by four
subsidiaries in 2007 and a total of $0.6 million was paid to certain employees of our subsidiaries.
Description
of Certain Statements of Income Line Items
Revenues
We
generate revenues primarily from sales of our display drivers. We have achieved
significant revenue growth since our inception, primarily due to a significant
increase in unit shipments, partially offset by the general trend of declining
average selling prices of our products. Historically, we have generated revenues
from sales of display drivers for large-sized applications, display drivers for
mobile handsets and display drivers for consumer electronics products. In
addition, our product portfolio includes operational amplifiers, timing
controllers, TFT-LCD, television and monitor chipsets, LCOS products for
near-to-eye applications and mini-projectors, and power management
ICs.
The
following table sets forth, for the periods indicated, our revenues by amount
and our revenues as a percentage of revenues by each product line:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percentage
of
Revenues
|
Amount
|
Percentage of
Revenues
|
Amount
|
Percentage of
Revenues
|
|||||||||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||||||||||
|
Display
drivers for large-sized applications
|
$ | 470,631 | 87.1 | % | $ | 645,513 | 86.7 | % | $ | 752,196 | 81.9 | % | ||||||||||||
|
Display
drivers for mobile handsets applications
|
31,123 | 5.8 | 52,160 | 7.0 | 75,704 | 8.2 | ||||||||||||||||||
|
Display
drivers for consumer electronics applications
|
18,571 | 3.4 | 28,616 | 3.8 | 66,634 | 7.3 | ||||||||||||||||||
|
Others(1)
|
19,879 | 3.7 | 18,229 | 2.5 | 23,677 | 2.6 | ||||||||||||||||||
|
Total
|
$ | 540,204 | 100.0 | % | $ | 744,518 | 100.0 | % | $ | 918,211 | 100.0 | % | ||||||||||||
|
Note:
|
(1)
|
Includes,
among other things, operational amplifiers, timing controllers, TFT-LCD
television and monitor chipsets, and LCOS products for near-to-eye
applications and mini-projectors, and power management
ICs.
|
A limited
number of customers account for substantially all our revenues. We are seeking
to diversify our customer base and to reduce our reliance on any one customer.
We began recognizing revenues from the sale of display drivers to CPT and its
affiliates in 2002 and began volume shipments to CPT and its affiliates in 2003.
Accordingly, the percentage of our revenues generated by sales to CMO and its
affiliates has decreased gradually since 2002, with the exception of 2007, when
sales to CMO and its affiliates increased due to CMO’s capacity expansion, which
was higher than the industry average. The table below sets forth, for the
periods indicated, our revenues generated from our most significant customers
(including their respective affiliates) and such revenues as a percentage of our
total revenues:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percentage
of
Revenues
|
Amount
|
Percentage
of
Revenues
|
Amount
|
Percentage
of
Revenues
|
|||||||||||||||||||
|
CMO
and its affiliates
|
$ | 318,008 | 58.9 | % | $ | 409,697 | 55.0 | % | $ | 539,737 | 58.8 | % | ||||||||||||
|
CPT
and its affiliates
|
87,534 | 16.2 | % | 92,561 | 12.4 | % | 66,694 | 7.3 | % | |||||||||||||||
|
SVA-NEC
|
30,360 | 5.6 | % | 54,272 | 7.3 | % | 76,774 | 8.4 | % | |||||||||||||||
|
Others
|
104,302 | 19.3 | % | 187,988 | 25.3 | % | 235,006 | 25.5 | % | |||||||||||||||
|
Total
|
$ | 540,204 | 100.0 | % | $ | 744,518 | 100.0 | % | $ | 918,211 | 100.0 | % | ||||||||||||
The global
TFT-LCD panel market is highly concentrated, with only a limited number of
TFT-LCD panel manufacturers producing large-sized TFT-LCD panels in high
volumes. We sell large-sized panel display drivers to many of these TFT-LCD
panel manufacturers. Our revenues, therefore, will depend on our ability to
capture an increasingly larger percentage of each panel manufacturer’s display
driver requirements.
We derive
substantially all of our revenues from sales to Asia-based customers whose end
products are sold worldwide. In 2005, 2006 and 2007, approximately 89.4%, 81.4%
and 85.5% of our revenues, respectively, were from customers headquartered in
Taiwan. We believe that substantially all of our revenues will continue to be
from customers located in Asia, where almost all of the TFT-LCD panel
manufacturers and mobile device module manufacturers are located. As a result of
the regional customer concentration, we expect to continue to be particularly
subject to economic and political events and other developments that affect our
customers in Asia. A substantial majority of our sales invoices are denominated
in U.S. dollars.
Costs
and Expenses
Our costs
and expenses consist of cost of revenues, research and development expenses,
general and administrative expenses, sales and marketing expenses and
share-based compensation expenses.
Cost
of Revenues
The
principal items of our cost of revenues are:
|
·
|
cost
of wafer fabrication;
|
|
·
|
cost
of processed tape used in TAB
packaging;
|
|
·
|
cost
of gold bumping, assembly and testing;
and
|
|
·
|
other
costs and expenses.
|
We
outsource the manufacturing of our semiconductors and semiconductor solutions to
semiconductor manufacturing service providers. The costs of wafer fabrication,
gold bumping, assembly and testing depend on the availability of capacity and
demand for such services. The wafer fabrication industry, in particular, is
highly cyclical, resulting in fluctuations in the price of processed wafers
depending on the available foundry capacity and the demand for foundry
services.
Research
and Development Expenses
Research
and development expenses consist primarily of research and development employee
salaries, including signing bonuses and related employee welfare costs, costs
associated with prototype wafers, processed tape, mask and tooling sets,
depreciation on research and development equipment and acquisition-related
charges. We believe that we will need to continue to spend a significant amount
on research and development in order to remain competitive. We expect to
continue increasing our spending on research and development in absolute dollar
amounts in the future as we continue to increase our research and development
headcount and associated costs to pursue additional product development
opportunities.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries of general and
administrative employees, including signing bonuses and related employee welfare
costs, depreciation on buildings, office furniture and equipment, rent and
professional fees. We anticipate that our general and administrative expenses
will increase in absolute dollar amounts as we expand our operations, hire
additional administrative personnel, incur depreciation expenses in connection
with our headquarters at the Tree Valley Industrial Park, and incur additional
compliance costs required of a publicly listed company in the United
States.
Sales
and Marketing Expenses
Our sales
and marketing expenses consist primarily of salaries of sales and marketing
employees, including signing bonuses and related employee welfare costs, travel
expenses and product sample costs. We expect that our sales and marketing
expenses will increase in absolute dollar amounts over the next several years.
However, we believe that as we continue to achieve greater economies of scale
and operating efficiencies, our sales and marketing expenses may decline over
time as a percentage of our revenues.
Share-Based
Compensation Expenses
Our
share-based compensation expenses consist of various forms of share-based
compensation that we have historically issued to our employees and consultants,
as well as share-based compensation issued to employees, directors and service
providers under our 2005 long-term incentive plan. We allocate such share-based
compensation expenses to the applicable cost of revenues and expense categories
as related services are performed. See note 15 to our consolidated
financial statements. Historically our share-based compensation practice
comprised grants of (i) bonus shares to employees, (ii) nonvested shares to
employees, (iii) treasury shares to employees and (iv) shares to non-employees.
We committed to pay a bonus to our employees in respect of their services
provided in 2004 and the ten months ended October 31, 2005, which was satisfied
through a grant of RSUs on December 30, 2005. We accrued
share-based
compensation expenses of approximately $4.1 million and $3.6 million in 2004 and
the ten months ended October 31, 2005, respectively, in connection with this
commitment. We also adopted a long-term incentive plan in October 2005 which
permits the grant of options or RSUs to our employees, directors and service
providers. We granted additional RSUs on December 30, 2005 to our employees and
directors and again on September 29, 2006 and September 26, 2007 to our
employees. Share-based compensation expenses recorded under the long-term
incentive plan totaled $2.8 million, $14.5 million and $20.1 million in 2005,
2006 and 2007, respectively. See “—Critical Accounting Policies and
Estimates—Share-Based Compensation” for further discussion of the accounting of
such expenses.
Income
Taxes
Since we
and our direct and indirect subsidiaries are incorporated in different
jurisdictions, we file separate income tax returns. Under the current laws of
the Cayman Islands, we are not subject to income or capital gains tax.
Additionally, dividend payments made by us are not subject to withholding tax in
the Cayman Islands. We recognize income taxes at the applicable statutory rates
in accordance with the jurisdictions where our subsidiaries are located and as
adjusted for certain items including accumulated losses carried forward,
non-deductible expenses, research and development tax credits, certain tax
holidays, as well as changes in our deferred tax assets and
liabilities.
ROC tax
regulations require our ROC subsidiaries to pay an additional 10% tax on
unappropriated earnings. ROC law offers preferential tax treatments to
industries that are encouraged by the ROC government. The ROC Statute for
Upgrading Industries entitles companies to tax credits for expenses relating to
qualifying research and development and personnel training expenses and
purchases of qualifying machinery. This tax credit may be applied within a
five-year period. The amount from the tax credit that may be applied in any year
(with the exception of the final year when the remainder of the tax credit may
be applied without limitation to the total amount of the income tax payable) is
limited to 50% of the income tax payable for that year. Under the ROC Statute
for Upgrading Industries, Himax Taiwan, Wisepal, Himax Display, Himax Analogic,
Himax Media Solutions and Himax Imaging were
granted tax credits by the ROC Ministry of Finance at rates set at a certain
percentage of the amount utilized in qualifying research and development and
personnel training expenses. The balance of unused investment tax credits
totaled $9.4 million, $19.4 million and $32.7 million as of December 31, 2005,
2006 and 2007, respectively. In addition, the ROC Statute for Upgrading
Industries provides to companies deemed to be operating in important or
strategic industries a five-year tax exemption for income attributable to
expanded production capacity or newly developed technologies. Such expanded
production capacity or newly developed technologies must be funded in whole or
in part from either the initial capital investment made by a company’s
shareholders, a subsequent capital increase or a capitalization of a company’s
retained earnings. As a result of this statute, income attributable to certain
of Himax Taiwan’s expanded production capacity or newly developed technologies
is tax exempt for a period of five years, effective on April 1, 2004, January 1,
2006 and January 1, 2008 and expiring on March 31, 2009, December 31, 2010 and
December 31, 2012, respectively. If
we did not have this tax exemption, net income and basic and diluted earnings
per ordinary share would have been $85.6 million, $0.43 and $0.43 for the year
ended December 31, 2007, respectively.
Critical
Accounting Policies and Estimates
We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial
statements.
Share-Based
Compensation
Share-based compensation primarily
consists of grants of nonvested or restricted shares of common stock, stock options and RSUs issued to employees. We have
applied SFAS No. 123R for our share-based compensation plans for all periods
since the incorporation of Himax Taiwan in 2001. The cost of employee services
received in exchange for share-based compensation is measured
based on the grant-date fair value of the share-based instruments issued. The
cost of employee services is equal to the grant-date fair value of shares issued
to employees and is recognized in earnings over the service period. Share-based compensation expense
estimates also take into account the number of shares awarded that management
believes will eventually vest. We adjust our estimate each period to reflect the
current estimate of forfeitures. As of December 31, 2007, we based our share-based compensation
cost on an assumed forfeiture rate of 11% per annum for awards granted under our long-term incentive plan. If actual forfeitures occur at a lower
rate, share-based compensation costs will increase in future
periods.
When
estimating the fair value of our ordinary shares prior to our initial public
offering, we reviewed both internal and external sources of information. The
sources we used to determine the fair value of the underlying shares at the date
of measurement have been subjective in nature and based on, among other
factors:
|
·
|
our
financial condition as of the date of
grant;
|
|
·
|
our
financial and operating prospects at that
time;
|
|
·
|
for
certain issuances in 2001 and early 2002, the price of new shares issued
to unrelated third parties;
|
|
·
|
for
certain issuances in 2002, 2003 and 2004, an independent third-party
retrospective analysis of the historical value of our common shares, which
utilized both a net asset-based methodology and market and peer group
comparables (including average price/earnings, enterprise value/sales,
enterprise value/earnings before interest and tax, and enterprise
value/earnings before interest, tax, depreciation and amortization);
and
|
|
·
|
for
our issuance of RSUs in 2005, an independent third-party analysis of the
current and future value of our ordinary shares, which utilized both
discounted cash flow and market value approaches, using multiples such as
price/earnings, forward price/earnings, enterprise value/earnings before
interest and tax, and forward enterprise value/earnings before interest
and tax.
|
Changes in
any of these factors or assumptions could have resulted in different estimates
of the fair value of our common shares and the related amounts of share-based
compensation.
Based on these factors, we estimated the fair value per share of
nonvested shares issued to certain employees in June 2001, November 2001, and
January 2002 at NT$4.02 ($0.116) per share and the fair value of 596,897 shares
(adjusted for stock splits) granted to two consultants in 2002 at $68,000. Similarly, we estimated
the fair value per share of employee bonus shares on the date of shareholder
approval to be NT$39.44 ($1.15) per share and NT$67.13 ($1.96) per share in 2003
and 2004, respectively. These employee bonus shares were issued in relation to employee services
provided in 2001, 2002 and 2003, respectively. We estimated the fair value of
treasury shares issued to employees at prices ranging from NT$15.32 ($0.46) per
share to NT$19.93 ($0.58) per share in 2002 and NT$20.17 ($0.58) per share to NT$52.10 ($1.54) per
share in 2003. We estimated the fair value of the ordinary shares underlying the
RSUs granted to our directors and employees at $8.62 per share in 2005. For our
issuance of RSUs in 2006 and 2007, the fair value of the ordinary shares underlying the RSUs
granted to our employees, was $5.71 and $3.95 per share, respectively, which was the
closing price of our ADSs on September 29, 2006 and September 26, 2007,
respectively.
Allowance
for Doubtful Accounts, Sales Returns and Discounts
We record
a reduction to revenues and accounts receivable by establishing a sales discount
and return allowance for estimated sales discounts and product returns at the
time revenues are recognized based primarily on historical discount and return
rates. However, if sales discount and product returns for a particular fiscal
period exceed historical rates, we may determine that additional sales discount
and return allowances are required to properly reflect our estimated remaining
exposure for sales discounts and product returns. We evaluate our outstanding
accounts receivable on a monthly basis for collectibility purposes. In
establishing the required allowance, we consider our historical collection
experience, current receivable aging and the current trend in the credit quality
of our customers. The movement in the allowance for doubtful accounts, sales
returns and discounts for the years ended December 31, 2005, 2006 and 2007 is as
follows:
|
Year
|
Balance
at
Beginning
of
Year
|
Additions
charged
to expense
|
Amounts
Utilized
|
Balance
at
End
of Year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2005
|
$ | 240 | $ | 398 | $ | (457 | ) | $ | 181 | |||||||
|
December
31, 2006
|
$ | 181 | $ | 2,843 | $ | (2,156 | ) | $ | 868 | |||||||
|
December
31, 2007
|
$ | 868 | $ | 1,705 | $ | (2,080 | ) | $ | 493 | |||||||
Inventory
Inventories are stated at the
lower of cost or market
value. Cost is determined using the weighted-average method. For work-in-process
and manufactured inventories, cost consists of the cost of raw materials
(primarily fabricated wafers and processed tape), direct labor and an
appropriate proportion of production overheads.
We also write down excess and obsolete inventory to its estimated market value
based upon estimations about future demand and market conditions. If actual
market conditions are less favorable than those projected by management, additional future
inventory write-downs may be required which could adversely affect our operating
results. Once written down, inventories are carried at this lower amount until
sold or scrapped. If actual market conditions are more favorable, we may have higher operating income when
such products are sold. Sales to date of such products have not had a
significant impact on our operating income. The inventory write-downs for the years ended December 31, 2005,
2006 and 2007 was
approximately $927,000, $5.2 million and $14.8 million, respectively, and are included
in cost of revenues in our consolidated statements of income.
The inventory write-down
was particularly high in 2007 primarily due to excess inventory issues related to
shorter-than-expected
product life cycle for certain products and the revision of
certain customer forecasts, which also partially contributed to decreased
demand as customers shifted to more advanced products.
Impairment
of Long-Lived Assets
We routinely review our
long-lived
assets that are held and used for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. The estimate of cash flows is based upon, among other
things, certain assumptions about expected future operating performance, average
selling prices, utilization rates and other factors. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, an impairment charge is
recognized for the amount that the carrying value of the asset exceeds its fair
value, based on the best information available, including discounted cash flow analysis. However, due
to the cyclical nature of our industry and changes in our business strategy,
market requirements, or the needs of our customers, we may not always be in a
position to accurately anticipate declines in the utility of our equipment or acquired technology
until they occur. We have not had any impairment charges on long-lived
assets during the period from December 31,
2003 to December 31,
2007.
|
|
Business
Combinations
|
When we
acquire businesses, we allocate the purchase price to tangible assets and
liabilities and identifiable intangible assets acquired. Any residual purchase
price is recorded as goodwill. The allocation of the purchase price requires
management to make significant estimates in determining the fair values of
assets acquired and liabilities assumed, especially with respect to intangible
assets. These estimates are based on historical experience and information
obtained from the management of the acquired companies. These estimates can
include, but are not limited to, the cash flows that an asset is expected to
generate in the future, the appropriate weighted-average cost of capital, and
the synergistic benefits expected to be derived from the acquired business.
These estimates are inherently uncertain and unpredictable. In addition,
unanticipated events and circumstances may occur which may affect the accuracy
or validity of such estimates.
Goodwill
We
review goodwill for impairment at least annually, and test for impairment
between annual tests if an event occurs or circumstances change that would
indicate that the carrying amount may be impaired. Impairment testing for
goodwill is done at a reporting unit level. The goodwill impairment test is a
two-step test. Under the first step, the fair value of the reporting unit is
compared with its carrying value (including goodwill). If the fair value of the
reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and we perform step two of the
impairment test (measurement). Under step two, an impairment loss is recognized
for any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combination. The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. We consider the enterprise as a whole to be the
reporting unit for purposes of evaluating goodwill impairment. Consequently, we
determine the fair value of the reporting unit using the quoted market price of
our ordinary shares. Based on the annual impairment testing of goodwill, we
concluded that there was no impairment in 2007.
Product
Warranty
Under our
standard terms and conditions of sale, products sold are subject to a limited
product quality warranty. We may receive warranty claims outside the scope of
the standard terms and conditions. We provide for the estimated cost of product
warranties at the time revenue is recognized based primarily on historical
experience and any specifically identified quality issues. The movement in
accrued warranty costs for the years ended December 31, 2005, 2006 and 2007 is
as follows:
|
Year
|
Balance
at
Beginning
of
Year
|
Additions
charged
to
expense
|
Amount
Utilized
|
Balance
at
End
of Year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2005
|
$ | 507 | $ | 1,415 | $ | (1,377 | ) | $ | 545 | |||||||
|
December
31, 2006
|
$ | 545 | $ | 2,101 | $ | (2,016 | ) | $ | 630 | |||||||
|
December
31, 2007
|
$ | 630 | $ | 799 | $ | (1,094 | ) | $ | 335 | |||||||
Income
Taxes
As part of
the process of preparing our consolidated financial statements, our management
is required to estimate income taxes and tax bases of assets and liabilities for
us and our subsidiaries. This process involves estimating current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes and the amount of tax credits and tax
loss carryforwards. These differences result in deferred tax assets and
liabilities, which are included in the consolidated balance sheets. Management
must then assess the likelihood that the deferred tax assets will be recovered
from future taxable income, and, to the extent it believes that recovery is not
more likely than not, a valuation allowance is provided.
In
assessing the ability to realize deferred tax assets, our management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets and
therefore the determination of the valuation allowance is dependent upon the
generation of future taxable income by the taxable entity during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of different liabilities, projected future taxable income,
and tax planning strategies in determining the valuation allowance.
Upon
initial adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, or FIN 48, on January 1, 2007, we recognize the effect of income
tax positions only if those positions are more likely than not to be sustained.
We have to recognize income tax expenses when the possibility of tax adjustments
made by the tax authority are greater than 50% in the future period. Changes in
income tax recognition or measurement of previous periods are reflected in the
period in which the change in judgment occurs.
Prior to
the adoption of FIN 48, we recognized the effect of income tax positions only if
such positions were probable of being sustained. We recognize interest and
penalties, if any, related to unrecognized tax benefits in income tax expense.
We have accrued tax liabilities or reduced deferred tax assets to address
potential exposures involving positions that are not considered to be more
likely than not of being sustained based on the technical merits of the tax
position as filed. A reconciliation of the beginning and ending amounts of
uncertain tax positions is as follows (in thousands):
|
Balance
on January 1,
2007
|
$ | 1,276 | ||
|
Increase
related to prior year tax positions
|
503 | |||
|
Increase
related to current year tax positions
|
2,189 | |||
|
Balance
on December 31,
2007
|
3,968 |
Except for
Himax Taiwan and Himax Technologies Anyang Limited (based in South Korea), or
Himax Anyang, all other subsidiaries have generated tax losses since inception
and are not included in the consolidated tax filing with Himax Taiwan. Valuation
allowance of $3.3 million, $6.3 million and $12.3 million as of December 31,
2005, 2006 and 2007, respectively, was provided to reduce their deferred tax
assets (consisting primarily of operating loss carryforwards and unused
investment tax credits) to zero because management believes it is unlikely that
these tax benefits will be realized. The additional provision of valuation
allowance recognized for the years ended December 31, 2005, 2006 and 2007 was
$2.4 million, $3.0 million and $6.0 million, respectively, as a result of
increases in deferred tax assets originating in these years which we did not
expect to realize.
Results
of Operations
Our
business has evolved rapidly and significantly since we commenced operations in
2001. Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period
comparisons
of operating results should not be relied upon as indicative of future
performance. On February 1, 2007, we acquired 100% of the outstanding ordinary
shares of Wisepal. The results of Wisepal’s operations has been included in our
consolidated financial statements since that date. The following table sets
forth a summary of our consolidated statements of income as a percentage of
revenues:
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100 | % | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of revenues
|
77.6 | 80.8 | 78.0 | |||||||||
|
Research
and development
|
7.6 | 8.1 | 8.0 | |||||||||
|
General
and administrative
|
1.3 | 1.3 | 1.6 | |||||||||
|
Sales
and marketing
|
0.9 | 0.9 | 1.0 | |||||||||
|
Total
costs and expenses
|
87.4 | 91.1 | 88.6 | |||||||||
|
Operating
income
|
12.6 | 8.9 | 11.4 | |||||||||
|
Other
non operating income
|
0.5 | 0.5 | 0.7 | |||||||||
|
Income
tax expenses (benefit)
|
1.7 | (0.7 | ) | (0.2 | ) | |||||||
|
Net
income
|
11.4 | 10.1 | 12.3 | |||||||||
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues. Our revenues
increased 23.3% to $918.2 million in 2007 from $744.5 million in 2006. This
increase was primarily due to a 21.9% increase in unit shipments of display
drivers for large-sized applications, partially offset by a 3.9% decrease in
average selling prices of such products. This increase was also attributable to
an increase of unit shipments for display drivers for mobile handsets, but was
partially offset by a 33.6% decrease in the average selling prices of such
products. The increase in unit shipments was primarily due to increased demand
from our customers, especially CMO and its affiliates, because they expanded
their production capacity, as well as an increase in the demand of large panel
televisions in 2007. In general, the average selling prices of our display
drivers decline from year to year due to a combination of the pricing pressure
we face from our customers, the general industry trend of declining average
selling prices of semiconductors over a product’s life cycle, and the
introduction of newer, lower-cost display drivers. The relatively small decrease
in the average selling prices for display drivers for large-sized applications
was primarily due to product migration to higher channel display drivers, which
generally have higher average selling prices, and less downward pricing pressure
from TFT-LCD makers in 2007.
Costs and Expenses. Costs and
expenses increased 19.9% to $814.3 million in 2007 from $679.0 million in 2006.
As a percentage of revenues, costs and expenses decreased to 88.6% in 2007
compared to 91.1% in 2006.
Cost of Revenues. Cost of
revenues increased 19.0% to $716.2 million in 2007 from $601.6 million in 2006.
The increase in cost of revenues was primarily due to an increase in unit
shipments. The inventory write-down was particularly high in 2007 primarily due
to excess inventory issues related to shorter-than-expected product life cycle
for certain products and the revision of certain customer forecasts, which also
partially contributed to decreased demand as customers shifted to more advanced
products. The inventory write-downs for the years ended December 31, 2006 and
2007 was approximately $5.2 million and $14.8 million, respectively. As a
percentage of revenues, cost of revenues decreased to 78.0% in 2007 from 80.8%
in 2006. The decrease in cost of revenues as a percentage of revenues was
primarily due to (1) a change in product mix, as the percentage of revenues from
sale of small and medium-sized display drivers (which typically have higher
gross margins) increased, and (2) through cost reduction efforts achieved by
improving designs and processes, increasing manufacturing yields and leveraging
our scale, volume requirements and close relationships with semiconductor
manufacturing service providers and suppliers.
|
|
·
|
Research and Development.
Research and development expenses increased 21.8% to $73.9 million
in 2007 from $60.7 million in the 2006, primarily due to the increase in
share-based compensation expenses, salary expenses, and amortization. The
increase in salary expenses was due to a 11.7% increase in headcount and
higher average salaries. The increase in share-based compensation expenses
resulted from our increase in headcount and our grant of RSUs to certain
employees in 2007. The increase is also a result of the increase in the
amortization of intangible assets related to the Wisepal acquisition, and
prepaid maintenance costs. The increase was partially offset by a decrease
in prototype wafer and processed tape
costs.
|
|
|
·
|
General and Administrative.
General and administrative expenses increased 52.7% to $14.9
million in 2007 from $9.8 million in 2006, primarily due to an increase in
depreciation, share-based compensation expenses, salary expenses and
professional fees. The increase in depreciation was mainly the result of
increased building and office equipment depreciation at our Tainan
headquarters; our new headquarters was completed in November 2006, and a
year’s worth of depreciation was provided in 2007, while in 2006
depreciation was provided for two months only. The increase in share-based
compensation expenses resulted from our increase in headcount and our
grant of RSUs to certain employees in 2007. The increase in salary
expenses was due to a 30.0% increase in headcount and higher average
salaries. The increase in general and administration expenses is also
partially attributable to the increase in patent filing
fees.
|
|
|
·
|
Sales and Marketing.
Sales and marketing expenses increased 33.9% to $9.3 million from
$7.0 million in 2006, primarily due to an increase in salary, share-based
compensation and amortization expenses. The increase in salary expenses
was due to a 33.3% increase in headcount. The increase in share-based
compensation expenses resulted from our increase in headcount and our
grant of RSUs to certain employees in 2007. The increase in sales and
marketing expenses was also attributable to the amortization of intangible
assets (customer relationships) related to from the Wisepal
acquisition.
|
Non-Operating Income (Loss).
We had non-operating income of $5.7 million in 2007 compared to $3.9
million in 2006. The primary component of our non-operating income is interest
income amounting to $5.4 million and $5.9 million in 2007 and 2006,
respectively. The increase in non-operating income in 2007 is primarily a result
of a $1.5 million impairment loss we recognized in 2006 for the write-off of our
equity investment in LightMaster Systems Inc., which filed for bankruptcy in
2006. We did not have any impairment loss in 2007.
Income Tax Expense (Benefit).
We recognized an income tax benefit of $1.9 million in 2007 compared to
an income tax benefit of $5.4 million in 2006. Our effective income tax rate
decreased from (7.8)% in 2006 to (1.7)% in 2007. The decrease in income tax
benefit is due to the additional accrual of tax expenses amounting to $3.9
million as a result of the most recent assessment from the tax authority. The
decrease is also partially due to the fact that the valuation allowance provided
for the deferred tax assets recognized in 2007 is $2.6 million higher than that
provided in 2006. For subsidiaries still in a tax loss position, a valuation
allowance was provided to reduce their deferred tax assets to zero as we do not
expect these tax benefits will be realized. The decrease in income tax benefit
was partially offset by an increase in tax-exempted income, and an increase in
investment tax credits compared to 2006.
Net Income. As a result of
the foregoing, our net income increased to $112.6 million in 2007 from $75.2
million in 2006.
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues. Our revenues
increased 37.8% to $744.5 million in 2006 from $540.2 million in 2005. This
increase was primarily due to a 59.4% increase in unit shipments of display
drivers for large-sized applications, partially offset by a 14.3% decrease in
average selling prices of such products. This increase was also attributable to
an increase of unit shipments for display drivers for mobile handsets, which
more than doubled, but was partially offset by a 24.0% decrease in average
selling prices of such products. The increase in unit shipments was primarily
due to the increased number of panels shipped by our customers as well as our
increased market share with certain major customers. The decrease in the
average selling prices of our display drivers was primarily due to a combination
of the pricing pressure we faced from our customers, the general industry trend
of declining average selling prices of semiconductors over a product’s life
cycle, the introduction of newer, lower-cost display drivers, as well as our
ability reduce per unit cost of revenues in order to meet such
pressure.
Costs and Expenses. Costs and
expenses increased 43.8% to $679.0 million in 2006 from $472.2 million in 2005.
As a percentage of revenues, costs and expenses increased to 91.1% in 2006
compared to 87.4% in 2005.
|
|
·
|
Cost of Revenues. Cost
of revenues increased 43.4% to $601.6 million in 2006 from $419.4 million
in 2005. The increase in cost of revenues was primarily due to an increase
in unit shipments. As a percentage of revenues, cost of revenues increased
to 80.8% in 2006 compared to 77.6% in 2005, primarily as a result of a
decrease in the average selling prices of our display drivers. We were
able to partially offset such declines by decreasing per unit costs
associated with the manufacturing, assembly, testing and delivery of our
products. This is a result of our cost reduction efforts achieved by
improving designs and processes, increasing manufacturing yields and
leveraging our scale of production, volume requirements and close
relationships
|
| with semiconductor manufacturing service providers and suppliers, as well as our strategy of sourcing from multiple service providers and suppliers in order to obtain better pricing. | ||
|
|
·
|
Research and Development.
Research and development expenses increased 46.9% to $60.7 million
in 2006 from $41.3 million in 2005, primarily due to the increase in
share-based compensation expenses and salary expenses. The increase in
salary expenses was due to a 27.6% increase in headcount and higher
average salaries. The increase was also partially a result of increased
mask costs and prototype wafer and processed tape costs associated with an
increased number of new products introduced. The increase in share-based
compensation expenses resulted from our increase in headcount and our
grant of RSUs to certain employees in
2006.
|
|
|
·
|
General and Administrative.
General and administrative expenses increased 43.9% to $9.8 million
in 2006 from $6.8 million in 2005, primarily due to an increase in
share-based compensation expenses and salary expenses. The increase in
share-based compensation expenses resulted from our grant of RSUs to
certain employees in 2006. The increase in salary expenses was due to
higher average salaries. This increase was also partially the result of
increased depreciation expense and fees relating to patent
filings.
|
|
|
·
|
Sales and Marketing.
Sales and marketing expenses increased 46.4% to $7.0 million in
2006 from $4.8 million in 2005, primarily due to an increase in salary
expenses and share-based compensation expenses. The increase in salary
expenses was due to a 44.6% increase in headcount. The increase in
share-based compensation expenses also resulted from our increase in
headcount and our grant of RSUs to certain employees in 2006. The increase
in sales and marketing expenses was also partially attributable to
increased travel expenses resulting from increased sales
activity.
|
Non-Operating Income (Loss).
We had non-operating income of $3.9 million in 2006 compared to $2.3
million in 2005, primarily as a result of a significant increase in interest
income due to higher cash balance on hand from the proceeds of our initial
public offering. This was partially offset by an impairment loss of $1.5 million
recognized from our write-off of our equity investment in LightMaster Systems
Inc., which filed for bankruptcy in 2006.
Income Tax Expense (Benefit).
We recognized an income tax benefit of $5.4 million in 2006 compared to
an income tax expense of $8.9 million in 2005. Our effective income tax rate
decreased from 12.7% in 2005 to (7.8)% in 2006, primarily due to an increase in
tax-exempted income, non-deductible share-based compensation expenses, a tax
benefit from the distribution of the prior year’s income and an increase in
investment tax credits compared to 2005, partially offset by the effect of an
enacted change in Taiwan’s tax laws in 2006 and the increase of valuation
allowance provided to reduce certain subsidiaries’ deferred tax assets to
zero.
Net Income. As a result of
the foregoing, our net income increased to $75.2 million in 2006 from a net
income of $61.6 million in 2005.
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
cash provided by operating activities
|
$ | 12,464 | $ | 29,696 | $ | 77,162 | ||||||
|
Net
cash used in investing activities
|
(25,363 | ) | (8,927 | ) | (25,019 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
14,404 | 81,886 | (67,241 | ) | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,509 | 102,667 | (14,973 | ) | ||||||||
|
Cash
and cash equivalents at beginning of period
|
5,577 | 7,086 | 109,753 | |||||||||
|
Cash
and cash equivalents at end of period
|
7,086 | 109,753 | 94,780 | |||||||||
Prior to
being a public company, we financed our operations primarily through the
issuance of shares in Himax Taiwan. As of December 31, 2007, we had $94.8
million in cash and cash equivalents.
Operating Activities. Net
cash provided by operating activities for the year ended December 31, 2007 was
$77.2 million compared to net cash provided by operating activities of $29.7
million for the year ended December 31, 2006. This increase was primarily due to
the increase in cash collected from customers, resulting from higher
revenues and
comparable
overall days sales outstanding in 2007 as in 2006. The increase in
operating cash inflows was partially offset by the increase in cash used to
purchase raw materials (primarily fabricated wafer and processed tape) and to
pay assembly and testing process fees, which resulted from the increase in
production. The increase in operating cash inflow was also partially
offset by RSUs granted that vested immediately on the grant date in September
2007 and settled in cash, which amounted to $14.4 million, and by the
net increase in operating expenditures such as salaries and rent. Net cash
provided by operating activities for the year ended December 31, 2006 was $29.7
million compared to net cash provided by operating activities of $12.5 million
for the year ended December 31, 2005. Net cash
provided by operating activities increased in 2006 primarily due to the increase
in cash collected from customers, resulting from higher revenues despite the
extension of payment terms to certain of our customers in 2006. The increase in
operating cash inflows was partially offset by the increase in cash used to
purchase raw materials (primarily fabricated wafer and processed tape) and to
pay assembly and testing process fees, which resulted from the increase in
production. The increase in operating cash inflows was also partially
offset by the increase in payment of income tax by $4.5 million and other
operating expenditures in 2006.
Investing Activities. Net
cash used in investing activities for the year ended December 31, 2007 was $25.0
million compared to net cash used in investing activities of $8.9 million for
the year ended December 31, 2006. This change was primarily due to the
release of restricted cash equivalents and marketable securities of $13.9
million in 2006, with no corresponding release in 2007 and
an increase in for available-for-sale marketable securities. Net cash
used in investing activities for the year ended December 31, 2006 was $8.9
million compared to net cash used in investing activities of $25.4 million for
the year ended December 31, 2005. This change was primarily due to a decrease in
net proceeds generated from the purchase and sale of available-for-sale
marketable securities of $8.8 million, when compared to the year ended December
31, 2005 and an increase in the purchase of property and equipment as a result
of the payment of construction costs in connection with our new headquarters in
the Tree Valley Industrial Park. This decrease was offset by the
release of restricted cash equivalents and marketable securities of $27.7
million.
Financing
Activities. Net cash used in financing activities for the year
ended December 31, 2007 was $67.2 million compared to net cash provided by
financing activities of $81.9 million for the year ended December 31, 2006,
primarily due to the distribution of cash dividends in 2007 and proceeds
received in our initial public offering in 2006, partially offset by an increase
in proceeds from the issuance of new shares by subsidiaries and an increase in
net repayment of short-term debt. Net cash provided by financing activities in
the year ended December 31, 2006 was $81.9 million compared to net cash provided
by financing activities of $14.4 million in the year ended December 31, 2005,
primarily due to proceeds received in our initial public offering which was
offset by the repayment of short-term debt and our repurchase of ordinary
shares.
Our
liquidity could be negatively impacted by a decrease in demand for our products.
Our products are subject to rapid technological change, among other factors,
which could result in revenue variability in future periods. Further, we expect
to continue increasing our headcount, especially in engineering and sales, to
pursue growth opportunities and keep pace with changes in technology. Should
demand for our products slow down or fail to grow as expected, our increased
headcount would result in sustained losses and reductions in our cash balance.
We have at times agreed to extend the payment terms for certain of our
customers. Other customers have also requested extension of payment terms and we
may grant such requests for extensions in the future. The extension of payment
terms for our customers could adversely affect our cash flow, liquidity and our
operating results.
We believe
that our current cash and cash equivalents and cash flow from operations will be
sufficient to meet our anticipated cash needs, including our cash needs for
working capital and capital expenditures for the foreseeable future. We may,
however, require additional cash resources due to higher than expected growth in
our business or other changing business conditions or other future developments,
including any investments or acquisitions we may decide to pursue.
Our
research and development efforts focus on improving and enhancing our core
technologies and know-how relating to semiconductor solutions for flat panel
displays and advanced televisions with particular emphasis on our three major
product lines. Although a significant portion of the resources at our integrated
circuit design center are invested in advanced research for future products, we
continue to invest in improving the performance and reducing the costs of our
existing products. Our application engineers, who provide on-system verification
of semiconductors and product specifications, and field application engineers,
who provide on-site engineering support at our customers’ offices, work closely
with panel manufacturers to co-develop display solutions for their electronic
devices. In 2005, 2006 and 2007, we incurred research and development expenses
of $41.3 million, $60.7 million and $73.9 million, respectively, representing
7.6%, 8.1% and 8.0% of our revenues, respectively.
We expect
demand for TFT-LCD panels will continue to grow in the long run as there are
increasing applications adopting TFT-LCD panels of different sizes. However, the
flat panel display industry is highly cyclical and subject to price fluctuations
and seasonality. There have been industry reports of a possible oversupply
of TFT-LCD panels starting from the fourth quarter of 2008, which could result
in downward pricing pressure on TFT-LCD panel manufacturers and component makers
similar to the situation in 2006. During periods of declining average selling
prices for TFT-LCD panels, TFT-LCD panel manufacturers may also decrease
capacity utilization and sell fewer panels, which could depress demand for our
display drivers.
For more
trend information, see “Item 5.A. Operating and Financial Review and
Prospects—Operating Results.”
As of
December 31, 2007, we did not have any off-balance sheet guarantees, interest
rate swap transactions or foreign currency forwards. We do not engage in trading
activities involving non-exchange traded contracts. Furthermore, as of December
31, 2007, we did not have any interests in variable interest
entities.
The
following table sets forth our contractual obligations as of December 31,
2007:
|
Payment
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Operating
lease obligations
|
1,069 | 827 | 242 | — | — | |||||||||||||||
|
Purchase
obligations(1)
|
63,655 | 63,655 | — | — | — | |||||||||||||||
|
Other
obligations(2)
|
2,367 | 1,442 | 925 | — | — | |||||||||||||||
|
Total
|
67,091 | 65,924 | 1,167 | — | — | |||||||||||||||
|
Notes:
|
(1)
|
Includes
obligations for wafer fabrication, raw materials and
supplies.
|
|
(2)
|
Includes
obligations under license agreements and donations for laboratories
commitments.
|
As of
December 31, 2006 and 2007, we had entered into several contracts for the
acquisition of equipment and computer software and the construction of our new
headquarters. Total contract prices amounted to $7.8 million and $0.9 million,
respectively. As of December 31, 2006 and 2007, the remaining commitments were
$2.8 million and $100,000, respectively.
In August 2004, we entered
into a license agreement for the use of certain central processing unit cores
for product development. In accordance with the agreement, we are required to
pay a license fee based on the progress of the project development and a royalty
based on shipments. The initial license fee of $100,000 was charged to research
and development expense in 2004; no fees or royalties were paid in 2005. We also
paid a license fee of $200,000 in 2006;
however, no
fees or royalties were paid in 2007.
In March
2005, we entered into a license agreement for the use of USB 2.0 relevant
technology for product development. In accordance with the agreement, we were
required to pay an initial license fee based on the progress of the project
development and a royalty based on shipments. No license fee was paid in 2005.
The license fee charged to research and development expense in 2006 and 2007 was
$10,000 and $250,000, respectively. In 2007, no royalty was paid.
In June
2007, we entered into a license agreement for the use of Analogix HDMI 1.3
receiver core relevant technology for product development. In accordance with
the agreement, we were required to pay an initial license fee based on the
progress of the project development and a royalty based on shipments. The
license fee paid and charged to research and development expense in 2007 was
$0.5 million. In 2007, no royalty was paid.
We
completed construction of our new headquarters located in the Tree Valley
Industrial Park in 2006. The facility occupies 22,172 square meters and houses
our research and development, engineering, sales and marketing, operations and
general administrative staff. The land (31,800 square meters) is owned by us.
The total costs were approximately $25.8 million, of which approximately $10.2
million was for the land and approximately $15.6 million was for the
construction of the building and related facilities (which included architect
fees, general contractor fees, building materials, the purchase and installation
of network, clean room, and office equipment and other fixtures). We have
already paid for the land and approximately $0.8 million, $9.7 million and
$5.1 million of the construction costs were paid in 2005, 2006 and 2007,
respectively, and we have no further obligations regarding our new
headquarters.
We also
lease office and building space pursuant to operating lease arrangements with
unrelated third parties. The lease arrangement will expire gradually from 2008
to 2010. As of December 31, 2006 and 2007, deposits paid
amounted
to $477,000 and $371,000, respectively, and were recorded as refundable deposit
in the accompanying consolidated balance sheets. As of December 31, 2007, future
minimum lease payments under non-cancelable operating leases totaled $827,000 in
2008, $226,000 in 2009 and $16,000 in 2010. Rental expenses for operating leases
amounted to $1.3 million, $1.8 million and $1.9 million in 2005, 2006 and 2007,
respectively.
Our
current corporate structure was established as a result of a share exchange
between us and the former shareholders of Himax Taiwan. The ROC Investment
Commission approved the share exchange, subject to our satisfying several
undertakings we gave in connection with our application seeking approval of the
share exchange: Himax Taiwan submitted to the ROC Investment Commission its
annual financial statements audited by a certified public accountant and other
relevant supporting documents in connection with the implementation of the
above-mentioned undertakings within four months after the end of each of 2005,
2006 and 2007. As of the date of this report we have satisfied our ROC
undertakings.
Under the
ROC Labor Standard Law, we established a defined benefit plan and were required
to make monthly contributions to a pension fund in an amount equal to 2% of
wages and salaries of our employees. Under the newly effective ROC Labor Pension
Act, beginning on July 1, 2005, we are required to make a monthly contribution
for employees that elect to participate in the new defined contribution plan of
no less than 6% of the employee’s monthly wages, to the employee’s individual
pension fund account. Substantially all participants in the defined benefit plan
have elected to participate in the newly defined contribution plan.
Participants’ accumulated benefits under the defined benefit plan are not
impacted by their election to change plans. We are required to make
contributions to the defined benefit plan until it is fully funded. As a result,
our monthly contribution to the pension fund increased to $68,211 in July 2005
compared to $15,646 in June 2005, and we expect to contribute at this increased
rate in the future. Total contributions to the new defined contribution plan in
2007 were $967,000 compared to $855,000 and $217,000 in 2006 and 2005,
respectively. Total contributions to the defined benefit plan and the new
defined contribution plan in 2007 were $1.3 million compared to $1.1 million
and $412,000 in 2006 and 2005, respectively. This increase has not,
and is not expected to have, a material effect on our cash flows or results of
operations.
Inflation
Inflation
in Taiwan has not had a material impact on our results of operations in recent
years. However, an increase in inflation can lead to increases in our costs and
lower our profit margins. According to the Directorate General of Budget,
Accounting and Statistics, Executive Yuan, ROC, the change of consumer price
index in Taiwan was 2.3%, 0.6% and 1.8% in 2005, 2006 and 2007,
respectively.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement,
or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for
the measurement of fair value, and enhances disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measures. SFAS
No. 157 is effective for fair value measures already required or permitted by
other standards for fiscal years beginning after November 15, 2007 (January 1,
2008 for us) and is to be applied prospectively. Subsequently in February 2008,
FASB issued FASB Staff Position (“FSP”) FAS 157-1 “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurement for Purposes of Lease
Classification or Measurement under Statement 13,” and FSP FAS 157-2,
“Effective Date of FASB
Statement No. 157.” FSP FAS 157-1 amends the scope of SFAS
No. 157 and other accounting standards that address fair value measurements
for purpose of lease classification or measurement under Statement 13. The FSP
is effective on initial adoption of SFAS No. 157. FSP FAS 157-2 defers the
effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. Management does not expect the
initial adoption of SFAS No. 157, FSP FAS 157-1 and FSP FAS 157-2 will have
a material impact on the Company’s consolidated financial
statements.
In
September 2006, the FASB issued SFAS Statement No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans – an Amendment of
FASB Statements No. 87, 88, 106, and 132(R), or SFAS No. 158. As described in
Note 2 (o), effective December 31, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. SFAS No. 158 also requires plan assets
and benefit obligations be measured as of the date of the fiscal year-end
statement of financial position with limited exceptions. The measurement
provisions of SFAS No. 158 are effective for fiscal years ending after December
15, 2008, and will not be applied retroactively. The measurement provisions of
SFAS No. 158 are consistent with the Company’s current policies and management
does not
anticipate that the adoption of the measurement provisions of SFAS No. 158 will
have an impact on its consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities –– including an amendment of FASB
Statement No. 115 or SFAS No. 159. SFAS No. 159 gives the Company the
irrevocable option to carry most financial
assets and liabilities at fair value that are not currently required to be
measured at fair
value. If the fair value option is elected, changes in fair value would be
recorded in earnings at each subsequent
reporting date. Management has elected not to adopt this optional
standard.
In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations or SFAS
No. 141R and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements –– an amendment to ARB No. 51 or
SFAS No. 160. SFAS No. 141R and 160 require most identifiable assets,
liabilities, noncontrolling interests, and goodwill acquired in a business
combination to be recorded at “full fair
value” and require noncontrolling interests (previously referred to as
minority interests) to be
reported as a component of equity, which changes the accounting for
transactions with
noncontrolling interest holders. Both Statements are effective for periods
beginning on or after December 15, 2008, and
earlier adoption is prohibited. SFAS No. 141R will be applied to business combinations occurring
after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date. The initial
adoption of SFAS No. 160 is expected to result only in a reclassification
of our noncontrolling interest to shareholders’ equity.
Members of
our board of directors may be elected by our directors or our shareholders. Our
board of directors consists of five directors, two of whom will be independent
directors within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market,
Inc. Marketplace Rules, or the Nasdaq Rules, as amended from time to time. Other
than Jordan Wu and Dr. Biing-Seng Wu, who are brothers, there are no family
relationships between any of our directors and executive officers. The following
table sets forth information regarding our directors and executive officers as
of June 1, 2008. Our directors and executive officers all assumed their
respective positions at our company, Himax Technologies, Inc., after our
shareholders’ meeting and board meeting, which were both held on October 25,
2005. Unless otherwise indicated, the positions or titles indicated in the table
below refer to Himax Technologies, Inc.
|
Directors
and Executive Officers
|
Age
|
Position/Title
|
||
|
Dr.
Biing-Seng Wu
|
50
|
Chairman
of the Board
|
||
|
Jordan
Wu
|
47
|
President,
Chief Executive Officer and Director
|
||
|
Jung-Chun
Lin
|
59
|
Director
|
||
|
Dr.
Chun-Yen Chang
|
70
|
Director
|
||
|
Yuan-Chuan
Horng
|
56
|
Director
|
||
|
Chih-Chung
Tsai
|
52
|
Chief
Technology Officer, Senior Vice President
|
||
|
Max
Chan
|
41
|
Chief
Financial Officer
|
||
|
Baker
Bai
|
50
|
Vice
President, Incubator System Design Center
|
||
|
John
Chou
|
49
|
Vice
President, Quality & Reliability Assurance & Support Design
Center
|
||
|
Norman
Hung
|
50
|
Vice
President, Sales and Marketing
|
Directors
Dr. Biing-Seng Wu is the
chairman of our board of directors. Dr. Wu is also the chairman of the board of
directors of Himax Taiwan, Himax Display, Himax Analogic and Himax Imaging.
Prior to our reorganization in October 2005, Dr. Wu served as president, chief
executive officer and a director of Himax Taiwan and chairman, president and
chief executive officer of Himax Display. Dr. Wu is also a director of Himax
Anyang and serves as a director, executive vice president and chief technology
officer of CMO, a TFT-LCD panel manufacturer, and a director of Chi Lin
Technology Co., Ltd., an electronics manufacturing service provider, Chi Mei El
Corp., an OLED company, and Nexgen Mediatech Inc., a TFT-LCD television
manufacturer. Dr. Wu has been active in the TFT-LCD panel industry for over 20
years and is a member of the boards of the Taiwan TFT-LCD Association and the
Society for Information
Display.
Prior to joining CMO in 1998, Dr. Wu was senior director and plant director of
Prime View International Co., Ltd,. a TFT-LCD panel manufacturer, from 1993 to
1997, and a manager of Thin Film Technology Development at the Electronics
Research & Service Organization/Industry Technology Research Institute, or
ERSO/ITRI, of Taiwan. Dr. Wu holds a B.S. degree, an M.S. degree and a Ph.D.
degree in electrical engineering from National Cheng Kung University. Dr. Wu is
the brother of Mr. Jordan Wu, our president and chief executive
officer.
Jordan Wu is our president
and chief executive officer. Prior to our reorganization in October 2005, Mr. Wu
served as the chairman of the board of directors of Himax Taiwan, a position
that he held since April 2003. Mr. Wu is also the chairman of the board of
directors of Wisepal, Himax Imaging, Himax Media Solutions, and Integrated
Microdisplays and a director of Himax Taiwan, Himax Display, Himax Analogic,
Himax Technologies (Samoa), Inc., Himax Anyang, Himax Technologies (Shenzhen)
Co. Inc., Himax Technologies (Suzhou) Co., Inc., and Himax Imaging. Prior to
joining Himax Taiwan, Mr. Wu served as chief executive officer of TV Plus
Technologies, Inc. and chief financial officer and executive director of DVN
Holdings Ltd. in Hong Kong. Prior to that, he was an investment banker at
Merrill Lynch (Asia Pacific) Limited, Barclays de Zoete Wedd (Asia) Limited and
Baring Securities, based in Hong Kong and Taipei. Mr. Wu holds a B.S. degree in
mechanical engineering from National Taiwan University and an M.B.A. degree from
the University of Rochester. Mr. Wu is the brother of Dr. Biing-Seng Wu, our
chairman.
Jung-Chun Lin is our
director. He has also been a director of Himax Taiwan since June 2001, a
director of Himax Display since July 2004 and a director of Himax Analogic
since July 2007. Mr. Lin also serves as a director, senior vice president, chief
financial officer and chief accounting officer of CMO and a senior vice
president of Chi Mei Corporation. Prior to joining CMO in 2000, Mr. Lin was vice
president of Chi Mei Corporation and had been with Chi Mei Corporation since
1971. Mr. Lin holds a B.S. degree in accounting from National ChengChi
University.
Dr. Chun-Yen Chang is our
director. Prior to our reorganization in October 2005, he served as a supervisor
of Himax Taiwan since December 2003. He was president of the National Chiao Tung
University, or NCTU, of Taiwan from 1998 to 2006. Prior to that, he served as
the director of the Microelectronics and Information Systems Research Center of
NCTU from 1996 to 1998 and as the dean of both the College of Electrical
Engineering and Computer Science of NCTU and the College of Engineering of NCTU
from 1990 to 1994. Dr. Chang has been active in the semiconductor industry for
over 40 years. He is a fellow of the Institute of Electrical and Electronics
Engineers, Inc., or IEEE, a foreign associate of the National Academy of
Engineering of the United States and a fellow of Academia Sinica of Taiwan. Dr.
Chang holds a B.S. degree in electrical engineering from National Cheng Kung
University and an M.S. degree and a Ph.D. degree in electrical engineering from
National Chiao Tung University.
Yuan-Chuan Horng is our
director. Prior to our reorganization in October 2005, Mr. Horng served as a
director of Himax Taiwan from August 2004 to October 2005. Mr. Horng is the
general manager of the Finance Department of China Steel Corporation, a position
he has held since April 2000. He has held various accounting and finance
positions at China Steel Corporation for over 30 years. Mr. Horng holds a B.A.
degree in economics from Soochow University.
Other
Executive Officers
Chih-Chung Tsai is our chief
technology officer and senior vice president. Mr. Tsai is also a director and
chief technology officer of Himax Taiwan, a director of Himax Display, Himax
Anyang, Wisepal, Himax Analogic and Integrated Microdisplays. Prior to joining
Himax Taiwan, Mr. Tsai served as vice president of IC Design of Utron Technology
from 1998 to 2001, manager and director of the IC Division of Sunplus Technology
from 1994 to 1998, director of the IC Design Division of Silicon Integrated
Systems Corp. from 1987 to 1993 and project leader at ERSO/ITRI from 1981 to
1987. Mr. Tsai holds a B.S. degree and an M.S. degree in electrical engineering
from National Chiao Tung University.
Max Chan is our chief
financial officer. Mr. Chan is also the chief financial officer of Himax Taiwan.
Mr. Chan is also a supervisor of Wisepal, Himax Imaging and Himax Media
Solutions. Prior to our reorganization in October 2005, Mr. Chan served as
director of the planning division of Himax Taiwan from June 2004 to October
2005. Prior to joining Himax Taiwan, he was treasury manager of Intel Capital,
the strategic investment division of Intel Corporation in Taiwan from 2000 to
2004, senior associate of Credit Suisse First Boston Asia International (Cayman)
Limited, Taiwan Branch in 2000 and a manager of the Overseas Direct Investment
Department of China Development Industrial Bank from 1992 to 2000. Mr. Chan
holds a B.S. degree in civil engineering and an M.B.A. degree in finance from
National Taiwan University and an M.S. degree in business administration from
the University of Illinois at Urbana-Champaign.
Baker Bai is our vice
president in charge of the Incubator System Design Center, a director of Himax
Taiwan, and a supervisor of Himax Display and Himax Anyang. Prior to joining
Himax Taiwan in 2001, Mr. Bai served as the director of the TFT Liquid Crystal
Module Fab of CMO from 1998 to 2001, research and development manager of the
Research Center of Vate Technology Inc., a semiconductor testing house, from
1994 to 1998, and research and development engineer at Chun Shan Technology
Institute from 1983 to 1994. Mr. Bai holds a B.S. degree in electrical
engineering from National Cheng Kung University, an M.S. degree in electrical
engineering from the University of Southern California and an M.S. degree in
electrical engineering from National Chiao Tung University.
John Chou is our vice
president in charge of the Quality & Reliability Assurance & Support
Design Center and also serves as a president and director of Himax Media
Solutions. Prior to joining Himax in 2005, Mr. Chou served as the director of
the Application and Marketing Department at Pyramis Corp., a subsidiary and the
semiconductor arm of Delta Electronics Inc., from August 2002 to April 2005. Mr.
Chou was application manager at O2Micro, Inc., an integrated circuit design
house, from 1997 to 2002 and design engineer and project manager at Philips
Lighting Electronics from 1992 to 1996. Mr. Chou holds a B.S. degree in
electrical engineering from National Cheng Kung University and an M.S. degree in
electrical engineering from California State University, Los
Angeles.
Norman Hung is our vice
president in charge of Sales and Marketing and also serves as a director of
Wisepal and a supervisor of Himax Analogic. From 2000 to 2006, Mr. Hung served
as president of ZyDAS Technology Corp., a fabless integrated circuit design
house. From 1999 to 2000, he served as vice president of Sales and Marketing for
HiMARK Technology Inc., another fabless integrated circuit design house. Prior
to that, from 1996 to 1998, Mr. Hung served as Director of Sales and Marketing
for Integrated Silicon Solution, Inc. He has also served in various Marketing
positions for Hewlett-Packard and Logitech. Mr. Hung holds a B.S. degree in
electrical engineering from National Cheng Kung University and an executive
M.B.A. degree from National Chiao Tung University.
In the
year ended December 31, 2007, the aggregate cash compensation that we paid to
our executive officers was approximately $0.5 million. The aggregate share-based
compensation that we paid to our executive officers was approximately $1.6
million. No executive officer is entitled to any severance benefits upon
termination of his or her employment with us.
In the
year ended December 31, 2007, the aggregate cash compensation that we paid to
our directors was approximately $30,000. The aggregate share-based compensation
that we paid to our directors was $43,100.
The
following table summarizes the RSUs that we granted in 2007 to our directors and
executive officers under our 2005 long-term incentive plan. See “Item 6.D.
Employees –– Share-Based Compensation Plans” for more details regarding our RSU
grants.
|
Name
|
Total
RSUs
Granted
|
Ordinary
Shares
Underlying
Vested
Portion
of RSUs
|
Ordinary
Shares
Underlying
Unvested
Portion
of
RSUs
|
|||||||||
|
Dr.
Biing-Seng Wu
|
91,765 | 22,941 | 68,824 | |||||||||
|
Jordan
Wu
|
105,724 | 26,431 | 79,293 | |||||||||
|
Jung-Chun
Lin
|
0 | 0 | 0 | |||||||||
|
Dr.
Chun-Yen Chang
|
0 | 0 | 0 | |||||||||
|
Yuan-Chuan
Horng
|
0 | 0 | 0 | |||||||||
|
Chi-Chung
Tsai
|
105,724 | 26,431 | 79,293 | |||||||||
|
Max
Chan
|
40,508 | 10,127 | 30,381 | |||||||||
|
Baker
Bai
|
50,640 | 12,660 | 37,980 | |||||||||
|
John
Chou
|
73,636 | 18,409 | 55,227 | |||||||||
|
Norman
Hung
|
57,212 | 14,303 | 42,909 | |||||||||
General
Our board
of directors consists of five directors, two of whom are independent directors
within the meaning of Rule 4200(a)(15) of the Nasdaq Rules, as amended from time
to time. We intend to follow home country practice that permits our board
of directors to have less than a majority of independent directors in lieu of
complying with Rule 4350(c)(1) of the Nasdaq Rules that require boards of U.S.
companies to have a board of directors which is comprised of a majority of
independent directors. Moreover, we intend to follow home country practice that
permits our independent directors not to hold regularly scheduled meetings at
which only independent directors are present in lieu of complying with Rule
4350(c)(2).
Committees
of the Board of Directors
To enhance
our corporate governance, we have established three committees under the board
of directors prior to the closing of this offer: the audit committee, the
compensation committee and the nominating and corporate governance committee. We
have adopted a charter for each of the three committees. Each committee’s
members and functions are described below.
Audit Committee.
Our audit committee currently consists of Yuan-Chuan Horng and Dr.
Chun-Yen Chang. Our board of directors has determined that all of our audit
committee members are “independent directors” within the meaning of Rule
4200(a)(15) of the Nasdaq Rules and meet the criteria for independence set forth
in Section 10A(m)(3)(B)(i) of the Exchange Act. We intend to follow home country
practice that permits an audit committee to contain two independent directors in
lieu of complying with Rule 4350(d) of the Nasdaq Rules that requires the audit
committees of U.S. companies to have a minimum of three independent directors.
Our audit committee will oversee our accounting and financial reporting
processes and the audits of our financial statements. The audit committee will
be responsible for, among other things:
|
|
·
|
selecting
the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent
auditors;
|
|
|
·
|
reviewing
with the independent auditors any audit problems or difficulties and
management’s response;
|
|
|
·
|
reviewing
and approving all proposed related party transactions, as defined in Item
404 of Regulation SK under the Securities
Act;
|
|
|
·
|
discussing
the annual audited financial statements with management and the
independent auditors;
|
|
|
·
|
reviewing
major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material internal control
deficiencies;
|
|
|
·
|
annually
reviewing and reassessing the adequacy of our audit committee
charter;
|
|
|
·
|
meeting
separately and periodically with management and the independent
auditors;
|
|
|
·
|
reporting
regularly to the board of directors;
and
|
|
|
·
|
such
other matters that are specifically delegated to our audit committee by
our board of directors from time to
time.
|
Compensation
Committee. Our current compensation committee consists of Yuan-Chuan
Horng, Dr. Chun-Yen Chang and Jung-Chun Lin. Our compensation committee assists
our board of directors in reviewing and approving the compensation structure,
including all forms of compensation, relating to our directors and executive
officers. Our chief executive officer may not be present at any committee
meeting where his or her compensation is deliberated. We intend to follow home
country practice that permits a compensation committee to contain a director who
does not meet the definition of “independence” within the meaning of Rule
4200(a) (15) of the Nasdaq Rules. We intend to follow home country practice in
lieu of complying with Rule 4350(c)(3)(A)(ii) and (B)(ii) of the Nasdaq Rules
which requires the compensation committees of U.S. companies to be comprised
solely of independent directors. The compensation committee will be responsible
for, among other things:
|
|
·
|
reviewing
and making recommendations to our board of directors regarding our
compensation policies and forms of compensation provided to our directors
and officers;
|
|
|
·
|
reviewing
and determining bonuses for our officers and other
employees;
|
|
|
·
|
reviewing
and determining share-based compensation for our directors, officers,
employees and consultants;
|
|
|
·
|
administering
our equity incentive plans in accordance with the terms thereof;
and
|
|
|
·
|
such
other matters that are specifically delegated to the compensation
committee by our board of directors from time to
time.
|
Nominating and
Corporate Governance Committee. Our nominating and corporate governance
committee assists the board of directors in identifying individuals qualified to
be members of our board of directors and in determining the composition of the
board and its committees. Our current nominating and corporate governance
committee consists of Yuan-Chuan Horng, Dr. Chun-Yen Chang and Jung-Chun Lin. We
intend to follow home country practice that permits a nominating committee to
contain a director who does not meet the definition of “independence” within the
meaning of Rule 4200(a)(15) of the Nasdaq Rules. We intend to follow home
country practice in lieu of complying with Rule 4350(c)(4)(A)(ii) and (B)(ii) of
the Nasdaq Rules that requires the nominating committees of U.S. companies be
comprised solely of independent directors. Our nominating and corporate
governance committee will be responsible for, among other things:
|
|
·
|
identifying
and recommending to our board of directors nominees for election or
re-election, or for appointment to fill any
vacancy;
|
|
|
·
|
reviewing
annually with our board of directors the current composition of our board
of directors in light of the characteristics of independence, age, skills,
experience and availability of service to
us;
|
|
|
·
|
reviewing
the continued board membership of a director upon a significant change in
such director’s principal
occupation;
|
|
|
·
|
identifying
and recommending to our board of directors the names of directors to serve
as members of the audit committee and the compensation committee, as well
as the nominating and corporate governance committee
itself;
|
|
|
·
|
advising
the board periodically with respect to significant developments in the law
and practice of corporate governance as well as our compliance with
applicable laws and regulations, and making recommendations to our board
of directors on all matters of corporate governance and on any corrective
action to be taken; and
|
|
|
·
|
monitoring
compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure
proper compliance.
|
Terms
of Directors and Officers
Under
Cayman Islands law and our articles of association, our directors hold office
until a successor has been duly elected and qualified unless the director was
appointed by the board of directors, in which case such director holds office
until the next annual meeting of shareholders at which time such director is
eligible for re-election. Our directors are subject to periodic retirement and
re-election by shareholders in accordance with our articles of association,
resulting in their retirement and re-election at staggered intervals. At each
annual general meeting, one-third of our directors who are subject to retirement
by rotation, or if their number is not a multiple of three, the nearest to
one-third but not exceeding one-third, retire from office. Any retiring director
is eligible for reappointment. The chairman of our board of directors will not
be subject to retirement by rotation or be taken into account in determining the
number of directors to retire in each year. Under this formula, assuming five
directors continue to serve on the board of directors, one director will retire
and be subject to re-election in each year beginning 2006, and until 2009, the
term that each director serves before he is subject to retirement by rotation
will vary from one year to four years. Under our articles of association, which
director will retire at each annual general meeting will be determined as
follows: (i) any director who wishes to retire and not offer himself for
re-election, (ii) if no director wishes to retire, the director who has been
longest in office since his last re-election or appointment, (iii) if two or
more directors have served on the board the longest, then as agreed among the
directors themselves or as determined by lot. Beginning in 2010, assuming that
our
board of
directors consists of five directors, each director will serve a term of four
years. All of our executive officers are appointed by and serve at the
discretion of our board of directors.
As of
December 31, 2005, 2006 and 2007, we had 716, 924 and 1,050 employees,
respectively. The following is a breakdown of our employees by function as of
December 31, 2007:
|
Function
|
Number
|
|||
|
Research
and development(1)
|
687 | |||
|
Engineering
and manufacturing(2)
|
120 | |||
|
Sales
and marketing(3)
|
160 | |||
|
General
and administrative
|
83 | |||
|
Total
|
1,050 | |||
|
Notes:
|
(1)
|
Includes
semiconductor design engineers, application engineers, assembly and
testing engineers and quality control
engineers.
|
|
(2)
|
Includes
manufacturing personnel of Himax Display, our subsidiary focused on design
and manufacturing of LCOS products and liquid crystal injection
services.
|
|
(3)
|
Includes
field application engineers.
|
Share-Based
Compensation Plans
Himax
Technologies, Inc. 2005 Long-Term Incentive Plan
We adopted
a long-term incentive plan in October 2005. The following description of the
plan is intended to be a summary and does not describe all provisions of the
plan.
Purpose of the Plan. The
purpose of the plan is to advance our interests and those of our shareholders
by:
|
|
·
|
providing
the opportunity for our employees, directors and service providers to
develop a sense of proprietorship and personal involvement in our
development and financial success and to devote their best efforts to our
business; and
|
|
|
·
|
providing
us with a means through which we may attract able individuals to become
our employees or to serve as our directors or service providers and
providing us a means whereby those individuals, upon whom the
responsibilities of our successful administration and management are of
importance, can acquire and maintain share ownership, thereby
strengthening their concern for our
welfare.
|
Type of Awards. The plan
provides for the grant of stock options and restricted share units.
Duration. Generally, the plan
will terminate five years from the effective date of the plan. After the plan is
terminated, no awards may be granted, but any award previously granted will
remain outstanding in accordance with the plan.
Administration. The plan is
administered by the compensation committee of our board of directors or any
other committee designated by our board to administer the plan. Committee
members will be appointed from time to time by, and will serve at the discretion
of, our board. The committee has full power and authority to interpret the terms
and intent of the plan or any agreement or document in connection with the plan,
determine eligibility for awards and adopt such rules, regulations, forms,
instruments and guidelines for administering the plan. The committee may
delegate its duties or powers.
Number of Authorized Shares.
We have authorized a maximum of 18,076,927 shares. As of the date of this
annual report, there were no stock options or restricted share units outstanding
under the plan except as described under “—Restricted Share Units.”
Eligibility and Participation.
All of our employees, directors and service providers are eligible to
participate in the plan. The committee may select from all eligible individuals
those individuals to whom awards will be granted and will determine the nature
of any and all terms permissible by law and the amount of each
award.
Stock Options. The committee
may grant options to participants in such number, upon such terms and at any
time as it determines. Each option grant will be evidenced by an award document
that will specify the exercise price, the maximum duration of the option, the
number of shares to which the option pertains, conditions upon which the option
will become vested and exercisable and such other provisions which are not
inconsistent with the plan.
The
exercise price for each option will be:
|
|
·
|
based
on 100% of the fair market value of the shares on the date of
grant;
|
|
|
·
|
set
at a premium to the fair market value of the shares on the day of grant;
or
|
|
|
·
|
indexed
to the fair market value of the shares on the date of grant, with the
committee determining the index.
|
The
exercise price on the date of grant must be at least equal to 100% of the fair
market value of the shares on the date of grant.
Each
option will expire at such time as the committee determines at the time of its
grant; however, no option will be exercisable later than the 10th anniversary of
its grant date. Notwithstanding the foregoing, for options granted to
participants outside the United States, the committee can set options that have
terms greater than ten years.
Options
will be exercisable at such times and be subject to such terms and conditions as
the committee approves. A condition of the delivery of shares as to which an
option will be exercised will be the payment of the exercise price. Subject to
any governing rules or regulations, as soon as practicable after receipt of
written notification of exercise and full payment, we will deliver to the
participant evidence of book-entry shares or, upon his or her request, share
certificates in an appropriate amount based on the number of shares purchased
under the option(s). The committee may impose such restrictions on any shares
acquired pursuant to the exercise of an option as it may deem
advisable.
Each
participant’s award document will set forth the extent to which he or she will
have the right to exercise the options following termination of his or her
employment or services.
We have
not yet granted any stock options under the plan.
Restricted Share Units. The
committee may grant restricted share units to participants. Each grant will be
evidenced by an award document that will specify the period(s) of restriction,
the number of restricted share units granted and such other provisions as the
committee determines.
Generally,
restricted share units will become freely transferable after all conditions and
restrictions applicable to such shares have been satisfied or lapse and
restricted share units will be paid in cash, shares, or a combination, as
determined by the committee.
The
committee may impose such other conditions or restrictions on any restricted
share units as it may deem advisable, including a requirement that participants
pay a stipulated purchase price for each restricted share unit, restrictions
based upon the achievement of specific performance goals and time-based
restrictions on vesting.
A
participant will have no voting rights with respect to any restricted share
units.
Each award
document will set forth the extent to which the participant will have the right
to retain restricted share units following termination of his or her employment
or services.
We
committed to pay a bonus to our employees to settle the accrued bonus payable in
respect of their service provided in 2004 and the ten months ended October 31,
2005, which was satisfied through a grant of 990,220 RSUs on December 30, 2005.
All RSUs granted to employees as a bonus vested immediately on the grant
date.
We made an
additional grant of 1,297,564 RSUs to our employees on December 30, 2005. The
vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested
immediately on the grant date, and a subsequent 25%
vested on
each of September 30, 2006 and 2007, and with the remainder vesting September
30, 2008, subject to certain forfeiture events.
We also
made a grant of 20,000 RSUs to our independent directors on December 30, 2005.
The vesting schedule for this RSU grant is as follows: 25% of the RSU grant
vested immediately on the grant date, and a subsequent 25% vested on each of
June 30, 2006 and 2007, and with the remainder vesting June 30, 2008, subject to
certain forfeiture events.
We made a
grant of 3,798,808 RSUs to our employees on September 29, 2006. The vesting
schedule for this RSU grant is as follows: 47.29% of the RSU grant vested
immediately on the grant date, and a subsequent 17.57% vested on September 26,
2007, with the remainder vesting equally on each of September 30, 2008 and 2009,
subject to certain forfeiture events.
We made a
grant of 6,694,411 RSUs to our employees on September 26, 2007. The vesting
schedule for this RSU grant is as follows: 54.55% of the RSU grant vested
immediately and was settled by cash in the amount of $14.4 million on the grant
date, with the remainder vesting equally on each of September 30, 2008, 2009 and
2010, subject to certain forfeiture events.
Dividend Equivalents. Any
participant selected by the committee may be granted dividend equivalents based
on the dividends declared on shares that are subject to any award, to be
credited as of dividend payment dates, during the period between the date the
award is granted and the date the award is exercised, vests, or expires, as
determined by the committee. Dividend equivalents will be converted to cash or
additional shares by such formula and at such time and subject to such
limitations as determined by the committee.
Transferability of Awards.
Generally, awards cannot be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution.
Adjustments in Authorized Shares.
In the event of any of the corporate events or transactions described in
the plan, to avoid any unintended enlargement or dilution of benefits, the
committee has the sole discretion to substitute or adjust the number and kind of
shares that can be issued or otherwise delivered.
Forfeiture Events. The
committee may specify in an award document that the participant’s rights,
payments and benefits with respect to an award will be subject to reduction,
cancellation, forfeiture or recoupment upon the occurrence of certain specified
events, in addition to any otherwise applicable vesting or performance
conditions of an award.
If we are
required to prepare an accounting restatement owing to our material
noncompliance, as a result of misconduct, with any financial reporting
requirement under the securities laws, then if the participant is one of the
individuals subject to automatic forfeiture under Section 304 of the
Sarbanes-Oxley Act of 2002, the participant will reimburse us the amount of any
payment in settlement of an award earned or accrued during the twelve-month
period following the first public issuance or filing with the SEC (whichever
first occurred) of the financial document embodying such financial reporting
requirement.
Amendment and Termination.
Subject to, and except as, provided in the plan, the committee has the
sole discretion to alter, amend, modify, suspend, or terminate the plan and any
award document in whole or in part. Amendments to the plan are subject to
shareholder approval, to the extent required by law, or by stock exchange rules
or regulations.
The
following table sets forth the beneficial ownership of our ordinary shares, as
of June 1, 2008, by each of our directors and executive officers.
|
Name
|
Number of
Shares Owned
|
Percentage
of Shares Owned
|
||||
|
Dr.
Biing-Seng Wu
|
32,093,786
|
16.81%
|
||||
|
Jordan
Wu
|
11,432,594
|
5.99%
|
|
|||
|
Jung-Chun
Lin
|
-
|
-
|
||||
|
Dr.
Chun-Yen Chang
|
797,307
|
*
|
||||
|
Name
|
Number of
Shares Owned
|
Percentage
of Shares
Owned
|
||||
|
Yuan-Chuan
Horng
|
455,552
|
*
|
||||
|
Chih-Chung
Tsai
|
2,948,243
|
1.54%
|
||||
|
Max
Chan
|
68,936
|
*
|
||||
|
Baker
Bai
|
2,297,134
|
1.20%
|
||||
|
John
Chou
|
47,642
|
*
|
||||
|
Norman
Hung
|
33,328
|
*
|
||||
* Less
than 1%
None of
our directors or executive officers has voting rights different from other
shareholders.
CMO
is a major shareholder of ours. As of June 1, 2008, CMO beneficially owned
13.0% of our outstanding shares. We have a close relationship with CMO, a
leading TFT-LCD panel manufacturer based in Taiwan which is listed on the Taiwan
Stock Exchange. CMO’s primary focus is the manufacture of large-sized TFT-LCD
panels for use in notebook computers, desktop monitors and LCD televisions.
Several of Himax Taiwan’s initial employees, including Dr. Biing-Seng Wu, our
chairman, were employees of CMO prior to the establishment of Himax Taiwan. CMO
was Himax Taiwan’s largest shareholder at the time of its incorporation and
remains one of our largest external shareholders. CMO has also been our largest
customer since our inception. As of December 31, 2007, sales to CMO (together
with its affiliates) accounted for 58.8% of our revenues. Certain of our
directors also hold key management positions at CMO. Jung-Chun Lin, our
director, holds the positions of director, vice president, chief financial
officer and chief accounting officer at CMO. Dr. Biing-Seng Wu, our chairman, is
also a director, executive vice president and chief technology officer of
CMO. We
also have entered into various transactions with CMO as further described
below.
CMO has
acquired our shares through various transactions. In June 2001, CMO acquired (1)
4,375,000 shares in connection with its capital injection of NT$43,750,000,
which is the equivalent of NT$10 per share, or the par value of Himax Taiwan’s
common shares and (2) 247,000 shares, 986,000 shares and 1,267,000 shares in
June 2001, November 2001 and January 2002, respectively, as consideration for 14
patents transferred to Himax Taiwan. In October 2003, CMO acquired 5,258,420
shares in connection with its capital injection of NT$131,460,500, which is the
equivalent of NT$25 per share. In July 2002, September 2003 and September 2004,
CMO acquired 2,750,000 shares, 2,082,753 shares and 7,856,356 shares,
respectively, either as a result of stock splits or stock splits effected in the
form of dividends.
There have
been no changes in our major shareholders or significant changes in the amount
of shares CMO holds since June 1, 2008.
The
following table sets forth information known to us with respect to the
beneficial ownership of our shares as of June 1, 2008, the most recent
practicable date, by (1) each shareholder known by us to beneficially own more
than 5% of our shares and (2) all directors and executive officers as a
group.
|
Name
of Beneficial Owner
|
Number
of Shares
Beneficially
Owned
|
Percentage
of Shares
Beneficially
Owned
|
||||||
|
Dr.
Biing-Seng Wu
|
32,093,786 | 16.81% | ||||||
|
Jordan
Wu
|
11,432,594 | 5.99% | ||||||
|
CMO
|
24,822,529 | 13.00% | ||||||
|
All
directors and executive officers as a group
|
50,174,522 | 26.28% | ||||||
As
publicly disclosed on the Schedule 13G filed on February 14, 2008, FMR LLC, and
its affiliates, is the beneficial owner of 23,985,887, or 12.39%, of our
shares.
None of our major shareholders has voting rights different from other
shareholders. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our company.
As of June 1, 2008,
190,905,649 of our shares were outstanding. We believe that, of such shares,
96,138,297 shares in the form of ADSs were held by approximately 9,727
holders in the United States as of June 1, 2008.
CMO
and Related Companies
CMO
We sell
display drivers to CMO. We generated net sales to CMO in the amount of $317.0
million in 2005, $335.8 million in 2006, and $281.8 million in 2007 and our
receivables from these sales were $67.4 million, $81.6 million and $94.1 million
as of December 31, 2005, 2006 and 2007, respectively.
We lease
office space and equipment from CMO. Rent and utility expenses paid to CMO
amounted to $0.6 million in 2005, $0.8 million in 2006 and $0.5 million in
2007.
Himax
Display also provides liquid crystal injection services to CMO. Himax Display
generated net sales of approximately $45,000 in 2005 from CMO in connection with
these services. Himax Display purchased liquid crystal from CMO, which was used
for Himax Display’s liquid crystal injection services, in amounts of $703,000,
$81,500 and $11,600 in 2005, 2006 and 2007, respectively.
In
February 2006 and March 2007, our board approved a donation of approximately
$150,000 to Chi Mei Culture Foundation, a non-profit organization affiliated
with CMO, which is dedicated to the promotion of the arts and culture in
Taiwan.
Chi
Mei Optoelectronics Japan Co., Ltd.
Chi Mei
Optoelectronics Japan Co., Ltd., or CMO-Japan, (formerly named International
Display Technology Co., Ltd., or IDTech) an affiliate of our company, is a
privately held company 100% owned by CMO. Incorporated in Japan with
headquarters based in Yasu, Japan, IDTech has historically developed and
manufactured large-sized, high-resolution TFT-LCD panels and currently markets
TFT-LCD panels for CMO. We sell display drivers to CMO-Japan. We generated net
sales to CMO-Japan in the amount of $0.3 million in 2005 and nil in 2006 and
2007. We had no receivables from these sales as of December 31, 2006 and
2007.
Chi
Mei Corporation
Chi Mei
Corporation, or CMC, is a privately held company incorporated in Taiwan and is
the largest shareholder of CMO. CMC manufactures various products, including
acrylonitrile butadiene styrene resins. We purchased consumable and
miscellaneous items from CMC in the amount of $48,000, $93,000 and $6,000 in
2005, 2006 and 2007, respectively.
NingBo
Chi Mei Optoelectronics Ltd.
NingBo Chi
Mei Optoelectronics Ltd., or CMO Ningbo, is a subsidiary of CMO. We sell display
drivers to CMO Ningbo. We generated net sales to CMO Ningbo in the amount of
$0.7 million in 2005, $73.9 million in 2006 and $249.1 million in 2007, and our
receivables from these sales were $0.7 million, $33.9 million and $92.8 million
as of December 31, 2005, 2006 and 2007, respectively.
Chi
Lin Technology Co., Ltd.
We sell
display drivers to Chi Lin Technology Co., Ltd., or Chi Lin Tech, a company
controlled by CMC. Chi Lin Tech, a publicly held Taiwanese company headquartered
in Tainan, Taiwan, is engaged in the business of, among other things, the sale
of LCD-related parts and the repair and maintenance of TFT-LCD panels. We
generated net sales to Chi Lin Tech in the amount of $2.8 million, $3.0 million
and $7.2 million in 2005, 2006 and 2007, respectively, and our receivables from
these sales was $1.2 million, $0.4 million and $1.0 million as of December 31,
2005, 2006 and 2007, respectively.
TopSun
Optoelectronics, Inc.
We sell
display drivers to TopSun Optoelectronics Inc., or TopSun, whose board of
directors is controlled by Chi Lin Tech. On January 1, 2007, TopSun merged with
Chi Lin Tech, with Chi Lin Tech being the surviving company. We generated net
sales to TopSun in the amount of $1.1 million in 2006, and our receivables from
these sales were $1.2 million as of December 31, 2006. We did not generate net
sales from TopSun prior to 2006.
Other
Related Company
Jemitek
Electronics Corp.
From June
2003 to November 2006, our chief executive officer was on the board of directors
of Jemitek Electronics Corp., or JEC. On March 1, 2007, JEC merged with InnoLux
Display Corporation, with InnoLux Display Corporation being the surviving
company. We sell display drivers to JEC, a privately held Taiwanese company
headquartered in Taipei, Taiwan which designs and assembles small and
medium-sized LCD panels for mobile phones and digital media players. We also
owned an equity interest in JEC beginning in June 2003, but disposed of all of
our interest in October 2006. We
generated net sales to JEC in the amount of $1.6 million and approximately
$9,000 in 2005 and 2006, respectively, and our receivables from these sales were
$0.1 million and nil as of December 31, 2005 and 2006, respectively. We did not
generate any net sales to JEC in 2007 and did not have any receivables from them
as of December 31, 2007.
Not
applicable.
8.A.1. See
Item 18 for our audited consolidated financial statements.
8.A.2. See
Item 18 for our audited consolidated financial statements, which cover the last
three financial years.
8.A.3. See
page F-2 for the report of our independent registered public accounting
firm.
8.A.4. Not
applicable.
8.A.5. Not
applicable.
8.A.6. Not
applicable.
On
July 30, 2007, a class action was filed in
the United
States District
Court for the Central District of California entitled
Vivian
Oh v. Max Chan,
CV07-04891-DDP. The
suit was allegedly brought on behalf of purchasers of our
ordinary shares pursuant
and/or traceable to our initial
public offering
on or about March 30, 2006. The
complaint named our Chief
Financial Officer, Max Chan, as the sole defendant, alleging a
breach
of fiduciary duty and violations of Sections 11, 12(a)(2) and 15 of the
Securities Act. The complaint sought damages in an unspecified
amount, rescission of the initial public offering, and
attorney’s
fees and costs. On
August 30, 2007, a similar class action was filed in the same court entitled
Michael
Pfeiffer v. Himax Technologies, Inc.,
Max
Chan, and Jordan Wu,
CV07-05468-JFW.
The suit was allegedly brought on behalf of purchasers of our
ADSs issued
in our initial
public offering. The
complaint named us,
our Chief
Executive Officer,
Jordan Wu,
and our Chief
Financial Officer, Max Chan, as defendants, alleging violations of
Sections
11
and 15 of the Securities Act.
The
complaint sought damages in an unspecified amount and attorney’s
fees and costs.
On
October 3, 2007, the plaintiffs moved to consolidate the cases, appoint lead
plaintiffs and approve lead plaintiffs’ selection of
counsel.
That
motion was
granted on February 5, 2008. Plaintiffs
filed an amended complaint
on February 25, 2008. The
amended complaint again names as defendants
us,
Jordan Wu, and Max Chan, and adds Chairman Biing-Seng Wu, director Jung-Chun Lin
and CMO
as defendants. The
amended complaint alleges that defendants violated Sections 11 and 15 of the
Securities Act by failing to disclose certain facts
related to CMO’s
inventory. Plaintiffs
seek
unspecified damages, attorney’s
fees and expenses, and rescission
of the initial
public offering.
We
and the individual defendants intend to defend
against this case vigorously.
Our
dividend policy is to retain the majority, if not all, of our available funds
and any future earnings for use in the operation and growth of our
business.
In
November 2005, we distributed a special cash dividend to our shareholders in the
amount of approximately $13.6 million, or the equivalent of approximately $0.075
per share based on our total shares outstanding as of a certain record date.
This dividend was paid to our shareholders in respect of our performance prior
to our initial public offering. We decided to pay the dividend in cash instead
of shares because our ordinary shares at the time of the dividend payment were
not listed on any stock exchange and therefore had limited liquidity. This
dividend was approved by our board of directors and was financed through a loan.
In 2006, we did not distribute any dividends.
On October
30, 2007 we paid a cash dividend to our shareholders in the amount of
approximately $39.7 million, or the equivalent of US$0.20 per share based on our
total shares outstanding as of October 5, 2007, the record date.
On May 27,
2008, we announced a cash dividend of US$0.35 per share that will be payable on
June 27, 2008, based on our total shares outstanding as of June 16, 2008, the
record date.
The
dividends distributed in 2005, 2006 and 2007 should not be considered
representative of the dividends that would be paid in any future periods or of
our dividend policy.
Our board
of directors has full discretion as to whether we will distribute dividends in
the future. Even if our board of directors decides to distribute dividends, the
form, frequency and amount of such dividends will depend upon our future
operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors as the board of directors
may deem relevant.
Our
ability to pay cash or stock dividends will depend, at least
partially, upon the amount of distributions, if any, received by us from
our direct and indirect subsidiaries, which must comply with the laws and
regulations of their respective countries and respective articles of
association. Since its inception in June 2001, Himax Taiwan has paid stock
dividends in an amount of 13,517,773 shares on September 1, 2003 and 42,976,372
shares on September 20, 2004 with respect to the fiscal years 2002 and 2003,
respectively. However, Himax Taiwan has not paid cash dividends in the past. In
accordance with ROC laws and regulations and Himax Taiwan’s articles of
incorporation, Himax Taiwan is permitted to distribute dividends after
allowances have been made for:
|
|
·
|
payment
of taxes;
|
|
|
·
|
recovery
of prior years’ deficits, if any;
|
|
|
·
|
legal
reserve (in an amount equal to 10% of annual net income after having
deducted the above items until such time as its legal reserve equals the
amount of its total paid-in
capital);
|
|
|
·
|
special
reserve based on relevant laws or regulations, or retained earnings, if
necessary;
|
|
|
·
|
dividends
for preferred shares, if any; and
|
|
|
·
|
cash
or stock bonus to employees (in an amount less than 10% of annual net
income) and remuneration for directors and supervisor(s) (in an amount
less than 2% of the annual net income); after having deducted the above
items, based on a resolution of the board of directors; if stock bonuses
are paid to employees, the bonus may also be appropriated to employees of
subsidiaries under the board of directors’
approval.
|
Furthermore,
if Himax Taiwan does not record any net income for any year as determined in
accordance with generally accepted accounting principles in Taiwan, it generally
may not distribute dividends for that year.
Any
dividend we declare will be paid to the holders of ADSs, subject to the terms of
the deposit agreement, to the same extent as holders of our ordinary shares, to
the extent permitted by applicable law and regulations, less the fees and
expenses payable under the deposit agreement. Any dividend we declare will be
distributed by the depositary bank to the holders of our ADSs. Cash dividends on
our ordinary shares, if any, will be paid in U.S. dollars.
We have
not experienced any significant changes since the date of the annual financial
statements.
Prior to
the share exchange through which Himax Taiwan became our wholly owned subsidiary
on October 14, 2005, the common shares of Himax Taiwan were traded on the
Emerging Stock Board from December 26, 2003 to August 10, 2005, under the stock
code “3222.” The common shares of Himax Taiwan were delisted from the Emerging
Stock Board on August 11, 2005.
The
Emerging Stock Board was established in January 2002 to facilitate the trading
of securities of companies that do not qualify for listing on the Taiwan Stock
Exchange or the Gre Tai Securities Market. The table below sets out, for the
periods indicated, the reported high and low closing market prices for the
common shares of Himax Taiwan on the Emerging Stock Board. Given the different
characteristics (such as the base of investors, non-centralized trading nature
of the system, disclosure requirements, corporate governance standards, the
relative lower trading volumes, the scope of research coverage and others) of
the trading system in which Himax Taiwan’s common shares were historically
traded, as compared to the Nasdaq Global Select Market, we believe that the
historical stock prices for the common shares of Himax Taiwan are not indicative
of any subsequent trading prices of the ADSs representing our ordinary
shares.
|
High
|
Low
|
|||||||
|
2003:
(from December 26)
|
NT$ | 74.18 | NT$ | 68.14 | ||||
|
2004:
|
||||||||
|
First
quarter
|
154.67 | 104.18 | ||||||
|
Second
quarter
|
183.70 | 114.21 | ||||||
|
Third
quarter
|
127.38 | 74.11 | ||||||
|
Fourth
quarter
|
74.81 | 61.61 | ||||||
|
2005:
(through August 10)
|
||||||||
|
January
|
75.00 | 63.63 | ||||||
|
February
|
82.08 | 74.98 | ||||||
|
March
|
84.42 | 80.04 | ||||||
|
April
|
94.64 | 82.24 | ||||||
|
May
|
84.11 | 74.29 | ||||||
|
June
|
84.37 | 80.08 | ||||||
|
July
|
96.32 | 81.64 | ||||||
|
August
(through August 10)
|
112.69 | 90.47 | ||||||
Source:
Gre
Tai Securities Market
The
average daily trading volume of the common shares of Himax Taiwan for the period
from December 26, 2003 to December 31, 2003, the year 2004 and the period from
January 1, 2005 to August 10, 2005, was 11,500, 60,385 and 309,183 common
shares, respectively, which represented approximately 0.0%, 0.0% and 0.2% of the
outstanding common shares of Himax Taiwan as of December 31, 2003, December 31,
2004 and August 10, 2005, respectively.
Our ADSs
have been quoted on the Nasdaq Global Select Market under the symbol “HIMX”
since March 31, 2006. The table below sets forth, for the periods indicated, the
high and low closing prices and the average daily volume of trading activity on
the Nasdaq Global Select Market for the shares represented by ADSs.
|
Closing
Price per ADS
|
|||||||||||||
|
High
|
Low
|
Average
Daily
Trading
Volume
|
|||||||||||
|
(US$)
|
(US$)
|
(in
thousand of ADSs)
|
|||||||||||
|
2006
|
|||||||||||||
|
Second
quarter (from April 1)
|
9.25
|
4.73
|
809.6 | ||||||||||
|
Third
quarter
|
7.30
|
5.00
|
269.9 | ||||||||||
|
Fourth
quarter
|
6.41
|
4.28
|
981.6 | ||||||||||
|
2007
|
|||||||||||||
|
First quarter
|
6.06
|
4.58
|
703.5 | ||||||||||
|
Second
quarter
|
6.03
|
4.97
|
509.7 | ||||||||||
|
Third
quarter
|
5.69
|
3.77
|
780.7 | ||||||||||
|
Closing
Price per ADS
|
|||||||||||||
|
High
|
Low
|
Average
Daily
Trading
Volume
|
|||||||||||
|
(US$)
|
(US$)
|
(in
thousand of ADSs)
|
|||||||||||
|
Fourth
quarter
|
4.47
|
3.79
|
965.7 | ||||||||||
|
2008
|
|||||||||||||
|
January
|
5.43
|
4.07
|
1,002.2 | ||||||||||
|
February
|
5.69
|
4.94
|
741.6 | ||||||||||
|
March
|
5.49
|
4.28
|
519.0 | ||||||||||
|
April
|
5.20
|
4.61
|
256.9 | ||||||||||
|
May
|
5.80
|
4.84
|
576.0 | ||||||||||
|
June
(through June 12)
|
6.14
|
5.62
|
1,394.5 | ||||||||||
Not
applicable.
The
principal trading market for our shares is the Nasdaq Global Select Market, on
which our shares are traded in the form of ADSs.
Not
applicable.
Not
applicable.
Not
applicable.
Not
applicable.
We
incorporate by reference into this annual report the description of our amended
and restated memorandum and articles of association contained in our F-1
registration statement (File No. 333-132372) filed with the Commission on March
13, 2006. Our shareholders adopted our amended and restated memorandum and
articles of association at an extraordinary shareholder meeting on October 25,
2005.
We are not
currently, and have not been in the last two years, party to any material
contract, other than contracts entered into in the ordinary course of
business.
We
have extracted from publicly available documents the information presented in
this section. The information below may be applicable because our wholly owned
operating subsidiary, Himax Technologies Limited, is incorporated in the ROC.
Please note that citizens of the PRC and entities organized in the PRC are
subject to special ROC laws, rules and regulations, which are not discussed in
this section.
The ROC’s
Foreign Exchange Control Statute and regulations provide that all foreign
exchange transactions must be executed by banks designated to handle foreign
exchange transactions by the Central Bank of ROC. Current regulations favor
trade-related foreign exchange transactions. Consequently, foreign currency
earned from exports of merchandise and services may now be retained and used
freely by exporters. All foreign currency needed for the importation of
merchandise and services may be purchased freely from the designated foreign
exchange banks.
Unless
approved by the Central Bank of ROC, Taiwan companies and residents may not
remit to and from Taiwan foreign currencies of over US$50 million and US$5
million, respectively, each calendar year. A requirement is also imposed on all
private enterprises to report all medium- and long-term foreign debt with the
Central Bank of ROC.
In
addition, a foreign person without an alien resident card or an unrecognized
foreign entity may remit to and from Taiwan foreign currencies of up to
US$100,000 per remittance if required documentation is provided to ROC
authorities. This limit applies only to remittances involving a conversion
between NT dollars and U.S. dollars or other foreign currencies.
Cayman
Islands Taxation
The Cayman
Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation, and there is no taxation in the nature
of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the Government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or brought within the
jurisdiction of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
We have,
pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman
Islands, obtained an undertaking from the Governor-in-Council that:
(a) no law
which is enacted in the Cayman Islands imposing any tax to be levied on profits,
income or gains or appreciations shall apply to us or our
operations;
(b) the
aforesaid tax or any tax in the nature of estate duty or inheritance tax shall
not be payable on our ordinary shares, debentures or other
obligations.
The
undertaking that we have obtained is for a period of 20 years from May 3,
2005.
United
States Federal Income Taxation
The
following is a discussion of material U.S. federal income tax consequences of
owning and disposing of our ordinary shares or ADSs to the U.S. Holders
described herein, but it does not purport to be a comprehensive description of
all of the tax considerations that may be relevant to a particular person’s
decision to hold such securities. The discussion applies only to U.S. Holders
that hold ordinary shares or ADSs as capital assets for U.S. federal income tax
purposes, and it does not describe all of the tax consequences that may be
relevant to holders subject to special rules, such as:
|
|
·
|
certain
financial institutions;
|
|
|
·
|
insurance
companies;
|
|
|
·
|
dealers
and certain traders in securities or foreign
currencies;
|
|
|
·
|
persons
holding ordinary shares or ADSs as part of a hedge, straddle, conversion,
integrated transaction or similar
transaction;
|
|
|
·
|
persons
whose functional currency for U.S. federal income tax purposes is not the
U.S. dollar;
|
|
|
·
|
partnerships
or other entities classified as partnerships for U.S. federal income tax
purposes;
|
|
|
·
|
persons
liable for the alternative minimum
tax;
|
|
|
·
|
tax-exempt
organizations;
|
|
|
·
|
persons
holding ordinary shares or ADSs that own or are deemed to own 10% or more
of our voting stock; or
|
|
|
·
|
persons
who acquired ordinary shares or ADSs pursuant to the exercise of any
employee stock option or otherwise as
compensation.
|
If an
entity that is classified as a partnership for U.S. federal income tax purposes
holds ordinary shares or ADSs, the U.S. federal income tax treatment of a
partner will generally depend on the status of the partner and upon the
activities of the partnership. Partnerships holding ordinary shares or ADSs and
partners in such partnerships should consult their tax advisers as to the
particular U.S. federal income tax consequences of holding and disposing of the
ordinary shares or ADSs.
This
discussion is based on the Internal Revenue Code of 1986, as amended,
administrative pronouncements, judicial decisions and final, temporary and
proposed Treasury regulations, all as of the date hereof. These laws are subject
to change, possibly on a retroactive basis. It is also based in part on
representations by the depositary and assumes that each obligation under the
deposit agreement and any related agreement will be performed in accordance with
its terms. Please consult your own tax adviser concerning the U.S. federal,
state, local and non-U.S. tax consequences of owning and disposing of ordinary
shares or ADSs in your particular circumstances.
As used
herein, a “U.S. Holder” is a beneficial owner of ordinary shares or ADSs that
is, for U.S. federal tax purposes: (1) a citizen or resident of the United
States; (2) a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or any political subdivision
thereof; or (3) an estate or trust the income of which is subject to U.S.
federal income taxation regardless of its source.
In
general, a U.S. Holder of ADSs will be treated for U.S. federal income tax
purposes as the owner of the underlying ordinary shares represented by those
ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges
ADSs for the underlying ordinary shares represented by those ADSs.
The U.S.
Treasury has expressed concerns that parties to whom ADRs are released before
delivery of shares to the depositary (“pre-release”) may be taking actions that
are inconsistent with the claiming of foreign tax credits for U.S. holders of
ADRs. Such actions would also be inconsistent with the claiming of the reduced
rate of tax, described below, applicable to dividends received by certain
non-corporate U.S. holders. Accordingly, the availability of the reduced tax
rate for dividends received by certain non-corporate U.S. Holders, described
below, could be affected by actions taken by parties to whom ADSs are
pre-released.
This
discussion assumes that we are not, and will not become, a passive foreign
investment company (as discussed below).
Taxation
of Distributions
Distributions
received by U.S. Holders with respect to the ordinary shares or ADSs, other than
certain pro rata distributions of ordinary shares, will constitute
foreign-source dividend income for U.S. federal income tax purposes to the
extent paid out of our current or accumulated earnings and profits, as
determined in accordance with U.S. federal income tax principles. We do not
expect to maintain records of earnings and profits in accordance with U.S.
federal income tax principles, and therefore it is expected that distributions
will generally be reported to U.S. Holders as dividends. Subject to applicable
limitations and the discussion above regarding concerns expressed by the U.S.
Treasury, dividends paid by qualified foreign corporations to certain
non-corporate U.S. Holders in taxable years beginning before January 1, 2011 are
taxable at a maximum rate of 15%. A foreign corporation is treated as a
qualified foreign corporation with respect to dividends paid on stock that is
readily tradable on a securities market in the United States, such as the Nasdaq
Global Select Market, where our ADSs are traded. Non-corporate U.S. Holders
should consult their own tax advisers to determine whether they are subject to
any special rules that limit their ability to be taxed at this favorable rate.
Corporate U.S. Holders will not be entitled to claim the dividends-received
deduction with respect to dividends paid by us.
Sale
and Other Disposition of Ordinary Shares or ADSs
A U.S.
Holder will generally recognize U.S.-source capital gain or loss for U.S.
federal income tax purposes on the sale or other disposition of ordinary shares
or ADSs, which will be long-term capital gain or loss if the ordinary
shares or
ADSs were held for more than one year. The amount of gain or loss will be equal
to the difference between the amount realized on the sale or other disposition
and the U.S. Holder’s tax basis in the ordinary shares or ADSs.
Passive
Foreign Investment Company Rules
We believe
that we were not a PFIC for U.S. federal income tax purposes for our taxable
year ended December 31, 2007. However, our actual PFIC status for any taxable
year will not be determinable until after the end of the taxable year, and,
accordingly, there can be no assurance that we will not be considered a PFIC for
our current or any future taxable year.
In
general, a non-U.S. company will be considered a PFIC for U.S. federal income
tax purposes for any taxable year in which (i) 75% or more of its gross income
consists of passive income (such as dividends, interest, rents and royalties) or
(ii) 50% or more of the average quarterly value of its assets consists of assets
that produce, or are held for the production of, passive income. As PFIC status
depends upon the composition of our income and assets and the market value of
our assets (including, among other things, any equity investments in less than
25%-owned entities) from time to time, there can be no assurance that we will
not be considered a PFIC for any taxable year.
If we were
to be treated as a PFIC for any taxable year during which a U.S. Holder held
ordinary shares or ADSs, certain adverse U.S. federal income tax rules would
apply on a sale or other disposition (including a pledge) of ordinary shares or
ADSs by the U.S. Holder. In general, under those rules, gain recognized by the
U.S. Holder on a sale or other disposition of ordinary shares or ADSs would be
allocated ratably over the U.S. Holder’s holding period for the ordinary shares
or ADSs. The amounts allocated to the taxable year of the sale or other
disposition and to any year before we became a PFIC would be taxed as ordinary
income. The amount allocated to each other taxable year would be subject to tax
at the highest rate in effect for individuals or corporations, as appropriate
for that taxable year, and an interest charge would be imposed on the amount
allocated to each such taxable year. Similar rules would apply to any
distribution in respect of ordinary shares or ADSs to the extent in excess of
125% of the average of the annual distributions on ordinary shares or ADSs
received by the U.S. Holder during the preceding three years or the U.S.
Holder’s holding period, whichever is shorter. Certain elections may be
available (including a mark-to-market election) to U.S. Holders that may
mitigate the adverse tax consequences resulting from PFIC status.
In
addition, if we were to be treated as a PFIC in a taxable year in which we pay a
dividend or in the prior taxable year, the 15% dividend rate discussed above
with respect to dividends received by certain non-corporate U.S. Holders would
not apply.
Information
Reporting and Backup Withholding
Payments
of dividends and sales proceeds that are made within the United States or
through certain U.S.-related financial intermediaries generally are subject to
information reporting and to backup withholding unless the U.S. Holder is a
corporation or other exempt recipient or, in the case of backup withholding, the
U.S. Holder provides a correct taxpayer identification number and certifies that
no loss of exemption from backup withholding has occurred. The amount of any
backup withholding from a payment to a U.S. Holder will be allowed as a credit
against the U.S. Holder’s U.S. federal income tax liability and may entitle the
U.S. Holder to a refund, provided that the required information is timely
furnished to the Internal Revenue Service.
Not
applicable.
Not
applicable.
It is
possible to read and copy documents referred to in this annual report that have
been filed with the SEC at the SEC’s public reference rooms in Washington, D.C.,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the reference rooms.
Not
applicable.
Interest Rate Risk. Our
exposure to interest rate risk for changes in interest rates is limited to the
interest income generated by our cash deposited with banks.
Foreign Exchange Risk. The
U.S. dollar is our reporting currency. The U.S. dollar is also the functional
currency for the majority of our operations. In 2007, 99.7% of our sales were
transacted in U.S. dollars and more than 97% of our cost of revenues was
denominated in U.S. dollars. However, in December 2007 more than 50% of our
operating expenses was denominated in NT dollars, with a small percentage
denominated in Japanese Yen and Chinese Renminbi, and the remainder denominated
in U.S. dollars. We anticipate that we will continue to conduct substantially
all of our sales in U.S. dollars. We do not believe that we have a material
currency risk with regard to the NT dollar. We
believe the majority any potential adverse foreign currency exchange impacts on
our operating assets may be offset by a potential favorable foreign currency
exchange impact on our operating liabilities. From time to time we have engaged
in, and may continue to engage in, forward contracts to hedge against our
foreign currency exposure.
As of
December 31, 2007, no foreign currency exchange contracts are
outstanding.
Not
applicable.
Not
applicable.
Use of Proceeds
The
following information regarding the use of proceeds relates to the registration
statement on Form F-1 (File No. 333-132372) for our initial public offering and
sale of 56,728,835 ADSs, each representing one of our ordinary shares, for an
aggregate offering price of $510,559,515. Our registration statement was
declared effective by the Commission on March 30, 2006.
We
received net proceeds of approximately $147.4 million from our initial public
offering (after deducting underwriting discounts and other expenses related to
the offering). None of the transaction expenses included payments to directors
or officers of our company, persons owning 10% or more of our equity securities
or our affiliates.
We have
utilized $32.1 million of the net proceeds from our initial public offering to
repay our short-term loans and make overseas investments. In addition, we
utilized $83.5 million on stock repurchases and $39.7 million on dividend
distribution. The majority of the remaining net proceeds are currently held in
interest-bearing bank deposits.
Morgan
Stanley Services Limited, Credit Suisse Securities (USA) Inc., Banc of America
Securities LLC, Piper Jaffray & Co., ABN AMRO Bank N.V. and N M Rothschild
& Sons Limited and HSBC Securities (USA) Inc. were the underwriters for our
initial public offering.
Evaluation
of Disclosure Controls and Procedures
Our chief
executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this
report,
have concluded that based on the evaluation of these controls and procedures
required by Rule 13a-15(b) of the Exchange Act, our disclosure controls and
procedures were effective.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. GAAP.
Our
internal control over financial reporting includes those policies and procedures
that:
|
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect our transactions and dispositions of our
assets;
|
|
|
·
|
provide
reasonable assurance that our transactions are recorded as necessary to
permit preparation of our financial statements in accordance with U.S.
GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and our directors;
and
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of internal
control effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management,
with the participation of our chief executive and chief financial officers,
assessed the effectiveness of our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) as of December 31, 2007 based
on the criteria set forth in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the assessment, our management believes that
our internal control over financial reporting was effective as of December 31,
2007.
KPMG, an
independent registered public accounting firm, has issued an audit report on the
effectiveness of our internal control over financial reporting as of December
31, 2007, which is included below:
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Himax
Technologies, Inc.:
We have
audited Himax Technologies, Inc. and subsidiaries’ internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Himax Technologies, Inc. and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Himax Technologies, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control – Integrated
Framework issued by the COSO.
Himax
Technologies, Inc. acquired Wisepal Technologies, Inc. during 2007, and
management excluded from its assessment of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2007, Wisepal
Technologies, Inc.’s internal control over financial reporting associated with
total assets of $9,188 thousand and total revenues of $6,429 thousand included
in the consolidated financial statements of Himax Technologies, Inc. and
subsidiaries as of and for the year ended December 31, 2007. Our audit of
internal control over financial reporting of Himax Technologies, Inc. and
subsidiaries also excluded an evaluation of the internal control over financial
reporting of Wisepal Technologies, Inc.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Himax
Technologies, Inc and subsidiaries as of December 31, 2006 and 2007, and the
related consolidated statements of income, comprehensive income, stockholders’
equity and cash flows for each of the years in the three-year period ended
December 31, 2007, and our report dated June 16, 2008 expressed an unqualified
opinion on those consolidated financial statements.
/s/
KPMG
Taipei,
Taiwan (the Republic of China)
June 16,
2008
Changes
in Internal Control Over Financial Reporting
In 2007,
we have implemented ERP software (SAP) to enhance the efficiency and the
controls of our financial reporting process. Except as mentioned above, no
change in our internal control over financial reporting has occurred during the
period covered by this annual report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Our board
of directors has determined that Yuan-Chuan Horng is an audit committee
financial expert, as that term is defined in Item 16A(b) of Form 20-F, and is
independent for the purposes of Rule 4200(a)(15) of the Nasdaq Marketplace Rules
and Rule 10A-3 of the Exchange Act.
Our board
of directors has adopted a code of business conduct and ethics that applies to
our directors, officers and employees, including our principal executive
officer, principal financial officer, principal accounting officer or controller
and any other persons who perform similar functions for us. We will provide a
copy of our code of business conduct and ethics without charge upon written
request to:
Himax
Technologies, Inc.
Human
Resources Department
No. 26,
Zin Lian Road, Fonghua Village
Sinshih
Township, Tainan County 74445
Taiwan,
Republic of China
Duration
of the Mandate and Terms of Office of the Independent Registered Public
Accounting Firm
KPMG, our
independent registered public accounting firm, began serving as our auditor upon
the formation of our company in 2001. The head auditor currently responsible for
our audit is Allan Yu. Mr. Yu has been serving in his role since 2006 when he
took over for Shing Hai Wei, who had been serving as our head auditor until our
initial public offering in April 2006.
Our audit
committee is responsible for the oversight of KPMG’s work. The policy of our
audit committee is to approve all audit and non-audit services provided by KPMG,
including audit services, audit-related services, tax services and other
services.
Auditor
Fees
We paid
the following fees for professional services to KPMG for the years ended
December 31, 2006 and 2007.
|
|
Year
ended December 31,
|
|||||||
|
Services
|
2006
|
2007
|
||||||
|
Audit
Fees(1)
|
$ | 402,000 | $ | 795,000 | ||||
|
All
Other Fees(2)
|
12,000 | 6,000 | ||||||
|
Total
|
$ | 414,000 | $ | 801,000 | ||||
| Note: |
(1)
|
Audit
Fees. This category includes the audit of our annual financial statements
and internal control over financial reporting, review of quarterly
financial statements and services that are normally provided by the
independent auditors in connection with statutory and regulatory filings
or engagements for those fiscal years. This category also includes
statutory audits required by the Tax Bureau of the
ROC.
|
|
(2)
|
All
Other Fees. This category consists of fees for the preparation of a
transfer pricing report.
|
Not
applicable.
On
November 1, 2007, our board of directors authorized a share buyback program
allowing us to repurchase up to $40.0 million of our ADSs in the open market or
through privately negotiated transactions. We completed this share buyback
program in the first quarter of 2008 and repurchased a total of approximately
$33.0 million of our ADSs (equivalent to approximately 7.6 million ADSs) from
the open market. The repurchased ADSs and their underlying ordinary shares have
been cancelled, thereby reducing our issued and outstanding shares by
approximately 4%.
78
The following table sets forth information regarding transactions
completed under the share buyback program for each of the specified
periods.
|
Period
|
(a) Total
Number of
Shares
Purchased
|
(b)
Average Price
Paid
per Share
|
(c)
Total Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
|
(d)
Approximate
Dollar
Value of
Shares
That May
Yet
Be Purchased
Under
the Plans
or
Programs
|
||||||||||||
|
November
1, 2007 to November 30, 2007
|
3,973,514
|
$ | 4.38 | 3,973,514 | $ | 22,612,902 | ||||||||||
|
December
1, 2007 to December 31, 2007
|
2,595,594 | $ | 4.23 | 6,569,108 | $ | 11,633,090 | ||||||||||
|
January
1, 2008 to January 31, 2008
|
849,914 | $ | 4.24 | 7,419,022 | $ | 8,025,902 | ||||||||||
|
March
1, 2008 to March 18, 2008
|
224,128 | $ | 4.67 | 7,643,150 | $ | 6,980,313 | ||||||||||
The
Company has elected to provide financial statements for fiscal year 2007 and the
related information pursuant to Item 18.
The
consolidated financial statements of the Company and the report thereon by its
independent auditors listed below are attached hereto as follows:
(a) Report
of Independent Registered Public Accounting Firm dated June 16,
2008.
(b)
Consolidated Balance Sheets of the Company and subsidiaries as of December 31,
2006 and 2007.
(c)
Consolidated Statements of Income of the Company and subsidiaries for the years
ended December 31, 2005, 2006 and 2007.
(d)
Consolidated Statements of Comprehensive Income of the Company and subsidiaries
for the years ended December 31, 2005, 2006 and 2007.
(e)
Consolidated Statements of Stockholders’ Equity of the Company and subsidiaries
for the years ended December 31, 2005, 2006 and 2007.
(f)
Consolidated Statements of Cash Flows of the Company and subsidiaries for the
years ended December 31, 2005, 2006 and 2007.
(g) Notes
to Consolidated Financial Statements of the Company and
subsidiaries.
|
Exhibit
Number
|
Description
of Document
|
|
1.1
|
Amended
and Restated Memorandum and Articles of Association of the Registrant, as
currently in effect. (Incorporated by reference to Exhibit 3.1 from our
Registration Statement on Form F-1 (file no. 333-132372) filed with the
Securities and Exchange Commission on March 13, 2006.)
|
|
2.1
|
Registrant’s
Specimen American Depositary Receipt (included in Exhibit
2.3).
|
|
2.2
|
Registrant’s
Specimen Certificate for Ordinary Shares. (Incorporated by
reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file
no. 333-132372) filed with the Securities and Exchange Commission on March
13, 2006.)
|
|
2.3
|
Form
of Deposit Agreement among the Registrant, the depositary and holders of
the American depositary receipts. (Incorporated by reference to
Exhibit (a) from our Registration Statement on Form F-6 (file no.
333-132383) filed with the Securities and Exchange Commission on March 13,
2006.)
|
|
2.4
|
Share
Exchange Agreement dated June 16, 2005 between Himax Technologies, Inc.
and Himax Technologies Limited. (Incorporated by reference to
Exhibit 4.4 from our Registration Statement on Form F-1 (file no.
333-132372) filed with the Securities and Exchange Commission on March 13,
2006.)
|
|
2.5
|
Letter
of the ROC Investment Commission, Ministry of Economic Affairs dated
August 30, 2005 relating to the approval of Himax Technologies, Inc.’s
inbound investment in Taiwan. (Incorporated by reference to
Exhibit 4.5 from our Registration Statement on Form F-1 (file no.
333-132372) filed with the Securities and Exchange Commission on March 13,
2006.)
|
|
2.6
|
Letter
of the ROC Investment Commission, Ministry of Economic Affairs dated
September 7, 2005 relating to the approval of Himax Technologies Limited’s
outbound investment outside of Taiwan. (Incorporated by
reference to Exhibit 4.6 from our Registration Statement on Form F-1 (file
no. 333-132372) filed with the Securities and Exchange Commission on March
13, 2006.)
|
|
4.1
|
Himax
Technologies, Inc. 2005 Long-Term Incentive Plan. (Incorporated
by reference to Exhibit 10.1 from our Registration Statement on Form F-1
(file no. 333-132372) filed with the Securities and Exchange Commission on
March 13, 2006.)
|
|
4.2
|
Plant
Facility Service Agreement dated July 20, 2004 between Himax Display, Inc.
and Chi Mei Optoelectronics Corp. (Incorporated by reference to
Exhibit 10.2 from our Registration Statement on Form F-1 (file no.
333-132372) filed with the Securities and Exchange Commission on March 13,
2006)
|
|
4.3
|
Lease
Agreement dated June 11, 2004 between Shin Kong Life Insurance Co., Ltd.
and Himax Technologies Limited. (Incorporated by reference to
Exhibit 10.3 from our Registration Statement on Form F-1 (file no.
333-132372) filed with the Securities and Exchange Commission on March 13,
2006.)
|
|
8.1
|
List
of Subsidiaries.
|
|
12.1
|
Certification
of Jordan Wu, President and Chief Executive Officer of Himax Technologies,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
12.2
|
Certification
of Max Chan, Chief Financial Officer of Himax Technologies, Inc., pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
13.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
15.1
|
Consent
of KPMG, Independent Registered Public Accounting
Firm.
|
SIGNATURES
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant certifies that it meets all of the requirements for filing on Form
20-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
HIMAX
TECHNOLOGIES, INC.
|
||||
|
By:
|
/s/
Jordan Wu
|
|||
|
Name:
|
Jordan
Wu
|
|||
|
Title:
|
President
and Chief Executive Officer
|
|||
Date: June
20, 2008
HIMAX
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
F-2
|
|
|
F-3
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
F-9
|
|
|
F-11
|
|
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Financial Statements
December
31, 2005, 2006 and 2007
(With
Report of Independent Registered
Public
Accounting Firm Thereon)
The Board
of Directors and Stockholders
Himax
Technologies, Inc.:
We have
audited the accompanying consolidated balance sheets of Himax Technologies, Inc.
(a Cayman Island Company) and subsidiaries as of December 31, 2006 and 2007, and
the related consolidated statements of income, comprehensive income,
stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financials
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Himax Technologies, Inc. and
subsidiaries as of December 31, 2006 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U. S. generally accepted accounting
principles.
As
described in the Notes 2 and 14 to the consolidated
financial statements, the Company adopted the recognition and disclosure
provisions of Statements of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, as of December 31,
2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Himax Technologies, Inc.’s internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated June 16, 2008 expressed
an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
/s/
KPMG
Taipei,
Taiwan (the Republic of China)
June 16,
2008
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
December
31, 2006 and 2007
(in
thousands of US dollars)
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 109,753 | 94,780 | |||||
|
Marketable
securities available-for-sale
|
8,828 | 15,208 | ||||||
|
Restricted
cash equivalents and marketable securities
|
108 | 97 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts, sales returns and
discounts of $464 and $190 at December 31, 2006 and 2007,
respectively
|
112,767 | 88,682 | ||||||
|
Accounts
receivable from related parties, less allowance for sales returns and
discounts of $404 and $303 at December 31, 2006 and 2007,
respectively
|
116,850 | 194,902 | ||||||
|
Inventories
|
101,341 | 116,550 | ||||||
|
Deferred
income taxes
|
6,744 | 12,684 | ||||||
|
Prepaid
expenses and other current assets
|
10,324 | 15,369 | ||||||
|
Total
current assets
|
466,715 | 538,272 | ||||||
|
Property, plant and equipment,
net
|
38,895 | 46,180 | ||||||
|
Deferred
income taxes
|
11,405 | 20,714 | ||||||
|
Goodwill
|
- | 26,878 | ||||||
|
Intangible
assets, net
|
393 | 12,721 | ||||||
|
Investments
in non-marketable securities
|
817 | 7,138 | ||||||
|
Refundable
deposits and prepaid pension costs
|
569 | 859 | ||||||
| 52,079 | 114,490 | |||||||
|
Total
assets
|
$ | 518,794 | 652,762 | |||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets (Continued)
December
31, 2006 and 2007
(in thousands of US
dollars, except share and per share data)
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
Liabilities,
Minority Interest and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 120,407 | 147,221 | |||||
|
Income
tax payable
|
11,666 | 19,147 | ||||||
|
Other accrued expenses and other
current liabilities
|
21,206 | 19,231 | ||||||
|
Total
current liabilities
|
153,279 | 185,599 | ||||||
|
Accrued
pension liabilities
|
192 | 218 | ||||||
|
Deferred
income taxes
|
- | 4,547 | ||||||
|
Total
liabilities
|
153,471 | 190,364 | ||||||
|
Minority
interest
|
1,396 | 11,089 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Ordinary shares, US$0.0001 par
value, 500,000,000 shares authorized; 193,600,302 and 191,979,691 shares issued and
outstanding at December 31, 2006 and 2007,
respectively
|
19 | 19 | ||||||
|
Additional
paid-in capital
|
221,666 | 235,894 | ||||||
|
Accumulated
other comprehensive loss
|
(275 | ) | (7 | ) | ||||
|
Unappropriated
retained earnings
|
142,517 | 215,403 | ||||||
|
Total
stockholders’ equity
|
363,927 | 451,309 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Total
liabilities, minority interest and stockholders’ equity
|
$ | 518,794 | 652,762 | |||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Years
ended December 31, 2005, 2006 and 2007
(in thousands of US dollars, except per
share data)
|
Year Ended December 31,
|
|||||||||||||
|
2005
|
2006
|
2007
|
|||||||||||
|
Revenues
|
|||||||||||||
|
Revenues
from third parties, net
|
$ | 217,420 | 329,886 | 371,267 | |||||||||
|
Revenues
from related parties, net
|
322,784 | 414,632 | 546,944 | ||||||||||
| 540,204 | 744,518 | 918,211 | |||||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Cost
of revenues
|
419,380 | 601,565 | 716,163 | ||||||||||
|
Research
and development
|
41,278 | 60,655 | 73,906 | ||||||||||
|
General
and administrative
|
6,784 | 9,762 | 14,903 | ||||||||||
|
Sales
and marketing
|
4,762 | 6,970 | 9,334 | ||||||||||
|
Total
costs and expenses
|
472,204 | 678,952 | 814,306 | ||||||||||
|
Operating
income
|
68,000 | 65,566 | 103,905 | ||||||||||
|
Non
operating income (loss):
|
|||||||||||||
|
Interest
income
|
580 | 5,860 | 5,433 | ||||||||||
|
Gain
on sale of marketable securities, net
|
105 | 60 | 112 | ||||||||||
|
Other
than temporary impairment loss on investments in non-marketable
securities
|
(129 | ) | (1,500 | ) | - | ||||||||
|
Foreign
currency exchange gains (losses), net
|
1,808 | (341 | ) | (319 | ) | ||||||||
|
Interest
expense
|
(125 | ) | (311 | ) | - | ||||||||
|
Other
income, net
|
19 | 173 | 464 | ||||||||||
| 2,258 | 3,941 | 5,690 | |||||||||||
|
Earnings
before income taxes and minority interest
|
70,258 | 69,507 | 109,595 | ||||||||||
|
Income
tax expense (benefit)
|
8,923 | (5,446 | ) | (1,860 | ) | ||||||||
|
Income
before minority interest
|
61,335 | 74,953 | 111,455 | ||||||||||
|
Minority
interest, net of tax
|
223 | 237 | 1,141 | ||||||||||
|
Net
income
|
$ | 61,558 | 75,190 | 112,596 | |||||||||
|
Basic
earnings per ordinary share
|
$ | 0.35 | 0.39 | 0.57 | |||||||||
|
Diluted
earnings per ordinary share
|
$ | 0.34 | 0.39 | 0.57 | |||||||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Years
ended December 31, 2005, 2006 and 2007
(in thousands of US
dollars)
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
income
|
$ | 61,558 | 75,190 | 112,596 | ||||||||
|
Other
comprehensive income:
|
||||||||||||
|
Unrealized
gains on securities, not subject to income tax:
|
||||||||||||
|
Unrealized
holding gains on available-for-sale marketable securities arising during
the period
|
129 | 56 | 198 | |||||||||
|
Reclassification
adjustment for realized gains included in net income
|
(105 | ) | (60 | ) | (112 | ) | ||||||
|
Foreign
currency translation adjustments, net of income tax of $3, $6 and $0 in
2005, 2006 and 2007, respectively
|
5 | 24 | 202 | |||||||||
|
Net unrecognized actuarial loss,
net of tax of
$22
|
- | - | (20 | ) | ||||||||
|
Comprehensive
income
|
$ | 61,587 | 75,210 | 112,864 | ||||||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Years
ended December 31, 2005, 2006 and 2007
(in thousands of US dollars and
shares)
|
Ordinary
share
|
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
paid-in capital
|
Treasury
shares
|
Accumulated
other comprehensive income (loss) |
Unappropriated
retained earnings |
Total
|
||||||||||||||||||||||
|
Balance
at January 1, 2005
|
180,769 | $ | 18 | 85,508 | - | 7 | 19,327 | 104,860 | ||||||||||||||||||||
|
Declaration
of special cash dividends
|
- | - | - | - | - | (13,558 | ) | (13,558 | ) | |||||||||||||||||||
|
Issuance
of ordinary shares as employee bonus
|
990 | - | 8,536 | - | - | - | 8,536 | |||||||||||||||||||||
|
Share-based
compensation expenses
|
330 | - | 4,184 | - | - | - | 4,184 | |||||||||||||||||||||
|
Dilution
gain from issuance of new subsidiary shares
|
- | - | 222 | - | - | - | 222 | |||||||||||||||||||||
|
Unrealized
holding gain on available-for-sale marketable securities
|
- | - | - | - | 24 | - | 24 | |||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | 5 | - | 5 | |||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 61,558 | 61,558 | |||||||||||||||||||||
|
Balance
at December 31, 2005
|
182,089 | 18 | 98,450 | - | 36 | 67,327 | 165,831 | |||||||||||||||||||||
|
Issuance
of ordinary shares upon initial public offering, net of issuance costs of
$8,207
|
17,290 | 2 | 147,406 | - | - | - | 147,408 | |||||||||||||||||||||
|
Shares
acquisition
|
(7,886 | ) | - | - | (39,460 | ) | - | - | (39,460 | ) | ||||||||||||||||||
|
Shares
retirement
|
- | (1 | ) | (39,459 | ) | 39,460 | - | - | - | |||||||||||||||||||
|
Share-based
compensation expenses
|
2,107 | - | 15,091 | - | - | - | 15,091 | |||||||||||||||||||||
|
Dilution
gain from issuance of new subsidiary shares
|
- | - | 178 | - | - | - | 178 | |||||||||||||||||||||
|
Adjustment
upon adoption of SFAS No. 158, net of tax of $98
|
- | - | - | - | (331 | ) | - | (331 | ) | |||||||||||||||||||
|
Unrealized
holding loss on available-for-sale marketable securities
|
- | - | - | - | (4 | ) | - | (4 | ) | |||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | 24 | - | 24 | |||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 75,190 | 75,190 | |||||||||||||||||||||
|
Balance
at December 31, 2006
|
193,600 | 19 | 221,666 | - | (275 | ) | 142,517 | 363,927 | ||||||||||||||||||||
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity (Continued)
Years
ended December 31, 2005, 2006 and 2007
(in thousands of US dollars and
shares)
|
Ordinary
share
|
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
paid-in capital
|
Treasury
shares
|
Accumulated
other comprehensive income (loss) |
Unappropriated
retained earnings |
Total
|
||||||||||||||||||||||
|
Issuance
of ordinary shares in connection with the acquisition of Wisepal
Technologies, Inc.
|
6,217 | $ | - | 45,032 | - | - | - | 45,032 | ||||||||||||||||||||
|
Ordinary
shares to be issued in connection with the acquisition of Wisepal
Technologies, Inc.
|
- | - | 1,687 | - | - | - | 1,687 | |||||||||||||||||||||
|
Shares
acquisition
|
(8,730 | ) | - | - | (39,207 | ) | - | - | (39,207 | ) | ||||||||||||||||||
|
Shares
retirement
|
- | - | (39,207 | ) | 39,207 | - | - | - | ||||||||||||||||||||
|
Share-based
compensation expenses
|
893 | - | 5,883 | - | - | - | 5,883 | |||||||||||||||||||||
|
Dilution
gain from issuance of new subsidiary shares
|
- | - | 833 | - | - | - | 833 | |||||||||||||||||||||
|
Net
unrecognized actuarial loss, net of tax of $22
|
- | - | - | - | (20 | ) | - | (20 | ) | |||||||||||||||||||
|
Unrealized
holding gain on available-for-sale marketable securities
|
- | - | - | - | 86 | - | 86 | |||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | 202 | - | 202 | |||||||||||||||||||||
|
Declaration
of cash dividends, $0.2 per share
|
- | - | - | - | - | (39,710 | ) | (39,710 | ) | |||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 112,596 | 112,596 | |||||||||||||||||||||
|
Balance
at December 31, 2007
|
191,980 | $ | 19 | 235,894 | - | (7 | ) | 215,403 | 451,309 | |||||||||||||||||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Years
ended December 31, 2005, 2006 and 2007
(in
thousands of US dollars)
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 61,558 | 75,190 | 112,596 | ||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
3,613 | 5,221 | 10,260 | |||||||||
|
Write-off
of in-process research and development
|
- | - | 1,600 | |||||||||
|
Share-based
compensation expenses
|
8,613 | 15,150 | 5,895 | |||||||||
|
Minority
interest, net of tax
|
(223 | ) | (237 | ) | (1,141 | ) | ||||||
|
Loss
on disposal of property, plant and equipment
|
- | 36 | 223 | |||||||||
|
Gain
on sales of subsidiary shares and investment in non-marketable securities,
net
|
(19 | ) | (137 | ) | (418 | ) | ||||||
|
Gain
on sale of marketable securities, net
|
(105 | ) | (60 | ) | (112 | ) | ||||||
|
Impairment
loss on investments in non-marketable securities
|
129 | 1,500 | - | |||||||||
|
Deferred
income taxes
|
(3,371 | ) | (8,938 | ) | (14,618 | ) | ||||||
|
Inventories
write downs
|
927 | 5,165 | 14,824 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(53,242 | ) | (32,237 | ) | 25,971 | |||||||
|
Accounts
receivable from related parties
|
(30,458 | ) | (47,263 | ) | (78,044 | ) | ||||||
|
Inventories
|
(51,839 | ) | (1,502 | ) | (29,602 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(6,413 | ) | 749 | (4,477 | ) | |||||||
|
Accounts
payable
|
67,152 | 14,606 | 26,232 | |||||||||
|
Income
tax payable
|
10,852 | (1,959 | ) | 7,481 | ||||||||
|
Other
accrued expenses and other current liabilities
|
5,290 | 4,412 | 492 | |||||||||
|
Net cash provided by operating
activities
|
12,464 | 29,696 | 77,162 | |||||||||
|
Cash flows from investing
activities:
|
||||||||||||
|
Purchase of land,
property and
equipment
|
(14,733 | ) | (17,829 | ) | (18,998 | ) | ||||||
|
Proceeds from sale of property and
equipment
|
- | - | 9 | |||||||||
|
Purchase of available-for-sale
marketable securities
|
(38,048 | ) | (31,911 | ) | (52,476 | ) | ||||||
|
Sales and maturities of
available-for-sale marketable securities
|
42,028 | 27,128 | 46,303 | |||||||||
|
Cash acquired in acquisition, net
of cash paid
|
- | 17 | 6,161 | |||||||||
|
Proceeds from sale of subsidiary shares
and investment in
non-marketable securities by Himax Technologies
Limited
|
51 | 1,142 | 562 | |||||||||
|
Purchase of investment in non-marketable
securities
|
- | (817 | ) | (6,321 | ) | |||||||
|
Purchase of subsidiary shares from
minority
interest
|
(523 | ) | (773 | ) | (295 | ) | ||||||
|
Refund from (increase in) refundable
deposits
|
(414 | ) | 171 | 25 | ||||||||
|
Release (pledge) of restricted
cash equivalents and marketable securities
|
(13,724 | ) | 13,945 | 11 | ||||||||
|
Net cash used in investing
activities
|
(25,363 | ) | (8,927 | ) | (25,019 | ) | ||||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
Years
ended December 31, 2005, 2006 and 2007
(in thousands of US
dollars)
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Distribution
of cash dividends
|
$ | (13,558 | ) | - | (39,710 | ) | ||||||
|
Proceeds
from initial
public offering, net of issuance costs
|
- | 147,408 | - | |||||||||
|
Proceeds
from issuance of new shares by subsidiaries
|
866 | 676 | 11,814 | |||||||||
|
Payments
to acquire ordinary shares for retirement
|
- | (38,835 | ) | (39,345 | ) | |||||||
|
Proceeds
from borrowing of short-term debt
|
27,274 | 11,303 | - | |||||||||
|
Repayment
of short-term debt
|
- | (38,577 | ) | - | ||||||||
|
Repayment
of long-term debt
|
(178 | ) | (89 | ) | - | |||||||
|
Net cash provided by (used in) financing
activities
|
14,404 | 81,886 | (67,241 | ) | ||||||||
|
Effect
of foreign currency exchange rate changes on cash and cash
equivalents
|
4 | 12 | 125 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,509 | 102,667 | (14,973 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
5,577 | 7,086 | 109,753 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 7,086 | 109,753 | 94,780 | ||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 125 | 311 | - | ||||||||
|
Income taxes
|
$ | 1,130 | 5,695 | 4,779 | ||||||||
|
Supplemental
disclosures of non-cash investing activities:
|
||||||||||||
|
Fair
value of ordinary shares issued by Himax Display, Inc. in the acquisition
of Integrated Microdisplays Limited
|
$ | - | 538 | - | ||||||||
See accompanying notes to
consolidated financial statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
December
31, 2005, 2006 and 2007
|
Note
1.
|
Background,
Principal Activities and Basis of
Presentation
|
Background
Himax
Technologies Limited (“Himax Taiwan”) was incorporated on June 12,
2001. On April 26, 2005, Himax Technologies, Inc. was established as
a new holding company in the Cayman Islands to hold the shares of Himax Taiwan
in connection with the reorganization and share exchange described
below.
On June
10, 2005, Himax Taiwan’s shareholders resolved the exchange of shares between
Himax Taiwan and Himax Technologies, Inc. (the “Company”) pursuant to Republic
of China (ROC) Business Mergers and Acquisitions Law. Upon obtaining
all necessary approvals from ROC authorities, the share exchange became
effective on October 14, 2005, whereby all issued and outstanding common shares
of Himax Taiwan were exchanged with Himax Technologies, Inc.’s new shares at a
1:1 ratio. The
approval of the ROC Investment Commission is conditioned upon the satisfaction
of certain undertakings the Company made to the ROC Investment Commission,
including undertakings relating to the Company’s plans to expand its investment
in the ROC as well as undertakings to submit certain documentation after the
effectiveness of the share exchange. Refer to Note 22 (j) for further
details. Upon completion of the share exchange, Himax Taiwan became
Himax Technologies, Inc.’s directly and wholly-owned subsidiary.
On April 4 and 13, 2006, the Company completed its
initial public offering and
sold 17,290,588 American Depositary Shares (“ADSs”), representing 17,290,588 new ordinary shares, at an
initial public offering
price of US$8.55 per ADS after deducting underwriting discounts and
commissions. The
Company received net proceeds, after deduction of the related offering costs, in the amount of $147,408 thousand.
Since
March 2006, the Company’s ordinary shares have been quoted on the NASDAQ Global
Select Market under the symbol “HIMX.” in the form of ADSs.
Principal
Activities
Himax
Technologies, Inc. and subsidiaries (collectively, the Company) designs,
develops and markets semiconductors that are critical components of flat panel
displays. The Company’s principal products are display drivers for
large-sized thin film transistor liquid crystal displays (TFT-LCD) panels, which
are used in desktop monitors, notebook computers and televisions, and
display
drivers for small- and medium-sized TFT-LCD panels which are used in mobile handsets, and consumer electronics products such
as digital cameras, mobile gaming devices and car navigation
displays. In addition, the Company has expanded its product offering
to include television semiconductor solutions, as well as liquid crystal on
silicon (LCOS) products. The Company’s customers are TFT-LCD panel
manufacturers, LCD and mobile device module manufacturers and television
makers.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of Himax
Technologies, Inc. and its subsidiaries as if the Company had been in existence for all periods
presented. As a result of the above-mentioned share exchange,
all of the outstanding ordinary
shares of Himax Technologies, Inc. were owned by former shareholders of Himax Taiwan until the Company’s initial public offering. This transaction is a
change in legal organization for which no change in accounting basis is
appropriate. Therefore, in presenting the consolidated financial
statements of the Company, the assets and liabilities,
revenues and expenses of Himax Taiwan and its subsidiaries are included at their
historical amounts for all periods presented.
The
accompanying consolidated financial statements of the Company have been prepared
in conformity with US generally accepted accounting principles (“US
GAAP”).
|
Note
2.
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Principles
of Consolidation
|
The
accompanying consolidated financial statements include the accounts and
operations of the Himax Technologies, Inc., and all its majority owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
|
|
(b)
|
Use
of Estimates
|
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions relating to the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting
period. Significant items subject to such estimates and assumptions
include the useful lives of property, plant and equipment and intangible assets,
allowances for doubtful accounts and sales returns; the valuation of deferred
income tax assets, property, plant and equipment, inventory, potential
impairment of marketable securities and other equity investments, share-based
compensation; reserves for employee benefit obligations, and income tax
uncertainties and other contingencies. Actual results could differ
from those estimates.
|
|
(c)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less at the time of purchase to be cash
equivalents. As of December 31, 2006 and 2007, the Company had
$89,500 thousand and $62,337 thousand of cash equivalents, respectively,
consisting of NT$ and US dollar denominated time deposits with an original
maturity of less than three months. As of December 31, 2007, the
Company had $97 thousand of negotiable certificate of deposits with an original
maturity of more than three months, which had been pledged as
collateral.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
(d)
|
Marketable
Securities
|
As of
December 31, 2006 and 2007, all of the Company’s investments in debt and
marketable equity securities are classified as available-for-sale securities and
are reported at fair value with changes in fair value, net of related taxes,
excluded from earnings and reported in other comprehensive
income. Available-for-sale securities, which mature or are expected
to be sold in one year, are classified as current assets.
Declines
in market value are charged against earnings at the time that a decline has been
determined to be other than temporary, which is based primarily on the financial
condition of the issuer and the extent and length of time of the
decline.
The cost
of the securities sold is computed based on the moving average cost of each
security held at the time of sale.
|
|
(e)
|
Inventories
|
Inventories
primarily consist of raw materials, work-in-process and finished goods awaiting
final assembly and test, and are stated at the lower of cost or market value.
Cost is determined using the weighted-average method. For
work-in-process and manufactured inventories, cost consists of the cost of raw
materials (primarily fabricated wafer and processed tape), direct labor and an
appropriate proportion of production overheads. The Company also
writes down excess and obsolete inventory to its estimated market value based
upon estimations about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional future inventory write-down may be required that could adversely
affect the Company’s operating results. Once written down, inventories are
carried at this lower amount until sold or scrapped. If actual market
conditions are more favorable, the Company may have higher operating income when
such products are sold. Sales to date of such products have not had a
significant impact on the Company’s operating income.
|
|
(f)
|
Investments
in Non-Marketable Securities
|
Non-marketable
equity securities in which the Company does not have the ability to exercise
significant influence over the operating and financial policies of the investee
are stated at cost. Dividends, if any, are recognized into earnings
when received.
An
impairment of an investment in non-marketable securities that is deemed to be
other-than-temporary results in a reduction in its carrying amount to its
estimated fair value. The resulting impairment loss is charged to
earnings at that time. To determine whether an impairment is
other-than-temporary, management primarily considers the financial condition of
the investee, reasons for the impairment, the severity and duration of the
impairment, changes in value subsequent to period end and forecasted performance
of the investee.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(g)
|
Property,
Plant and Equipment
|
Property,
plant and equipment consists primarily of land purchased in August 2005 as the
construction site of the Company’s new headquarters which was completed in
November 2006, and machinery and equipment used in the design and development of
products, and is stated at cost. Depreciation on building and
machinery and equipment commences when the asset is ready for its intended use
and is calculated on the straight-line method over the estimated useful lives of
the assets which range as follows: building 25 years, building improvements, 6
to 16 years, machinery and equipment, generally three to six
years. Leasehold improvements are amortized on a straight line basis
over the shorter of the lease term or the estimated useful life of the
asset. Software is amortized on a straight line basis over estimated
useful lives ranging from two to five years.
|
|
(h)
|
Goodwill
|
Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in connection with the Company’s acquisition of Wispal
Technologies, Inc. in 2007. Goodwill is reviewed for impairment at
least annually in accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible
Assets. Impairment testing for goodwill is done at a reporting
unit level. The goodwill impairment test is a two-step
test. Under the first step, the fair value of the reporting unit is
compared with its carrying value (including goodwill). If the fair
value of the reporting unit is less than its carrying value, an indication of
goodwill impairment exists for the reporting unit and the Company must perform
step two of the impairment test (measurement). Under step two, an
impairment loss is recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with FASB Statement No. 141, Business
Combinations. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. If the
fair value of the reporting unit exceeds its carrying value, step two does not
need to be performed. Management considers the enterprise as a whole
to be the reporting unit for purpose of evaluating goodwill impairment and
consequently, determines the fair value of the reporting unit using the quoted
market price of the Company’s ordinary shares.
During
2007, management performed its annual impairment testing of goodwill and
concluded that there was no impairment in 2007.
|
(i)
|
Intangible
Assets
|
Acquired intangible assets include
patents, developed technology and customer
relationships assets at December 31, 2006 and 2007. Intangible assets are amortized on a
straight-line basis over their estimated useful lives; patents, five years, developed technology, five to seven
years and customer
relationships, seven years.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
(j)
|
Derivative
Financial Instruments
|
All
derivative financial instruments are recognized as either assets or liabilities
and are reported at fair value at each balance sheet date. As none of
the derivative financial instruments meet all the conditions for hedge
accounting, changes in the fair value of derivative financial instruments are
recognized in earnings and are included in other income (expense) in the
accompanying consolidated statements of income.
|
|
(k)
|
Impairment
of Long-Lived Assets
|
The
Company’s long-lived assets,
which consist of property, plant and equipment and intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is assessed
by a comparison of the carrying amount of an asset to its estimated undiscounted
future cash flows expected to be generated. If the carrying amount of
an asset exceeds such estimated cash flows, an impairment charge is recognized
for the amount by which the carrying amount of the asset exceeds its estimated
fair value. Management generally determines fair value based on the estimated
discounted future cash flows expected to be generated by the asset.
|
|
(l)
|
Revenue
Recognition
|
The
Company recognizes revenue from product sales when persuasive evidence of an
arrangement exists, the product has been delivered, the price is fixed and
determinable and collection is reasonably assured. The Company uses a
binding purchase order as evidence of an arrangement. The Company
considers delivery to occur upon shipment provided title and risk of loss has
passed to the customer based on the shipping terms, which is generally when the
product is shipped to the customer from the Company’s facilities or the
outsourced assembly and testing house. In some cases, title and risk
of loss does not pass to the customer when the product is received by
them. In these cases, the Company recognizes revenue at the time when
title and risk of loss is transferred, assuming all other revenue recognition
criteria have been satisfied. These cases include several inventory
locations where the Company manages inventory for its customers, some of which
inventory is at customer facilities. In such cases, revenue is not
recognized when products are received at these locations; rather, revenue is
recognized when customers take the inventory from the location for their
use.
The
Company records a reduction to revenue and accounts receivable by establishing a
sales discount and return allowance for estimated sales discounts and product
returns at the time revenue is recognized based primarily on historical discount
and return rates. However, if sales discount and product returns for
a particular fiscal period exceed historical rates, management may determine
that additional sales discount and return allowances are required to properly
reflect the Company’s estimated remaining exposure for sales discounts and
product returns.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Sales taxes collected from customers and remitted
to governmental authorities are accounted for on a net basis and therefore are
excluded from revenues in the consolidated statements of
income.
|
(m)
|
Product
Warranty
|
Under the
Company’s standard terms and conditions of sale, products sold are subject to a
limited product quality warranty. The Company may receive warranty
claims outside the scope of the standard terms and conditions. The
Company provides for the estimated cost of product warranties at the time
revenue is recognized based primarily on historical experience and any
specifically identified quality issues.
|
|
(n)
|
Research
and Development and Advertising
Costs
|
The
Company’s research and development and advertising expenditures are charged to
expense as incurred. Advertising expenses for the years ended
December 31, 2005, 2006 and 2007, were $29 thousand, $27 thousand and $8
thousand, respectively.
The
Company recognizes government grants to fund research and development
expenditures as a reduction of research and development expense in the
accompanying consolidated statements of income based on the percentage of actual
qualifying expenditures incurred to date to the most recent estimate of total
expenditures for which they are intended to be compensated.
|
|
(o)
|
Employee
Retirement Plan
|
The
Company has established an employee noncontributory defined benefit retirement
plan (the “Defined Benefit Plan”) covering full-time employees in the
ROC.
The
Company records annual amounts relating to its pension and postretirement plans
based on calculations that incorporate various actuarial and other assumptions
including, discount rates, mortality, assumed rates of return, compensation
increases, and turnover rates. The Company reviews its assumptions on
an annual basis and makes modifications to the assumptions based on current
rates when it is appropriate to do so. The effect of modifications to
those assumptions is recorded in accumulated other comprehensive income
beginning from the end of 2006 and amortized to net periodic cost over future
periods using the corridor method. The Company believes that the
assumptions utilized in recording its obligations under its plans are reasonable
based on its experience and market conditions.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
On
December 31, 2006, the Company adopted the recognition and disclosure provisions
of FASB Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, or SFAS No.
158. SFAS No. 158 requires companies to recognize the funded status
of defined benefit pension and other postretirement plans as a net asset or
liability and to recognize changes in that funded status in the year in which
the changes occur through other comprehensive income to the extent those changes
are not included in the net periodic cost. SFAS No. 158 also eliminates the requirement for
Additional Minimum Pension Liability required under SFAS No. 87. This statement does not change the existing criteria for
measurement of periodic benefit costs, plan assets or benefit
obligations.
The funded
status reported on the balance sheet as of December 31, 2006 under SFAS No. 158 was measured as the difference
between the fair value of
plan assets and the benefit obligation on a plan-by-plan basis. The incremental effect of the initial adoption of SFAS No. 158 at December 31, 2006 was a reduction of
accumulated other comprehensive income of $331 thousand, which was applied
as follows:
|
Before
application
of
SFAS No. 158
|
SFAS
No. 158 Adjustments
|
After
application
of
SFAS No. 158
|
||||||||||
|
Refundable
deposits and prepaid pension costs
|
$
|
811
|
(242
|
)
|
569
|
|||||||
|
Deferred
income taxes-noncurrent
|
11,307
|
98
|
11,405
|
|||||||||
|
Total
assets
|
518,938
|
(144
|
)
|
518,794
|
||||||||
|
Accrued
pension liabilities
|
-
|
192
|
192
|
|||||||||
|
Minority
interest
|
1,401
|
(5
|
)
|
1,396
|
||||||||
|
Accumulated
other comprehensive income (loss), net of tax
|
56
|
(331
|
)
|
(275
|
)
|
|||||||
|
Total
stockholders’ equity
|
364,258
|
(331
|
)
|
363,927
|
||||||||
|
Total
stockholders’ equity and liabilities
|
518,938
|
(144
|
)
|
518,794
|
||||||||
The recognition provisions of
SFAS No. 158 had no effect on the consolidated statements of income for the periods presented. The adoption of SFAS No. 158 did not impact the
Company’s compliance with debt covenants or its
cash position.
The
Company has adopted a defined contribution plan covering full-time employees in
the ROC (the “Defined Contribution Plan”) beginning July 1, 2005 pursuant to ROC Labor Pension
Act. Pension cost for a period is determined based on the
contribution called for in that period. Substantially all
participants in the Defined Benefit Plan have been provided the option of
continuing to participate in the Defined Benefit Plan, or to participate
in the Defined Contribution Plan on a prospective basis from July 1,
2005. Accumulated benefits attributed to participants that elect to
change plans are not impacted by their election.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(p)
|
Income
Taxes
|
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the carrying amounts
of existing assets and liabilities in the financial statements and their
respective tax bases, and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded for deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Beginning with the adoption of FASB
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, or FIN 48, as of January 1, 2007, the Company
recognizes the effect of
income tax positions only if those positions are more likely
than not of being sustained. Recognized income tax
positions are measured at the largest amount that
is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which
the change in judgment occurs. Prior to the adoption of FIN 48, the
Company recognized the effect of income tax positions only if such positions were probable of being
sustained. On
January 1, 2007, the Company adopted FIN 48. As a result,
management conducted a comprehensive evaluation of its uncertain tax
positions. Management concluded that it was not necessary for the
Company to recognize any adjustments as a result of the initial adoption of FIN
48. Further, the Company did not recognize any interest or penalties related to unrecognized tax benefits
in
2007.
|
|
(q)
|
Foreign
Currency Translation
|
The
reporting currency of the Company is the United States dollar. The
functional currency for the Company’s major operations is the United States
dollar. Accordingly, the assets and liabilities of subsidiaries whose functional currency
is other than the United States dollar are included in the consolidation by
translating the assets and liabilities into the reporting currency (the United
States dollar) at the exchange rates applicable at the end of the reporting
period. Equity accounts are translated at historical
rates. The statements of income and cash flows are translated at the
average exchange rates during the year. Translation gains or losses
are accumulated as a separate component of stockholders’ equity in accumulated
other comprehensive income (loss). Foreign currency denominated
monetary assets and liabilities are remeasured into functional currency at
end-of-period exchange rates. Non-monetary assets and liabilities, including
inventories, prepaid expenses and other current assets, property and equipment,
other assets and equity, are remeasured at historical exchange rates. Revenue
and expenses are remeasured at average exchange rates in effect during each
period. Gains or losses from foreign currency remeasurement are included in
other income (loss) in the accompanying consolidated statements of
income.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(r)
|
Earnings
Per Share
|
Basic
earnings per share is computed using the weighted average number of ordinary
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of ordinary and diluted ordinary equivalent
shares outstanding during the period. Ordinary equivalent shares
consist of nonvested shares and unvested treasury stock issued to employees that
are contingently returnable until lapse of the requisite service period,
ordinary shares that are contingently issuable upon the vesting of unvested
restricted share units (RSUs) granted to employees and independent directors and
contingently issuable ordinary shares upon the achievement of specific
milestones as of December 31, 2007 related to the acquisition of Wisepal
Technologies, Inc.
Basic and
diluted earnings per ordinary share have been calculated as
follows:
|
Year December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
income (in thousands)
|
$ | 61,558 | 75,190 | 112,596 | ||||||||
|
Denominator
for basic earnings per share:
|
||||||||||||
|
Weighted
average number of ordinary shares outstanding (in
thousands)
|
176,105 | 192,475 | 196,862 | |||||||||
|
Basic
earnings per share
|
$ | 0.35 | 0.39 | 0.57 | ||||||||
Contingently
returnable nonvested shares and unvested treasury stock issued to employees,
contingently issuable ordinary shares underlying the unvested RSUs granted to
employees and independent directors and contingently issuable ordinary shares
related to acquisition are included in the calculation of diluted earnings per
share based on treasury stock method. In 2006, the unvested 590,401 RSUs
which will vest during 2007 and 2008 were excluded from the diluted
earnings per share computation as their effect would be anti-dilutive. In 2007, the unvested
1,272,600 RSUs which will vest during 2008 and 2009 were excluded as
their effect would be anti-dilutive.
|
Year December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Net
income (in thousands)
|
$ | 61,558 | 75,190 | 112,596 | ||||||||
|
Denominator
for diluted earnings per share:
|
||||||||||||
|
Weighted
average number of ordinary shares outstanding (in
thousands)
|
176,105 | 192,475 | 196,862 | |||||||||
|
Nonvested
ordinary shares, RSUs and contingent shares (in thousands)
|
4,554 | 2,615 | 660 | |||||||||
| 180,659 | 195,090 | 197,522 | ||||||||||
|
Diluted
earnings per share
|
$ | 0.34 | 0.39 | 0.57 | ||||||||
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(s)
|
Share-Based
Compensation
|
The Company has applied SFAS
No.123 (revised 2004),
Share-Based
Payment, from its
incorporation in June 2001 for its share-based compensation plan. The
cost of employee services received in exchange for share-based compensation is
measured based on the grant-date fair value of the share-based instruments issued. The
cost of employee services is equal to the grant-date fair value of shares issued
to employees and is recognized in earnings over the service
period. Compensation cost also considers the number of awards
management believes will eventually vest. As a
result, compensation cost is reduced by the estimated
forfeitures. The estimate is adjusted each period to reflect the
current estimate of forfeitures, and finally, the actual number of awards that
vest.
|
|
(t)
|
Sale
of Newly Issued Subsidiary
Shares
|
A gain
resulting from the issuance of shares by a subsidiary to a third-party that
reduces the Company’s percentage ownership (“dilution gain”) is recognized as
additional paid in capital in the Company’s consolidated statements of
stockholders’ equity. For the year ended December 31, 2005, the
Company recognized a dilution gain of $170 thousand and $52 thousand,
respectively, resulting from the issuance to third parties of new shares
(representing a 20.73 % interest) and the issuance to employees of nonvested
shares (representing a 6.60% interest) by Himax Analogic Inc. (“ Himax
Analogic”, a consolidated subsidiary, formerly known as Amazion Electronics,
Inc,) for cash proceeds of $866 thousand and for employees’ future service with
a fair value of $392 thousand, respectively. For the year ended
December 31, 2006, the Company recognized a dilution gain of $178 thousand,
resulting from the issuance to third parties of new shares (representing a 2.34
% interest) by Himax Display Inc. (“Himax Display”, a consolidated subsidiary)
for cash proceeds of $676 thousand. For the year ended December 31,
2007, the Company recognized a dilution gain of $319 thousand and $514 thousand,
resulting from the issuance to third parties of new shares (representing a 1.45
% and 6.38 % interest, respectively) by Himax Display and Himax Analogic for
cash proceeds of $1,217 thousand and $2,290 thousand, respectively.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(u)
|
Recently
Issued Accounting Pronouncements
|
In September 2006, the FASB issued FASB
Statement No. 157, Fair
Value Measurement, or SFAS No. 157. SFAS No. 157 defines fair value, establishes
a framework for the measurement of fair value, and enhances disclosures about
fair value measurements. The Statement does not require any new fair value
measures. The Statement is effective for fair
value measures already required or permitted by other standards for fiscal years
beginning after November 15, 2007 (January 1, 2008 for the Company) and is to be
applied prospectively. Subsequently in February 2008, FASB issued FASB Staff Position
(“FSP”) FAS 157-1 “Application of FASB
Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurement for Purposes
of Lease Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective Date of
FASB Statement No. 157.” FSP FAS 157-1 amends the scope of SFAS
No. 157 and other accounting standards that address fair value measurements
for purpose of lease classification or measurement under Statement
13. The FSP is effective on
initial adoption of Statement 157. FSP FAS 157-2 defers the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the
financial statements on a recurring basis. Management does not expect the
initial adoption of SFAS No. 157, FSP FAS
157-1 and FSP FAS 157-2 will have a material impact on the Company’s consolidated financial
statements.
In September 2006, the FASB issued SFAS
Statement No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans-an Amendment of FASB
Statements No. 87, 88, 106, and 132 (R), or SFAS No. 158. As
described in Note 2 (o), effective December 31, 2006, the Company
adopted the recognition and disclosure provisions of SFAS No.
158. SFAS No. 158 also requires plan assets and benefit obligations
be measured as of the date of its fiscal year-end statement of financial
position with limited exceptions. The
measurement provisions of SFAS No. 158 are effective for fiscal years ending after
December 15, 2008, and will not be applied retrospectively. The
measurement provisions of SFAS No. 158 are consistent with the
Company’s current policies and management does not anticipate that the adoption
of the measurement provisions of SFAS No. 158 will have an impact on its consolidated financial
statements.
In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities – including an
amendment of FASB Statement No.
115 or SFAS No. 159. SFAS No. 159 gives the Company the irrevocable
option to carry most financial assets and
liabilities at fair value that are not currently required to be
measured at fair value. If the fair value option is elected,
changes in fair value would be recorded in earnings at each subsequent reporting date.
SFAS No. 159 is effective for the
Company’s 2008 fiscal year. Management has elected not to adopt this
standard.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
In December 2007, the FASB issued FASB
Statement No. 141R, Business
Combinations or SFAS No.
141R and FASB Statement No.
160, Noncontrolling
Interests in Consolidated Financial Statements– an amendment to ARB
No. 51 or SFAS No. 160. SFAS No. 141R and 160 require most identifiable
assets, liabilities, noncontrolling interests, and goodwill acquired in a
business combination to be recorded at “full fair value” and require noncontrolling interests
(previously referred to as
minority interests) to be reported as a component
of equity, which changes the accounting for transactions with noncontrolling interest holders.
Both Statements are effective for
periods beginning on or after December 15, 2008, and earlier adoption
is prohibited. SFAS No. 141R will be applied to by the Company to business combinations, if any, that occur after the effective date. SFAS No. 160 will be applied prospectively to
all noncontrolling interests, including any
that arose before the effective date. The initial adoption of SFAS No. 160 is
expected to only result in a reclassification of the Company’s noncontrolling interest to
shareholders’ equity.
|
Note
3.
|
Acquisition
|
On
February 1, 2007, the Company acquired 100 percent of the outstanding ordinary
shares of Wisepal Technologies, Inc. (“Wisepal”). The results of
Wisepal’s operations had been included in the Company’s consolidated financial
statements since that date. Wisepal is a display driver IC company
primarily focuses on small-and medium-sized applications. As a result
of the acquisition, the Company is expected to diversify its product portfolio
with more exposure towards small-and medium-sized products. It also
expects to be further strengthen the Company’s competitiveness in the display
driver market with the addition of technology resources.
The
aggregate purchase price was $46,971 thousand, consisting of 6,090,114 shares of
the Company’s ordinary shares amounting to $43,021 thousand; 418,440 units of
the Company’s RSUs amounting to $2,011 thousand in exchange for Wisepal’s
unvested stock option of which 127,283 units vested immediately on the
acquisition date; other direct acquisition cost of $252 thousand and a
contingent consideration of 395,248 shares of the Company’s ordinary shares
amounting to $1,687 thousand to be issued to the former parent company of
Wisepal at US$0.001 per share based on the purchase agreement. The
value of the Company’s ordinary shares and the vested portion of the RSUs issued
was determined based on the average market price of the Company’s ordinary
shares over the 2-day period before and after the terms of the acquisition were
agreed to and announced. The value of the additional contingent
ordinary shares to be issued was determined based on the market price of the
Company’s ordinary shares as of December 31, 2007.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
following table summarizes the allocation of the purchase price to the estimated
fair values of the assets acquired and liabilities assumed at the date of
acquisition.
|
At
February
1, 2007
|
||||
|
(in
thousands)
|
||||
|
Cash
|
$ | 6,413 | ||
|
Current
assets, other than cash
|
3,037 | |||
|
Property
and equipment
|
622 | |||
|
Intangible
assets - in-process R&D
|
1,600 | |||
|
-
others
|
14,300 | |||
|
Goodwill
|
26,878 | |||
|
Total
assets acquired
|
52,850 | |||
|
Current
liabilities
|
(1,332 | ) | ||
|
Deferred
income taxes
|
(4,547 | ) | ||
|
Total
liabilities assumed
|
(5,879 | ) | ||
|
Net
assets acquired
|
46,971 | |||
Acquired
tangible assets were valued at estimates of their current fair values. The
valuation of acquired intangible assets was determined based on management’s
estimates and consultation with an independent appraiser. Of the
$15,900 thousand of the acquired intangible assets, $1,600 thousand was assigned
to in-process R&D assets that
had not yet reached technological feasibility and had no alternative future use
and were written off at the date of acquisition in accordance with FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase
Method. Those write-offs are included in research and
development expenses in the accompanying consolidated statements of
income. The remaining acquired intangible assets, all of which will
be amortized, have a weighted-average useful life of approximately 7
years. The intangible assets that make up that amount include core
and developed technology of $6,200 thousand (7-year weighted-average useful
life) and customer relationships of $8,100 thousand (7-year weighted-average
useful life). Himax paid a premium for this acquisition because of
expected synergistic benefits, including the assembled workforce, and to broaden
the supplier base to secure foundry capacity and optimize its foundry mix and
further diversified its technology and product mix. Goodwill is not
expected to be deductible for tax purpose.
F-23
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
following unaudited pro forma results of operations for the years end December
31, 2006 and 2007 are presented as though the acquisition occurred at the
beginning of the respective periods (dollars in thousand except per share
amounts):
|
For
the
years
end
December
31,
(unaudited)
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Net
revenues
|
$ | 770,595 | 919,105 | |||||
|
Net
income
|
$ | 75,628 | 112,406 | |||||
|
Diluted
earnings per share
|
$ | 0.38 | 0.57 | |||||
|
Note
4.
|
Marketable
Securities
|
Following
is a summary of marketable securities as of December 31, 2006 and
2007:
|
December 31, 2006
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Market
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Time
deposit with original maturities more than three months
|
$ | 522 | - | - | 522 | |||||||||||
|
Open-ended
bond fund
|
8,277 | 29 | - | 8,306 | ||||||||||||
|
Total
|
$ | 8,799 | 29 | - | 8,828 | |||||||||||
|
December 31, 2007
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Market
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Time
deposit with original maturities more than three months
|
$ | 154 | - | - | 154 | |||||||||||
|
Open-ended
bond fund
|
14,929 | 125 | - | 15,054 | ||||||||||||
|
Total
|
$ | 15,083 | 125 | - | 15,208 | |||||||||||
The
Company’s portfolio of available for sale marketable securities by contractual
maturity or the expected holding period as of December 31, 2006 and 2007 is due
in one year or less.
F-24
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Information
on sales of available for sale marketable securities for the years ended
December 31, 2005, 2006 and 2007 is summarized below.
|
Period
|
Proceeds
from sales
|
Gross
realized gains
|
Gross
realized losses
|
|||||||||
| (in thousands) | ||||||||||||
|
Year
ended December 31, 2005
|
$ | 42,028 | 105 | - | ||||||||
|
Year
ended December 31, 2006
|
$ | 27,128 | 60 | - | ||||||||
|
Year
ended December 31, 2007
|
$ | 46,303 | 112 | - | ||||||||
At
December 31, 2006, the Company had $108 thousand of restricted marketable
securities, consisting of time deposits with an original maturity of more than
three months, which had been pledged as collateral for custom duty.
|
Note
5.
|
Allowance
for Doubtful Accounts, Sales Returns and
Discounts
|
The
activity in the allowance for doubtful accounts, sales returns and discounts for
the years ended December 31, 2005, 2006 and 2007 follows:
|
Period
|
Balance
at
beginning
of year
|
Addition
|
Amounts
utilized
|
Balance
at
end
of
year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
For
the year ended December 31, 2005
|
$ | 240 | 398 | (457 | ) | 181 | ||||||||||
|
For
the year ended December 31, 2006
|
$ | 181 | 2,843 | (2,156 | ) | 868 | ||||||||||
|
For
the year ended December 31, 2007
|
$ | 868 | 1,705 | (2,080 | ) | 493 | ||||||||||
|
Note
6.
|
Inventories
|
As of
December 31, 2006 and 2007, inventories consisted of the following:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Finished
goods
|
$ | 44,194 | 62,195 | |||||
|
Work
in process
|
40,039 | 47,439 | ||||||
|
Raw
materials
|
17,048 | 6,905 | ||||||
|
Supplies
|
54 | 11 | ||||||
|
Merchandise
|
6 | - | ||||||
| $ | 101,341 | 116,550 | ||||||
F-25
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
7.
|
Prepaid
Expenses and Other Current Assets
|
|
December 31,
|
|||||||||
|
2006
|
2007
|
||||||||
|
(in
thousands)
|
|||||||||
|
Refundable
business tax
|
$ | 5,994 | 10,461 | ||||||
|
Prepaid
software maintenance fee
|
2,789 | 1,501 | |||||||
|
Subsidy
receivables
|
640 | 1,007 | |||||||
|
Prepaid
rental and others
|
901 | 2,400 | |||||||
| $ | 10,324 | 15,369 | |||||||
|
Note
8.
|
Intangible
Assets
|
|
December
31, 2006
|
|||||||||
|
Gross
carrying
amount
|
Weighted
average
amortization
period
|
Accumulated amortization
|
|||||||
| (in thousands) | |||||||||
|
Technology
|
$ | 139 |
5
years
|
86 | |||||
|
Patents
|
358 |
5
years
|
18 | ||||||
|
Total
|
$ | 497 | 104 | ||||||
|
December
31, 2007
|
|||||||||
|
Gross
carrying
amount
|
Weighted
average
amortization
period
|
Accumulated amortization
|
|||||||
| (in thousands) | |||||||||
|
|
|||||||||
|
Technology
|
$ | 6,339 |
7
years
|
926 | |||||
|
Customer
relationship
|
8,100 |
7
years
|
1,061 | ||||||
|
Patents
|
358 |
5
years
|
89 | ||||||
|
Total
|
$ | 14,797 | 2,076 | ||||||
Amortization
expense for the years ended December 31, 2005, 2006 and 2007, was $28 thousand,
$45 thousand and $1,972 thousand, respectively. Estimated
amortization expense for the next five years is $2,140 thousand in 2008, $2,114
thousand in 2009 and 2010, $2,097 thousand in 2011, and $2,043 thousand in
2012.
F-26
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
9.
|
Property,
Plant and Equipment
|
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ | 10,154 | 10,154 | |||||
|
Building
and improvements
|
12,967 | 16,413 | ||||||
|
Machinery
|
6,744 | 6,366 | ||||||
|
Research
and development equipment
|
8,611 | 12,144 | ||||||
|
Software
|
5,149 | 7,496 | ||||||
|
Office
furniture and equipment
|
2,478 | 4,575 | ||||||
|
Others
|
4,150 | 3,970 | ||||||
| 50,253 | 61,118 | |||||||
|
Accumulated
depreciation and amortization
|
(12,742 | ) | (15,860 | ) | ||||
|
Prepayment
for purchases of equipment and software
|
1,384 | 922 | ||||||
| $ | 38,895 | 46,180 | ||||||
Depreciation
and amortization of these assets for 2005, 2006 and 2007, was $3,585 thousand,
$5,176 thousand and $8,288 thousand, respectively.
|
Note
10.
|
Investments
in Non-marketable Securities
|
Following
is a summary of such investments as of December 31, 2006 and 2007:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Chi
Lin Technology Co. Ltd.
|
$ | 817 | 1,057 | |||||
|
Jetronics
International Corp.
|
- | 1,600 | ||||||
|
C
Company
|
- | 4,481 | ||||||
| $ | 817 | 7,138 | ||||||
In 2006,
the Company considered its investment in equity of LightMaster Systems, Inc. to
be other than temporarily impaired due to the bankruptcy case concerning
LightMaster Systems, Inc. filed in July 2006. The carrying amount of
$1,500 thousand was fully written off with an impairment loss recognized in
other non-operating loss in the accompanying consolidated statements of
income.
As of
December 31, 2007, it was not practicable for the Company to estimate the fair
value of its investment in equity of Chi Lin Technology Co. Ltd. (on January 1, 2007,
TopSun Optronics, Inc. merged with Chi
Lin Technology Co. Ltd., Chi Lin
Technology Co. Ltd.
was the surviving company), Jetronics International Corp., and C
Company. However, there are no identified events or changes in
circumstance that may have significant adverse effects on the recoverability of
the carrying value of these investments.
F-27
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
11.
|
Other
Accrued Expenses and Other Current
Liabilities
|
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Accrued
payroll and related expenses
|
$ | 3,441 | 4,099 | |||||
|
Accrued
mask and mold fees
|
3,282 | 6,020 | ||||||
|
Payable
for purchases of equipment
|
4,317 | 1,257 | ||||||
|
Accrued
professional service fee
|
1,202 | 1,179 | ||||||
|
Accrued
warranty costs
|
630 | 335 | ||||||
|
Accrued
commission
|
1,836 | 64 | ||||||
|
Accrued
insurance, welfare expenses, etc.
|
6,498 | 6,277 | ||||||
| $ | 21,206 | 19,231 | ||||||
The
movement in accrued warranty costs for the years ended December 31, 2005, 2006
and 2007, is as follows:
|
Period
|
Balance at
beginning
of
year
|
Additions
charged
to
expense
|
Amounts
utilized
|
Balance
at
end of year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Year
ended December 31, 2005
|
$ | 507 | 1,415 | (1,377 | ) | 545 | ||||||||||
|
Year
ended December 31, 2006
|
$ | 545 | 2,101 | (2,016 | ) | 630 | ||||||||||
|
Year
ended December 31, 2007
|
$ | 630 | 799 | (1,094 | ) | 335 | ||||||||||
|
Note
12.
|
Short-term
Debt
|
As of
December 31, 2005, short-term debt consisted of a $13,600 thousand loan,
denominated in US dollars, and which has a maturity date that had been extended
to May 2, 2006. The remaining balance of short-term debt of
approximately $13,674 thousand, is comprised of three separate loans in the
amounts of NT$250,000 thousand ($7,596 thousand), NT$40,000 thousand ($1,216
thousand) and NT$160,000 thousand ($4,862 thousand), all of which are
denominated in New Taiwan dollars and which have maturity dates that have been
extended to March 26, 2006, March 26, 2006 and March 27, 2006,
respectively. All short term debts had been fully paid off during
2006.
As of
December 31, 2006 and 2007, unused credit lines amounted to $42,557 thousand and
$57,919 thousand, respectively.
F-28
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
13.
|
Government
Grant
|
The
Company entered into several contracts with Industrial Development Bureau of
Ministry of Economic Affairs (IDB of MOEA), Department of Industrial Technology of
Ministry of Economic Affairs (DOIT of MOEA) and the Administrative Bureau of
Science-Based Industrial
Park (SBIP) during
2003, 2004, 2005 and 2007 for the development of certain new
leading products or technologies. Details of these contracts are
summarized below:
|
Authority
|
Total Grant
|
Execution Period
|
Product Description
|
|||
|
(in
thousands)
|
||||||
|
IDB
of MOEA
|
|
NT$ 22,700
(US$654)
|
September
2003 to February 2005
|
Mobile
phone TFT driver IC
|
||
|
SBIP
|
3,800
(US$112)
|
|
October
2004 to July 2005
|
Application
of LCOS
|
||
|
DOIT of
MOEA
|
19,500
(US$610)
|
December 2004 to November
2005
|
Multimedia high definition TV
SOC
|
|||
|
DOIT of
MOEA
|
7,000
(US$214)
|
September
2005 to December
2006
|
Mobile phone TFT single chip
SOC
|
|||
|
DOIT of
MOEA
|
22,670 (US$703)
|
August
2007 to July 2009
|
Display Port
IC
|
Government
grants recognized by the Company as a reduction of research and development
expense in the accompanying consolidated statements of income in 2005, 2006 and
2007 were $381 thousand, $466 thousand and $108 thousand,
respectively.
|
Note
14.
|
Retirement
Plan
|
The
Company has established the Defined Benefit Plan covering full-time employees in
the ROC. In accordance with the Defined Benefit Plan, employees are
eligible for retirement or are required to retire after meeting certain age or
service requirements. Retirement benefits are based on years of
service and the average salary for the six-month period before the employee’s
retirement. Each employee earns two months of salary for each of the
first fifteen years of service, and one month of salary for each year of service
thereafter. The maximum retirement benefit is 45 months of
salary. Retirement benefits are paid to eligible participants on a
lump-sum basis upon retirement.
Defined
Benefit Plan assets consist entirely of a Pension Fund (the “Fund”) denominated
solely in cash, as mandated by ROC Labor Standard Law. The Company
contributes an amount equal to 2% of wages and salaries paid every month to the
Fund (required by law). The Fund is administered by a pension fund
monitoring committee (the “Committee”) and is deposited in the Committee’s name
in the Bank of Taiwan (formerly Central Trust of China which was acquired by
Bank of Taiwan in 2007).
F-29
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
As
discussed in note 2(o), effective December 31, 2006, the Company adopted the
recognition and disclosure provisions of SFAS No. 158. SFAS No. 158
requires companies to recognize the funded status of defined benefit pension and
other postretirement plans as a net asset or liability on its balance
sheet. Actuarial gains and losses are generally amortized subject to
the corridor, over the average remaining service life of the Company’s active
employee.
Beginning
July 1, 2005, pursuant to the newly effective ROC Labor Pension Act, the Company
is required to make a monthly contribution for full-time employees in the ROC
that elected to participate in the Defined Contribution Plan at a rate no less
than 6% of the employee’s monthly wages to the employees’ individual pension
fund accounts at the ROC Bureau of Labor Insurance. Expense recognized in 2005,
2006 and 2007, based on the contribution called for was $356 thousand, $883
thousand and $1,066 thousand, respectively.
Substantially
all participants in the Defined Benefits Plan had elected to participate in the
Defined Contribution Plan. The transfer of participants to the
Defined Contribution Plan did not have a material effect on the Company’s
financial position or results of operations. Participants’
accumulated benefits under the Defined Benefit Plan are not impacted by their
election to change the plans and their seniority remains regulated by ROC Labor
Standard Law, such as the retirement criteria and the amount
payable. The Company is required to make contribution for the Defined
Benefit Plan until it is fully funded. Pursuant to relevant
regulatory requirements, the Company expects to make a cash contribution of $398
thousand to its pension fund maintained with the Bank of Taiwan and $1,734
thousand to the employees’ individual pension fund accounts at the ROC Bureau of
Labor Insurance in 2008.
The
Company uses a measurement date of December 31, for the Defined Benefit
Plan. The changes in projected benefit obligation, plan assets and
details of the funded status of the Plan are as follows:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 622 | 885 | |||||
|
Acquisition
from Wisepal
|
- | 56 | ||||||
|
Service
cost
|
9 | 3 | ||||||
|
Interest
cost
|
22 | 26 | ||||||
|
Actuarial
loss
|
232 | 120 | ||||||
|
Benefit
obligation at end of year
|
885 | 1,090 | ||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value at beginning of year
|
414 | 712 | ||||||
|
Acquisition
from Wisepal
|
- | 46 | ||||||
|
Actual
return on plan assets
|
12 | 22 | ||||||
|
Employer
contribution
|
286 | 349 | ||||||
|
Fair
value at end of year
|
712 | 1,129 | ||||||
|
Funded
status
|
$ | (173 | ) | 39 | ||||
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Amounts
recognized in the balance sheet consist of:
|
||||||||
|
Prepaid
pension costs
|
$ | 19 | 257 | |||||
|
Accrued
pension liabilities
|
(192 | ) | (218 | ) | ||||
|
Net
amount recognized
|
$ | (173 | ) | 39 | ||||
Amounts
recognized in accumulated other comprehensive income was net actuarial loss of
$331 thousand and $351 thousand at December 31, 2006 and 2007,
respectively.
The
accumulated benefit obligation for the Defined Benefit Plan was $379 thousand
and $407 thousand at December 31, 2006 and 2007, respectively. As of
December 31, 2006 and 2007, no employee was eligible for retirement or was
required to retire.
For the
years ended December 31, 2005, 2006 and 2007, the net periodic pension cost
consisted of the following:
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Service
cost
|
$ | 150 | 9 | 3 | ||||||||
|
Interest
cost
|
13 | 22 | 26 | |||||||||
|
Expected
return on plan assets
|
(6 | ) | (18 | ) | (20 | ) | ||||||
|
Net
amortization
|
6 | 6 | 96 | |||||||||
|
Net
periodic pension cost
|
$ | 163 | 19 | 105 | ||||||||
The net
actuarial loss for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost in 2008 is
$30 thousand.
At
December 31, 2006 and 2007, the weighted-average assumptions used in computing
the benefit obligation are as follows:
|
December
31,
|
||||||||||||
|
2006
|
2007
|
|||||||||||
|
Himax Taiwan,
Himax
Display &
Himax
Analogic
|
Himax
Display &
Himax Analogic
|
Himax Taiwan,
Wisepal
& Himax
Media Solutions
|
||||||||||
|
Discount
rate
|
2.75%
|
3.00%
|
3.00%
|
|||||||||
|
Rate
of increase in compensation levels
|
4.00%
|
4.00%
|
5.00%
|
|||||||||
F-31
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
For the
years ended December 31, 2005, 2006 and 2007, the weighted average assumptions
used in computing net periodic benefit cost are as follows:
|
Year Ended December 31,
|
||||||||||||||||||||
|
2005
|
2006
|
2007
|
||||||||||||||||||
|
HimaxTaiwan
|
Himax
Display &
Himax Analogic
|
Himax
Taiwan,
Himax
Display &
Himax
Analogic
|
Himax
Display &
Himax Analogic
|
Himax
Taiwan,
Wisepal
& Himax
Media
Solutions
|
||||||||||||||||
|
Discount
rate
|
3.50%
|
3.50%
|
2.75%
|
3.00%
|
3.00%
|
|||||||||||||||
|
Rate
of increase in compensation levels
|
4.00%
|
3.00%
|
4.00%
|
4.00%
|
5.00%
|
|||||||||||||||
|
Expected
long-term rate of return on pension assets
|
3.50%
|
3.50%
|
2.75%
|
3.00%
|
3.00%
|
|||||||||||||||
The
Company determines the expected long-term rate of return on plan assets based on
the yields of twenty year ROC central government bonds and the historical
long-term rate of return on the above mentioned Fund mandated by the ROC Labor
Standard Law.
Benefits
payments to be paid during the next ten years are estimated as
follows:
|
Amount
|
||||
|
(in
thousands)
|
||||
|
2008
|
$ | - | ||
|
2009
|
- | |||
|
2010
|
- | |||
|
2011
|
- | |||
|
2012
|
- | |||
|
2013
~ 2017
|
242 | |||
F-32
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
Note
15. Share-Based Compensation
|
The amount
of share-based compensation expenses included in applicable costs of sales and
expense categories is summarized as follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of revenues
|
$ | 188 | 275 | 422 | ||||||||
|
Research
and development
|
6,336 | 11,806 | 15,393 | |||||||||
|
General
and administrative
|
848 | 1,444 | 2,182 | |||||||||
|
Sales
and marketing
|
1,241 | 1,625 | 2,324 | |||||||||
| $ | 8,613 | 15,150 | 20,321 | |||||||||
|
|
(a)
|
Employee
Annual Bonus Plan
|
In June
2005, Himax Taiwan discontinued the employee stock bonus program with effect
from December 31, 2004. Due to a history of paying bonus based on annual
operating results, the Company’s employees have developed an expectation of
receiving a bonus of some form. In order to meet such expectation and
to retain and motivate employees, management communicated to all employees that
they would receive a competitive bonus for services rendered beginning in 2004
and up to the effectiveness of a long-term incentive plan which was expected to
be adopted after the completion of the share exchange referred to in Note 1 and
approval of the Company’s shareholders.
Based on a
compensation package analysis with the Company’s primary domestic competitors,
an annual bonus on top of the cash compensation was accrued. The
revised bonus plan allows the bonus to be paid in cash or shares. If
a cash payment is not made, the shares given will have the same value as the
cash award. Employee compensation expense of $4,141 thousand was accrued in 2004
relating to such bonus plan.
In order
to settle the above mentioned accrued bonus payable, on December 27, 2005,
pursuant to the authorization of the Company’s shareholders and the delegation
of the Company’s board of directors, the Company’s compensation committee
approved a grant of 990,220 RSUs to employees for their service provided in 2004
and the ten months ended October 31, 2005. All RSUs granted to
employees as a bonus vested immediately on the grant date.
The amount
of compensation expense from the annual bonus plan was determined based on the
estimated fair value of the ordinary shares underlying the RSUs granted on the
date of grant, which was $8.62 per share.
F-33
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
allocation of compensation expenses from the annual bonus plan is summarized as
follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of revenues
|
$ | 98 |
-
|
-
|
||||||||
|
Research
and development
|
3,215 |
-
|
-
|
|||||||||
|
General
and administrative
|
454 |
-
|
-
|
|||||||||
|
Sales
and marketing
|
628 |
-
|
-
|
|||||||||
| $ | 4,395 |
-
|
-
|
|||||||||
|
|
(b)
|
Long-term
Incentive Plan
|
|
On
October 25, 2005, the Company’s shareholders approved a long-term
incentive plan. The plan permits the grants of options or RSUs
to the Company’s employees, directors and service providers where each
unit of RSU represents one ordinary share of the Company.
On December 30, 2005, the Company’s compensation
committee made grants of 1,297,564 RSUs and 20,000 RSUs to its employees
and independent directors, respectively. The vesting schedule
for the RSUs granted to employees is as follows: 25% of the RSU grant
vested immediately on the grant date, and a subsequent 25% will vest on
each of September 30, 2006, 2007 and 2008, subject to certain forfeiture
events. The vesting schedule for the RSUs granted to
independent directors is as follows: 25% of the RSU grant vested
immediately on the grant date, and a subsequent 25% will vest on each of
June 30, 2006, 2007 and 2008, subject to certain forfeiture
events.
On September 29, 2006, the Company’s compensation
committee made grants of 3,798,808 RSUs to its employees. The
vesting schedule for the RSUs is as follows: 47.29% of the RSUs grant
vested immediately on the grant date and a subsequent 17.57% will vest on
each of September 30, 2007, 2008 and 2009, subject to certain forfeiture
events.
On September 26, 2007, the Company’s compensation
committee made grants of 6,694,411 RSUs to its employees. The
vesting schedule for the RSUs is as follows: 54.55% of the RSUs grant
vested immediately on the grant date which were settled by cash amounting
to $14,426 thousand, a subsequent 15.15% will vest on each of September
30, 2008, 2009 and 2010 which will be settled by the Company’s ordinary
shares, subject to certain forfeiture events.
The amount of compensation expense from the long-term
incentive plan was determined based on the estimated fair value and the
market price of the ordinary shares underlying the RSUs granted on the
date of grant, which was $8.62 per share, $5.71 per share and $3.95 per
share on December 30, 2005, September 29, 2006 and September 26, 2007,
respectively.
|
F-34
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Management
is primarily responsible for estimating the fair value of the Company’s ordinary
shares underlying the RSUs granted on December 30, 2005. When
estimating fair value for such share prior to the Company’s IPO, management
considers a number of factors, including contemporaneous valuations from an
independent third-party appraiser. The share valuation methodologies
used include the discounted cash flow approach and the market value approach
where a different weight to each of the approaches is assigned to estimate the
value of the Company when the RSUs were granted. The discounted cash
flow approach involves applying appropriate discount rates to estimated cash
flows that are based on earnings forecasts. The market value approach
incorporates certain assumptions including the market performance of comparable
companies as well as the Company’s financial results and business
plan. These assumptions include: no material changes in the existing
political, legal, fiscal and economic conditions in Taiwan; the Company’s
ability to retain competent management, key personnel and technical staff to
support its ongoing operations; and no material deviation in industry trends and
market conditions from economic forecasts.
In
December 2007, due to the carve-out of television semiconductor solutions
business to incorporate Himax Media Solutions, Inc. (“Himax Media Solutions”, a
consolidated subsidiary), 145 employees were transferred from Himax Taiwan to
Himax Media Solutions. 361,046 units of these employees’ unvested
RSUs were cancelled in exchange for 3,416,714 nonvested shares of Himax Media
Solutions’ ordinary share. See Note 15 (c) (iv) for
further details of the modification of award.
RSUs
activity under the long-term incentive plan during the periods indicated is as
follows:
|
Number
of
Underlying
Shares
for RSUs
|
Weighted
Average
Grant
Date Fair Value
|
|||||||
|
Balance
at January 1, 2005
|
- | $ |
-
|
|||||
|
Granted
|
1,317,564 |
8.62
|
||||||
|
Vested
|
(329,395 | ) |
8.62
|
|||||
|
Balance
at December 31, 2005
|
988,169 |
8.62
|
||||||
|
Granted
|
3,798,808 |
5.71
|
||||||
|
Vested
|
(2,106,669 | ) |
6.14
|
|||||
|
Forfeited
|
(172,165 | ) |
7.19
|
|||||
|
Balance
at December 31, 2006
|
2,508,143 |
6.39
|
||||||
|
Granted
|
6,694,411 |
3.95
|
||||||
|
Vested
|
(4,507,170 | ) |
4.46
|
|||||
|
Cancelled
|
(361,046 | ) |
3.98
|
|||||
|
Forfeited
|
(680,949 | ) |
5.27
|
|||||
|
Balance
at December 31, 2007
|
3,653,389 |
4.75
|
||||||
F-35
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
As of
December 31, 2007, the total compensation cost related to the unvested RSUs not
yet recognized was $14,965 thousand. The weighted-average period over
which it is expected to be recognized is 2.34 years.
The
allocation of compensation expenses from the RSUs granted to employees and
independent directors under the long-term incentive plan is summarized as
follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
|
2006
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of revenues
|
$ | 62 | 264 | 422 | ||||||||
|
Research
and development
|
2,080 | 11,263 | 15,164 | |||||||||
|
General
and administrative
|
262 | 1,392 | 2,182 | |||||||||
|
Sales
and marketing
|
436 | 1,554 | 2,323 | |||||||||
| $ | 2,840 | 14,473 | 20,091 | |||||||||
|
|
(c)
|
Nonvested
Shares Issued to Employees
|
(i) In
June 2001, November 2001 and January 2002, Himax Taiwan granted nonvested shares
of common stock to certain employees for their future service. The
shares will vest five years after the grant date. If employees leave
Himax Taiwan before completing the five year service period, they must sell
these shares back to Himax Taiwan at NT$1.00 (US$0.03) per share.
Because
the shares had not vested, the capital increase recorded when the shares were
issued was fully offset by an equal amount of deferred compensation expense.
Compensation expense is recognized on a straight-line basis over the five-year
service period with a corresponding reduction of deferred compensation expense,
resulting in a net increase in equity. The Company recognized
compensation expenses of $92 thousand and $70 thousand in 2005 and 2006,
respectively. Such compensation expense was recorded as research and
development expenses in the accompanying consolidated statements of income since
the employees who received such nonvested shares were assigned to the research
and development department. The fair value of shares on grant date
was estimated based on the then most recent price of new shares issued to
unrelated third parties, which was NT$4.02 (US$0.116) per share.
F-36
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Nonvested
share activity during the periods indicated is as follows:
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair Value
|
|||||||
|
Balance
at January 1, 2005
|
3,195,885 | $ | 0.116 | |||||
|
Forfeited
|
(2,487 | ) | 0.116 | |||||
|
Balance
at December 31, 2005
|
3,193,398 | 0.116 | ||||||
|
Vested
|
(3,193,398 | ) | 0.116 | |||||
|
Balance
at December 31, 2006
|
- | - | ||||||
The
forfeiture of nonvested shares issued to employees is based on the original
number of shares granted, not including the shares issued pursuant to subsequent
stock splits or dividends.
As of
December 31, 2006, the total compensation cost related to the actual number of
nonvested shares that vest has been fully recognized.
(ii) In
September 2005, Himax Analogic granted nonvested shares of its common stock to
certain employees for their future service. The shares will vest four
years after the grant date. If employees leave Himax Analogic before
completing the four year service period, they must sell these shares back to
Himax Analogic at NT$1.00 (US$0.03) per share. The Company recognized
compensation expenses of $33 thousand, $59 thousand, and $59 thousand in 2005,
2006, and 2007, respectively. Such compensation expense was recorded
as research and development expenses in the accompanying consolidated statements
of income with a corresponding increase to minority interest in the accompanying
consolidated balance sheets. The fair value of shares on grant date
was estimated based on the then most recent price of new shares issued to
unrelated third parties, which was NT$10 (US$0.319) per share.
Nonvested
share activity of this award during the period indicated is as
follows:
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair Value
|
|||||||
|
Balance
at January 1, 2005
|
- | $ |
-
|
|||||
|
Granted
|
1,250,000 |
0.319
|
||||||
|
Forfeited
|
(445,000 | ) |
0.319
|
|||||
|
Balance
at December 31, 2005
|
805,000 |
0.319
|
||||||
|
Forfeited
|
(36,000 | ) |
0.319
|
|||||
|
Balance
at December 31, 2006
|
769,000 |
0.319
|
||||||
|
Forfeited
|
(66,000 | ) |
0.319
|
|||||
|
Balance
at December 31, 2007
|
703,000 |
0.319
|
||||||
F-37
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
As of
December 31, 2007, the total compensation cost related to this award not yet
recognized was $70 thousand. The weighted-average period over which
it is expected to be recognized is 1.54 years.
(iii) In September 2007, Himax
Imaging Inc. (“Himax Imaging”, a consolidated subsidiary) granted nonvested
shares of its common stock to certain employees for their future service, and
the employees must pay $0.15 per share. The shares will vest four
years after the grant date. If employees leave Himax Imaging before
completing the four year service period, they must sell these shares back to
Himax Imaging at $0.15 per share. The Company recognized compensation
expenses of $56 thousand in 2007. Such compensation expense was
recorded as research and development expenses in the accompanying consolidated
statements of income with a corresponding increase to minority interest in the
accompanying consolidated balance sheets. The fair value of shares on
grant date was estimated based on the then most recent price of new shares
issued, which was US$0.33 per share.
Nonvested
share activity of this award during the period indicated is as
follows:
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair Value
|
|||||||
|
Balance
at January 1, 2007
|
- | $ |
-
|
|||||
|
Granted
|
5,559,000 |
0.33
|
||||||
|
Balance
at December 31, 2007
|
5,559,000 |
0.33
|
||||||
As of
December 31, 2007, the total compensation cost related to this award not yet
recognized was $967 thousand. The weighted-average period over which
it is expected to be recognized is 3.84 years.
(iv) As
stated in Note 15 (b) above, in December 2007, Himax Media Solutions granted
3,416,714 nonvested shares of its ordinary share to 145 employees transferred
from Himax Taiwan to exchange for 361,046 units of these employees’ unvested
RSUs. The modification of equity award incurred an incremental
compensation cost of $148 thousand for the excess of the fair value of the
modified award issued over the fair value of the original unvested RSUs at the
date of modification. The Company then added incremental compensation
cost to the remaining unrecognized compensation cost of the original award at
the date of modification and the total compensation cost are recognized as
compensation expenses ratably over the requisite service period of the modified
award.
F-38
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The fair
value of the original unvested RSUs was determined based on the average market
price of the Company’s ordinary shares underlying the RSU at the modification
dates occurred during the period from November 12, 2007 to November 16,
2007. The fair value of Himax Media Solutions’ nonvested shares at
the modification date was determined based on the then most recent price of
Himax Media Solutions’ new shares issued to unrelated third parties, which was
NT$15 (US$0.464) per share.
The vesting schedule for the
nonvested shares is as follows: 50% will vest on June 20, 2009 and the remaining
50% will vest on December 20, 2010. The Company recognized
compensation expenses of $14 thousand in 2007. Such compensation
expense was recorded as sales and marketing expense and research and development
expenses in the accompanying consolidated statements of income.
Nonvested
share activity of this award during the period indicated is as
follows:
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair Value
|
|||||||
|
Balance
at January 1, 2007
|
- | $ |
-
|
|||||
|
Granted
|
3,416,714 |
0.464
|
||||||
|
Forfeited
|
(18,000 | ) |
0.464
|
|
||||
|
Balance
at December 31, 2007
|
3,398,714 |
0.464
|
||||||
As of
December 31, 2007, the total compensation cost related to this award not yet
recognized was $1,313 thousand. The weighted-average period over
which it is expected to be recognized is 2.97 years.
|
|
(d)
|
Treasury
Stock Issued to Employees
|
In 2002
and 2003, treasury shares were issued to employees with a three year vesting
period. The excess of the fair value of these common shares over any
amount that an employee paid for treasury stock is recorded as deferred
compensation expense which is reflected as an offset to equity upon issuance of
the treasury shares. Deferred compensation expense is amortized to
compensation expense on a straight-line basis over the three-year service period
with a corresponding increase to equity.
Management
is primarily responsible for estimating the fair value of its
share. When estimating fair value, management considered a number of
factors, including retrospective valuations from an independent third-party
valuer. The estimated grant date fair value per share in 2002 and
2003 range from NT$15.32 (US$0.459) to NT$19.93 (US$0.577) and NT$20.17
(US$0.583) to NT$52.10 (US$1.538), respectively.
F-39
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Treasury
stock activity during the periods indicated is as follows:
|
Number
of
Shares
|
Weighted
Average
of
Excess
of Grant
Date
Fair Value
over
Employee
Payment
|
|||||||
|
Balance
at January 1, 2005
|
7,185,668 | $ |
0.597
|
|||||
|
Vested
|
(2,706,593 | ) |
0.356
|
|
||||
|
Balance
at December 31, 2005
|
4,479,075 |
0.743
|
|
|||||
|
Vested
|
(4,479,075 | ) |
0.743
|
|||||
|
Balance
at December 31, 2006
|
- |
-
|
||||||
The
forfeiture of treasury stock issued to employees is based on the original number
of shares granted, not including the shares issued pursuant to subsequent stock
splits or dividends.
The
allocation of compensation expenses from the treasury stock issued to employees
is summarized as follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of revenues
|
$ | 28 | 11 |
-
|
||||||||
|
Research
and development
|
916 | 414 |
-
|
|||||||||
|
General
and administrative
|
132 | 52 |
-
|
|||||||||
|
Sales
and marketing
|
177 | 71 |
-
|
|||||||||
| $ | 1,253 | 548 |
-
|
|||||||||
|
|
(e)
|
RSUs
issued in connection with the acquisition of Wisepal
|
| As stated in Note 3, on February 1, 2007, the Company granted 418,440 units of RSUs in exchange for Wisepal’s unvested stock option where each unit of RSU represents one ordinary share of the Company. 127,283 RSUs grant vested immediately on the acquisition date and a subsequent 10%, 33% and 27% of the RSU grant will vest on each of September 30, 2007, 2008 and 2009, respectively, subject to certain forfeiture events. Vested portion of the RSUs grant was included in the purchase cost of Wisepal while the unvested portion is treated as post-combination compensation expense. The value of the unvested portion of the RSUs grant amounted to $945 thousand which was determined based on the market price of the Company’s ordinary shares on the acquisition date. Such post-combination compensation expense is amortized to compensation expense on a straight-line basis over the requisite service period. The Company recognized compensation expenses of $94 thousand in 2007 which was recorded as research and development expenses in the accompanying consolidated statements of income. |
F-40
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Number
of
Underlying
Shares for RSUs
|
Weighted
Average
Grant
Date Fair Value
|
|||||||
|
Balance
at January 1, 2007
|
- | $ |
-
|
|||||
|
Granted
|
418,440 |
7.064
|
||||||
|
Vested
|
(165,114 | ) |
7.064
|
|||||
|
Forfeited
|
(200,760 | ) |
7.064
|
|||||
|
Balance
at December 31, 2007
|
52,566 |
7.064
|
||||||
As of
December 31, 2007, the total compensation cost related to this award not yet
recognized was $180 thousand. The weighted-average period over which
it is expected to be recognized is 1.75 years.
|
|
(f)
|
Employee
stock options
|
|
On
December 20, 2007, board of directors of Himax Media Solutions approved a
plan to grant stock options to certain employees. The plan
authorizes grants to purchase up to 6,800,000 shares of Himax Media
Solutions’ authorized but unissued ordinary shares. The exercise
price is NT$15 (US$0.464). All options
under the plan have four-year terms and 50%, 25% and 25% of each
grant will become exercisable subsequent to the second, third and
fourth anniversary of the grant date, respectively. The
Company recognized compensation expenses of $7 thousand in
2007. Such compensation expense was recorded as sales and
marketing expense and research and development expenses in the
accompanying consolidated statements of income.
At
December 31, 2007, there were 304,500 additional shares available for
Himax Media Solutions’ grant under the plan. The calculated
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that used the weighted average
assumptions in the following table. Himax Media Solutions uses
the simplified method to estimate the expected term of the options as
it does not have any historical share option exercise experience and the
exercise data relating to employees of other companies is not easily
obtainable. Since Himax Media Solutions’ shares are not
publicly traded and its shares are rarely traded privately, expected
volatility is computed based on the average historical volatility of
similar entities with publicly traded shares. The risk-free
rate for the expected term of the option is based on the interest rate of
10 years ROC central government bond at the time of
grant.
|
|
Valuation
assumptions:
|
2007
|
|||
|
Expected
dividend yield
|
0% | |||
|
Expected
volatility
|
39.94% | |||
|
Expected
term (years)
|
4.375 | |||
|
Risk-free
interest rate
|
2.4776% | |||
F-41
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Stock
option activity during the periods indicated is as follows:
|
Number
of shares
|
Weighted
average
exercise
price
|
Weighted
average
remaining
contractual term
|
||||||||||
|
Balance
at December 20, 2007
|
- | $ | - | - | ||||||||
|
Granted
|
6,495,500 | 0.464 | 4.375 | |||||||||
|
Forfeited
|
(5,000 | ) | 0.464 | 4.375 | ||||||||
|
Balance
at December 31, 2007
|
6,490,500 | 0.464 | 4.375 | |||||||||
The
weighted average grant date calculated value of the options granted in 2007 was
NT$3.09 (US$0.096). No option was exercisable as of December 31,
2007.
|
Note
16.
|
Stockholders'
Equity
|
|
|
(a)
|
Share
capital
|
|
On
October 14, 2005, the shareholders of Himax Taiwan exchanged an aggregated
of 180,769,264 common shares of Himax Taiwan for an aggregate of
180,769,264 ordinary shares of Himax Technologies,
Inc. Accordingly, as of October 14, 2005, Himax Technologies,
Inc. has an authorized share capital of 500,000,000 ordinary shares with
par value of US$0.0001 per share, and 180,769,265 ordinary shares issued
and outstanding. There was no change in the amount of total
stockholders’ equity as a result of this transaction.
In accordance with the Company’s board of director’s
resolution on November 2, 2006, the Company repurchased 7,885,835 ADSs and
2,161,636 ADSs in 2006 and 2007, respectively from open
market. On February 1, 2007, the Company announced the
completion of its share buyback program. In total, the Company
has repurchased $50 million or 10,047,471 ADSs in the open market at an
average price of US$4.98 per ADS.
In accordance with the Company’s board of director’s
resolution on November 1, 2007, the Company authorized another new share
buyback program. The program allows the Company to repurchase
up to $40 million of the Company’s ADSs for retirement. The
Company repurchased 6,569,108 ADSs in
2007.
|
F-42
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(b)
|
Earnings
distribution
|
|
As a
holding company, the major asset of the Company is the 100% ownership
interest in Himax Taiwan. Dividends received from the Company’s
subsidiaries in Taiwan, if any, will be subjected to withholding tax under
ROC law. The ability of the Company’s subsidiaries to pay
dividends, repay intercompany loans from the Company or make other
distributions to the Company may be restricted by the availability of
funds, the terms of various credit arrangements entered into by the
Company’s subsidiaries, as well as statutory and other legal
restrictions. The Company’s subsidiaries in Taiwan are
generally not permitted to distribute dividends or to make any other
distributions to shareholders for any year in which it did not have either
earnings or retained earnings (excluding reserve). In addition,
before distributing a dividend to shareholders following the end of a
fiscal year, a Taiwan company must recover any past losses, pay all
outstanding taxes and set aside 10% of its annual net income (less prior
years’ losses and outstanding taxes) as a legal reserve until the
accumulated legal reserve equals its paid-in capital, and may set aside a
special reserve.
The legal and special reserve provided by Himax Taiwan
as of December 31, 2006 and 2007 amounting to $14,178 thousand and $21,001
thousand, respectively.
|
|
Note
17.
|
Income
Taxes
|
|
Substantially
all of the Company’s pre-tax income is derived from the operations in the
ROC and substantially all of the Company’s income tax expense (benefit) is
incurred in the ROC.
An additional 10% corporate income tax will be assessed
on undistributed income for the consolidated entities in the ROC, but only
to the extent such income is not distributed before the end of the
following year. The 10% surtax is recorded in the period the
income is earned, and the reduction in the tax liability is recognized in
the period the distribution to shareholders is finalized. Prior
to 2006, the tax effects of temporary differences were initially measured
by using the undistributed tax rate of 32.5%. Commencing from
2006, due to the enacted changes in ROC Income Tax Acts in May 2006
that revised the tax base of the undistributed income surtax from
“assessed taxable income, net of current tax” to “net income under
ROC generally accepted accounting principles (ROC GAAP) ”, the tax effects
of temporary differences between ROC GAAP and tax base are initially
measured at the distributed tax rate of 25% and the tax effects of
temporary differences between US GAAP and ROC GAAP are initially measured
at the revised undistributed tax rate of
31.8%.
|
F-43
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
In
accordance with the ROC Statute for Upgrading Industries, the Company’s capital
increase in 2003 and 2004 related to the manufacturing of newly designed TFT-LCD
driver was approved by the government authorities as a newly emerging, important
and strategic industry. The incremental income derived from selling
the above new product is tax exempt for a period of five years. The
tax exemption period of the Company‘s effective tax incentive as of December 31,
2007 are as follows:
|
Date of capital increase
|
Tax exemption period
|
|
|
September
1, 2003
|
April
1, 2004 ~ March 31, 2009
|
|
|
October
29, 2003
|
January
1, 2006 ~December 31, 2010
|
|
|
September
20, 2004
|
January
1, 2008 ~December 31, 2012
|
The
aggregate basic and diluted earnings per share effect of such income tax
exemption for the years ended December 31, 2005, 2006 and 2007, is a $0.05,
$0.08 and $0.14, increase to earnings per share, respectively.
The
components of income tax expense (benefit) are summarized as
follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
income tax expense
|
$ | 12,294 | 3,492 | 12,770 | ||||||||
|
Deferred
income tax benefit
|
(3,371 | ) | (8,938 | ) | (14,630 | ) | ||||||
| $ | 8,923 | (5,446 | ) | (1,860 | ) | |||||||
F-44
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
differences between expected income tax expense, computed based on the statutory
undistributed income tax rate of 32.5%, 31.8% and 31.8% for 2005, 2006 and 2007,
respectively, and the actual income tax expense (benefit) as reported in the
accompanying consolidated statements of income for the years ended December 31,
2005, 2006 and 2007 are summarized as follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Expected
income tax expense
|
$ | 22,834 | 22,103 | 34,851 | ||||||||
|
Tax-exempted
income
|
(9,189 | ) | (16,012 | ) | (27,018 | ) | ||||||
|
Effect
of difference between tax base of undistributed income surtax with pre-tax
income
|
- | 1,562 | 4,012 | |||||||||
|
Adjustment
for enacted change in tax laws
|
- | 1,099 | - | |||||||||
|
Impairment
loss on investment in non-marketable securities
|
- | 477 | - | |||||||||
|
Nontaxable
gains on sale of marketable securities
|
(38 | ) | (67 | ) | (168 | ) | ||||||
|
Increase
of investment tax credits
|
(10,647 | ) | (15,216 | ) | (20,048 | ) | ||||||
|
Increase
in valuation allowance
|
2,421 | 2,798 | 5,366 | |||||||||
|
Non
deductible share-based compensation expenses
|
2,799 | 1,002 | 330 | |||||||||
|
Provision
for uncertain tax position in connection with share-based compensation
expenses
|
124 | 526 | 276 | |||||||||
|
Tax
benefit resulting from distribution of prior year’s income
|
- | (789 | ) | (689 | ) | |||||||
|
Foreign
tax rate differential
|
83 | (1,796 | ) | (1,690 | ) | |||||||
|
Variance
from audits of prior years’ income tax filings
|
(15 | ) | (873 | ) | 3,000 | |||||||
|
Others
|
551 | (260 | ) | (82 | ) | |||||||
|
Actual
income tax expense (benefit)
|
$ | 8,923 | (5,446 | ) | (1,860 | ) | ||||||
The
adjustment for enacted change in tax laws includes adjustment to deferred tax
assets and liabilities and the undistributed income surtax of 2005 related to
this change amounting to $686 thousand and $413 thousand,
respectively. The enacted changes in ROC Income Tax Acts in May 2006
affects the determination of the undistributed income surtax commencing from
2005 and related deferred income tax assets and liabilities existed as of the
enactment date. The Company recognized the impact of the change in
2006, the year of enactment of the tax law.
F-45
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The amount
of total income tax expense (benefit) allocated to continuing operations and the
amounts separately allocated to other items are summarized as
follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Continuing
operations
|
$ | 8,923 | (5,446 | ) | (1,860 | ) | ||||||
|
Charged
directly to equity
|
- | (98 | ) | - | ||||||||
|
Other
comprehensive income (loss)
|
3 | 3 | 16 | |||||||||
|
Total
income tax expense (benefit)
|
$ | 8,926 | (5,541 | ) | (1,844 | ) | ||||||
As of
December 31, 2006 and 2007, the components of deferred income tax assets
(liabilities) were as follows:
|
December 31,
|
|||||||||
|
2006
|
2007
|
||||||||
|
(in
thousands)
|
|||||||||
|
Deferred
tax assets:
|
|||||||||
|
Inventory
|
$ | 1,497 | 5,430 | ||||||
|
Capitalized
expense for tax purposes
|
85 | 204 | |||||||
|
Accrued
compensated absences
|
88 | 121 | |||||||
|
Allowance
for sales return, discounts and warranty
|
328 | 207 | |||||||
|
Unused
investment tax credits
|
19,420 | 32,689 | |||||||
|
Unused
loss carry-forward
|
3,094 | 6,970 | |||||||
|
Accrued
pension cost
|
98 | 100 | |||||||
|
Other
|
13 | 203 | |||||||
|
Total
gross deferred tax assets
|
24,623 | 45,924 | |||||||
|
Less:
valuation allowance
|
(6,278 | ) | (12,300 | ) | |||||
|
Net
deferred tax assets
|
18,345 | 33,624 | |||||||
|
Deferred
tax liabilities:
|
|||||||||
|
Unrealized
foreign exchange gain
|
125 | 41 | |||||||
|
Foreign
currency translation adjustments
|
6 | - | |||||||
|
Prepaid
pension cost
|
65 | 169 | |||||||
|
Acquired
intangible assets
|
- | 4,547 | |||||||
|
Deferred
revenue
|
- | 16 | |||||||
|
Total
gross deferred tax liabilities
|
196 | 4,773 | |||||||
|
Net
deferred tax assets
|
$ | 18,149 | 28,851 | ||||||
F-46
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
valuation allowance for deferred tax assets as of January 1, 2005, 2006 and 2007
was $893 thousand, $3,314 thousand and $6,278 thousand, respectively. The
net change in the valuation allowance for the years ended December 31,
2005, 2006 and 2007, was an increase of $2,421 thousand, $2,964 thousand
and $6,022 thousand, respectively. The change in 2006 and 2007
includes an increase of valuation allowance of $166 thousand and $656 thousand,
respectively, which was provided for the deferred tax assets attributable to the
acquisition of Integrated Microdisplays Limited in October 2006 and Wisepal in
February 2007.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible and tax loss carryforwards
utilizable. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax
assets, the Company will need to generate future taxable income of approximately
$110,534 thousand prior to the expiration of the net operating loss
carryforwards and investment tax credit carryforwards in
2011. Taxable income for the years ended December 31, 2006 and 2007
was $10,199 thousand and $25,043 thousand, respectively. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of the remaining deferred tax assets at December 31, 2007. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
As of
December 31, 2006 and 2007, subsequent recognized tax benefits relating to the
valuation allowance for deferred tax assets will be allocated as
follows:
|
|
December 31,
|
|||||||
|
2006
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Income
tax benefit that would be reported in the consolidated statement of
income
|
$ | 6,112 | 11,478 | |||||
|
Goodwill
and other noncurrent intangible assets
|
166 | 822 | ||||||
| $ | 6,278 | 12,300 | ||||||
Except for
Himax Taiwan and Himax Anyang (Korea), all other subsidiaries of the Company
have generated tax losses since inception and are not included in the
consolidated tax filing with Himax Taiwan, a valuation allowance of $6,278
thousand and $12,300 thousand as of December 31, 2006 and 2007, respectively,
was provided to reduce their deferred tax assets (consisting primarily of
operating loss carryforwards and unused investment tax credits) to zero because
management believes it is unlikely these tax benefits will be
realized. The total tax loss carryforwards for these subsidiaries at
December 31, 2007 was $27,555 thousand, which will expire if unused by
2012. The remaining investment tax credit for these subsidiaries at
December 31, 2007 was $5,843 thousand, which will expire if unused by
2011.
F-47
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
According
to the Statute for Upgrading Industries, the purchase of machinery for the
automation of production, expenditure for research and development and training
of professional personnel entitles the Company to tax credits. This
credit may be applied over a period of five years. The amount of the
credit that may be applied in any year except the final year is limited to 50%
of the income tax payable for that year. There is no limitation on
the amount of investment tax credit that may be applied up to the amount of the
tax actually payable in the final year.
As of
December 31, 2007, all of the Company’s remaining investment tax credits of
NT$1,060,100 thousand (US$32,689 thousand), which will expire if unused by
2011.
Himax
Taiwan’s income tax returns have been examined and assessed by the ROC tax
authorities through 2005.
The
Company had accrued tax liabilities or reduced deferred tax asset to address
potential exposures involving positions that could be challenged by taxing
authorities. As of January 1, 2007, the amount of uncertain tax
positions was $1,276 thousand. As of December 31, 2007, the amount of
uncertain tax positions $3,968 thousand.
A
reconciliation of the beginning and ending amount of uncertain tax positions is
as follows (in thousands):
|
Balance
at January 1, 2007
|
$ | 1,276 | ||
|
Increase
related to prior year tax positions
|
503 | |||
|
Increase
related to current year tax positions
|
2,189 | |||
|
Balance
at December 31, 2007
|
3,968 | |||
Included
in the balance of total unrecognized tax benefits at December 31, 2007, are
potential benefits of $3,968 thousand that if recognized, would reduce the
Company’s effective tax rate. The Company’s major taxing jurisdiction
is Taiwan. The tax years 2006 and 2007 remain open to examination by
Taiwan tax jurisdictions. It is possible that the
examination will result in a positive or negative adjustment to the Company's
unrecognized tax positions within the next 12 months. The
Company is unable to estimate the range of the benefit or detriment as of
December 31, 2007.
As part of
the analysis completed, management determined that there were various FIN
No. 48 implications to the compensation expenses for RSU and investment tax
credits that resulted in the establishment of an accrued liability pursuant to
FIN No. 48 of $885 thousand on compensation expenses and a reduction of
deferred tax assets of $3,083 thousand on certain investment tax credit
carryforwards.
F-48
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
18.
|
Derivative
Financial Instruments
|
|
The Company operates in Taiwan and internationally, giving rise to
exposure to changes in foreign currency exchanges rates. The
Company enters into foreign currency forward contracts to reduce such
exposure. None of the Company’s derivatives qualify for hedge
accounting pursuant to SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. Accordingly, the
derivative instruments are recorded at fair value on the consolidated
balance sheets with the change in fair value being reflected immediately
in earnings in the consolidated statements of income.
The Company did not hold any derivative financial
instruments as of December 31, 2006 and 2007, respectively. The
realized gains (losses) resulting from foreign currency forward contracts
were $108 thousand and ($611) thousand in 2005 and 2006,
respectively.
|
|
Note
19.
|
Fair
Value of Financial Instruments
|
| The fair values of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their relatively short maturities. Marketable securities consisting of open-ended bond funds are reported at fair value based on quoted market prices at the reporting date. Marketable securities consisting of time deposits with original maturities more than three months is determined using the discounted present value of expected cash flows. The fair value of investments in non-marketable securities has not been estimated as there are no identified events or changes in circumstances that may have significant adverse effects on the carrying value of these investments, and it is not practicable to estimate their fair values. |
|
Note
20.
|
Significant
Concentrations
|
|
Financial instruments that currently subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents,
marketable securities and accounts receivable. The Company
places its cash primarily in checking and saving accounts with reputable
financial institutions. The Company has not experienced any
material losses on deposits of the Company’s cash and cash
equivalents. Marketable securities consist of time deposits
with original maturities of greater than three months and investments in
an open-ended bond fund identified to fund current
operations. All marketable securities are classified as
available-for-sale.
The Company derived substantially all of its revenues
from sales of display drivers that are incorporated into TFT-LCD
panels. The TFT-LCD panel industry is intensely competitive and
is vulnerable to cyclical market conditions and subject to price
fluctuations. The Company expects to be substantially dependent
on sales to the TFT-LCD panel industry for the foreseeable
future.
|
The
Company depends on two customers for a substantial majority of its revenues and
the loss of, or a significant reduction in orders from, either of them would
significantly reduce the Company’s revenues and adversely impact the Company’s
operating results. The largest customer (CMO and its affiliates), a
related party, accounted for approximately 58.9%, 55.0% and 58.8%, respectively,
of the Company’s revenues in 2005, 2006 and 2007. The other (Chunghwa
Picture Tubes and its affiliates) accounted for 16.2%, 12.4% and 7.3%,
respectively in 2005, 2006 and 2007. The largest customer represented
more than 10% of the Company’s accounts receivable balance at December 31, 2006
and 2007. CMO and its affiliates accounted for approximately 50.3%
and 68.4% of the Company’s accounts receivable balance at December 31, 2006 and
2007, respectively. Moreover, the Company has at times agreed to
extend the payment terms for certain of its customers. Other customers have also
requested extension of payment terms, and the Company may grant such requests
for extension in the future. As a result, a default by any such
customer, a prolonged delay in the payment of accounts receivable, or the
extension of payment terms for the Company’s customers would adversely affect
the Company’s cash flow, liquidity and operating results. The Company
performs ongoing credit evaluations of each customer and adjusts credit policy
based upon payment history and the customer’s credit worthiness, as determined
by the review of their current credit information. See Notes 21 and 23 for
additional information.
The
Company focuses on design, development and marketing of its products and
outsources all its semiconductor fabrication, assembly and test. The
Company primarily depends on eight foundries to manufacture its wafer, and any
failure to obtain sufficient foundry capacity or loss of any of the foundries it
uses could significantly delay the Company’s ability to ship its products, cause
the Company to lose revenues and damage the Company’s customer
relationships.
There are
a limited number of companies which supply processed tape used to manufacture
the Company’s semiconductor products and therefore, from time to time, shortage
of such processed tape may occur. If any of the Company’s suppliers
experience difficulties in delivering processed tape used in its products, the
Company may not be able to locate alternative sources in a timely
manner. Moreover, if shortages of processed tape were to occur, the
Company may incur additional costs or be unable to ship its products to
customers in a timely manner, which could harm the Company’s business customer
relationships and negatively impact its earnings.
A limited
number of third-party assembly and testing houses assemble and test
substantially all of the Company’s current products. As a result, the
Company does not directly control its product delivery schedule, assembly and
testing costs and quality assurance and control. If any of these
assembly and testing houses experiences capacity constraints or financial
difficulties, or suffers any damage to its facilities, or if there is any other
disruption of its assembly and testing capacity, the Company may not be able to
obtain alternative assembly and testing services in a timely
manner. Because the amount of time the Company usually takes to
qualify assembly and testing houses, the Company could experience significant
delays in product shipments if it is required to find alternative
sources. Any problems that the Company may encounter with the
delivery, quality or cost of its products could damage the Company’s reputation
and result in a loss of customers and orders.
F-50
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
21.
|
Related-party
Transactions
|
|
|
(a)
|
Name
and relationship
|
|
Name
of related parties
|
Relationship
|
|
|
Chi
Mei Optoelectronics Corp. (CMO)
|
Shareholder
represented on the Company’s Board of Directors; the Company’s Chairman
represented on CMO’s Board of Directors
|
|
|
Chi
Mei Optoelectronics Japan, Co., Ltd . (CMO-Japan, formerly named
International Display Technology Ltd. or ID Tech)
|
Wholly
owned subsidiary of CMO
|
|
|
Jemitek
Electronic Corp. (JEC)
|
The
Company’s CEO represented on JEC’s Board of Directors until November
2007. JEC was acquired by Innolux Display Incorporation on
March 1, 2007.
|
|
|
Chi
Mei Corporation (CMC)
|
Major
shareholder of CMO
|
|
|
NEXGEN
Mediatech Inc. (NEXGEN)
|
CMC
nominated more than half of the seats on NEXGEN’s Board of
Directors
|
|
|
Chi
Mei Communication System, Inc. (CMCS)
|
CMC
nominated more than half of the seats on CMCS’s Board of
Directors
|
|
|
Chi
Lin Technology Co., Ltd.(Chi Lin Tech)
|
CMC
nominated more than half of the seats on Chi Lin Tech’s Board of
Directors
|
|
|
NingBo
Chi Mei Optoelectronics Ltd. (CMO-NingBo)
|
The
subsidiary of CMO
|
|
|
Chi
Mei EL Corporation (CMEL)
|
The
subsidiary of CMO
|
|
|
TopSun
Optronics, Inc. (TopSun)
|
Chi
Lin Tech nominated more than half of the seats on TopSun’s Board of
Directors since September 2006. On January 1, 2007,
TopSun
merged with Chi Lin Tech, Chi Lin
Tech was the
surviving company
|
|
|
NanHai
Chi Mei Optoelectronics Ltd. (CMO- NanHai)
|
The
subsidiary of CMO
|
|
|
ChiHsin
Electronics Corp. (ChiHsin)
|
The
subsidiary of CMO
|
|
|
Chi
Mei Logistics Corp. (CMLC)
|
The
subsidiary of CMO
|
|
|
NingBo
Chi Mei Logistics Corp. (CMLC-NingBo)
|
The
subsidiary of CMO
|
F-51
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(b)
|
Significant
transactions with related parties
|
|
|
(i)
|
Revenues
and accounts receivable
|
| Revenues from related parties are summarized as follows: |
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
CMO
|
$ | 317,012 | 335,797 | 281,766 | ||||||||
|
CMO-NingBo
|
721 | 73,898 | 249,117 | |||||||||
|
Chi
Lin Tech
|
2,841 | 2,985 | 7,162 | |||||||||
|
CMO-
NanHai
|
- | - | 7,141 | |||||||||
|
ChiHsin
|
- | - | 1,499 | |||||||||
|
CMEL
|
- | 2 | 214 | |||||||||
|
NEXGEN
|
370 | 805 | 45 | |||||||||
|
TopSun
|
- | 1,136 | - | |||||||||
|
JEC
|
1,565 | 9 | - | |||||||||
|
CMO-Japan
|
275 | - | - | |||||||||
| $ | 322,784 | 414,632 | 546,944 | |||||||||
A
breakdown by product type for sales to CMO and its affiliates is summarized as
follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Display
driver for large-size applications
|
$ | 316,837 | 408,075 | 536,610 | ||||||||
|
Display
driver for consumer electronics applications
|
6 | 484 | 1,434 | |||||||||
|
Display
driver for mobile handsets
|
- | 8 | 771 | |||||||||
|
Others
|
1,165 | 1,130 | 922 | |||||||||
| $ | 318,008 | 409,697 | 539,737 | |||||||||
The
sales prices CMO receives are comparable to those offered to unrelated third
parties.
F-52
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
related accounts receivable resulting from the above sales as of December 31,
2006 and 2007, were as follows:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
CMO
|
$ | 81,610 | 94,069 | |||||
|
CMO-NingBo
|
33,923 | 92,779 | ||||||
|
CMO-
NanHai
|
- | 5,732 | ||||||
|
ChiHsin
|
- | 1,574 | ||||||
|
Chi
Lin Tech
|
444 | 1,049 | ||||||
|
NEXGEN
|
117 | 2 | ||||||
|
TopSun
|
1,158 | - | ||||||
|
CMEL
|
2 | - | ||||||
|
|
117,254 | 195,205 | ||||||
|
Allowance
for sales returns and discounts
|
(404 | ) | (303 | ) | ||||
| $ | 116,850 | 194,902 | ||||||
| The credit terms granted to CMO and its subsidiaries ranged form 60 days to 90 days, and the credit terms granted to other related parties ranged from 30 days to 45 days. The credit terms offered to unrelated third parties ranged from 30 days to 120 days. | ||
|
|
(ii)
|
Purchases
and accounts payable
|
| Purchases from related parties are summarized as follows: |
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
CMO
|
$ | 703 | 82 | 12 | ||||||||
|
CMC
|
9 | - | 12 | |||||||||
|
Chi
Lin Tech
|
31 | 7 | - | |||||||||
| $ | 743 | 89 | 24 | |||||||||
| The purchases had been full paid as of December 31, 2006 and 2007. | ||
| The terms of payment to related parties were approximately 30~60 days after receiving, comparable to that from third parties. | ||
|
|
(iii)
|
Property
transactions
|
| In 2005, the Company purchased equipment amounting to $2 thousand from Chi Lin Tech. The purchase had been full paid as of December 31, 2005. |
F-53
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(iv)
|
Lease
|
| The Company entered into a lease contract with CMO, CMLC and CMLC-NingBo for leasing office space and equipment. For the years ended December 31, 2005, 2006 and 2007, the related rent and utility expenses resulting from the aforementioned transactions amounted to $619 thousand, $759 thousand and $465 thousand, respectively, and were recorded as cost of revenue and operating expenses in the accompanying consolidated statements of income. As of December 31, 2006 and 2007, the related payables resulting from the aforementioned transactions amounted to $155 thousand and $111 thousand, respectively, and were recorded as other accrued expenses in the accompanying consolidated balance sheets. |
|
|
(v)
|
Sales
agent
|
|
The
Company entered into sales agent contracts with CMO and
CMCS. For the years ended December 31, 2005, the sales
commission resulting from such contracts amounted to $49
thousand. The sales commission expenses were recorded as a
deduction from revenue in the accompanying consolidated statements of
income. No commission expense occurred under such contracts in
2006 and 2007.
|
||
| (vi) | Others | |
|
In
2005, 2006 and 2007, the Company purchased consumable and miscellaneous
items amounting to $78 thousand, $159 thousand and $63 thousand,
respectively, from CMO, CMC, Chi Lin Tech and NEXGEN, which were charged
to operating expense. As of December 31, 2006 and 2007, the
related payables resulting from the aforementioned transactions were $4
thousand and $1 thousand, respectively.
In
2005, 2006 and 2007, Chi Lin Tech provided IC bonding service on prototype
panels for the Company’s research activities for a fee of $43 thousand,
$128 thousand and $113 thousand, respectively, which was charged to
research and development expense. As of December 31, 2006 and
2007, the related process fee payable resulting from the aforementioned
transactions was $38 thousand and $11 thousand,
respectively.
|
F-54
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
Note
22.
|
Commitments
and Contingencies
|
|
|
(a)
|
As
of December 31, 2006 and 2007, amounts of outstanding letters of credit
for the purchase machinery and equipment and license agreement were $146
thousand and $150 thousand,
respectively.
|
|
|
(b)
|
As
of December 31, 2006, and 2007 the Company had entered into several
contracts for the acquisition of equipment and computer software and the
construction of its new headquarters. Total contract prices
amounted to $7,806 thousand and $877 thousand, respectively. As
of December 31, 2006 and 2007, the remaining commitments were $2,816
thousand and $100 thousand,
respectively.
|
|
|
(c)
|
The
Company leases its office and buildings pursuant to operating lease
arrangements with unrelated third parties. The lease
arrangement will expire gradually from 2008 to 2010. As of
December 31, 2006 and 2007, deposits paid amounted to $477 thousand and
$371 thousand, respectively, and were recorded as refundable deposit in
the accompanying consolidated balance
sheets.
|
As of
December 31, 2007, future minimum lease payments under noncancelable operating
leases are as follows:
|
Duration
|
Amount
|
|||
|
(in
thousands)
|
||||
|
January
1, 2008~December 31, 2008
|
$ | 827 | ||
|
January
1, 2009~December 31, 2009
|
226 | |||
|
January
1, 2010~December 31, 2010
|
16 | |||
| $ | 1,069 | |||
Rental
expense for operating leases amounted to $1,305 thousand, $1,763 thousand and
$1,852 thousand in 2005, 2006 and 2007, respectively.
|
|
(d)
|
The
Company entered into several sales agent agreements commencing from
2003. Based on these agreements, the Company shall pay
commissions at the rates ranging from 0.6% to 5% of the sales to customers
in the specific territory or referred by agents as stipulated in these
agreements. Total commissions incurred amounting to $4,478
thousand, $3,788 thousand and $535 thousand, respectively, in 2005, 2006
and 2007, respectively. The sales commission expenses were
recorded as a deduction from revenue in the accompanying consolidated
statements of income.
|
|
|
(e)
|
In
August of 2004, the Company entered into a license agreement for the use
of certain central processing unit cores for product
development. In accordance with the agreement, the Company is
required to pay an initial license fee based on the three progresses of
the project development and a royalty based on shipments. The
license fee paid and charged to research and development expense in 2006
was $200 thousand. No license fee occurred in 2005 and
2007. As of December 31, 2007, no royalty
occurred.
|
F-55
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
In March
2005, the Company entered into a license agreement for the use of USB 2.0
relevant technology for product development. In accordance with the
agreement, the Company is required to pay an initial license fee based on the
progress of the project development and a royalty based on
shipments. No license fee occurred in 2005. The license fee charged
to research and development expense in 2006 and 2007 was $10 thousand and $250
thousand, respectively. As of December 31, 2007, no royalty
occurred.
In June
2007, the Company entered into a license agreement for the use of Analogix HDMI
1.3 receiver core relevant technology for product development. In
accordance with the agreement, the Company is required to pay an initial license
fee based on the progress of the project development and a royalty based on
shipments. The license fee paid and charged to research and
development expense in 2007 was $500 thousand. As of December 31,
2007, no royalty occurred.
|
|
(f)
|
The
company has entered into two agreements to provide donations for
laboratories with two top local universities in Taiwan. Total
contributions amounted to NT$50.4 million ($1.6 million). As of
December 31, 2007, the remaining commitments were NT$38.6 million ($1.2
million).
|
|
|
(g)
|
The
Company from time to time is subject to claims regarding the proprietary
use of certain technologies. Currently, the Company is not
aware of any such claims that it believes could have a material adverse
effect on its financial position or results of
operations.
|
|
(h)
|
Since
Himax Taiwan is not a listed company, it will depend on Himax
Technologies, Inc. to meet its equity financing requirements in the
future. Any capital contribution by Himax Technologies, Inc. to
Himax Taiwan may require the approval of the relevant ROC
authorities. The Company may not be able to obtain any such
approval in the future in a timely manner, or at all. If Himax
Taiwan is unable to receive the equity financing it requires, its ability
to grow and fund its operations may be materially and adversely
affected.
|
|
| (i) | The Company has entered into several wafer fabrication or assembly and testing service arrangements with service providers. The Company may be obligated to make payments for purchase orders entered into pursuant to these arrangements. |
F-56
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(j)
|
The
current corporate structure of the Company was established through a share
exchange, which became effective on October 14, 2005, between the Company
and the former shareholders of Himax Taiwan. The ROC Investment
Commission (an agency under the administration of the ROC Ministry of
Economic Affairs) approved the share exchange on September 7, 2005. In
connection with the application seeking approval of the share exchange,
the Company made the following undertakings to expand its investment in
the ROC, the approval of which was conditional upon the satisfaction of
such undertakings: (1) Himax Taiwan must purchase three hectares of land
in connection with the construction of its new headquarters in Tainan,
Taiwan, (2) Himax Taiwan must increase the number of employees
in the ROC to 430 employees, 475 employees and 520 employees by the end of
2005, 2006 and 2007, respectively, (3) Himax Taiwan must invest no less
than NT$800.0 million ($24.4 million), NT$900.0 million ($27.6 million)
and NT$1.0 billion ($30.7 million) for research and development in Taiwan
in 2005, 2006 and 2007, respectively, which may be satisfied through
cash-based compensation paid to research and development personnel but not
through non-cash share-based compensation and (4) Himax Taiwan must submit
to the ROC Investment Commission its annual financial statements audited
by a certified public accountant and other relevant supporting documents
in connection with the implementation of the above-mentioned conditions
within four months after the end of each of 2005, 2006 and
2007.
If
the Company does not satisfy the undertakings set by the ROC Investment
Commission in approving the share exchange, the ROC Investment Commission
may revoke Himax Taiwan’s right to repatriate profits to the Company
and/or its approval of the share exchange, the occurrence of either of
which would materially and adversely affect the Company’s business,
financial condition and results of operations and decrease the value of
the Company’s American depositary shares (ADSs). The material adverse
consequences include: (1) difficulty in obtaining approval for additional
investments in Himax Taiwan, (2) restrictions on transfer of net proceeds
of overseas offerings, (3) limitation on ability to raise capital through
the Company and (4) the loss of certain protections under the status as a
foreign-invested company under the ROC Statute for Investment by Foreign
Nationals, including the protection from expropriation of Himax Taiwan’s
assets.
Before
distributing a dividend to the Company, Himax Taiwan must recover any
accumulated losses in prior years, pay all outstanding taxes and set aside
10% of its annual net income as a legal reserve until the accumulated
legal reserve equals Himax Taiwan’s paid-in capital. Refer to Note 16 (b)
of the Company’s consolidated financial statements for further details.
However, if the Company does not satisfy the undertakings with the ROC
Investment Commission, the ROC Investment Commission may deny Himax
Taiwan’s right to repatriate dividends to the Company. Himax Taiwan’s
ability to make advances or repay intercompany loans with terms of less
than one year to the Company will not be restricted as such activities are
not subject to the ROC Investment Commission’s
approval.
|
F-57
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
|
The
ROC Investment Commission has the right (at its discretion) to revoke its
approval of the share exchange based on the undertakings described above.
Prior to the ROC Investment Commission exercising its discretionary right
to revoke its approval of the share exchange or Himax Taiwan’s right to
repatriate profits to the Company, in practice the Company and Himax
Taiwan would be notified and given an opportunity to be heard. There are
no promulgated rules or regulations setting forth the factors that the ROC
Investment Commission would consider in exercising its discretion. Each
case is determined individually. Should the approval be revoked, the
Company and Himax Taiwan would be entitled to appeal such decision to the
Committee of Appeal of the ROC Ministry of Economic Affairs and/or
initiate court proceedings to reverse such decision. A revocation by the
ROC Investment Commission would not (1) invalidate the effectiveness of
the share exchange pursuant to which the Company’s ownership structure was
established, (2) limit Himax Taiwan’s ability to issue equity or debt
securities or incur debt or (3) otherwise restrict Himax Taiwan’s
operations (other than as set out in the undertakings).
In
August 2005, the Company purchased 3.18 hectares of land for an aggregate
purchase price of approximately NT$325.8 million ($10.2 million) which
satisfied the first condition. Himax Taiwan had 549 employees,
664 employees and 569 employees as of December 31, 2005, 2006 and 2007,
respectively, and had spent NT$1,012 million ($30.9 million), NT$1,394
million ($42.8 million) and NT$1,859 million ($56.5 million) in research
and development expenditures in 2005, 2006 and 2007,
respectively. Therefore, as of December 31, 2005, 2006 and
2007, the Company had satisfied the 2005, 2006 and 2007 undertakings the
Company made with the ROC Investment
Commission.
|
|
|
(k)
|
On
July 30, 2007, a purported class action lawsuit was filed in the United
States District Court for the Central District of California against the
Company’s Chief Financial Officer alleging breach of fiduciary duty and
violations of Sections 11, 12(a) (2) and 15 of the Securities Act of
1933. On August 30, 2007, a similar class action lawsuit was
filed in the same court against the Company, its Chief Executive Officer
and its Chief Financial Officer, alleging violations of Sections 11 and 15
of the Securities Act of 1933. On February 5, 2008, the court
consolidated the two actions. The consolidated complaint added
as defendants certain of the Company’s directors, as well as Chi Mei
Optoelectronics Corporation (“CMO”), seeking unspecified damages on behalf
of purchasers of the Company’s stock pursuant and/or traceable to the
Company’s initial public offering in March 2006. The Plaintiffs
claim that defendants violated U.S. securities laws because the
registration statement associated with the IPO contained material
misrepresentations and/or omissions related to CMO’s inventory level prior
to the IPO. The Company filed a Motion to dismiss the lawsuit
on March 20, 2008, which is still
pending.
|
F-58
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
|
Subject
to certain limitations, and pursuant to its Articles of Association, the
Company is indemnifying its Chief Executive Officer and Chief Financial
Officer in connection with this lawsuit. The Company and the
individual defendants believe that the claims are not meritorious and
intend to defend against this lawsuit
vigorously. Nevertheless, the litigation is in its preliminary
stages and the Company cannot predict its outcome. An adverse
outcome in the litigation, if it occurred, could have a material adverse
effect on the Company’s results of operations. As of December
31, 2007, no provision for loss has been recognized in the Company’s
consolidated financial statements because at this stage the likelihood of
an unfavorable outcome is not considered probable and the amount of loss,
if any, is not estimable.
|
|
Note
23.
|
Segment
Information
|
The
Company is engaged in the design, development and marketing of semiconductors
for flat panel displays. Based on the Company’s internal organization
structure and its internal reporting, management has determined that the Company
does not have any operating segments as that term is defined in SFAS No. 131,
Disclosures about Segments of
an Enterprise and Related Information.
Revenues
from the Company’s major product lines are summarized as follow:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Display
drivers for large-size applications
|
$ | 470,631 | 645,513 | 752,196 | ||||||||
|
Display
drivers for mobile handset applications
|
31,123 | 52,160 | 75,704 | |||||||||
|
Display
drivers for consumer electronics applications
|
18,571 | 28,616 | 66,634 | |||||||||
|
Others
|
19,879 | 18,229 | 23,677 | |||||||||
| $ | 540,204 | 744,518 | 918,211 | |||||||||
The
following tables summarize information pertaining to the Company’s revenues from
customers in different geographic region (based on customer’s headquarter
location):
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Taiwan
|
$ | 482,991 | 605,924 | 785,334 | ||||||||
|
Other
Asia Pacific (China, Korea and Japan)
|
57,213 | 138,287 | 132,687 | |||||||||
|
Europe
(Netherlands and France)
|
- | 307 | 190 | |||||||||
| $ | 540,204 | 744,518 | 918,211 | |||||||||
F-59
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
carrying value of the company’s tangible long-lived assets are located in the
following countries:
|
December 31,
|
||||||||
|
2006
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Taiwan
|
$ | 38,681 | 45,379 | |||||
|
China
|
208 | 574 | ||||||
|
U.S.
|
- | 219 | ||||||
|
Korea
|
6 | 8 | ||||||
| $ | 38,895 | 46,180 | ||||||
Revenues
from significant customers, those representing 10% or more of total revenue for
the respective periods, are summarized as follows:
|
Year Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
CMO
and its affiliates, a related party
|
$ | 318,008 | 409,697 | 539,737 | ||||||||
|
Chunghwa
Picture Tubes and its affiliates
|
87,534 | 92,561 | 66,694 | |||||||||
| $ | 405,542 | 502,258 | 606,431 | |||||||||
Accounts
receivable from significant customers, those representing 10% or more of total
accounts receivable for the respective periods, is summarized as
follows:
|
December 31,
|
|||||||||
|
2006
|
2007
|
||||||||
|
(in
thousands)
|
|||||||||
|
CMO
and its affiliates, a related party
|
$ | 115,535 | 194,154 | ||||||
|
Chunghwa
Picture Tubes and its affiliates
|
33,846 | 24,138 | |||||||
| $ | 149,381 | 218,292 | |||||||
|
Note
24.
|
Subsequent
Events
|
|
|
(a)
|
Ordinary
share buybacks
|
| In January and March 2008, the Company repurchased 1,074,042 ADSs from the open market for total cash consideration of $4,653 thousand. The Company has repurchased $33 million or 7,643,150 ADSs in the open market at an average price of US$4.32 per ADS as of May 30, 2008. The repurchased ADSs and their underling ordinary shares were then cancelled, thereby reducing approximately 7.6 million shares or 4% of the Company’s issued and outstanding ordinary shares in 2008. |
F-60
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
|
|
(b)
|
Dilution
of ownership stakes in Himax Media Solutions
|
| On January 3, 2008, the Company recognized a dilution gain of $2,045 thousand, resulting from the issuance of 18,096 thousands new shares of common stock (representing a 19.9% interest) by Himax Media Solutions to CMO, a related party, TPV Technology Limited (“TPV”) and other third parties for cash proceeds of $8,402 thousand. After the transaction, the Company still retains a controlling financial interest in Himax Media Solutions. | ||
|
(c)
|
Declaration
of cash dividend
|
|
| On May 27, 2008, the Company announced that the board of directors declared a cash dividend of US$0.35 per ordinary share of the Company. The dividend will be payable on June 27, 2008. |
|
Note
25.
|
Himax
Technologies, Inc. (the Parent Company only)
|
|
As
a holding company, dividends received from the Company’s subsidiaries in
Taiwan, if any, will be subjected to withholding tax under ROC law as well
as statutory and other legal restrictions. The current
corporate structure of the Company was established as a result of a share
exchange between the Company and the former shareholders of Himax
Taiwan. The ROC Investment Commission has approved the share
exchange, subject to the certain conditions as disclosed in the first
paragraph of Note 22 (j). If the Company were unable to satisfy
any of the conditions imposed by ROC Investment Commission, the ROC
Investment Commission may revoke the Company’s right to repatriation of
profits to be distributed by Himax Taiwan or rescind its approval of the
share exchange pursuant to which the Company’s ownership structure was
established.
As of December 31, 2007, the amount of restricted net
assets of Himax Taiwan, which may not be transferred to the Company in the
forms of cash dividends by Himax Taiwan if the Company were unable to
satisfy any of the conditions imposed by ROC Investment Commission was
$366,608 thousand.
|
F-61
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
The
Company believes that the above-mentioned restrictions of the ROC Investment
Commission represent a limitation on distribution of assets from its subsidiary
to the Company, therefore, the condensed separate financial information of the
Parent Company only, as if the Parent Company had been in existence for all
periods, are presented as follows:
Condensed
Balance Sheets
|
December 31,
|
|||||||||
|
2006
|
2007
|
||||||||
|
(in
thousands)
|
|||||||||
|
Cash
and cash equivalents
|
$ | 95,591 | 18,588 | ||||||
|
Other
current assets
|
31,013 | 1,109 | |||||||
|
Investment
in non-marketable securities
|
- | 1,600 | |||||||
|
Investments
in subsidiaries
|
238,648 | 430,700 | |||||||
|
Total
assets
|
$ | 365,252 | 451,997 | ||||||
|
Liabilities
|
$ | 1,325 | 688 | ||||||
|
Total
stockholders’ equity
|
363,927 | 451,309 | |||||||
|
Total
liabilities and stockholder’s equity
|
$ | 365,252 | 451,997 | ||||||
The Parent
Company had no long-term obligations or guarantees as of December 31, 2006 and
2007.
Condensed
Statements of Income
|
Year ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
|
$ | - | - | - | ||||||||
|
Costs
and expenses
|
(77 | ) | - | (683 | ) | |||||||
|
Operating
income (loss)
|
(77 | ) | - | (683 | ) | |||||||
|
Equity
in earnings from subsidiaries
|
61,733 | 69,435 | 107,583 | |||||||||
|
Other
non operating income (loss)
|
(98 | ) | 5,755 | 5,696 | ||||||||
|
Earnings
before income taxes
|
61,558 | 75,190 | 112,596 | |||||||||
|
Income
tax
|
- | - | - | |||||||||
|
Net
Income
|
$ | 61,558 | 75,190 | 112,596 | ||||||||
F-62
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (Continued)
December
31, 2005, 2006 and 2007
Condensed
Statements of Cash Flows
|
Year ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 61,558 | 75,190 | 112,596 | ||||||||
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating activities:
|
||||||||||||
|
Share-based
compensation expense
|
- | - | 5 | |||||||||
|
Equity
in earnings from subsidiaries
|
(61,733 | ) | (69,435 | ) | (107,583 | ) | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Other current
assets
|
- | (5,789 | ) | 21,674 | ||||||||
|
Other accrued expenses and other
current liabilities
|
133 | 1,192 | (499 | ) | ||||||||
|
Net cash provided by (used in)
operating activities
|
(42 | ) | 1,158 | 26,193 | ||||||||
|
Net
cash used in investing activities
|
- | (540 | ) | (24,141 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Distribution
of special cash dividends
|
(13,558 | ) | - | (39,710 | ) | |||||||
|
Proceeds
from borrowings (repayments) of short-term debt
|
13,600 | (13,600 | ) | - | ||||||||
|
Proceeds
from initial public offering, net of issuance costs
|
- | 147,408 | - | |||||||||
|
Acquisitions
of ordinary shares for retirement
|
- | (38,835 | ) | (39,345 | ) | |||||||
|
Net
cash provided by (used in) financing activities
|
42 | 94,973 | (79,055 | ) | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
- | 95,591 | (77,003 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
- | - | 95,591 | |||||||||
|
Cash
and cash equivalent at end of year
|
$ | - | 95,591 | 18,588 | ||||||||
F-63