Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One)
o
|
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT
OF 1934
|
OR
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the fiscal year ended December 31,
2006
|
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from ________________ to
________________
|
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:
Title
of each class
|
Name
of each exchange on which registered
|
Ordinary
Shares, par value $0.0001 per ordinary share
|
The
Nasdaq Global Market Inc.*
|
|
|
*
|
Not
for trading, but only in connection with the listing on the NASDAQ
Global
Market, Inc. of American Depositary Shares representing such
Ordinary
Shares
|
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.
193,600,302 Ordinary Shares.
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 o |
Non-accelerated
filer x |
Indicate
by check mark which financial statement item the registrant has elected
to
follow. o Item
17 x Item
18
TABLE
OF CONTENTS
|
Page
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
1
|
CERTAIN
CONVENTIONS
|
1
|
PART
I
|
3
|
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
3
|
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
|
3
|
ITEM
3. KEY INFORMATION
|
3
|
3.A.
Selected Financial Data
|
3
|
3.B.
Capitalization and Indebtedness
|
5
|
3.C.
Reason for the Offer and Use of Proceeds
|
5
|
3.D.
Risk Factors
|
5
|
ITEM
4. INFORMATION ON THE COMPANY
|
25
|
4.A.
History and Development of the Company
|
25
|
4.B.
Business Overview
|
26
|
4.C.
Organizational Structure
|
40
|
4.D.
Property, Plants and Equipment
|
42
|
ITEM
4A. UNRESOLVED STAFF COMMENTS
|
42
|
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
42
|
5.A.
Operating Results
|
42
|
5.B.
Liquidity and Capital Resources
|
55
|
5.C.
Research and Development
|
57
|
5.D.
Trend Information
|
57
|
5.E.
Off-Balance Sheet Arrangements
|
57
|
5.F.
Tabular Disclosure of Contractual Obligations
|
57
|
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
60
|
6.A.
Directors and Senior Management
|
60
|
6.B.
Compensation of Directors and Executive Officers
|
62
|
6.C.
Board Practices
|
62
|
6.D.
Employees
|
65
|
6.E.
Share Ownership
|
67
|
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
68
|
7.A.
Major Shareholders
|
68
|
7.B.
Related Party Transactions
|
69
|
7.C.
Interests of Experts and Counsel
|
70
|
ITEM
8. FINANCIAL INFORMATION
|
70
|
8.A.
Consolidated Statements and Other Financial Information
|
70
|
8.A.7.
Litigation
|
70
|
8.A.8.
Dividends and Dividend Policy
|
70
|
8.B.
Significant Changes
|
71
|
ITEM
9. THE OFFER AND LISTING
|
71
|
9.A.
Offering and Listing Details
|
71
|
9.B.
Plan of Distribution
|
72
|
9.C.
Markets
|
72
|
9.D.
Selling Shareholders
|
73
|
9.E.
Dilution
|
73
|
9.F.
Expenses of the Issue
|
73
|
ITEM
10. ADDITIONAL INFORMATION
|
73
|
10.A.
Share Capital
|
73
|
10.B.
Memorandum and Articles of Association
|
73
|
10.C.
Material Contracts
|
73
|
10.D.
Exchange Controls
|
73
|
10.E.
Taxation
|
73
|
10.F.
Dividends and Paying Agents
|
76
|
10.G.
Statement by Experts
|
76
|
10.H.
Documents on Display
|
76
|
10.I.
Subsidiary Information
|
76
|
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
76
|
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
76
|
PART
II
|
77
|
ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
77
|
ITEM
14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF
PROCEEDS
|
77
|
ITEM
15. CONTROLS AND PROCEDURES
|
77
|
ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
|
78
|
ITEM
16B. CODE OF ETHICS
|
78
|
ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
78
|
ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
|
79
|
ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
|
79
|
PART
III
|
79
|
ITEM
17. FINANCIAL STATEMENTS
|
79
|
ITEM
18. FINANCIAL STATEMENTS
|
79
|
ITEM
19. EXHIBITS
|
81
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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. 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, other factors. For a discussion of these risks
and other factors, please see “Item 3. Key Information—Risk
Factors.”
CERTAIN
CONVENTIONS
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$32.59, 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 29, 2006. 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 18, 2007,
the noon buying rate was $1.00 to NT$33.17. Any discrepancies in any
table between totals and sums of the amounts listed are due to
rounding.
Unless
otherwise indicated, in this annual report,
• the
terms “we,” “us,” “our company,” “our,” and “Himax” refer to Himax Technologies,
Inc., its predecessor entities and subsidiaries;
• the
term “Himax Taiwan” refers to Himax Technologies Limited, our wholly owned
subsidiary in Taiwan and our predecessor;
• “shares”
or “ordinary shares” refers to our ordinary shares, par value $0.0001 per
share;
• “RSUs”
refers to restricted share units;
• “ADSs”
refers to our American depositary shares, each of which represents one ordinary
share;
• “ADRs”
refers to the American depositary receipts that evidence our ADSs;
• “ROC”
or “Taiwan” refers to the island of Taiwan and other areas under the effective
control of the Republic of China;
• “PRC”
or “China” for purposes of this annual report refers to the People’s Republic of
China, excluding Taiwan and the special administrative regions of Hong Kong
and
Macau;
• “LTPS”
refers to low temperature poly silicon;
• “OLED”
refers to organic light-emitting diode;
• “LCOS”
refers to liquid crystal on silicon;
• “TFT-LCD”
refers to amorphous silicon thin film transistor liquid crystal display, or
“a-Si TFT-LCD;”
• “semiconductor
manufacturing service providers” refers to third-party wafer fabrication
foundries, gold bumping houses and assembly and testing houses;
• “processed
tape” refers to polyimide tape plated with copper foil that has a circuit formed
within it, which is used in tape automated bonding packaging;
• “large-sized
panels” refers to panels that are typically ten inches and above in diagonal
measurement;
• “small-
and medium-sized panels” refers to panels that are typically less than ten
inches in diagonal measurement;
• all
references to “New Taiwan dollars,” “NT dollars” and “NT$” are to the legal
currency of the ROC; and
• all
references to “dollars,” “U.S. dollars,” and “$” are to the legal currency of
the United States.
PART
I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM
3. KEY INFORMATION
3.A.
Selected Financial Data
The
selected consolidated statement of income data and consolidated cash flow data
for the years ended December 31, 2004, 2005 and 2006 and the selected
consolidated balance sheet data as of December 31, 2005 and 2006 are derived
from our consolidated financial statements included herein, which have been
audited by KPMG Certified Public Accountants, or KPMG, and were prepared in
accordance with U.S. GAAP. The selected consolidated balance sheet data as
of
December 31, 2002, 2003 and 2004 and the selected consolidated statement of
operations data and consolidated cash flow data for the years ended December
31,
2002 and 2003 have been derived from our consolidated financial statements
that
have not been included herein but have been audited by KPMG 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
Consolidated
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$ |
56,478
|
|
|
$ |
131,843
|
|
|
$ |
300,273
|
|
|
$ |
540,204
|
|
|
$ |
744,518
|
|
Costs
and expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
45,313
|
|
|
|
100,102
|
|
|
|
235,973
|
|
|
|
419,380
|
|
|
|
601,565
|
|
Research
and development
|
|
|
7,800
|
|
|
|
21,077
|
|
|
|
24,021
|
|
|
|
41,278
|
|
|
|
60,655
|
|
General
and administrative
|
|
|
1,489
|
|
|
|
4,614
|
|
|
|
4,654
|
|
|
|
6,784
|
|
|
|
9,762
|
|
Sales
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)(2)
|
|
$ |
|
|
|
$ |
(581 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per ordinary share(2) and per ADS(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.21
|
|
|
$ |
0.35
|
|
|
$ |
0.39
|
|
Diluted
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.21
|
|
|
$ |
0.34
|
|
|
$ |
0.39
|
|
Weighted-average
number of shares used in earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
103,276
|
|
|
|
116,617
|
|
|
|
169,320
|
|
|
|
176,105
|
|
|
|
192,475
|
|
Diluted
|
|
|
104,739
|
|
|
|
116,617
|
|
|
|
173,298
|
|
|
|
180,659
|
|
|
|
195,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per ordinary share(4)
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.08
|
|
|
$ |
0.00
|
|
Note:
|
(1)
|
The
amount of share-based compensation included in applicable costs and
expenses categories is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Cost
of revenues
|
|
$ |
172
|
|
|
$ |
827
|
|
|
$ |
291
|
|
|
$ |
188
|
|
|
$ |
275
|
|
Research
and development
|
|
|
3,057
|
|
|
|
11,666
|
|
|
|
4,288
|
|
|
|
6,336
|
|
|
|
11,806
|
|
General
and administrative
|
|
|
353
|
|
|
|
2,124
|
|
|
|
721
|
|
|
|
848
|
|
|
|
1,444
|
|
Sales
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $29.7
million, $0.18 and $0.17, respectively, for the year ended December
31,
2004, $52.4 million, $0.30 and $0.29, respectively, for the year
ended
December 31, 2005 and $59.2 million, $0.31 and $0.30, respectively,
for
the year ended December 31, 2006. A portion of this tax
exemption expires on March 31, 2009 and the remainder on December
31,
2010.
|
|
(3)
|
Each
ADS represents one ordinary share.
|
|
(4)
|
In
November 2005, we distributed a special cash dividend of approximately
$0.08 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, 2002, 2003, 2004, 2005 and 2006 and selected consolidated cash
flow
data for the years ended December 31, 2002, 2003, 2004, 2005 and
2006:
|
|
As
of December 31,
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents(1)
|
|
$ |
2,697
|
|
|
$ |
2,529
|
|
|
$ |
5,577
|
|
|
$ |
7,086
|
|
|
$ |
109,753
|
|
Accounts
receivable, net
|
|
|
1,637
|
|
|
|
12,543
|
|
|
|
27,016
|
|
|
|
80,259
|
|
|
|
112,767
|
|
Accounts
receivable from related parties, net
|
|
|
4,786
|
|
|
|
22,893
|
|
|
|
39,129
|
|
|
|
69,587
|
|
|
|
116,850
|
|
Inventories
|
|
|
12,056
|
|
|
|
21,088
|
|
|
|
54,092
|
|
|
|
105,004
|
|
|
|
101,341
|
|
Total
current assets
|
|
|
26,885
|
|
|
|
88,245
|
|
|
|
144,414
|
|
|
|
300,056
|
|
|
|
466,715
|
|
Total
assets
|
|
|
29,423
|
|
|
|
96,159
|
|
|
|
157,770
|
|
|
|
327,239
|
|
|
|
518,794
|
|
Accounts
payable
|
|
|
5,803
|
|
|
|
22,901
|
|
|
|
38,649
|
|
|
|
105,801
|
|
|
|
120,407
|
|
Total
current liabilities
|
|
|
11,750
|
|
|
|
43,613
|
|
|
|
52,157
|
|
|
|
160,784
|
|
|
|
153,279
|
|
Total
liabilities
|
|
|
11,975
|
|
|
|
43,870
|
|
|
|
52,246
|
|
|
|
160,784
|
|
|
|
153,471
|
|
Ordinary
Shares
|
|
|
11
|
|
|
|
17
|
|
|
|
18
|
|
|
|
18
|
|
|
|
19
|
|
Total
stockholders’ equity (5)
|
|
|
17,448
|
|
|
|
52,289
|
|
|
|
104,860
|
|
|
|
165,831
|
|
|
|
363,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(3,884 |
) |
|
|
(1,593 |
) |
|
|
(8,688 |
) |
|
|
12,464
|
|
|
|
29,696
|
|
Net
cash provided by (used in) investing activities
|
|
|
(7,130 |
) |
|
|
(28,915 |
) |
|
|
11,001
|
|
|
|
(25,363 |
) |
|
|
(8,927 |
) |
Net
cash provided by financing activities
|
|
|
11,644
|
|
|
|
30,341
|
|
|
|
735
|
|
|
|
14,404
|
|
|
|
81,886
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
12
|
|
|
|
As
of December 31,
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
630
|
|
|
|
(167 |
) |
|
|
3,048
|
|
|
|
1,509
|
|
|
|
102,667
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NT
dollars per U.S. dollar)
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
34.54
|
|
|
|
35.16
|
|
|
|
32.85
|
|
|
|
34.70
|
|
2003
|
|
|
34.40
|
|
|
|
34.98
|
|
|
|
33.72
|
|
|
|
33.99
|
|
2004
|
|
|
33.37
|
|
|
|
34.16
|
|
|
|
31.74
|
|
|
|
31.74
|
|
2005
|
|
|
32.13
|
|
|
|
33.77
|
|
|
|
30.65
|
|
|
|
32.80
|
|
2006
|
|
|
32.51
|
|
|
|
33.31
|
|
|
|
31.28
|
|
|
|
32.59
|
|
First
quarter
|
|
|
32.28
|
|
|
|
32.65
|
|
|
|
31.83
|
|
|
|
32.42
|
|
Second
quarter
|
|
|
32.15
|
|
|
|
32.70
|
|
|
|
31.28
|
|
|
|
32.33
|
|
Third
quarter
|
|
|
32.76
|
|
|
|
33.10
|
|
|
|
32.24
|
|
|
|
33.10
|
|
Fourth
quarter
|
|
|
32.84
|
|
|
|
33.31
|
|
|
|
32.27
|
|
|
|
32.59
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
32.77
|
|
|
|
32.99
|
|
|
|
32.38
|
|
|
|
32.95
|
|
February
|
|
|
32.97
|
|
|
|
33.08
|
|
|
|
32.86
|
|
|
|
32.98
|
|
March
|
|
|
33.01
|
|
|
|
33.13
|
|
|
|
32.84
|
|
|
|
33.01
|
|
April
|
|
|
33.15
|
|
|
|
33.33
|
|
|
|
33.05
|
|
|
|
33.33
|
|
May
|
|
|
33.28
|
|
|
|
33.41
|
|
|
|
32.97
|
|
|
|
33.09
|
|
June
(through June 18)
|
|
|
33.05
|
|
|
|
33.18
|
|
|
|
32.98
|
|
|
|
33.17
|
|
Source:
Federal Reserve Bank of New York
Note: (1)
|
Determined by averaging the rates on each business
day.
|
3.B.
Capitalization and Indebtedness
Not
applicable.
3.C.
Reason for the Offer and Use of Proceeds
Not
applicable.
3.D.
Risk Factors
Risks
Relating to Our Financial Condition, Business and Industry
Our
limited operating history makes it difficult for us to forecast our revenues
and
plan our expenses accurately, or to evaluate our business and prospects
appropriately.
We
commenced operations in June 2001 and have only a limited operating history,
which may not provide a meaningful basis on which to evaluate our business.
Our
limited operating history, combined with the rapidly evolving nature of the
flat
panel display semiconductor industry and other factors that are beyond our
control, makes
it
difficult to accurately forecast our future revenues and budget our operating
expenses. We have limited historical financial data from which to predict our
future revenues and expenses. Most of our expenses are fixed in the short term
or incurred in advance of anticipated revenues; therefore, we may not be able
to
reduce our expenses in a timely manner to offset any shortfall in
revenues.
We
may not
have sufficient experience to address the risks frequently encountered by
companies with limited operating history, including our potential failure
to:
|
·
|
maintain
our profitability;
|
|
·
|
preserve
our position in the large-sized panel display driver
market;
|
|
·
|
acquire
and retain customers;
|
|
·
|
secure
satisfactory performance from our semiconductor manufacturing service
providers;
|
|
·
|
diversify
our revenue sources by successfully developing, designing and selling
products other than large-sized panel display
drivers;
|
|
·
|
develop
display drivers with more advanced features and for use in different
applications;
|
|
·
|
attract,
train, motivate and retain qualified
personnel;
|
|
·
|
keep
up with evolving industry standards and market
developments;
|
|
·
|
manage
our expanding operations and product offerings, including our recent
acquisition of Wisepal Technologies, Inc., or Wisepal, and the integration
of any future acquisitions;
|
|
·
|
raise
our brand recognition, maintain and enhance our reputation and develop
customer loyalty;
|
|
·
|
anticipate
and adapt to any changes in government regulations, mergers and
acquisitions involving our competitors, technological developments
and
other significant competitive and market
dynamics;
|
|
·
|
maintain
adequate control of our expenses;
or
|
|
·
|
manage
risks relating to intellectual property rights, including the protection
of our proprietary technologies.
|
If
we were
unsuccessful in addressing any of these risks, our business would be materially
and adversely affected.
We
do not expect to sustain our recent growth rate 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 79.9% to $540.2 million in 2005 and further
increased by 37.8% to $744.5 million in 2006. Our net income increased from
$36.0 million in 2004 to a net income of $61.6 million in 2005 and then further
increased to a net income of $75.2 million in 2006. 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.
We
face numerous challenges relating to our growth.
The
scope
and complexity of our business have 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:
|
·
|
hire,
train, integrate and manage additional qualified engineers, senior
managers, sales and marketing personnel and information technology
personnel;
|
|
·
|
implement
additional, and improve existing, administrative and operations systems,
procedures and controls;
|
|
·
|
expand
our accounting and internal audit team, including hiring additional
personnel with U.S. GAAP and internal control
expertise;
|
|
·
|
continue
to expand and upgrade our design and product development
capabilities;
|
|
·
|
manage
multiple relationships with semiconductor manufacturing service providers,
customers, suppliers and certain other third parties;
and
|
|
·
|
manage
our financial condition.
|
Moreover,
if our allocation of resources did 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. We cannot assure
you that we will be able to manage our growth effectively in the
future.
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:
|
·
|
our
ability to successfully design, develop and introduce in a timely
manner
new or enhanced products acceptable to our
customers;
|
|
·
|
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;
|
|
·
|
the
loss of one or more of our key
customers;
|
|
·
|
decreases
in the average selling prices of our
products;
|
|
·
|
our
accumulation of inventory;
|
|
·
|
the
relative unpredictability in the volume and timing of customer
orders;
|
|
·
|
the
risk of cancellation or deferral of customer orders in anticipation
of our
new products or product enhancements, or due to a reduction in our
customers’ end demand;
|
|
·
|
changes
in the availability of capacity of semiconductor manufacturing service
providers;
|
|
·
|
the
rate at which new markets emerge for new products under
development;
|
|
·
|
the
evolution of industry standards and
technologies;
|
|
·
|
product
obsolescence and our ability to manage product
transitions;
|
|
·
|
our
involvement in litigation or other types of
disputes;
|
|
·
|
general
economic conditions; and
|
|
·
|
natural
disasters, particularly earthquakes and typhoons, or disease outbreaks
affecting countries where we conduct our business or where our products
are manufactured, assembled or
tested.
|
These
factors are difficult to foresee. They or 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
have derived 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
2005
and 2006, approximately 96.3% and 97.6% of our revenues, respectively, was
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. For example, according to Display Search,
the average selling price of
17-inch and
32-inch panels decreased by 25.2%
and
28.7%,
respectively, in
2006 compared to 2005. 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 we cannot assure you
that
we will be able to reduce costs to offset such downward pricing pressure in
the
future. Moreover, as a result of this slowdown in demand for TFT-LCD panels,
in
2006 we were required to extend the payment terms we offer to certain of our
customers, which negatively impacted our cash flows. 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.
We
primarily depend on five 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 critical to our business because we do not manufacture
our
own wafers and instead rely primarily on five 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 high-voltage CMOS process technology required for the
manufacture of wafers used in display drivers. Although we are in negotiations
with third-party foundries to enter into long-term supply arrangements that
guarantee us access to foundry capacity, we do not currently have such
arrangements. 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 is possible
that foundry customers that are larger and better financed than we are, or
that
have agreements or better relationships with the foundries we use, may induce
these foundries to reallocate 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 the supply of products that we need, which could significantly delay
our ability to ship our products, causing a loss of revenues and damages in
our
customer relationships.
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, and Chartered Semiconductor Manufacturing
Ltd.,
or Chartered, to manufacture a portion of our products. In 2007, we also plan
to
begin using United Microelectronics Corporation, or UMC, and Powerchip
Semiconductor Corp., or Powerchip, on a mass-production scale. As a result
of
outsourcing the manufacturing of our wafers, we face several significant risks,
including:
|
·
|
failure
to secure necessary manufacturing capacity, or being able to obtain
required capacity only at higher
cost;
|
|
·
|
limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs;
and
|
|
·
|
the
unavailability of, or potential delays in obtaining access to, key
process
technologies.
|
In
addition, in order to manufacture our display drivers used in large-sized
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:
|
·
|
potential
capacity constraints faced by the limited number of high-voltage
foundries
and the lack of investment in new and existing high-voltage
foundries;
|
|
·
|
difficulty
in attaining consistently high manufacturing yields from high-voltage
foundries;
|
|
·
|
delay
and time required (approximately one year) to qualify and ramp up
production at a new high voltage foundry;
and
|
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 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 or the loss of
one
of our suppliers may increase our costs or limit our revenues and impair our
ability to ship our products on time.
There
is a
limited number of companies which supply 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 used in our products, we may not be able to locate
alternative sources in a timely manner. Moreover, if shortages of processed
tape
were to occur, 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 at, any of the
third-party assembly and testing houses that assemble and test our products
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 capacity 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 capacity. If the primary assembly and testing service
providers that we rely upon were not able to meet our requirements, 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 or financial difficulties or suffers any damage to its facilities,
or if there is any other 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 delay our ability to
sell 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 color filters, backlights and glass substrates. In the past, companies
that use our products 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 and 2004. While shortages of components and other
materials critical to the design and manufacture of our customers’ products have
yet to limit our sales, such delays could cause a slowdown in demand and a
decrease in sales for our products.
We
depend on two customers for a substantial majority of our revenues and the
loss
of, or a significant reduction in orders from, either of them would
significantly reduce our revenues and adversely impact our operating
results.
Our
top
two customers, CMO and CPT, together with their respective affiliates, accounted
for approximately 58.9% and 16.2%, respectively, of our revenues in 2005 and
for
approximately 55.0% and 12.4%, respectively, of our revenues in 2006. The loss
of either CMO or CPT as our customer or a sharp reduction in sales to either
customer would have a significant negative impact on our business. As further
discussed below, our sales to these customers are made pursuant to standard
purchase orders rather than contracts. 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 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 and CPT 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.
Failure
to attract new customers may limit our growth
prospects.
We
face
challenges in attracting new customers for our existing products as well as
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 may not have 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 required for each
large-sized panel, thereby reducing the number of display drivers we are able
to
sell per panel. If such reduction is not offset by the general growth of the
industry, the growth in our market share or an increase in our average selling
prices, our revenues may decline.
Multiple
display drivers are required for each large-sized panel to function. We are
designing higher-channel display drivers to reduce the number of display drivers
required for each large-sized 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
foregoing
goals. If we fail to attain the foregoing goals, and the decrease in revenues
as
a result of the reduction in the number of display drivers we sell per panel
is
not offset by the increase in average selling prices or unit sales, our revenues
may decline.
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 our 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, including engineers
and others, could delay the development and introduction of, and would have
an
adverse effect on our ability to sell, our products as well as our overall
business and growth prospects. We may also incur increased operating expenses
and be required to divert the attention of other senior executives to recruit
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 we use to
manufacture our products is typically longer than the lead time that our
customers provide to us 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 these customers in advance of receiving
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 our 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 case, 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.
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.
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.
If
we do not achieve additional design wins in the future, our ability to grow
will
be limited.
Our
future
success will depend 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, we may experience delays
in
shipping our products, 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
sole
foundries we use for a specific product is unable to provide us with our
required capacity, we could experience significant delays in delivering the
product being manufactured for us by that foundry. Also, if any of the foundries
we use experience financial difficulties, if their foundry 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.
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 12.8% of our
outstanding shares as of December 31, 2006, and is also our largest customer,
accounting (together with its affiliates) for approximately 55.0% of our
revenues in 2006. 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.
Our
products are complex and may require modifications to resolve undetected errors
or failures, 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 revisions are released. If our products were
delivered with errors or defects, we could incur additional development, repair
or replacement costs, and our credibility and 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 in 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 free of 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 thus are 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 their
increasing complexity may result in an increase in our costs and delays in
the
availability of our products. In addition, if foundries 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 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 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 that was prepared based on forecasts provided by the
customer. 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 affected materially and
adversely.
The
concentration of our accounts receivable and the extension of payment terms
for
our customers exposes us to increased credit risk and could harm our operating
results and cash flows.
As
of
December 31, 2006, we had two customers that each represented more than 10%
of
our accounts receivable balance. CMO and CPT, together with their respective
affiliates, represented approximately 50.3% and 14.7%, respectively, of our
total accounts receivable as of December 31, 2006. Moreover, we have at times
agreed to extend the payment terms for certain of our customers. Other customers
have also requested extension of payments terms, and we 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 our customers would adversely affect our cash flow, liquidity
and our operating results.
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
2005
and 2006, 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 87.1% and 86.7%
of
our revenues in 2005 and 2006, respectively. Continued market acceptance of
our
display drivers is therefore critical to our future success.
Our
strategy of expanding our product offerings to liquid crystal on silicon
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 LCOS products. LCOS products
utilize a form of LCD reflective technology to produce images. We believe that
end-use products utilizing LCOS products (such as near-to-eye applications,
rear
projection televisions and mini-projectors) could potentially be a large market.
LCOS technology, however, is at a relatively early stage of commercialization
and the production of products using LCOS technology at acceptable yields has
proven difficult. We cannot assure you that we will be able to develop, design
and manufacture such products at costs and with performance specifications
acceptable to customers. Moreover, the market acceptance of LCOS technology
is
still unproven. Wide acceptance of LCOS technology would require brand name
electronics companies devoting substantial resources to promote products based
on this technology. Furthermore, for near-to-eye devices utilizing LCOS
technology (such as wearable display devices embedded in goggles or eyewear)
to
become widely accepted, consumers must first become accustomed to wearing such
devices. By devoting resources to the development of LCOS products we may
negatively affect the development of our other products. If the LCOS market
does
not develop as we expect, our LCOS strategy may result in operating losses
in
this aspect of our business and may adversely affect our results of operations
and growth prospects.
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. CMO is one of our largest shareholders and has
been
our largest customer since our inception, and certain of our directors also
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
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, 2007, Jordan Wu and Dr. Biing-Seng Wu (who are brothers) beneficially owned
approximately 5.5% and 16.0% of our ordinary shares, respectively, and CMO
beneficially owned approximately 12.6% 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, if they acted
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
by third parties of infringement by us 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 has resulted 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 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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·
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stop
selling products or using technology or manufacturing processes that
contain the allegedly infringing intellectual
property;
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·
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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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·
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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 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, 2006, we and our subsidiaries had 177 U.S. patent applications
pending, 217 Taiwan patent applications pending and 134 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 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. 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
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, 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 (a total of 6,090,114 shares) and we assumed all of the
assets, liabilities and personnel of Wisepal. Acquisitions or investments that
we may potentially 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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·
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problems
integrating the acquired operations, technologies or products into
our
existing business and products;
|
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·
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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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need
for financial resources above our planned investment
levels;
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·
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failures
in recognizing anticipated
synergies;
|
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·
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difficulties
in retaining business relationships with suppliers and customers
of the
acquired company;
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·
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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; and
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potential
expenses related to the depreciation of tangible assets and amortization
of intangible assets.
|
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 your 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 the display driver and television
semiconductor solutions segments, is highly competitive, and we cannot assure
you that we will be able to compete successfully against our
competitors.
The
semiconductor industry, in particular the display driver and television
semiconductor solutions segments, 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 us 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 give
our competitors significant advantages,
such as early access to product
roadmaps and
design-in
priorities,
which allows them to respond more quickly
to changing
customer demands and achieve more design-wins
than we can. In
addition, competitors who
have 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
and 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 us 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
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
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 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 timely develop
and introduce new and enhanced products. 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 only asset is our 100% ownership interest in Himax
Taiwan. Dividends and interest on intercompany
loans 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, including the ROC government’s right to revoke repatriation
of profits. See “— Political, Geographical and Economic Risks — If we failed to
satisfy the undertakings we made to the ROC Investment Commission in connection
with our application seeking approval of the share exchange, the ROC Investment
Commission could take actions against us that would materially and adversely
affect our business, financial condition and results of operations and decrease
the value of our ADSs.” In addition, although there are currently no foreign
exchange control regulations which 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
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 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
2006, approximately 81.4% of our revenues was 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 quantity, 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.
Strained
relations between the PRC and the ROC 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 recently 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 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 97.0% our
revenues and 86.0% of our cost of revenues were denominated in U.S. dollars
in
2006, 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 2006 approximately 63.0%
of
our operating expenses were denominated in NT dollars, with less than 2.0%
denominated in Japanese Yen, Korean Won and Chinese Renminbi combined, and
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 against us 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 $4.7 million, $9.4 million,
and
$19.4 million as of December 31, 2004, 2005 and 2006, 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 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 and January 1, 2006,
Himax Taiwan has been entitled to two preferential tax treatments each for
a
period of five years, which expires on March 31, 2009 and December 31, 2010,
respectively. As a result of this preferential tax treatment, 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
$59.2 million, $0.31 and $0.30 for the year ended December 31, 2006,
respectively.
If
we failed to satisfy the undertakings we made to the ROC Investment Commission
in connection with our application seeking approval of the share exchange,
the
ROC Investment Commission could take actions against us that would materially
and adversely affect our business, financial condition and results of operations
and decrease the value of our ADSs.
Our
current corporate structure was established through a share exchange, which
became effective on October 14, 2005, between us and the former shareholders
of
Himax Taiwan. The share exchange was subject to the review and approval of
the
ROC Investment Commission, an agency under the administration of the ROC
Ministry of Economic Affairs established for the purposes of promoting Taiwan’s
economic development and attracting foreign investments. It has supervisory
and
regulatory authority for matters relating to, among other things,
inbound
investments
in Taiwanese companies by non-ROC persons and overseas ROC nationals, and
outbound investments by Taiwanese companies or individuals.
In
connection with our application seeking approval of the share exchange, we
and
Himax Taiwan made the following undertakings to the ROC Investment
Commission:
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to
purchase three hectares of land in connection with the construction
of our
new headquarters in Tainan, Taiwan;
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to
increase the number of employees in Taiwan to 430 employees, 475
employees
and 520 employees by the end of 2005, 2006 and 2007, respectively;
and
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to
invest no less than $24.4 million (NT$800.0 million), $27.6 million
(NT$900.0 million) and $30.7 million (NT$1.0 billion) 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.
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The
undertakings do not specify, and the ROC Investment Commission has not required,
that the required personnel and research and development expenditures be
directed for any particular purpose. Instead, these undertakings allow
management discretion on the utilization of such resources. We made the
undertakings as assurances of our commitment to invest in Taiwan based on our
business plan, the expected growth in 2005, 2006 and 2007 and our anticipated
requirements with respect to our headquarter expansion plans, employee headcount
projections and research and development requirements.
The
ROC
Investment Commission approved the share exchange subject to our satisfying
the
above-mentioned undertakings. The failure to satisfy these undertakings could
have the following material adverse consequences:
Revocation
of the Right of Repatriation of Profits. The ROC Investment Commission can
(at its discretion) revoke Himax Taiwan’s right to repatriate profits to us.
Since we rely on dividend payments from Himax Taiwan, such a restriction would
adversely affect our ability to pay dividends to our shareholders.
Revocation
of the Approval of the Share Exchange. The ROC
Investment Commission has the right (at its discretion) to revoke its approval
of the share exchange. Prior to exercising this right, in practice we 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.
Such
a
revocation could have any of the following material adverse
consequences:
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We
may face difficulties obtaining subsequent ROC Investment Commission
approvals for additional investments in Himax Taiwan, including further
equity investments such as cash or asset contributions and inter-company
loans from us.
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We
may face difficulties obtaining approval from the ROC Central Bank
of
China to transfer the net proceeds of capital raising efforts to
Himax
Taiwan. Any restriction on our ability to transfer the net proceeds
of our
capital raising to Himax Taiwan would effectively limit Himax Taiwan’s
ability to access the capital markets through us since we are a holding
company with no operations and the use of proceeds for any capital
raised
by us would be for the operations of Himax Taiwan through which
substantially all of our operations are
conducted.
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Himax
Taiwan may also lose its status as a foreign-invested company under
the
ROC Statute for Investment by Foreign Nationals, resulting in the
loss of
certain protections, including the protection from possible expropriation
of the company’s assets.
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Although
we intend to discharge our undertakings to the ROC Investment Commission, and
have done so with respect to the undertakings in 2005 and 2006, we cannot assure
you that we will be able to satisfy the remaining undertakings. To the extent
that we experience no or negative revenue growth as a result of significant
company-specific or industry-wide events, we would be limited in our ability
to
adjust our headcount and research and
development
expenditures in response to those events. In this case, these undertakings
would
restrict our operational flexibility and adversely affect our operating margins
and results of operations. Nor can we assure you that we would be successful
in
amending the undertakings if necessary or in appealing to reverse a decision
to
revoke Himax Taiwan’s right to repatriate profits or the share exchange
approval. The occurrence of either revocation would have a material and adverse
effect on our business prospects, financial condition and results of operations
and decrease the value of our ADSs.
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 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 outbreak could occur,
and the measures taken by the governments of countries affected, including
the
ROC and the PRC, would 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 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 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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addition
or departure of key personnel;
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fluctuations
of exchange rates between the U.S. dollar and NT
dollar;
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litigation
related to our intellectual property;
and
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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, 2007, we had 197,656,063
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.
You
may not have the same voting rights as the holders of our ordinary shares and
may not receive voting materials in time 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 in time 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 when 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 are located outside of 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 the courts of the Cayman Islands will generally
recognize and enforce a non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits.
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 would shareholders of a corporation incorporated in
a
jurisdiction in the United States.
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 laws 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;
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dissenting
shareholders do not have 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; 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, that a shareholder may consider in its best
interest, and 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 we have one or more
material weaknesses in our internal control over financial reporting as of
December 31, 2007, as required by Section 404 of the Sarbanes-Oxley Act of
2002.
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
attest to and report on management’s assessment of the effectiveness of the
company’s internal control over financial reporting. These requirements will
first apply to our Annual Report on Form 20-F for the fiscal year ending
December 31, 2007. 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 decline
to
attest to our management’s assessment or may issue an adverse or qualified
report. Furthermore, effective internal control 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 control 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.
We
have had control deficiencies in our internal controls over financial reporting
in the past and cannot assure you that additional deficiencies or material
weaknesses will not be identified in the future.
Our
reporting obligations as a public company will continue to place a significant
strain on our management, operational and financial resources and systems for
the foreseeable future. Prior to our initial public offering, we were a newly
established private company with limited accounting personnel and other
resources with which to address our internal controls and procedures. As a
result, in connection with the audit of our consolidated financial statements
for the years ended December 31, 2003 and 2004, our independent registered
public accounting firm identified two control deficiencies that were significant
deficiencies in our internal control procedures which, in their judgment, could
adversely affect our ability to record, process, summarize and report financial
data consistent with the assertions of our management in the financial
statements. A significant deficiency is a control deficiency, or a combination
of control deficiencies, that results in more than a remote likelihood that
a
more than inconsequential misstatement of the company’s annual or interim
financial statements will not be prevented or detected. Specifically, the
control deficiencies identified consisted of (1) a lack of personnel with
significant U.S. GAAP reporting experience necessary to identify and resolve
certain complex U.S. GAAP matters in a timely manner, and (2) the use of manual
accounting systems that carry a risk of inconsistent operation, are subject
to
human error and do not enable timely recording of transactions. In connection
with the audit of our consolidated financial statements for the year ended
December 31, 2005 our independent registered accounting firm did not identify
any significant deficiencies but continued to identify our use of manual
accounting systems as a control deficiency and identified two additional control
deficiencies related to the lack of a systematic approach for monitoring
contracts with accounting implications and the lack of an automated credit
control system. Our independent registered accounting firm also did not identify
any significant deficiencies in connection with the audit of our consolidated
financial statements for the year ended December 31, 2006, but continued to
identify our use of manual accounting systems and our incomplete and ongoing
implementation of an automated credit control system as control deficiencies.
One additional control deficiency was identified relating to our current
approach for the estimation of the annual effective tax rate for interim
financial reporting which may lack the precision to reliably estimate income
taxes attributable to interim financial reporting periods. We intend to involve
our relevant departments in a joint effort to further improve upon the current
approach to derive the best possible estimation of the annual effective tax
rate for interim periods of financial reporting.
We
plan to
remediate the above-mentioned control deficiency in time to meet the deadline
imposed by the Sarbanes-Oxley Act for compliance with the requirements of
Section 404. However, we cannot assure you that we will be able to remedy this
control deficiency or that additional significant deficiencies or material
weaknesses in our internal control over financial reporting will not be
identified in the future. If the significant deficiencies reported by our
independent registered public accounting firm are to recur, or if we identify
additional weaknesses or fail to implement new or improved controls successfully
in a timely manner, our ability to assure timely and accurate financial
reporting may be adversely affected, we may be required to restate our financial
statements, and investors could lose confidence in the reliability of our
financial statements, which in turn could negatively impact the trading price
of
our ADSs, result in lawsuits being filed against us by our shareholders, or
otherwise harm our reputation.
Significant
resources from our management team and additional expenses have been, and may
continue to be, required to implement and maintain effective controls and
procedures in order to remedy the above-mentioned control deficiencies and
any
additional weaknesses we and our independent registered public accounting firm
may identify in our internal control over financial reporting in the future.
We
have hired, and may need to continue to hire, additional employees and outside
consultants with accounting and financial reporting experience
(particularly
those
with
U.S. GAAP reporting experience) and further train our existing employees. If
additional personnel are needed, we cannot assure you that we will be able
to
recruit qualified personnel in a timely and cost-efficient manner to meet our
requirements.
We
may become a passive foreign investment company, which could result in adverse
U.S. federal income tax consequences to U.S.
investors.
Based
on
the nature of our business, we do not expect to be a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes for our current taxable
year. However, whether or not we are a PFIC for any taxable year will be based
in part on the character of our income and assets and the value of our assets
from time to time, which will be based in part on the trading price of our
ADSs,
which may be volatile. Accordingly, it is possible that we may be a PFIC for
any
taxable year. If we were treated as a PFIC for any taxable year during which
a
U.S. investor held an ordinary share or ADS, certain adverse U.S. federal income
tax consequences could apply to the U.S. investor. See “Item 10E.
Taxation.”
ITEM
4. INFORMATION ON THE COMPANY
4.A.
History and Development of the Company
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. Acquisition of our ordinary
shares by non-ROC shareholders of Himax Taiwan is not subject to the approval
of
the ROC Investment Commission. 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.
Pursuant
to the approval letters from the ROC Investment Commission, we and Himax Taiwan
have to comply with certain documentation requirements in order to evidence
the
satisfaction of our undertakings. On November 24,
2005, Himax Taiwan submitted to the ROC Investment Commission (1) the status
report confirming the completion of the share exchange, (2) the shareholders’
notice setting the record date of the share exchange and (3) the shareholders
register maintained by our registrar. In addition, on December 5, 2005,
Himax Taiwan submitted to the ROC Investment Commission its latest corporate
registration card issued by the ROC Ministry of Economic Affairs. We
have also submitted Himax Taiwan’s 2005 and 2006 audited financials as support
for our satisfaction of the various undertakings and expect to submit Himax
Taiwan’s 2007 audited financials in 2008. We do not anticipate any difficulties
in providing the required documentation to the ROC Investment Commission and
expect that any further required documents (if any) will be submitted on a
timely basis in satisfaction of our obligations under the relevant approval
letter.
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.
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 and Shenzhen, China; Yokohama, Japan;
Anyangsi Kyungkido, South Korea; and Irvine, California, USA.
Investor
inquiries should be directed to us at the address and telephone number of our
principal executive offices set forth above. 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.
We
closed
our initial public offering on April 4, 2006 and our ADSs have been listed
on
the Nasdaq Global Market since March 31, 2006. Our ordinary shares
are not listed or publicly traded on any trading markets.
4.B.
Business Overview
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 offering to include television semiconductor solutions,
as
well as LCOS products. 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.
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:
|
·
|
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.
|
|
·
|
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.
|
|
·
|
Scaler.
For certain displays, a scaler is installed to magnify or shrink
image
data in order for the image to fill the
panel.
|
|
·
|
Operational
Amplifier. An operational amplifier supplies the reference voltage to
source drivers in order to make their output voltage
uniform.
|
|
·
|
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—Television Semiconductor Solutions—Television Chipsets” for a
description of these components.
|
|
·
|
Others.
Flat panel displays also require multiple general purpose
semiconductors such as memory, power converters and
inverters.
|
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 us. 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 typically 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
three principal product lines:
|
·
|
display
drivers and timing controllers;
|
|
·
|
television
semiconductor solutions; and
|
We
commenced volume shipments of our first source and gate driver 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.
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.
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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 method 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.
|
|
·
|
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.
|
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:
|
|
|
|
TFT-LCD
Source Drivers
|
|
• |
384
to 960 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 18V
|
|
|
• |
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
|
|
|
• |
supports
TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized interface
technologies
|
|
|
|
|
TFT-LCD
Gate Drivers
|
|
•
|
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
|
|
|
|
|
Timing
Controllers
|
|
|
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
|
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.
Mobile
Handset Applications
We
offer
display drivers for mobile handset displays that combine source driver, gate
driver and other functions into a single chip. 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 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:
|
|
|
|
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) and a range of panel sizes
from
1.5 to 3.2 inches in diagonal measurement
|
|
|
•
|
supports
262K colors to 16 million colors |
|
|
•
|
input
logic voltage ranging from standard 3.3V to low power 1.65V |
|
|
•
|
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
|
|
|
•
|
supports
262K colors to 16 million colors |
|
|
•
|
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 like 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 the battery life.
The
following table summarizes the features of our products used in consumer
electronics products:
|
|
|
|
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
|
|
|
•
|
products
for analog or digital interfaces |
|
|
|
|
Timing
Controllers
|
|
•
|
poducts
for analog or digital interfaces
|
|
|
•
|
supports
various resolutions from 280 x 220 pixels to 800 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 source driver, gate driver, timing controller and power circuit into
a
single chip.
Television
Semiconductor Solutions
We
provide
television semiconductor solutions specifically designed to meet the
requirements of advanced television systems.
Set
forth
below are the various semiconductor components that may be utilized in advanced
televisions:
Television
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 (ADC) are
included.
|
|
·
|
Digital
Interfaces. Receive digital signals via digital receivers. Digital
visual interfaces (DVI) and high-definition multimedia interfaces
(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 which target high-end
segments as well
as cost-effective chips which target entry-level segments.
The
following table summarizes the features of our analog TV single-chip
solutions:
|
|
|
|
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 |
Television
Tuner Modules
We
offer a
variety of digital and analog television tuner modules. We are highly skilled
in
designing compact, high-performance tuner modules that integrate semiconductors
and other components on the system board. The semiconductors and components
are
purchased from third-party suppliers and are assembled by third-party
electronics manufacturing service providers. We design our television tuner
modules in an advanced, coil-free architecture to provide slim and small
tuners.
Our
tuners
are suitable for most of the world’s signal transmission standards, including:
Digital Video Broadcast–Terrestrial, also known as DVB-T, the digital television
standard (depending on the bandwidth) in Taiwan, Australia and Europe; Advanced
Television System Committee, or ATSC, the digital television standard in
the
United States and Canada; National Television System Committee, or NTSC,
the
analog television standard in the United States, Canada, Japan, the Philippines,
Taiwan and South Korea; Phase Alternating Line, or PAL, the analog television
standard in Western Europe, Australia, Hong Kong and China; and Systeme
Electronique Couleur Avec Memoire, or SECAM, the analog television standard
in
France, Russia and Eastern Europe.
The
following table sets forth the features of our television tuner
modules:
|
|
|
|
Digital
Television Tuner Modules
|
|
•
|
DVB-T
tuners for 6MHz bandwidth (for use in Taiwan), 7MHz bandwidth (for
use in
Australia) and 8MHz bandwidth (for use in Europe)
|
|
|
•
|
ATSC
RF tuners with NTSC function |
|
|
•
|
lower
power RF tuners |
|
|
|
|
Analog
Television Tuner Modules
|
|
•
|
global
tuner combining NTSC, PAL and SECAM television standards and FM
radio
tuner
|
|
|
•
|
low
power off-air tuner combining NTSC and PAL television standards and
FM
radio tuner |
|
|
•
|
mobile
analog tuner combining NTSC television standards and FM radio
tuner |
|
|
•
|
slim
design to save space |
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, rear projection televisions 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.
The
following table sets forth the features of our LCOS products:
|
|
|
|
LCOS
Modules for Near-to-eye, Mini- and
|
|
•
|
640
x 360 pixels (Q720P), VGA and SVGA resolutions
|
Mobile-projector
Applications
|
|
•
|
8-bit
(16 million colors) |
|
|
•
|
high
reflectivity and greater than 100:1 contrast ratio |
|
|
•
|
low
power consumption |
|
|
|
|
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 |
Other
Products and Services
We
established Himax Analogic Inc., or Himax Analogic, (formerly Amazion
Electronics Inc.) in July 2004 to design, develop and market semiconductors
for
power management applications. To date, Himax Analogic has generated $2,475
in
revenues from such products. We also offer liquid crystal injection services
through our subsidiary Himax Display. In 2006, Himax Display generated $4.2
million in revenues from such services.
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 typical 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
direct
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, 2006, we sold our products to more than 50 customers. In 2004, 2005 and
2006, CMO and its affiliates accounted for 63.2%, 58.9%, and 55.0% of our
revenues, respectively, while CPT and its affiliates accounted for 19.5%,
16.2%,
and 12.4% of our revenues, respectively, in the same periods. We expect that
sales to CMO and CPT 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, 2006:
Chi
Mei
Optoelectronics Corp.
Chunghwa
Picture Tubes
Funai
Electric Co., Ltd.
HannStar
Display Corporation
InnoLux
Display Corporation
Optrex
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 (12 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 roadmaps.
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 team 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, Taipei and Hsinchu in Taiwan, in Suzhou and Shenzhen,
China, in Anyangsi Kyungkido, South Korea and in Yokohama, Japan, 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 with 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 suppliers, evaluating 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 2005 and will expire in January 2008. In addition, in March 2007,
we
received IECQ QC 080000 certification 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 timely deliver high-quality products to our
customers.
Access
to
semiconductor manufacturing service providers is critical as display drivers
typically 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,
and Powerchip. 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:
|
|
Chartered
Semiconductor Manufacturing Ltd.
|
Chipbond
Technology Corporation
|
Lite-on
Semiconductor Corp.
|
ChipMOS
Technologies Inc.
|
Macronix
International Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
Powerchip
Semiconductor Corp.
|
|
Taiwan
Semiconductor Manufacturing Company
|
|
United
Microelectronics Corporation
|
|
Vanguard
International Semiconductor Corporation
|
|
Processed
Tape for TAB Packaging
|
|
CASIO
Micronics Co., Ltd.
|
Chipbond
Technology Corporation
|
Hitachi
Cable, Ltd.
|
ChipMOS
Technologies Inc.
|
Mitsui
Mining & Smelting Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
Samsung
Techwin Co. Ltd.
|
Siliconware
Precision Industries Co., Ltd.
|
Stemco.,
Ltd
|
|
Sumitomo
Metal Mining Package Material Co., Ltd.
|
|
|
|
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, 2006, we held a total of 148 patents, including 100 in Taiwan,
32
in the United States, 9 in China, 6 in Korea and 1 in Japan. The expiration
dates of our patents range from 2019 to 2026. We also have a total of 217
pending patent applications in Taiwan, 177 in the United States and 134 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:
|
·
|
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 us. 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, Genesis Microchip, Inc., Mediatek Corp., Micronas
Semiconductor Holding AG, MStar Semiconductor, Inc., NXP Semiconductor,
Pixelworks Inc., STMicroelectronics, 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 also 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.
4.C.
Organizational Structure
The
following chart sets forth our corporate structure and ownership interest
in
each of our principal operating subsidiaries and affiliates as of June 1,
2007.
The
following table sets forth summary information for our subsidiaries as of
June
1, 2007.
|
|
|
|
Jurisdiction of
Incorporation
|
|
|
|
Percentage of
Our Ownership
Interest
|
|
|
|
|
|
|
$(in
millions)
|
|
|
Himax
Technologies Limited
|
|
IC
design and sales
|
|
ROC
|
|
55.3
|
|
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
|
|
2.3
|
|
100%(1)
|
Himax
Technologies (Suzhou) Co., Ltd.
|
|
Sales
|
|
PRC
|
|
1.0
|
|
100%(1)
|
Himax
Technologies (Shenzhen) Co., Ltd.
|
|
Sales
|
|
PRC
|
|
0.5
|
|
100%(1)
|
Himax
Display, Inc.
|
|
IC
design, manufacturing and sales
|
|
ROC
|
|
18.2
|
|
87.5%
|
Integrated
Microdisplays Limited
|
|
IC
design and sales
|
|
Hong
Kong
|
|
0.6
|
|
100%(2)
|
Subsidiary
|
|
Main Activities
|
|
Jurisdiction of
Incorporation
|
|
Total Paid-in
Capital
|
|
Percentage of
Our Ownership
Interest
|
|
|
|
|
|
|
$(in
millions)
|
|
|
Himax
Analogic, Inc. (formerly Amazion Electronics, Inc.)
|
|
IC
design and sales
|
|
ROC
|
|
4.1
|
|
86.3%
|
Himax
Imaging, Inc.
|
|
Investments
|
|
Cayman
|
|
5.5
|
|
100%
|
Himax
Imaging Ltd.
|
|
IC
design and sales
|
|
ROC
|
|
2.1
|
|
100%
|
Himax
Imaging Corp.
|
|
IC
design and sales
|
|
California,
USA
|
|
2.5
|
|
100%
|
(1)
Indirectly, through our 100% ownership of Himax Technologies
Limited
(2)
Indirectly, through our 87.5% ownership of Himax Display, Inc.
4.D.
Property, Plants and Equipment
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 $25.7 million,
of which approximately $10.2 million was for the land and approximately $15.5
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
and
Shenzhen, China; Yokohama, 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.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A.
Operating Results
Overview
We
design,
develop and market semiconductors that are critical components of flat panel
displays. Our principal products are display drivers for use 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 are also expanding our product offering
to
include television semiconductor solutions such as television chipsets and
television tuner modules, as well as LCOS products. 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
have achieved significant revenue growth since our inception. Our revenues
were
$300.3 million, $540.2 million and $744.5 million in 2004, 2005 and 2006,
respectively. We do not expect similar growth rates in our revenues in future
periods. Our net income was $36.0 million, $61.6 million and $75.2 million
in
2004, 2005 and 2006, respectively. 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 rapidly 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 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. In 2004, 2005 and 2006,
substantially all of our revenues 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;
|
|
·
|
cost
of revenues and cost reductions;
|
|
·
|
supply
chain management;
|
|
·
|
share-based
compensation expenses; and
|
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 affected by the cyclicality of the TFT-LCD panel industry. Downward pricing
pressure on TFT-LCD panel manufacturers could result in similar downward
pricing
pressure on us. According to
Display Search, the average
selling price of 17-inch and 32-inch panels
decreased by 25.2%
and
28.7%, respectively, in
2006 compared to 2005. 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
number of large-sized panels shipped. We have 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 roadmaps 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 2004, 2005 and 2006 were 78.6%, 77.6% and 80.8%, respectively.
For
the year ended December 31, 2006, as a percentage of our total manufacturing
costs, the cost of wafer fabrication was 45.7%, the cost of processed tape
was
24.2%, and the cost of assembly and testing was 29.2%. 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.
We have historically granted bonus shares to our employees from our inception
to
December 2003. Employee bonuses are accrued and recognized as share-based
compensation expenses in the period services are provided. We determined
the
amount of employee bonuses based on ROC GAAP financial results, subject to
shareholder approval. The difference between the estimated bonuses and actual
amounts paid, either in cash or through the issuance of shares, was charged
to
earnings upon shareholder approval of the amount and form (shares or cash)
of
employee bonuses. Amounts charged for share issuances are based upon the
estimated fair value of such bonus shares at the date of shareholder approval.
Our share-based compensation expenses also 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 totaling $5.8 million, $8.6 million,
and $15.2 million in 2004, 2005 and 2006, respectively. See “—Critical
Accounting Policies—Share-Based Compensation Expenses.” 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.
Shares
Issued to Non-Employees. In 2002, Himax Taiwan granted 596,897 common
shares to two consultants in exchange for their assistance in the development
of
LCOS technology during the period from July 2001 through June
2002. Himax Taiwan recognized share-based compensation expenses of
$34,000 in both 2001 and 2002.
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 September 30,
2006, with the remainder vesting on each of September 30, 2007 and 2008,
subject
to certain forfeiture events.
We
made an additional grant
of 3,798,808
RSUs to our employees on September 29,
2006. The
vesting schedule for this RSU grant
is as follows: 47.3%
of the RSU grant vested immediately on
the grant date, with the remainder vesting equally on
each of September 30, 2007,
2008
and 2009,
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 June
30,
2006, with the remainder vesting on each of June 30, 2007 and 2008, subject
to
certain forfeiture events. No RSUs were granted to our independent
directors in 2006.
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 was
$5.71
per ordinary share which was based on the trading price of our ADSs on that
day.
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 year ended December 31, 2006,
we had
paid
a total amount of US$3.4
million in signing bonuses which
was
also
charged
to earnings.
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, television chipsets, television tuner modules and liquid crystal
injection.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except percentages)
|
|
Display
drivers for large-sized applications
|
|
$ |
258,006
|
|
|
|
85.9 |
% |
|
$ |
470,631
|
|
|
|
87.1 |
% |
|
$ |
645,513
|
|
|
|
86.7 |
% |
Display
drivers for mobile handsets applications
|
|
|
12,607
|
|
|
|
4.2
|
|
|
|
31,123
|
|
|
|
5.8
|
|
|
|
52,160
|
|
|
|
7.0
|
|
Display
drivers for consumer electronics applications
|
|
|
21,754
|
|
|
|
7.3
|
|
|
|
18,571
|
|
|
|
3.4
|
|
|
|
28,616
|
|
|
|
3.8
|
|
Others(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
|
100.0 |
% |
|
$ |
|
|
|
|
100.0 |
% |
|
$ |
|
|
|
|
100.0 |
% |
Note:
|
(1)
|
Includes,
among other things, operational amplifiers, timing controllers,
television
chipsets, television tuner modules and liquid crystal
injection.
|
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. The table below sets forth,
for
the periods indicated, our revenues generated from significant customers
(including their respective affiliates) and others and such revenues as a
percentage of our total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except percentages)
|
|
CMO
and its affiliates
|
|
$ |
189,870
|
|
|
|
63.2 |
% |
|
$ |
318,008
|
|
|
|
58.9 |
% |
|
$ |
409,697
|
|
|
|
55.0 |
% |
CPT
and its affiliates
|
|
|
58,430
|
|
|
|
19.5 |
% |
|
|
87,534
|
|
|
|
16.2 |
% |
|
|
92,561
|
|
|
|
12.4 |
% |
Others
|
|
|
|
|
|
|
17.3 |
% |
|
|
|
|
|
|
24.9 |
% |
|
|
|
|
|
|
32.6 |
% |
Total
|
|
$ |
|
|
|
|
100.0 |
% |
|
$ |
|
|
|
|
100.0 |
% |
|
$ |
|
|
|
|
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-use products are sold worldwide. In 2004, 2005 and 2006, approximately
94.8%, 89.4% and 81.4% 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
is 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 (primarily overhead and direct
labor).
|
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 and related employee welfare costs, costs associated with prototype
wafers and processed tape, mask and tooling sets and depreciation on research
and development equipment. 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 to increase 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 and related employee welfare costs, Southern Taiwan
Science Park management fees, rent and professional fees. We moved Himax
Taiwan’s operations out of Southern Taiwan Science Park in July 2004, and
therefore we paid no management fees in 2005 and 2006. 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 and amortization expenses in connection with our new headquarters
located 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 and related employee welfare costs 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
economies of scale and greater 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 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 applicable cost of revenues and expense categories
as
related services are performed. See note 14 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 service 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 have
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 to our employees. See
“—Critical Accounting Policies—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, Himax Display and Himax Analogic
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 $4.7 million, $9.4 million and $19.4 million as of December 31, 2004,
2005 and 2006, 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 our expanded production capacity or newly developed technologies is tax
exempt for a period of five years, effective on April 1, 2004 and January
1,
2006 and expiring on March 31, 2009 and December 31, 2010,
respectively. If we did not have this tax
exemption, net income and basic and diluted earnings per ordinary share would
have been $59.2 million, $0.31 and $0.30 for the year ended December 31,
2006,
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
As
of
December 31, 2006, we have not issued any stock options to employees or others.
Share-based compensation primarily consists of grants of nonvested or restricted
shares of common stock 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,
2006, we based our share-based compensation cost on an
assumed forfeiture rate of 5.3% per annum. 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 cashflow 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, the
fair
value of the ordinary shares underlying the RSUs granted to our employees,
was
$5.71 per share, which was the closing price of our ADSs on September 29,
2006.
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, 2004, 2005 and 2006
is as
follows:
|
|
Balance
at
Beginning
of
Year
|
|
|
|
Addition
|
|
|
|
Amounts
Utilized
|
|
|
|
|
|
|
(in
thousands)
|
|
December
31, 2004
|
|
$ |
28
|
|
|
$ |
1,022
|
|
|
$ |
(810 |
) |
|
$ |
240
|
|
December
31, 2005
|
|
$ |
240
|
|
|
$ |
398
|
|
|
$ |
(457 |
) |
|
$ |
181
|
|
December
31, 2006
|
|
$ |
181
|
|
|
$ |
2,843
|
|
|
$ |
(2,156 |
) |
|
$ |
868
|
|
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-down may be required that 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-down for the years ended December 31,
2004, 2005 and 2006 was approximately $847,000, $927,000 and, $5.2 million,
respectively, and are included in cost of revenues in our consolidated
statements of income. The inventory write-down was particularly high
in 2006 primarily due to a higher volume base, broader product offerings and
more severe market fluctuations.
Impairment
of Long-Lived Assets
We
routinely review our long-lived assets, other than goodwill and indefinite
life
intangibles 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 other than goodwill and indefinite
life
intangibles during the period from December 31, 2002 to December 31,
2006.
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.
Product
Warranty
Under
our
standard terms and conditions of sale, products sold are subject to a limited
product quality warranty. The stated limited warranty period is 60 days. 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, 2004, 2005 and 2006 is as follows:
Year
|
|
Balance
at
Beginning
of
Year
|
|
|
|
Addition
|
|
|
|
Amount
Utilized
|
|
|
|
|
|
|
(in
thousands)
|
|
December
31, 2004
|
|
$ |
—
|
|
|
$ |
960
|
|
|
$ |
453
|
|
|
$ |
507
|
|
December
31, 2005
|
|
$ |
507
|
|
|
$ |
1,415
|
|
|
$ |
(1,377 |
) |
|
$ |
545
|
|
December
31, 2006
|
|
$ |
545
|
|
|
$ |
2,101
|
|
|
$ |
(2,016 |
) |
|
$ |
630
|
|
Income
Taxes
As
part of
the process of preparing our consolidated financial statements, 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 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 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.
Except
for
Himax Taiwan, all of our other subsidiaries have generated tax losses since
inception and are not included in the consolidated tax filing with Himax Taiwan,
a valuation allowance of $893,000, $3.3 million and $6.3 million as of December
31, 2004, 2005 and 2006, 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 net change in valuation allowance
for
the years ended December 31, 2004, 2005 and 2006 was an increase of $882,000,
$2.4 million, and $3.0 million, respectively, as a result of increases in
deferred tax assets which we do 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.
The following table sets forth a summary of our consolidated statements of
income as a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
78.6
|
|
|
|
77.6
|
|
|
|
80.8
|
|
Research
and development
|
|
|
8.0
|
|
|
|
7.6
|
|
|
|
8.1
|
|
General
and administrative
|
|
|
1.5
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Sales
and marketing
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.9
|
|
Total
costs and expenses
|
|
|
89.0
|
|
|
|
87.4
|
|
|
|
91.1
|
|
Operating
income
|
|
|
11.0
|
|
|
|
12.6
|
|
|
|
8.9
|
|
Other
non operating income
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Income
tax expenses (benefit)
|
|
|
(0.6 |
) |
|
|
1.7
|
|
|
|
(0.7 |
) |
Net
income
|
|
|
12.0
|
|
|
|
11.4
|
|
|
|
10.1
|
|
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 to reduce per
unit
cost of revenues in order to meet such pressure. Revenues from related parties
increased 28.4% to $414.6 million in 2006 from $322.8 million in 2005 as a
result of increased unit shipments to CMO (and its affiliates) and other related
parties. However, revenues from related parties as a percentage of
our revenues decreased from 59.8% in 2005 to 55.7% in 2006 as our sales to
other
customers continued to grow, reflecting our effort in diversifying our customer
base and reducing our reliance on any one customer.
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 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, 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 47.0% to
$60.7 million in the 2006 from $41.3 million in the 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
44.1% 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 45.8% 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.
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Revenues.
Our revenues increased 79.9% to $540.2 million in 2005 from $300.3 million
in
2004. This increase was primarily due to a 118.4% increase in unit shipments
of
display drivers for large-sized applications, partially offset by a 16.2%
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 for large-sized applications, as well as our ability to reduce per
unit
cost of revenues in order to meet such pressure. Revenues from related parties
increased 69.2% to $322.8 million in 2005 from $190.8 million in 2004 as a
result of increased unit shipments to CMO (and its affiliates) and other related
parties. However, revenues from related
parties
as
a percentage of our revenues decreased from 63.5% in 2004 to 59.8% in 2005
as
our sales to other customers continued to grow, reflecting our effort in
diversifying our customer base and reducing our reliance on any one
customer.
Costs
and Expenses. Costs and expenses increased 76.6% to $472.2 million in 2005
from $267.4 million in 2004. As a percentage of revenues, costs and expenses
decreased to 87.4% in 2005 compared to 89.0% in 2004.
·
|
Cost
of Revenues. Cost of revenues increased 77.7% to $419.4 million in
2005 from $236.0 million in 2004. The increase in cost of revenues
was
primarily due to an increase in unit shipments, partially offset
by a
slight decrease in per units 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, 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 72.0% to
$41.3 million in the 2005 from $24.0 million in 2004, primarily due
to the
increase in salary expenses and share-based compensation expenses.
The
increase in salary expenses was due to increased headcount and higher
average salaries. The increase was also partially as 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 also resulted from our increase in headcount
and our
grant of RSUs to certain employees on December 30,
2005.
|
·
|
General
and Administrative. General and administrative expenses increased
45.8% to $6.8 million in 2005 from $4.7 million in 2004, primarily
due to
an increase in salary expenses. The increase in salary expenses was
due to
increased headcount and higher average salaries. The increase in
general
and administrative expenses also partially resulted from increased
costs
associated with increased management and other fees paid to our security
company and increased fees relating to patent
filings.
|
·
|
Sales
and Marketing. Sales and marketing expenses increased 73.7% to $4.8
million in 2005 from $2.7 million in 2004, primarily due to an increase
in
salary expenses and share-based compensation expenses. The increase
in
salary expenses was due to a 76.6% increase in headcount and higher
average salaries. The increase in share-based compensation expenses
also
resulted from our increase in headcount and our grant of RSUs to
certain
employees on December 30, 2005. The increase in sales and marketing
expenses was also partially as a result of increased travel expenses
reflecting increased sales
activity.
|
Non-Operating
Income (Loss). We had a non-operating income of $2.3 million in 2005
compared to $1.3 million in 2004, primarily as a result of increases in both
foreign exchange gain and interest income as compared to 2004. Foreign exchange
gain increased due to the weakening of the NT dollar and Japanese yen relative
to the U.S. dollar. The significant increase in interest income was due to
the
higher cash balance on hand, which was primarily placed in higher yield U.S.
dollar denominated time deposits beginning in August 2005.
Income
Tax Expense (Benefit). Income tax expenses increased to $8.9 million in
2005 compared to an income tax benefit of $1.8 million in 2004. Our effective
income tax rate increased from (5.2%) in 2004 to 12.7% in 2005, primarily due
to: (a) the increase of valuation allowance provided to reduce certain
subsidiaries’ deferred tax assets to zero, (b) the increase of non-deductible
share-based compensation expenses and (c) the absence in 2005 of a tax benefit
from the distribution of the prior year’s income compared to 2004, which was
partially offset by more investment tax credits and tax exempted income as
compared to 2004.
Net
Income. As a result of the foregoing, our net income increased to $61.6
million in 2005 from a net income of $36.0 million in 2004.
5.B.
Liquidity and Capital Resources
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
(8,688 |
) |
|
$ |
12,464
|
|
|
$ |
29,696
|
|
Net
cash provided by (used in) investing activities
|
|
|
11,001
|
|
|
|
(25,363 |
) |
|
|
(8,927 |
) |
Net
cash provided by financing activities
|
|
|
735
|
|
|
|
14,404
|
|
|
|
81,886
|
|
Effect
of exchange rates changes on cash and cash equivalents |
|
|
- |
|
|
|
4 |
|
|
|
12 |
|
Net
increase in cash
|
|
|
3,048
|
|
|
|
1,509
|
|
|
|
102,667
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,529
|
|
|
|
5,577
|
|
|
|
7,086
|
|
Cash
and cash equivalents at end of period
|
|
|
5,577
|
|
|
|
7,086
|
|
|
|
109,753
|
|
Prior
to
being a public company, we financed our operations primarily through the
issuance of shares in Himax Taiwan. As of December 31, 2006, we had $109.8
million in cash and cash equivelents.
Operating
Activities. 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 as a result of
an
increase in operating profit and accounts payable due to an increase in cost
of
revenues and other expenses, which was partially offset by an increase in
accounts receivables. The increase in accounts receivable was primarily a result
of the increase in sales in 2006 and the extension of payment terms for certain
of our customers. Net cash provided by operating activities for the year ended
December 31, 2005 was $12.5 million compared to net cash used in operating
activities of $8.7 million for the year ended December 31, 2004. Net cash
provided by operating activities increased in 2005 primarily as a result of
an
increase in operating profit and accounts payable due to the extension of
payment terms received from certain vendors, which was partially offset by
an
increase in accounts receivable. We negotiated an extension of payment terms
with two of our main third-party semiconductor manufacturing service providers
in order to better balance our cash flows with payment terms that we offer
our
customers. The increase in accounts receivable was primarily as a result of
the
significant increase in sales in the second half of 2005 and the extension
of
payment terms for certain of our customers in the fourth quarter of
2005.
Investing
Activities. Net cash used in investing activities in the year ended
December 31, 2006 was $8.9 million compared to net cash used in investing
activities of $25.4 million in 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. Net cash used in investing activities in
the year ended December 31, 2005 was $25.4 million compared to net cash provided
by investing activities of $11.0 million in the year ended December 31, 2004.
This change was primarily due to a decrease in net proceeds generated from
the
purchase and sale of available-for-sale marketable securities of $15.2 million,
when compared to the year ended December 31, 2004, an increase in the purchase
of property and equipment and a pledge of restricted cash equivalents and
marketable securities of $13.7 million.
Financing
Activities. 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. Net cash provided by financing activities
in the year ended December 31, 2005 was $14.4 million compared to net cash
provided by financing activities of $0.7 million in the year ended December
31,
2004, primarily due to proceeds received from borrowings of short-term debt
and
the issuance of Himax Analogic’s shares, which was offset by a distribution of
special cash dividends and the repayment of long-term debt.
Our
liquidity could be adversely affected by our obligation to meet certain
conditions set by the ROC Investment Commission (including a requirement to
make
substantial investments in research and development) in connection with its
approval for the share exchange as further described below under “—Contractual
Obligations.”
Moreover,
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 for 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 extension in the future. The extension of payment terms for our customers
could adversely affect our cash flow, liquidity and our operating
results.
5.C.
Research and Development
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 cost 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 2004, 2005 and 2006, we incurred research and development expenses
of $24.0 million, $41.3 million, and $60.7 million, respectively, representing
8.0%, 7.6%, and 8.1% of
our
revenues, respectively.
5.D.
Trend Information
For
trend
information, see “Item 5. Operating and Financial Review and Prospects—Operating
Results.”
5.E.
Off-Balance Sheet Arrangements
As
of
December 31, 2006, we did not have any off-balance sheet guarantees, interest
rate swap transactions or foreign currency forward contracts. We do not engage
in trading activities involving non-exchange traded contracts. Furthermore,
as
of December 31, 2006, we did not have any interests in variable interest
entities.
5.F.
Tabular Disclosure of Contractual Obligations
The
following table sets forth our contractual obligations as of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Operating
lease obligations
|
|
|
1,476
|
|
|
|
864
|
|
|
|
612
|
|
|
|
—
|
|
|
|
—
|
|
Purchase
obligations(1)
|
|
|
143,164
|
|
|
|
143,164
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
obligations(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
(1)
|
Includes
obligations for wafer fabrication, raw materials and
supplies. |
|
|
|
|
(2)
|
Includes
obligations under license agreements and investment obligations
required
by the ROC Investment Commission. |
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 and expect to pay $100,000 in 2007 under the agreement.
In
addition, we completed construction of our new headquarters located in the
Tree
Valley Industrial Park. 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 $25.7 million, of which approximately $10.2
million was for the land and approximately $15.5 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
and
$9.7 million of the construction costs were paid in 2005 and 2006, respectively.
We expect to pay the remaining $5.0 million of the construction costs in 2007
using cash on hand and cash flows generated from our operations.
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 has approved the share exchange, subject to our satisfying the
following undertakings we gave in connection with our application seeking
approval of the share exchange: Himax Taiwan is required to (1) purchase three
hectares of land in connection with the construction of its new headquarters
in
Tainan, Taiwan; (2) increase the number of Taiwanese employees to 430 employees,
475 employees and 520 employees by the end of 2005, 2006 and 2007, respectively;
and (3) invest no less than $24.4 million, $27.6 million and $30.7 million
for
research and development in Taiwan in 2005, 2006 and 2007, respectively. The
required research and development expenditure may be satisfied through
cash-based compensation but cannot be satisfied through non-cash share-based
compensation. Himax Taiwan is required to 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.
We
believe that the undertakings under the ROC Investment Commission approval
are
in line with our business plan. In August 2005, we purchased 3.18 hectares
of
land for an aggregate purchase price of approximately $10.2 million in
satisfaction of the first condition. As of December 31, 2005 and 2006, we had
satisfied the conditions with respect to the Taiwan employees’ requirements with
549 and 664 Taiwan employees for 2005 and 2006, respectively, and Himax Taiwan
had spent approximately $30.9 million and $42.8 million in research and
development expenditures in 2005 and 2006, respectively. With respect to 2007,
we expect that we will spend an amount at or above the research and development
expenditure requirements. We intend to commit the necessary resources
in both headcount and research and development to support our plans for further
growth and to ensure future competitiveness. Our business plan for
2007 contemplates an increase in headcount (mostly research and development
personnel) and research and development expenditure to improve and enhance
our
core technologies and know-how. Based on our historical trend with
respect to increases in headcount and research and development expenditure,
and
our projected headcount and research and development expenditure, we expect
that
the above-mentioned requirements for 2007 will be satisfied.
Although
we intend to discharge our undertakings to the ROC Investment Commission, we
cannot assure you that we will be able to do so under all circumstances. To
the
extent that we experience no or negative revenue growth as a result of
significant company-specific or industry-wide events, we would be limited in
our
ability to adjust our headcount and research and development expenditures in
response to those events. In this case, these undertakings would restrict our
operational flexibility and adversely affect our operating margins and results
of operations. See “Item 3.D. Risk Factors—Political, Geographical and Economic
Risks — If we failed to satisfy the undertakings we made to the ROC Investment
Commission in connection with our application seeking approval of the share
exchange, the ROC Investment Commission could take actions against us that
would
materially and adversely affect our business, financial condition and results
of
operations and decrease the value of our ADSs.”
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 new 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 2006 were $855,000
compared to $217,000 in 2005. Total contributions to the defined benefit plan
and the new defined contribution plan in 2006 were $1.1 million compared to
$412,000 in 2005. This increase has not, and is not expected to have,
a material effect on our cash flows or results of operations.
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.
Inflation
Inflation
in Taiwan has not had a material impact on our results of operations in recent
years. The rate of inflation in Taiwan was 1.6%, 2.3%, and 0.6% in 2004,
2005 and 2006, respectively.
Recent
Accounting Pronouncements
In
September 2005, the FASB approved the consensus reached on the Emerging Issues
Task Force Issue No. 04-13, or EITF 04-13, Accounting for Purchases and
Sales of Inventory with the Same Counterparty. EITF 04-13 provides guidance
for circumstances under which two or more transactions involving inventory
with
the same counterparty should be viewed as a single nonmonetary transaction
within the scope of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and whether there are circumstances under which nonmonetary
exchanges of inventory within the same line of business should be recognized
at
fair value. EITF 04-13 will be applied to new arrangements entered into, and
modifications or renewals of existing arrangements occurring after January
1,
2007. We do not expect the adoption of EITF 04-13 to have a material impact
on
our consolidated financial position, results of operations or cash
flows.
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, or FIN 48, an interpretation of FASB Statement 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements and prescribes a threshold of
“more-likely-than-not” for recognition of tax benefits of uncertain tax
positions taken or expected to be taken in a tax return. FIN 48 also
provides related guidance on measurement, derecognition, classification,
interest and penalties, and disclosure. The provisions of FIN 48 will
be effective for us on January 1, 2007, with any cumulative effect of the change
in accounting principle recorded as an adjustment to opening retained
earnings. Our current policy is to recognize tax benefits of
uncertain tax positions only if it is probable that the positions will be
sustained. Based on our assessment, the initial adoption of the
provisions of FIN 48 will not have any impact on our results of operations
and
financial position in 2007.
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. We are
currently evaluating the impact and required disclosures of this standard,
but
do not expect SFAS No. 157 to have a material impact on our consolidated results
of operations or financial position.
In
September 2006, the FASB issued FASB Staff Position No. AUG AIR-1,
Accounting for Planned Major Maintenance Activities. This
guidance prohibits the use of the accrue-in-advance method of accounting for
planned major activities because an obligation has not occurred and therefore
a
liability should not be recognized. The provisions of this guidance
will be effective for reporting periods beginning after December 15,
2006. The provisions of the Staff Position are consistent with our
current policies and we do not anticipate that the adoption of the provisions
of
this guidance will have a material impact on our results of operations or
financial position.
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 that 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 retrospectively. The measurement provisions
of
SFAS No. 158 are consistent with the Company’s currency policies and the Company
does not anticipate that the adoption of the measurement provisions of SFAS
No.
158 will have an impact on its consolidated financial
statements. The
incremental effect of the initial adoption of SFAS No.
158
at December 31, 2006
was a reduction of accumulated other comprehensive
income of
$331,000,
net of tax.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Consideration of the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, or SAB No.
108. The intent of SAB No. 108 is to reduce diversity in practice for
the method companies use to quantify financial statement misstatements,
including the effect of prior year uncorrected errors. SAB No. 108
established an approach that requires quantification of financial statement
errors using both an income statement and a cumulative balance sheet
approach. SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 in 2006 did not have
any impact on the Company’s consolidated financial statements.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A.
Directors and Senior Management
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, 2007. 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
|
|
|
|
|
Dr.
Biing-Seng Wu
|
|
|
49
|
|
Chairman
of the Board
|
Jordan
Wu
|
|
|
46
|
|
President,
Chief Executive Officer and Director
|
Jung-Chun
Lin
|
|
|
58
|
|
Director
|
Dr.
Chun-Yen Chang
|
|
|
69
|
|
Director
|
Yuan-Chuan
Horng
|
|
|
55
|
|
Director
|
Chih-Chung
Tsai
|
|
|
51
|
|
Chief
Technology Officer, Senior Vice President
|
Max
Chan
|
|
|
40
|
|
Chief
Financial Officer
|
Baker
Bai
|
|
|
49
|
|
Vice
President, Incubator System Design Center
|
John
Chou
|
|
|
48
|
|
Vice
President, Quality & Reliability Assurance & Support Design
Center
|
Norman
Hung
|
|
|
49
|
|
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 Inc. 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 and Integrated
Microdisplays and a director of Himax Taiwan, Himax Display, Himax Analogic,
Himax Samoa, Himax Anyang, Himax Shenzhen, Himax Suzhou and Himax Imaging Ltd.
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 and a supervisor of Himax Analogic since
July
2004. 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 and Integrated Microdisplays, and a
supervisor of Himax Analogic. Prior to joining Himax Taiwan, Mr. Tsai served
as
vice president of IC Design of Utron Technology from 1998 to 2001, 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. 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 Himax Analogic, 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 director of Himax
Analogic. 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 Himax Analogic and Wisepal. 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.
6.B.
Compensation of Directors and Executive Officers
In
the
year ended December 31, 2006, the aggregate cash compensation that we paid
to
our executive officers was approximately $0.52 million. The aggregate
share-based compensation that we paid to our executive officers was
approximately $0.76 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, 2006, the aggregate cash compensation that we paid
to
our directors was approximately $20,000. The aggregate share-based compensation
that we paid to our directors was $43,100.
The
following table summarizes the RSUs that we granted in 2006 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.
|
|
|
|
|
Ordinary
Shares
Underlying
Vested
Portion
of RSUs
|
|
|
Ordinary
Shares
Underlying
Unvested
Portion
of
RSUs
|
|
Dr.
Biing-Seng Wu
|
|
|
30,188
|
|
|
|
7,547
|
|
|
|
22,641
|
|
Jordan
Wu
|
|
|
71,581
|
|
|
|
17,895
|
|
|
|
53,686
|
|
Jung-Chun
Lin
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Dr.
Chun-Yen Chang
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Yuan-Chuan
Horng
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Chi-Chung
Tsai
|
|
|
71,581
|
|
|
|
17,895
|
|
|
|
53,686
|
|
Max
Chan
|
|
|
23,872
|
|
|
|
5,968
|
|
|
|
17,904
|
|
Baker
Bai
|
|
|
43,441
|
|
|
|
10,860
|
|
|
|
32,581
|
|
John
Chou
|
|
|
38,747
|
|
|
|
22,500
|
|
|
|
16,247
|
|
Norman
Hung
|
|
|
37,672
|
|
|
|
11,667
|
|
|
|
26,005
|
|
6.C.
Board Practices
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 Stock Market, Inc.
Marketplace Rules, or 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 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 while his compensation is deliberated. We intend to
follow home country practice that permits a compensation committee to contain
a
director that 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 that 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 that 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.
6.D.
Employees
As
of
December 31, 2004, 2005 and 2006, we had 469, 716 and 924 employees,
respectively. The following is a breakdown of our employees by
function as of December 31, 2006:
|
|
|
|
Research
and development(1)
|
|
|
615
|
|
Engineering
and manufacturing(2)
|
|
|
125
|
|
Sales
and marketing(3)
|
|
|
120
|
|
General
and administrative
|
|
|
64
|
|
Total
|
|
|
924
|
|
(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
September 30, 2006, and with the remainder vesting each of September 30, 2007
and 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 June 30,
2006, and with the remainder vesting each of June 30, 2007 and 2008, subject
to
certain forfeiture events.
We
made an
additional grant of 3,798,808 RSUs to our employees on September 29, 2006.
The
vesting schedule for this RSU grant is as follows: 47.3% of the RSU grant vested
immediately on the grant date, with the remainder vesting equally on each of
September 29, 2007, 2008 and 2009, 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 due 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.
6.E.
Share Ownership
The
following table sets forth the beneficial ownership of our ordinary shares,
as
of June 1, 2007, by each of our directors and executive officers.
Name
|
|
Number of
Shares
Owned
|
|
|
Percentage
of
Shares
Owned
|
|
|
|
|
|
|
|
|
|
|
Dr.
Biing-Seng Wu
|
|
|
31,578,765
|
|
|
|
15.98 |
% |
Jordan
Wu
|
|
|
10,906,363
|
|
|
|
5.52 |
% |
Jung-Chun
Lin
|
|
|
|
|
|
|
Dr.
Chun-Yen Chang
|
|
|
794,807
|
|
|
|
*
|
|
Yuan-Chuan
Horng
|
|
|
453,052
|
|
|
|
*
|
|
Chih-Chung
Tsai
|
|
|
2,922,012
|
|
|
|
1.48 |
% |
Max
Chan
|
|
|
61,247
|
|
|
|
*
|
|
Baker
Bai
|
|
|
2,281,364
|
|
|
|
1.15 |
% |
Name
|
|
Number of
Shares
Owned
|
|
|
Percentage
of
Shares
Owned
|
|
|
|
|
|
|
|
|
|
|
John
Chou
|
|
|
39,863
|
|
|
|
*
|
|
Norman
Hung
|
|
|
23,997
|
|
|
|
*
|
|
|
None
of our directors or executive officers has different voting rights
from
other shareholders.
|
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A.
Major Shareholders
CMO
is our
major shareholder. As of June 1, 2007, CMO beneficially owned 12.56%
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 manufacturing 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 shareholders. CMO has also been our largest customer
since our inception. As of December 31, 2006, sales to CMO (together with its
affiliates) accounted for 55.0% 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, 2007.
The
following table sets forth information known to us with respect to the
beneficial ownership of our shares as of June 1, 2007, 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.
|
|
Number
of Shares
Beneficially
Owned
|
|
|
Percentage
of Shares
Beneficially
Owned
|
|
Dr.
Biing-Seng Wu
|
|
|
31,578,765
|
|
|
|
15.98 |
% |
Jordan
Wu
|
|
|
10,906,363
|
|
|
|
5.52 |
% |
CMO
|
|
|
24,822,529
|
|
|
|
12.56 |
% |
All
directors and executive officers as a group
|
|
|
49,061,470
|
|
|
|
24.82 |
% |
None
of
our major shareholders has different voting rights 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, 2007, 197,656,063 of our shares were outstanding. We believe that, of such
shares, 89,537,409 shares in the form of ADSs were held by approximately
5,033 holders in the United States as of June 1, 2007.
7.B.
Related Party Transactions
CMO
and Related Companies
CMO
We
sell
display drivers to CMO. We generated net sales to CMO in the amount of $189.1
million in 2004, $317.0 million in 2005, and $335.8 million in 2006 and our
receivables from these sales were $38.6 million, $67.4 million and $81.6 million
as of December 31, 2004, 2005 and 2006, respectively.
We
lease
office space and equipment from CMO. Rent and utility expenses paid to CMO
amounted to $0.6 million in 2004, $0.6 million in 2005, and $0.8 million in
2006.
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. In 2004 and 2005, Himax Display
purchased empty cells and liquid crystal from CMO which were used for Himax
Display’s liquid crystal injection services, in an amount of $176,000 and
$703,000, respectively. In 2006, Himax Display did not make purchases from
or
sales to CMO in connection with liquid crystal injection services.
In
February 2006, 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.
International
Display Technology Co., Ltd.
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 its
headquarters based in Yasu, Japan, IDTech historically has developed and
manufactured large-sized, high-resolution TFT-LCD panels and currently markets
TFT-LCD panels for CMO. We sell display drivers to IDTech. We generated net
sales to IDTech in the amount of $0.8 million in 2004, $0.3 million in 2005
and
nil in 2006. We had no receivables from these sales as of December 31, 2004
and
2005.
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 $65,000, $48,000, and $93,000
in
2004, 2005 and 2006, 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 and $73.9 million in 2006 and our receivables
from these sales were $0.7 million and $33.9 million as of December 31, 2005
and
2006, 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 $0.3 million, $2.8 million
and $3.0 million in 2004, 2005 and 2006, respectively, and our receivables
from
these sales was $0.2 million, $1.2 million and $0.4 million as of December
31,
2004, 2005 and 2006, respectively. We did not generate net sales to Chi Lin
Tech
prior to 2004.
TopSun
Optoelectronics, Inc.
We
sell
display drivers to TopSun Optoelectronics Inc., or TopSun, whose board of
directors is controlled by Chi Lin Tech. 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, . 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 our remaining interest in October
2006. We generated net sales to JEC in the amount
of $0.6 million in 2004, $1.6 million in 2005, and $0.009 million in 2006,
respectively, and our receivables from these sales were $0.5 million, $0.1
million, and nil as of December 31, 2004, 2005 and 2006, respectively. We did
not generate net sales from JEC prior to 2004.
7.C.
Interests of Experts and Counsel
Not
applicable.
ITEM
8. FINANCIAL INFORMATION
8.A.
Consolidated Statements and Other Financial Information
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.
8.A.7.
Litigation
We
are not
involved in any litigation or other legal matters which could reasonably be
expected to, if decided adversely to us, have a material adverse impact on
our
business or operations.
8.A.8.
Dividends and Dividend Policy
Our
dividend policy is to retain most, 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 was
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.
This special dividend should not be considered representative of the dividends
that would be paid in any future periods or our dividend policy. In 2006, we
did
not distribute any dividends.
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 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:
|
·
|
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.
If
we are
not able to satisfy our undertakings to the ROC Investment Commission, Himax
Taiwan may not be able to pay dividends to us, which may adversely affect your
ability to receive dividends because we rely on Himax Taiwan and our other
subsidiaries for dividend payments, if any, to our shareholders. See “Item 3.D.
Risk Factors—Political, Geographical and Economic Risks—If we failed to satisfy
the undertakings we made to the ROC Investment Commission in connection with
our
application seeking approval of the share exchange, the ROC Investment
Commission could take actions against us that would materially and adversely
affect our business, financial condition and results of operations and decrease
the value of our ADSs.”
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.
8.B.
Significant Changes
We
have
not experienced any significant changes since the date of the annual financial
statements.
ITEM
9. THE OFFER AND LISTING
9.A.
Offering and Listing Details
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 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.
|
|
|
|
|
|
|
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 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 Market for the shares represented by ADSs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Daily
Trading
Volume
|
|
|
|
(US$)
|
|
|
(US$)
|
|
|
(in
thousand of ADSs)
|
|
2006
|
|
|
|
|
|
|
|
|
|
Second
quarter (from April 1)
|
|
|
9.25
|
|
|
|
4.73
|
|
|
|
809.6
|
|
Third
quarter
|
|
|
7.59
|
|
|
|
4.85
|
|
|
|
269.9
|
|
Fourth
quarter
|
|
|
6.50
|
|
|
|
4.21
|
|
|
|
981.6
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
5.25
|
|
|
|
4.53
|
|
|
|
710.4
|
|
February
|
|
|
6.15
|
|
|
|
4.71
|
|
|
|
1,021.5
|
|
March
|
|
|
5.66
|
|
|
|
4.96
|
|
|
|
422.7
|
|
April
|
|
|
6.07
|
|
|
|
5.20
|
|
|
|
515.4
|
|
May
|
|
|
6.04
|
|
|
|
5.00
|
|
|
|
514.5
|
|
June
(through June 18)
|
|
|
5.86
|
|
|
|
4.97
|
|
|
|
561.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.B.
Plan of Distribution
Not
applicable.
9.C.
Markets
The
principal trading market for our shares is the Nasdaq Global Market, on which
our shares are traded in the form of ADSs.
9.D.
Selling Shareholders
Not
applicable.
9.E.
Dilution
Not
applicable.
9.F.
Expenses of the Issue
Not
applicable.
ITEM
10. ADDITIONAL INFORMATION
10.A.
Share Capital
Not
applicable.
10.B.
Memorandum and Articles of Association
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.
10.C.
Material Contracts
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.
10.D.
Exchange Controls
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.
10.E.
Taxation
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
purchasing, 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 acquire 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;
|
|
·
|
dealers
and certain traders in securities or foreign
currencies;
|
|
·
|
persons
holding ordinary shares or ADSs as part of a hedge, straddle, conversion
or other integrated 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.
|
This
discussion is based on the Internal Revenue Code of 1986, as amended,
administrative pronouncements, judicial decisions and final, temporary and
proposed Treasury regulations, 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 purchasing, 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 ADSs are pre-released
may
be taking actions that are inconsistent with the claiming of foreign tax credits
for U.S. Holders of ADSs. 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 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 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, under
current law dividends received by certain non-corporate U.S. Holders in taxable
years beginning before January 1, 2011 will be taxable at a maximum rate of
15%,
provided the ADSs are traded on the Nasdaq Global Market. 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, 2006 and do not expect to become one in the foreseeable
future. 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. In particular, the market value
of our assets may be determined in large part by the market price of our ADSs,
which may fluctuate considerably given that market prices of technology
companies have been especially volatile. If we were treated as a PFIC for any
taxable year during which a U.S. Holder held an ordinary share or ADS, certain
adverse tax consequences could apply to the U.S. Holder.
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 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, and an interest charge would be imposed on the amount allocated
to
each such taxable year. Further, any distribution in respect of ordinary shares
or ADSs 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, would be subject to
taxation as described above. 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 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.
10.F.
Dividends and Paying Agents
Not
applicable.
10.G.
Statement by Experts
Not
applicable.
10.H.
Documents on Display
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.
10.I.
Subsidiary Information
Not
applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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
Currency 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
2006, 97.0% of our sales were transacted in U.S. dollars and 86.0% of our
cost of revenues was denominated in U.S. dollars. However, in December 2006
approximately 63.0% of our operating expenses was denominated in NT dollars,
less than 2.0% was denominated in Japanese Yen and Chinese Renminbi combined,
and the remainder was denominated in U.S. dollars. We anticipate that we will
continue to transact substantially all of our sales in U.S. dollars. We do
not believe that we have a material currency exchange risk with regard to the
NT
dollar. We believe the majority of 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, 2006, no foreign currency exchange contracts are
outstanding.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
applicable.
PART
II
ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not
applicable.
ITEM
14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
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 American depositary shares, 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 $38.6 million of the net proceeds from our initial public offering
to
repay our short-term loans. 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.
ITEM
15. CONTROLS AND PROCEDURES
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we performed an evaluation of
the
effectiveness of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report, or the evaluation date.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded as of the evaluation date that our disclosure controls and
procedures are effective for gathering, analyzing and disclosing the information
we are required to disclose in this annual report we file under the Securities
Exchange Act of 1934, within the time periods specified in the SEC’s rules and
forms. Our management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which by their nature can provide
only reasonable assurance regarding management’s control
objectives.
In
connection with the audit of our consolidated financial statements for the
years
ended December 31, 2003 and 2004, our independent registered public accounting
firm identified two control deficiencies that were significant deficiencies
in
our internal control procedures which, in their judgment, could adversely affect
our ability to record, process, summarize and report financial data consistent
with the assertions of our management in the financial statements. A significant
deficiency is a control deficiency, or a combination of control deficiencies,
that results in more than a remote likelihood that a more than inconsequential
misstatement of the company’s annual or interim financial statements will not be
prevented or detected. Specifically, the control deficiencies identified
consisted of (1) a lack of personnel with significant U.S. GAAP reporting
experience necessary to identify and resolve certain complex U.S. GAAP matters
in a timely manner, and (2) the use of manual accounting systems that carry
a
risk of inconsistent operation, are subject to human error and do not enable
timely recording of transactions. In connection with the audit of our
consolidated financial statements for the year ended December 31, 2005, our
independent registered accounting firm did not identify any significant
deficiencies but continued to identify our use of manual accounting systems
as a
control deficiency and identified two additional control deficiencies related
to
the lack of a systematic approach for monitoring contracts with accounting
implications and the lack of an automated credit control system. Our independent
registered accounting firm also did not identify any significant deficiencies
in
connection with the audit of our consolidated financial statements for the
year
ended December 31, 2006, but continued to identify our use of manual accounting
systems and our incomplete and ongoing implementation of an automated credit
control system as control deficiencies. One additional control deficiency was
identified relating to
our
current approach for the estimation of the annual effective tax rate for interim
financial reporting that may lack precision to reliably estimate income taxes
attributable to interim financial reporting periods. We intend to involve our
relevant departments in a joint effort to further improve upon the current
approach to derive the best possible estimation of the annual effective tax
rate
for interim periods of financial reporting. Our board of directors and the
audit
committee have been advised of these issues.
There
has
been no change in our internal control over financial reporting that 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.
ITEM
16A. AUDIT COMMITTEE FINANCIAL EXPERT
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 Rules and Rule
10A-3 of the Exchange Act
ITEM
16B. CODE OF ETHICS
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
ITEM
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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 until then served as our head
auditor since 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, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit
Fees(1)
|
|
$ |
540,000
|
|
|
|
402,000
|
|
All
Other Fees(2)
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
(1)
Audit
Fees. This category includes the audit of our annual financial
statements, 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 certain agreed upon
procedures performed by KPMG based on our request for the study of a proposed
acquisition of a research and development team, and fees for the preparation
of
a transfer pricing report.
ITEM
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
Not
applicable.
ITEM
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
On
November 2, 2006, our board of directors authorized a share buyback program
allowing us to repurchase up to $50.0 million of our ADSs in the open market
or
through privately negotiated transactions. We completed this share
buyback program in the first quarter of 2007 and repurchased a total of
approximately $50.0 million of our ADSs (equivalent to approximately 10 million
ADSs) from the open market. The repurchased ADSs and their underlying
ordinary shares have been cancelled, thereby reducing approximately 5% of our
issued and outstanding shares.
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
9, 2006 to November 30, 2006
|
|
|
2,944,840
|
|
|
$ |
5.07
|
|
|
|
2,944,840
|
|
|
$ |
35,056,654
|
|
December
1, 2006 to December 31, 2006
|
|
|
4,940,995
|
|
|
$ |
4.96
|
|
|
|
7,885,835
|
|
|
$ |
10,540,210
|
|
January
1, 2007 to January 23, 2007
|
|
|
2,161,636
|
|
|
$ |
4.87
|
|
|
|
10,047,471
|
|
|
$ |
443
|
|
PART
III
ITEM
17. FINANCIAL STATEMENTS
The
Company has elected to provide financial statements for fiscal year 2006 and
the
related information pursuant to Item 18.
ITEM
18. FINANCIAL STATEMENTS
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 May 28,
2007.
(b)
Consolidated Balance Sheets of the Company and subsidiaries as of December
31,
2005 and 2006.
(c)
Consolidated Statements of Income of the Company and subsidiaries for the years
ended December 31, 2004, 2005 and 2006.
(d)
Consolidated Statements of Comprehensive Income of the Company and subsidiaries
for the years ended December 31, 2004, 2005 and 2006.
(e)
Consolidated Statements of Stockholders’ Equity of the Company and subsidiaries
for the years ended December 31, 2004, 2005 and 2006.
(f)
Consolidated Statements of Cash Flows of the Company and subsidiaries for the
years ended December 31, 2004, 2005 and 2006.
(g)
Notes
to Consolidated Financial Statements of the Company and
subsidiaries.
ITEM
19. EXHIBITS
|
|
|
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 Certified Public Accountants, 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, 2007
HIMAX
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2005 and 2006
|
F-3
|
Consolidated
Statements of Income for the Years Ended December 31, 2004, 2005
and
2006
|
F-5
|
Consolidated
Statements of Comprehensive Income for the Years Ended December
31, 2004,
2005 and 2006
|
F-6
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2004,
2005 and 2006
|
F-7
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2004,
2005 and
2006
|
F-8
|
Notes
to Consolidated Financial Statements
|
F-10
|
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Financial Statements
December
31, 2004, 2005 and 2006
(With
Report of Independent Registered
Public
Accounting Firm Thereon)
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2006,
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, 2006. 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, 2005 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U. S. generally accepted accounting
principles.
As
described in the Notes 2 and 13 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.
/s/
KPMG
Certified Public Accountants
Taipei,
Taiwan (the Republic of China)
May
28,
2007
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2005 and 2006
(in
thousands of US dollars)
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
7,086
|
|
|
|
109,753
|
|
Marketable
securities available-for-sale
|
|
|
3,989
|
|
|
|
8,828
|
|
Restricted
cash equivalents and marketable securities
|
|
|
14,053
|
|
|
|
108
|
|
Accounts
receivable, less allowance for doubtful accounts, sales returns and
discounts of $80 and $464 at December 31, 2005 and 2006,
respectively
|
|
|
80,259
|
|
|
|
112,767
|
|
Accounts
receivable from related parties, less allowance for sales returns
and
discounts of $101 and $404 at December 31, 2005 and 2006,
respectively.
|
|
|
69,587
|
|
|
|
116,850
|
|
Inventories
|
|
|
105,004
|
|
|
|
101,341
|
|
Deferred
income taxes
|
|
|
8,965
|
|
|
|
6,744
|
|
Prepaid
expenses and other current assets
|
|
|
11,113
|
|
|
|
10,324
|
|
Total
current assets
|
|
|
300,056
|
|
|
|
466,715
|
|
|
|
|
|
|
|
|
|
|
Property, plant,
and
equipment,
net
|
|
|
24,426
|
|
|
|
38,895
|
|
Deferred
income taxes
|
|
|
151
|
|
|
|
11,405
|
|
Intangible
assets, net
|
|
|
81
|
|
|
|
393
|
|
Investments
in non-marketable securities
|
|
|
1,813
|
|
|
|
817
|
|
Refundable
deposits and prepaid pension costs
|
|
|
712
|
|
|
|
569
|
|
|
|
|
27,183
|
|
|
|
52,079
|
|
Total
assets
|
|
$ |
327,239
|
|
|
|
518,794
|
|
See
accompanying notes to consolidated
financial
statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets-continued
December
31, 2005 and 2006
(in
thousands of US
dollars, except share and per share data)
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
Liabilities,
Minority Interest and Stockholders' Equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
27,274
|
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
89
|
|
|
|
-
|
|
Accounts
payable
|
|
|
105,801
|
|
|
|
120,407
|
|
Income
tax payable
|
|
|
13,625
|
|
|
|
11,666
|
|
Other
accrued expenses and other
current liabilities
|
|
|
13,995
|
|
|
|
21,206
|
|
Total
current liabilities
|
|
|
160,784
|
|
|
|
153,279
|
|
Accrued
pension liabilities
|
|
|
-
|
|
|
|
192
|
|
Total
liabilities
|
|
|
160,784
|
|
|
|
153,471
|
|
Minority
interest
|
|
|
624
|
|
|
|
1,396
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Ordinary
share, US$0.0001 par
value, 500,000,000 shares authorized; 182,088,880
and 193,600,302 shares
issued and
outstanding at December 31, 2005 and 2006,
respectively
|
|
|
18
|
|
|
|
19
|
|
Additional
paid-in capital
|
|
|
98,450
|
|
|
|
221,666
|
|
Accumulated
other comprehensive income (loss)
|
|
|
36
|
|
|
|
(275 |
) |
Unappropriated
retained earnings
|
|
|
67,327
|
|
|
|
142,517
|
|
Total
stockholders' equity
|
|
|
165,831
|
|
|
|
363,927
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Total
liabilities, minority interest and stockholders'
equity
|
|
$ |
327,239
|
|
|
|
518,794
|
|
See
accompanying notes to consolidated
financial
statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Income
Years
ended December 31, 2004, 2005 and 2006
(in
thousands of US dollars, except per
share data)
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Revenues
from third parties, net
|
|
$ |
109,514
|
|
|
|
217,420
|
|
|
|
329,886
|
|
Revenues
from related parties, net
|
|
|
190,759
|
|
|
|
322,784
|
|
|
|
414,632
|
|
|
|
|
300,273
|
|
|
|
540,204
|
|
|
|
744,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
235,973
|
|
|
|
419,380
|
|
|
|
601,565
|
|
Research
and development
|
|
|
24,021
|
|
|
|
41,278
|
|
|
|
60,655
|
|
General
and administrative
|
|
|
4,654
|
|
|
|
6,784
|
|
|
|
9,762
|
|
Sales
and marketing
|
|
|
2,742
|
|
|
|
4,762
|
|
|
|
6,970
|
|
Total
costs and expenses
|
|
|
267,390
|
|
|
|
472,204
|
|
|
|
678,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
32,883
|
|
|
|
68,000
|
|
|
|
65,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
72
|
|
|
|
580
|
|
|
|
5,860
|
|
Gain
on sale of marketable securities, net
|
|
|
401
|
|
|
|
105
|
|
|
|
60
|
|
Other
than temporary impairment loss on investments in non-marketable
securities
|
|
|
-
|
|
|
|
(129 |
) |
|
|
(1,500 |
) |
Foreign
exchange gains (losses), net
|
|
|
847
|
|
|
|
1,808
|
|
|
|
(341 |
) |
Interest
expense
|
|
|
(6 |
) |
|
|
(125 |
) |
|
|
(311 |
) |
Other
income, net
|
|
|
5
|
|
|
|
19
|
|
|
|
173
|
|
|
|
|
1,319
|
|
|
|
2,258
|
|
|
|
3,941
|
|
Income
before income taxes and minority interest
|
|
|
34,202
|
|
|
|
70,258
|
|
|
|
69,507
|
|
Income
tax expense (benefit)
|
|
|
(1,771 |
) |
|
|
8,923
|
|
|
|
(5,446 |
) |
Income
before minority interest
|
|
|
35,973
|
|
|
|
61,335
|
|
|
|
74,953
|
|
Minority
interest, net of tax
|
|
|
27
|
|
|
|
223
|
|
|
|
237
|
|
Net
income
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per ordinary share
|
|
$ |
0.21
|
|
|
|
0.35
|
|
|
|
0.39
|
|
Diluted
earnings per ordinary share
|
|
$ |
0.21
|
|
|
|
0.34
|
|
|
|
0.39
|
|
See
accompanying notes to consolidated
financial
statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
Years
ended December 31, 2004, 2005 and 2006
(in
thousands of US
dollars, except per share data)
|
|
Year
Ended December
31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities, not subject to tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains on available-for-sale marketable securities arising
during
the period
|
|
|
334
|
|
|
|
129
|
|
|
|
56
|
|
Reclassification
adjustment for realized gains included in net income
|
|
|
(401 |
) |
|
|
(105 |
) |
|
|
(60 |
) |
Foreign
currency translation adjustments, net of tax of $3 and $6 in 2005
and
2006, respectively.
|
|
|
-
|
|
|
|
5
|
|
|
|
24
|
|
Comprehensive
income
|
|
$ |
35,933
|
|
|
|
61,587
|
|
|
|
75,210
|
|
See
accompanying notes to consolidated
financial
statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders' Equity
Years
ended December 31, 2004, 2005 and 2006
(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
(accumulated
deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2004
|
|
|
173,185
|
|
|
$ |
17
|
|
|
|
56,220
|
|
|
|
-
|
|
|
|
74
|
|
|
|
(4,022 |
) |
|
|
52,289
|
|
Stock
split effected in the form of a stock dividend
|
|
|
|
|
|
|
-
|
|
|
|
12,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,651 |
) |
|
|
-
|
|
Issuance
of ordinary shares as employee bonus
|
|
|
7,584
|
|
|
|
1
|
|
|
|
14,829
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,830
|
|
Share-based
compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
1,696
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,696
|
|
Dilution
gain from issuance of new subsidiary shares
|
|
|
-
|
|
|
|
-
|
|
|
|
112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112
|
|
Unrealized
holding loss on available-for-sale marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(67 |
) |
|
|
-
|
|
|
|
(67 |
) |
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,000
|
|
|
|
36,000
|
|
Balance
at December 31, 2004
|
|
|
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
|
|
See
accompanying notes to consolidated
financial
statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended December 31, 2004, 2005 and 2006
(in
thousands of US dollars)
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,761
|
|
|
|
3,613
|
|
|
|
5,221
|
|
Share-based
compensation expenses
|
|
|
5,837
|
|
|
|
8,613
|
|
|
|
15,150
|
|
Minority
interest, net of tax
|
|
|
(27 |
) |
|
|
(223 |
) |
|
|
(237 |
) |
Loss
on disposal of property, plant, and equipment
|
|
|
69
|
|
|
|
-
|
|
|
|
36
|
|
Gain
on sales of subsidiary shares and investment in non-marketable securities,
net
|
|
|
-
|
|
|
|
(19 |
) |
|
|
(137 |
) |
Gain
on sale of marketable securities, net
|
|
|
(401 |
) |
|
|
(105 |
) |
|
|
(60 |
) |
Impairment
loss on investments in non-marketable securities
|
|
|
-
|
|
|
|
129
|
|
|
|
1,500
|
|
Deferred
income taxes
|
|
|
(4,986 |
) |
|
|
(3,371 |
) |
|
|
(8,938 |
) |
Inventory
write downs
|
|
|
847
|
|
|
|
927
|
|
|
|
5,165
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(14,473 |
) |
|
|
(53,242 |
) |
|
|
(32,237 |
) |
Accounts
receivable from related parties
|
|
|
(16,236 |
) |
|
|
(30,458 |
) |
|
|
(47,263 |
) |
Inventories
|
|
|
(33,851 |
) |
|
|
(51,839 |
) |
|
|
(1,502 |
) |
Prepaid
expenses and other current assets
|
|
|
(3,296 |
) |
|
|
(6,413 |
) |
|
|
749
|
|
Accounts
payable
|
|
|
15,748
|
|
|
|
67,152
|
|
|
|
14,606
|
|
Income
tax payable
|
|
|
(761 |
) |
|
|
10,852
|
|
|
|
(1,959 |
) |
Other
accrued expenses and other current liabilities
|
|
|
4,081
|
|
|
|
5,290
|
|
|
|
4,412
|
|
Net
cash provided by
(used in) operating
activities
|
|
|
(8,688 |
) |
|
|
12,464
|
|
|
|
29,696
|
|
Cash
flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of land,
property and
equipment
|
|
|
(8,046 |
) |
|
|
(14,733 |
) |
|
|
(17,829 |
) |
Purchase
of available-for-sale
marketable securities
|
|
|
(47,163 |
) |
|
|
(38,048 |
) |
|
|
(31,911 |
) |
Sales
and maturities of
available-for-sale marketable securities
|
|
|
66,312
|
|
|
|
42,028
|
|
|
|
27,128
|
|
Cash
acquired
in
acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
Proceeds
from sale of subsidiary
shares and
investment
in
non-marketable
securities by
Himax Technologies
Limited
|
|
|
-
|
|
|
|
51
|
|
|
|
1,142
|
|
Purchase
of investment
in non-marketable
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(817 |
) |
Purchase
of subsidiary shares from
minority interest
|
|
|
-
|
|
|
|
(523 |
) |
|
|
(773 |
) |
Refund
from (increase
in)
refundable
deposits
|
|
|
(137 |
) |
|
|
(414 |
) |
|
|
171
|
|
Release
(pledge) of restricted
cash equivalents and marketable securities
|
|
|
35
|
|
|
|
(13,724 |
) |
|
|
13,945
|
|
Net
cash provided by (used in)
investing activities
|
|
|
11,001
|
|
|
|
(25,363 |
) |
|
|
(8,927 |
) |
See
accompanying notes to consolidated
financial
statements.
HIMAX
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows, continued
Years
ended December 31, 2004, 2005 and 2006
(in
thousands of US
dollars)
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Distribution
of special cash dividends
|
|
$ |
-
|
|
|
|
(13,558 |
) |
|
|
-
|
|
Proceeds
from initial
public offering, net of issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
147,408
|
|
Proceeds
from issuance of new shares by subsidiaries
|
|
|
803
|
|
|
|
866
|
|
|
|
676
|
|
Acquisition
of ordinary shares for retirement
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,835 |
) |
Proceeds
from borrowing of short-term debt
|
|
|
-
|
|
|
|
27,274
|
|
|
|
11,303
|
|
Repayment
of short-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,577 |
) |
Repayment
of long-term debt
|
|
|
(68 |
) |
|
|
(178 |
) |
|
|
(89 |
) |
Net
cash provided by financing
activities
|
|
|
735
|
|
|
|
14,404
|
|
|
|
81,886
|
|
Effect
of exchange rate changes on cash and cash
equivalents
|
|
|
-
|
|
|
|
4
|
|
|
|
12
|
|
Net
increase in cash and cash equivalents
|
|
|
3,048
|
|
|
|
1,509
|
|
|
|
102,667
|
|
Cash
and cash equivalents at beginning of year
|
|
|
2,529
|
|
|
|
5,577
|
|
|
|
7,086
|
|
Cash
and cash equivalents at end of year
|
|
$ |
5,577
|
|
|
|
7,086
|
|
|
|
109,753
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
6
|
|
|
|
125
|
|
|
|
311
|
|
Income
taxes
|
|
$ |
3,867
|
|
|
|
1,130
|
|
|
|
5,695
|
|
Supplemental
disclosures of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
for purchase of equipment and construction in progress
|
|
$ |
(71 |
) |
|
|
(2,285 |
) |
|
|
(1,846 |
) |
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
Notes
to Consolidated Financial Statements
December
31, 2004, 2005 and 2006
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. Many of these undertakings are
prospective, on-going obligations and have yet to be satisfied to
date. Refer to Note 21 (i) 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 $147,408,000.
Since
March 2006, the Company’s ordinary shares have been quoted on the NASDAQ Global
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 consumer
electronics products such as display drivers for small- and medium-sized TFT-LCD
panels which are used in
mobile
handset,
digital cameras, mobile gaming devices and car navigation
displays. The Company has expanded its product offering to include
television semiconductor solutions such as television chipsets and tuners,
modules, 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, 2004, 2005 and 2006
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
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.
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 carrying value of property, equipment and intangible assets,
valuation allowances for receivables and deferred income tax assets, inventory
realizable values, potential impairment of marketable securities and other
equity investments, valuation of derivative financial instruments and
share-based compensation, and valuation of assets and obligations related to
employee retirement benefits. Actual results could differ from those
estimates.
|
(c)
|
Stock
Split and Stock Dividends
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
On
September 30, 2004, Himax Taiwan’s stockholders approved stock dividends at par
value per share of NT$3.63 and a stock split, pursuant to which it issued
42,976,372 shares and 11,837,166 shares of common stock to the then holders
of
its outstanding shares of common stock.
This
transaction resulted in an increase of 46.31% of the then outstanding common
shares for 2004 which is accounted for as a stock split effected in the form
of
a dividend. However, retained earnings were charged for the stock
splits effected in the form of a dividend to comply with Taiwanese legal
requirements. All
references in the consolidated financial statements and notes to the
number of shares outstanding, per share amounts and stock option data of the
Company’s common stock have been retroactively adjusted to reflect the effect of
this stock split in 2004.
|
(d)
|
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, 2005, the Company had $13,600
thousand of cash equivalents, consisting of US dollar denominated time deposits
with an original maturity of two months, which had been pledged as collateral
for short-term debt, and are recorded as restricted cash equivalents in the
accompanying consolidated balance sheets. As of December 31, 2006,
the Company had $89,500 thousand of cash equivalents, consisting of US dollar
denominated time deposits with an original maturity of less than three
months.
As
of
December 31, 2005 and 2006, 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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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.
|
(g)
|
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, the Company 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.
|
(h)
|
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, 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 four years.
The
Company’s acquired technology is recorded at acquisition cost and amortized over
its
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
estimated
useful life of five years on a straight-line basis.
|
(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 qualify 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 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. The Company generally determines fair value
based on the estimated discounted future cash flows expected to be generated
by
the asset.
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, the Company 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, 2004, 2005 and 2006
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.
Under
the
Company’s standard terms and conditions of sale, products sold are subject to a
limited product quality warranty. The standard limited warranty
period is 60 days. 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, 2004, 2005 and 2006, were $78 thousand, $29 thousand and $27
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 which they are intended to compensate.
|
(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, 2004, 2005 and 2006
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 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, 2004, 2005 and 2006
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.
|
(q)
|
Foreign
Currency Translation
|
The
reporting currency of the Company is the United States dollar. The functional
currency for the Company’s majority 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.
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 and
ordinary shares that are contingently issuable upon the vesting of unvested
restricted share units (RSUs) granted to employees and independent
directors.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Basic
and
diluted earnings per ordinary share have been calculated as
follows:
|
|
Year
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (in thousands)
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding (in
thousands)
|
|
|
169,320
|
|
|
|
176,105
|
|
|
|
192,475
|
|
Basic
earnings per share
|
|
$ |
0.21
|
|
|
|
0.35
|
|
|
|
0.39
|
|
Contingently
returnable nonvested shares and unvested treasury stock issued to employees
and
contingently issuable ordinary shares underlying the unvested RSUs granted
to
employees and independent directors 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.
|
|
Year
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (in thousands)
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
Denominator
for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding (in
thousands)
|
|
|
169,320
|
|
|
|
176,105
|
|
|
|
192,475
|
|
Nonvested
ordinary shares and RSUs (in thousands)
|
|
|
3,978
|
|
|
|
4,554
|
|
|
|
2,615
|
|
|
|
|
173,298
|
|
|
|
180,659
|
|
|
|
195,090
|
|
Diluted
earnings per share
|
|
$ |
0.21
|
|
|
|
0.34
|
|
|
|
0.39
|
|
|
(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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
(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, 2004, the
Company recognized a dilution gain of $112 thousand resulting from the issuance
to third parties of new shares (representing a 5.39 % interest) by Himax
Display, Inc. (“Himax Display”, a consolidated subsidiary) for cash proceeds of
$803 thousand. 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. (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
for cash proceeds of $676 thousand.
|
(u)
|
Recently
Issued Accounting Pronouncements
|
In
September 2005, the Emerging Issues
Task Force (EITF) issued EITF Issue No. 04-13 Accounting for Purchases
and
Sales of Inventory
with the Same Counterparty (EITF 04-13). EITF
04-13 provides
guidance as to when purchases and sales of inventory with the same counterparty
should be accounted for as a single exchange transaction. EITF 04-13 also
provides guidance as to when a nonmonetary exchange
of inventory
should be accounted for at fair value. EITF
04-13 will be applied to new
arrangements entered into, and modifications or renewals of existing
arrangements occurring after January 1, 2007. The
application of EITF 04-13 is not expected
to have a
significant impact on the Company’s
financial
statements.
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. Management
is currently evaluating the
impact and disclosures of this standard, but does not expect SFAS No.
157 will have a material impact on the Company’s
consolidated results of operations or
financial condition.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
In
September 2006, the FASB issued FASB
Staff Position No. AUG AIR-1, Accounting for Planned
Major
Maintenance Activities. This
guidance prohibits the use of the
accrue-in-advance method of
accounting for planned major activities because an obligation has not occurred
and therefore a liability should not be recognized. The
provisions of this guidance will be
effective for reporting periods beginning after December 15, 2006. The
provisions of the Staff Position
are
consistent with the Company’s
current policies and management
does not anticipate that the adoption of the provisions of this guidance will
have a material impact on its results of operations
and financial
position.
In
July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty
in Income
Taxes, an
interpretation of FASB Statement
109, or FIN
48. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes
a threshold
of more-likely-than-not for recognition of tax benefits of uncertain tax
positions taken or expected to be taken in a tax return. FIN
48 also provides related guidance on
measurement, derecognition, classification, interest and penalties,
and disclosure.
The
provisions of FIN 48 will be
effective for the Company on January 1, 2007, with any cumulative effect of
the
change in accounting principle recorded as an adjustment to opening retained
earnings. The
initial
adoption
of the provisions of
FIN 48 will not have
any
impact
(unaudited) on the Company’s results
of operations
and financial position.
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
currency 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
September 2006, the SEC issued Staff
Accounting Bulletin
No. 108 (“SAB No. 108”),
Consideration
the Effects of Prior
Year Misstatements when Quantifying
Misstatements
in Current Year
Financial Statements,
or SAB No. 108. SAB No. 108 The intent
of
SAB No. 108 is to reduce
diversity in practice for the method companies use to quantify
financial statement misstatements,
including the effect of prior year uncorrected errors. SAB No. 108
established
an approach that requires quantification of financial
statement
errors using both an income statement and a cumulative balance sheet
approach. SAB No. 108 for the year ended December 31, 2006 is
effective for fiscal years ending after November 15, 2006. The
adoption of SAB No. 108 for the year ended December 31, 2006 did not
have any
impact on the Company’s
consolidated financial
statements.
Note
3.
|
Marketable
Securities
|
Following
is a summary of marketable securities as of December 31, 2005 and
2006:
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
|
December
31, 2005
|
|
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in
thousands)
|
|
Time
deposit with original maturities more than three months
|
|
$ |
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
Open-ended
bond fund
|
|
|
3,804
|
|
|
|
33
|
|
|
|
-
|
|
|
|
3,837
|
|
Total
|
|
$ |
3,956
|
|
|
|
33
|
|
|
|
-
|
|
|
|
3,989
|
|
|
|
December
31, 2006
|
|
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Gross
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
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
|
|
The
Company’s portfolio of available for sale marketable securities by contractual
maturity as of December 31, 2005 and 2006 is due in one year or
less.
Information
on sales of available for sale marketable securities for the years ended
December 31, 2004, 2005 and 2006 is summarized below.
Period
|
|
Proceeds
from
sales
|
|
|
Gross
realized
gains
|
|
|
Gross
realized
losses
|
|
|
|
|
|
|
(in
thousands)
|
|
Year
ended December 31, 2004
|
|
$ |
66,312
|
|
|
|
401
|
|
|
-
|
|
Year
ended December 31, 2005
|
|
$ |
42,028
|
|
|
|
105
|
|
|
-
|
|
Year
ended December 31, 2006
|
|
$ |
27,128
|
|
|
|
60
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005 and 2006, the Company had $453 thousand and $108 thousand,
respectively, of restricted marketable securities, consisting of time deposits
with an original maturity of more than three months, which had been pledged
as
collateral for long-term debt or custom duty.
Note
4.
|
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, 2004, 2005 and 2006 follows:
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Period
|
|
Balance
at
beginning
of
year
|
|
|
Addition
|
|
|
Amounts
utilized
|
|
|
Balance
at
end
of year
|
|
|
|
(in
thousands)
|
|
For
the year ended December 31, 2004
|
|
$ |
28
|
|
|
|
1,022
|
|
|
|
(810 |
) |
|
|
240
|
|
For
the year ended December 31, 2005
|
|
$ |
240
|
|
|
|
398
|
|
|
|
(457 |
) |
|
|
181
|
|
For
the year ended December 31, 2006
|
|
$ |
181
|
|
|
|
2,843
|
|
|
|
(2,156 |
) |
|
|
868
|
|
As
of
December 31, 2005 and 2006, inventories consisted of the following:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Merchandise
|
|
$ |
38
|
|
|
|
6
|
|
Finished
goods
|
|
|
32,192
|
|
|
|
44,194
|
|
Work
in process
|
|
|
51,769
|
|
|
|
40,039
|
|
Raw
materials
|
|
|
20,877
|
|
|
|
17,048
|
|
Supplies
|
|
|
128
|
|
|
|
54
|
|
|
|
$ |
105,004
|
|
|
|
101,341
|
|
Note
6.
|
Prepaid
Expenses and Other Current
Assets
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Refundable
business tax
|
|
$ |
7,953
|
|
|
|
5,994
|
|
Prepaid
rental, software maintenance fee and others
|
|
|
2,910
|
|
|
|
4,330
|
|
Fair
value of foreign currency forward contract
|
|
|
250
|
|
|
|
-
|
|
|
|
$ |
11,113
|
|
|
|
10,324
|
|
Note
7.
|
Intangible
Assets
|
The
amount
assigned to intangible assets acquired in the acquisition of Integrated
Microdisplays Limited on October 3, 2006 was $358 thousand which includes two
registered patents and were amortized over a 5-year useful life.
The
gross
carrying amount of the Company’s acquired technologies was $140 thousand and
$497 thousand at December 31, 2005 and 2006, respectively. The
related accumulated amortization was $59 thousand and $104 thousand at December
31, 2005 and 2006, respectively.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Amortization
expense for the years ended December 31, 2004, 2005 and 2006, was $28 thousand,
$28 thousand and $45 thousand, respectively. Future amortization expense for
the
net carrying amount
of
these intangible assets at December 31, 2006 is estimated also to be $99
thousand in 2007, $97 thousand in 2008, $72 thousand in 2009 and 2010, and
$53
thousand in 2011.
Note
8.
|
Property,
Plant, and Equipment
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Land
|
|
$ |
10,160
|
|
|
|
10,154
|
|
Building
|
|
|
-
|
|
|
|
12,967
|
|
Machinery
|
|
|
6,184
|
|
|
|
6,744
|
|
Research
and development equipment
|
|
|
5,464
|
|
|
|
8,611
|
|
Software
|
|
|
3,590
|
|
|
|
5,149
|
|
Office
furniture and equipment
|
|
|
1,534
|
|
|
|
2,478
|
|
Others
|
|
|
3,474
|
|
|
|
4,150
|
|
|
|
|
30,406
|
|
|
|
50,253
|
|
Accumulated
depreciation and amortization
|
|
|
(7,566 |
) |
|
|
(12,742 |
) |
Prepayment
for purchases of equipment and software
|
|
|
798
|
|
|
|
1,384
|
|
Construction
of buildings in progress
|
|
|
788
|
|
|
|
-
|
|
|
|
$ |
24,426
|
|
|
|
38,895
|
|
Depreciation
and amortization of these assets for 2004, 2005 and 2006, was $2,733 thousand,
$3,585 thousand and $5,176 thousand, respectively.
Note
9.
|
Investments
in Non-marketable
Securities
|
Following
is a summary of such investments as of December 31, 2005 and 2006:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
TopSun
Optronics, Inc.
|
|
$ |
-
|
|
|
|
817
|
|
Jemitek
Electronic Corp.
|
|
|
313
|
|
|
|
-
|
|
LightMaster
Systems, Inc.
|
|
|
1,500
|
|
|
|
-
|
|
|
|
$ |
1,813
|
|
|
|
817
|
|
In
2005,
the Company considered its investment in equity of Integrated Microdisplays
Limited to be other than temporarily impaired due to a significant operating
deficit. The carrying amount of $129 thousand was fully written off
with an impairment loss recognized in other non-operating loss in the
accompanying consolidated statements of income.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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, 2006, it was not practicable for the Company to estimate the fair
value of its investment in equity of TopSun Optronics, Inc. However, there
are
no identified events or changes in circumstance that may have significant
adverse effects on the recoverability of the carrying value of the
investment.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Note
10.
|
Other
Accrued Expenses and Other Current
Liabilities
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Accrued
payroll and related expenses
|
|
$ |
2,855
|
|
|
|
3,441
|
|
Accrued
commission
|
|
|
2,534
|
|
|
|
1,836
|
|
Accrued
warranty costs
|
|
|
545
|
|
|
|
630
|
|
Accrued
mask and mold fees
|
|
|
3,039
|
|
|
|
3,282
|
|
Payable
for purchases of equipment
|
|
|
2,471
|
|
|
|
4,317
|
|
Accrued
insurance, welfare expenses, etc.
|
|
|
2,551
|
|
|
|
7,700
|
|
|
|
$ |
13,995
|
|
|
|
21,206
|
|
The
movement in accrued warranty costs for the years ended December 31, 2004, 2005
and 2006, is as follows:
Period
|
|
Balance
at
beginning
of
year
|
|
|
Addition
|
|
|
Amounts
utilized
|
|
|
Balance
at
end
of
year
|
|
|
|
(in
thousands)
|
|
Year
ended December 31, 2004
|
|
$ |
-
|
|
|
|
960
|
|
|
|
(453 |
) |
|
|
507
|
|
Year
ended December 31, 2005
|
|
$ |
507
|
|
|
|
1,415
|
|
|
|
(1,377 |
) |
|
|
545
|
|
Year
ended December 31, 2006
|
|
$ |
545
|
|
|
|
2,101
|
|
|
|
(2,016 |
) |
|
|
630
|
|
Short-term
debt borrowed in 2005 are bank loans used to finance the payment of a special
cash dividend that the Company distributed to its shareholders of record as
of
November 2, 2005 and to support the working capital requirements for general
corporate purposes.
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, 2005 and 2006, unused credit lines amounted to $26,727 thousand
and
$42,557 thousand, respectively.
Interest
rates per annum on short-term debt outstanding as of December 31, 2005 ranged
from 1.70% to 4.61%. Cash equivalents in the form of time deposits of
$13,600 thousand are held as collateral for certain short-term debt at December
31, 2005.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Note
12.
|
Government
Grant and Long-term
Debt
|
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 and 2005
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
|
|
|
|
|
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
|
Government
grants recognized by the Company as a reduction of research and development
expense in the accompanying consolidated statements of income in 2004, 2005
and
2006 were $556 thousand, $381 thousand and $466 thousand,
respectively.
In
2002,
IDB of MOEA provided an interest free loan of $355 thousand to the
Company. The loan is repaid in eight equal installments starting from
July1, 2004 and had been fully paid off during 2006. The Company is
required to pay a return fee equal to 2% of the sales of certain developed
products with a ceiling of 30% of the interest free loan within three years
commencing from the sales of the project product. In 2004, a return
fee of $0.45 thousand was accrued and recognized as a reduction of sales in
the
accompanying consolidated statements of income. No return fee occurred in 2005
and 2006.
As
of
December 31, 2005, time deposits pledged to bank for repayment guarantee of
the
above-mentioned interest free loan amounted to $361 thousand. The
restricted time deposits have been released during 2006.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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 Central Trust of China.
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
and 2006, based on the contribution called for was $356 thousand and $883
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
$310
thousand to its pension fund maintained with the Central Trust of China and
$1,048 thousand to the employees’ individual pension fund accounts at the ROC
Bureau of Labor Insurance in 2007.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Change
in projected benefit obligation:
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
414
|
|
|
|
622
|
|
Service
cost
|
|
|
150
|
|
|
|
9
|
|
Interest
cost
|
|
|
13
|
|
|
|
22
|
|
Actuarial
loss
|
|
|
45
|
|
|
|
232
|
|
Benefit
obligation at end of year
|
|
|
622
|
|
|
|
885
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value at beginning of year
|
|
|
215
|
|
|
|
414
|
|
Actual
return on plan assets
|
|
|
4
|
|
|
|
12
|
|
Employer
contribution
|
|
|
195
|
|
|
|
286
|
|
Fair
value at end of year
|
|
|
414
|
|
|
|
712
|
|
Funded
status
|
|
$ |
(208 |
) |
|
|
(173 |
) |
Unrecognized
net actuarial loss
|
|
$ |
206
|
|
|
|
-
|
|
Amounts
recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
Prepaid
pension costs
|
|
$ |
12
|
|
|
|
19
|
|
Accrued
pension liabilities
|
|
|
(14 |
) |
|
|
(192 |
) |
Net
amount recognized
|
|
$ |
(2 |
) |
|
|
(173 |
) |
Amounts
recognized in accumulated other comprehensive income was net actuarial loss
of
$331 thousand as of December 31, 2006.
The
accumulated benefit obligation for the Defined Benefit Plan was $288 thousand
and $379 thousand at December 31, 2005 and 2006, respectively. As of
December 31, 2005 and 2006, no employee was eligible for retirement or was
required to retire.
For
the
years ended December 31, 2004, 2005 and 2006, the net periodic pension cost
consisted of the following:
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
170
|
|
|
|
150
|
|
|
|
9
|
|
Interest
cost
|
|
|
5
|
|
|
|
13
|
|
|
|
22
|
|
Expected
return on plan assets
|
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(18 |
) |
Net
amortization and deferral
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Net
periodic pension cost
|
|
$ |
178
|
|
|
|
163
|
|
|
|
19
|
|
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 2007
is
$34 thousand.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
At
December 31, 2005 and 2006, the weighted-average assumptions used in computing
the benefit obligation are as follows:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
Himax
Taiwan
|
|
|
Himax
Display
&
Himax
Analogic
|
|
|
Himax
Taiwan,
Himax
Display
&
Himax
Analogic
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
3.50%
|
|
|
3.50%
|
|
|
2.75%
|
|
Rate
of increase in compensation levels
|
|
4.00%
|
|
|
3.00%
|
|
|
4.00%
|
|
For
the
years ended December 31, 2004, 2005 and 2006, the weighted average assumptions
used in computing net periodic benefit cost are as follows:
|
|
Year
Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Himax
Taiwan
|
|
Himax
Display & Himax Analogic
|
|
Himax
Taiwan
|
|
Himax
Display & Himax Analogic
|
|
Himax
Taiwan,
Himax
Display
& Himax Analogic
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
2.50%
|
|
3.00%
|
|
3.50%
|
|
3.50%
|
|
2.75%
|
Rate
of increase in compensation levels
|
|
4.00%
|
|
1.00%
|
|
4.00%
|
|
3.00%
|
|
4.00%
|
Expected
long-term rate of return on pension assets
|
|
2.50%
|
|
3.00%
|
|
3.50%
|
|
3.50%
|
|
2.75%
|
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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Benefits
payments to be paid during the next ten years are estimated as
follows:
|
|
Amount
|
|
|
|
(in
thousands)
|
|
2007
|
|
$ |
-
|
|
2008
|
|
|
-
|
|
2009
|
|
|
-
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
2012
~ 2016
|
|
|
114
|
|
Note
14.
|
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Cost
of revenues
|
|
$ |
291
|
|
|
|
188
|
|
|
|
275
|
|
Research
and development
|
|
|
4,288
|
|
|
|
6,336
|
|
|
|
11,806
|
|
General
and administrative
|
|
|
721
|
|
|
|
848
|
|
|
|
1,444
|
|
Sales
and marketing
|
|
|
537
|
|
|
|
1,241
|
|
|
|
1,625
|
|
|
|
$ |
5,837
|
|
|
|
8,613
|
|
|
|
15,150
|
|
|
(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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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.
The
allocation of compensation expenses
from the annual bonus plan is summarized as follows:
|
|
Year
Ended December
31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Cost
of
revenues
|
|
$ |
220
|
|
|
|
98
|
|
|
|
-
|
|
Research
and
development
|
|
|
3,045
|
|
|
|
3,215
|
|
|
|
-
|
|
General
and
administrative
|
|
|
540
|
|
|
|
454
|
|
|
|
-
|
|
Sales
and
marketing
|
|
|
336
|
|
|
|
628
|
|
|
|
-
|
|
|
|
$ |
4,141
|
|
|
|
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 27, 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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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
and
$5.71 per share on December 27, 2005 and September 29, 2006,
respectively.
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.
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
|
|
As
of
December 31, 2006, the total compensation cost related to the unvested RSUs
not
yet recognized was $13,745 thousand. The weighted-average period over
which it is expected to be recognized is 2.25 years.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of
revenues
|
|
$ |
-
|
|
|
|
62
|
|
|
|
264
|
|
Research
and
development
|
|
|
-
|
|
|
|
2,080
|
|
|
|
11,263
|
|
General
and
administrative
|
|
|
-
|
|
|
|
262
|
|
|
|
1,392
|
|
Sales
and
marketing
|
|
|
-
|
|
|
|
436
|
|
|
|
1,554
|
|
|
|
$ |
-
|
|
|
|
2,840
|
|
|
|
14,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Nonvested
Shares Issued to Employees
|
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 $130 thousand, $92 thousand and $70 thousand in 2004,
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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Nonvested
share activity during the periods indicated is as follows:
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2004
|
|
|
3,680,864
|
|
|
|
$
0.116
|
|
Forfeited
|
|
|
(484,979 |
) |
|
|
0.116
|
|
Balance
at December 31, 2004
|
|
|
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.
In
September 2005, Himax Analogic Inc. (a consolidated subsidiary) 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 Inc. before completing the
four year service period, they must sell these shares back to Himax Analogic
Inc. at NT$1.00 (US$0.03) per share. The Company recognized compensation
expenses of $33 thousand and $59 thousand in 2005 and 2006,
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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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
|
|
As
of
December 31, 2006, the total compensation cost related to this award not yet
recognized was $182 thousand. The weighted-average period over which
it is expected to be recognized is 2.54years.
|
(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.
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, 2004
|
|
|
8,474,948
|
|
|
|
$
0.607
|
|
Forfeited
|
|
|
(1,289,280 |
) |
|
|
0.662
|
|
Balance
at December 31, 2004
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 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.
As
of
December 31, 2006, the total compensation cost related to the actual number
of
treasury stocks that vest has been fully recognized.
The
allocation of compensation expenses from the treasury stock issued to employees
is summarized as follows:
|
|
Year
Ended December
31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Cost
of revenues
|
|
$ |
71
|
|
|
|
28
|
|
|
|
11
|
|
Research
and development
|
|
|
1,113
|
|
|
|
916
|
|
|
|
414
|
|
General
and administrative
|
|
|
181
|
|
|
|
132
|
|
|
|
52
|
|
Sales
and marketing
|
|
|
201
|
|
|
|
177
|
|
|
|
71
|
|
|
|
$ |
1,566
|
|
|
|
1,253
|
|
|
|
548
|
|
Note
15.
|
Stockholders'
Equity
|
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 a board of director’s resolution on November 2, 2006, the
Company authorized a share buyback program. The program allows the
Company to repurchase up to $50 million of the Company’s ADSs for
retirement. The Company repurchased 7,885,835 ADSs in
2006.
|
(b)
|
Earnings
distribution
|
As
a
holding company, and prior to the proposed overseas listing, 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
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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, 2005 and 2006
amounting to $6,680 thousand and $14,178 thousand, respectively.
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%.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
In
accordance with the ROC Statute for Upgrading Industries, the Company’s capital
increase in 2003 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,
2006 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
|
|
The
aggregate basic and diluted earnings per share effect of such income tax
exemption for the years ended December 31, 2004, 2005 and 2006, is a $0.04,
$0.05 and $0.08 increase to earnings per share, respectively.
The
components of income tax expense (benefit) are summarized as
follows:
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Current
income tax expense
|
|
$ |
3,215
|
|
|
|
12,294
|
|
|
|
3,492
|
|
Deferred
income tax benefit
|
|
|
(4,986 |
) |
|
|
(3,371 |
) |
|
|
(8,938 |
) |
|
|
$ |
(1,771 |
) |
|
|
8,923
|
|
|
|
(5,446 |
) |
The
differences between expected income tax expense, computed based on the statutory
undistributed income tax rate of 32.5%, 32.5% and 31.8% for 2004, 2005 and
2006,
respectively, and the actual income tax expense (benefit) as reported in the
accompanying consolidated statements of income for the years ended December
31,
2004, 2005 and 2006 are summarized as follows:
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Expected
income tax expense
|
|
$ |
11,115
|
|
|
|
22,834
|
|
|
|
22,103
|
|
Tax-exempted
income
|
|
|
(6,328 |
) |
|
|
(9,189 |
) |
|
|
(16,012 |
) |
Effect
of difference between tax base of undistributed income surtax with
pre-tax
income
|
|
|
-
|
|
|
|
-
|
|
|
|
1,562
|
|
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
|
|
|
(130 |
) |
|
|
(38 |
) |
|
|
(67 |
) |
Increase
of investment tax credits
|
|
|
(7,586 |
) |
|
|
(10,647 |
) |
|
|
(15,216 |
) |
Increase
in valuation allowance
|
|
|
882
|
|
|
|
2,421
|
|
|
|
2,798
|
|
Non
deductible share-based compensation expenses
|
|
|
1,897
|
|
|
|
2,799
|
|
|
|
1,002
|
|
Provision
for uncertain tax position in connection with share-based compensation
expenses
|
|
|
-
|
|
|
|
124
|
|
|
|
526
|
|
Tax
benefit resulting from distribution of prior year’s income
|
|
|
(1,650 |
) |
|
|
-
|
|
|
|
(789 |
) |
Foreign
tax rate differential
|
|
|
41
|
|
|
|
83
|
|
|
|
(1,796 |
) |
Others
|
|
|
(12 |
) |
|
|
536
|
|
|
|
(1,133 |
) |
Actual
income tax expense (benefit)
|
|
$ |
(1,771 |
) |
|
|
8,923
|
|
|
|
(5,446 |
) |
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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.
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Continuing
operations
|
|
$ |
(1,771 |
) |
|
|
8,923
|
|
|
|
(5,446 |
) |
Charged
directly to
equity
|
|
|
-
|
|
|
|
-
|
|
|
|
(98 |
) |
Other
comprehensive
income
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
Total
income tax expense (benefit) |
|
$ |
(1,771 |
) |
|
|
8,926
|
|
|
|
(5,541 |
) |
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
As
of
December 31, 2005 and 2006, the components of deferred income tax assets
(liabilities) were as follows:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Inventory
|
|
$ |
643
|
|
|
|
1,497
|
|
Unrealized
foreign exchange loss
|
|
|
30
|
|
|
|
-
|
|
Capitalized
expense for tax purposes
|
|
|
145
|
|
|
|
85
|
|
Accrued
compensated absences
|
|
|
37
|
|
|
|
88
|
|
Allowance
for sales return, discounts and warranty
|
|
|
236
|
|
|
|
328
|
|
Unused
investment tax credits
|
|
|
9,407
|
|
|
|
19,420
|
|
Unused
loss carry-forward
|
|
|
1,851
|
|
|
|
3,094
|
|
Defined
benefit pension plan
|
|
|
-
|
|
|
|
98
|
|
Investments
in non-marketable securities
|
|
|
42
|
|
|
|
-
|
|
Other
|
|
|
51
|
|
|
|
13
|
|
Total
gross deferred tax assets
|
|
|
12,442
|
|
|
|
24,623
|
|
Less:
valuation allowance
|
|
|
(3,314 |
) |
|
|
(6,278 |
) |
Net
deferred tax assets
|
|
|
9,128
|
|
|
|
18,345
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized
foreign exchange gain
|
|
|
5
|
|
|
|
125
|
|
Foreign
currency translation adjustments
|
|
|
3
|
|
|
|
6
|
|
Prepaid
pension cost
|
|
|
4
|
|
|
|
65
|
|
Total
gross deferred tax liabilities
|
|
|
12
|
|
|
|
196
|
|
Net
deferred tax assets
|
|
$ |
9,116
|
|
|
|
18,149
|
|
The
valuation allowance for deferred tax assets as of January 1, 2004, 2005 and
2006
was $11 thousand, $893 thousand and $3,314 thousand, respectively. The net
change in the valuation allowance for the years ended December 31, 2004,
2005 and 2006, was an increase of $882 thousand, $2,421 thousand and $2,964
thousand, respectively. The change in 2006 includes an increase of valuation
allowance of $166 thousand which was provided for the deferred tax assets
attributable to the acquisition of Integrated Microdisplays Limited in October
2006.
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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Subsequent
recognized tax benefits
relating to the valuation allowance for deferred tax assets as of December
31,
2006, will be allocated as follows:
Income
tax benefit that would be reported in the consolidated statement of
income
|
|
$ |
6,112
|
|
Goodwill
and other noncurrent intangible assets
|
|
|
166
|
|
|
|
$ |
6,278
|
|
Except
for
Himax Taiwan, 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 $3,314 thousand and $6,278 thousand as of
December 31, 2005 and 2006, 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, 2006 was $3,094 thousand, which will expire if
unused by 2011. The remaining investment tax credit for these
subsidiaries at December 31, 2006 was $3,196 thousand, which will expire if
unused by 2009.
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, 2006, all of the Company’s remaining investment tax credits of
NT$634,268 thousand (US$19,420 thousand), which will expire if unused by
2010.
Himax
Taiwan’s income tax returns have been examined and assessed by the ROC tax
authorities through 2003.
Pursuant
to the Statute of Income Basic Tax Amount (the “IBTA Statute”) pronounced in
late 2005, an alternative minimum tax system will be effective commencing from
January 1, 2006 in Taiwan. When a taxpayer’s income tax amount is
less than the basic tax amount (“BTA”), the taxpayer would be required to pay
the regular income tax and the difference between the BTA and the regular
tax. For enterprise, BTA is determined by regular taxable income plus
specific add-back items applied with a tax rate ranges from 10% to
12%. The add-back items include exempt gain from nonpublic traded
security transactions and exempt income under tax holidays,
etc. Currently, the tax rate set by the authority is
10%. As there are grandfathered treatments for the tax holidays
approved from the tax authorities before the IBTA Statute take effect, the
effectiveness of the IBTA Statute does not have significant impact to the
Company.
Note
17.
|
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
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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. The table below shows the fair value and notional principal of
the Company’s derivative financial instruments as of December 31,
2005. The estimated fair value of the derivative instruments is
recorded in other current assets on the accompanying consolidated balance sheet
as of December 31, 2005. The fair value of the derivative financial
instruments as of December 31, 2005 is estimated based on quoted market prices
from brokers or banks. Although the following table reflects the
notional principal and fair value of amounts of derivative financial
instruments, it does not reflect the gains or losses associated with the
exposures and transactions that these financial instruments are intended to
hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying
exposures will depend on actual market conditions during the remaining life
of
the instruments.
As
of
December 31, 2005, the details of foreign currency exchanges contracts
outstanding are summarized as follows:
December
31, 2005
|
BUY
|
SELL
|
Contract
amount
|
Fair
Value
|
Settlement
date
|
Maturity
amount
|
(in
thousands)
|
NTD
|
USD
|
$
12,000
|
$
213
|
January
25, 2006
|
NT$
400,348
|
JPY
|
USD
|
$
10,000
|
$
37
|
January
25, 2006 ~ February 22, 2006
|
JPY
1,177,925
|
As
of
December 31, 2004 and 2005, unrealized gains included in earnings related to
the
above foreign currency forward contracts were $448 thousand and $250 thousand,
respectively. The realized gains (losses) resulting from foreign
currency forward contracts were $677 thousand, $108 thousand and ($611) thousand
in 2004, 2005 and 2006, respectively.
Note
18.
|
Fair
Value of Financial
Instruments
|
The
fair
values of cash, cash equivalents, accounts receivable, short-term debt,
current-portion of long-term debt, 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. Derivative
financial instruments are also reported at fair value based on quoted market
prices from brokers or banks. 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.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Note
19.
|
Significant
Concentrations
|
Financial
instruments that currently subject the Company to concentrations of credit
risk
consist primarily of cash, cash equivalents, marketable securities,
accounts
receivable and derivative financial instruments. 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 enters
into foreign currency forward contracts to reduce exposure to changes in foreign
currency exchanges rates. The Company entered into such contracts
with major international foreign banks or reputable local banks. The
likelihood of default on the part of the banks is considered
remote.
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 63.2%, 58.9% and 55.0%, respectively,
of the Company’s revenues in 2004, 2005 and 2006. The second largest
(Chunghwa Picture Tubes and its affiliates) accounted for 19.5%, 16.2% and
12.4%, respectively. Each of these two customers also represented
more than 10% of the Company’s accounts receivable balance at December 31, 2005
and 2006. CMO and its affiliates accounted for approximately 45.5%
and 50.3% of the Company’s accounts receivable balance at December 31, 2005 and
2006, respectively. Chunghwa Picture Tubes and its affiliates
accounted for 27.6% and 14.7%, 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 our 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 20 and 22 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 five 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. The Company plans to begin using another two foundries
on a mass-production scale in 2007 in order to diversify the Company’s foundry
sources.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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.
Note
20.
|
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
|
International
Display Technology Ltd. (ID
Tech)
|
|
Wholly
owned subsidiary of CMO
|
Jemitek
Electronic Corp. (JEC)
|
|
The
Company’s CEO represented on JEC’s Board of Directors
|
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
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Name
of related parties
|
|
Relationship
|
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
|
|
(b)
|
Significant
transactions with related parties
|
|
(i)
|
Revenues
and accounts receivable
|
|
|
Revenues
from related parties are summarized as
follows: |
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
CMO
|
|
$ |
189,095
|
|
|
|
317,012
|
|
|
|
335,797
|
|
CMO-NingBo
|
|
|
-
|
|
|
|
721
|
|
|
|
73,898
|
|
Chi
Lin Tech
|
|
|
290
|
|
|
|
2,841
|
|
|
|
2,985
|
|
TopSun
|
|
|
-
|
|
|
|
-
|
|
|
|
1,136
|
|
NEXGEN
|
|
|
-
|
|
|
|
370
|
|
|
|
805
|
|
JEC
|
|
|
599
|
|
|
|
1,565
|
|
|
|
9
|
|
CMEL
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
ID
Tech
|
|
|
775
|
|
|
|
275
|
|
|
|
-
|
|
|
|
$ |
190,759
|
|
|
|
322,784
|
|
|
|
414,632
|
|
A
breakdown by product type for sales to CMO is summarized as
follows:
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Display
driver for large-size applications
|
|
$ |
188,526
|
|
|
|
315,841
|
|
|
|
334,179
|
|
Display
driver for consumer electronics applications
|
|
|
41
|
|
|
|
6
|
|
|
|
482
|
|
Display
driver for mobile handsets
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Others
|
|
|
528
|
|
|
|
1,165
|
|
|
|
1,130
|
|
|
|
$ |
189,095
|
|
|
|
317,012
|
|
|
|
335,797
|
|
The
sales
prices CMO receives are comparable to those offered to unrelated third
parties.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
The
related accounts receivable resulting from the above sales as of December 31,
2005 and 2006, were as follows:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
CMO
|
|
$ |
67,392
|
|
|
|
81,610
|
|
CMO-NingBo
|
|
|
721
|
|
|
|
33,923
|
|
TopSun
|
|
|
-
|
|
|
|
1,158
|
|
Chi
Lin
Tech
|
|
|
1,234
|
|
|
|
444
|
|
NEXGEN
|
|
|
221
|
|
|
|
117
|
|
CMEL
|
|
|
-
|
|
|
|
2
|
|
JEC
|
|
|
120
|
|
|
|
-
|
|
|
|
|
69,688
|
|
|
|
117,254
|
|
Allowance
for sales returns and
discounts
|
|
|
(101 |
) |
|
|
(404 |
) |
|
|
$ |
69,587
|
|
|
|
116,850
|
|
|
|
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
CMO
|
|
$ |
176
|
|
|
|
703
|
|
|
|
82
|
|
Chi
Lin Tech
|
|
|
-
|
|
|
|
31
|
|
|
|
7
|
|
CMC
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
$ |
176
|
|
|
|
743
|
|
|
|
89
|
|
|
|
The purchases had
been full paid as of
December 31, 2005 and 2006.
|
|
|
The terms of payment to related
parties were
approximately 30~60 days after receiving, comparable
to that from third
parties.
|
|
|
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. |
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
|
The Company entered into a lease contract with
CMO for
leasing office space and equipment. For the years ended
December 31, 2004, 2005 and 2006, the related rent and utility
expenses
resulting from the aforementioned transactions amounted to $633
thousand, $619 thousand and $759 thousand, respectively, and were
recorded
as cost of revenue and operating expenses in the accompanying consolidated
statements of income. As of December 31, 2005 and 2006, the
related payables resulting from the aforementioned transactions
amounted
to $55 thousand and $155 thousand, respectively, and were recorded
as
other accrued expenses in the accompanying consolidated balance
sheets.
|
|
|
The
Company entered into sales agent contracts with CMO and
CMCS. For the years ended December 31, 2004 and 2005, the sales
commission resulting from such contracts amounted to $48 thousand
and $49
thousand, respectively. 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.
|
|
|
In
2004, 2005 and 2006, the Company purchased consumable and miscellaneous
items amounting to $121 thousand, $78 thousand and $159 thousand,
respectively, from CMO, CMC, Chi Lin Tech and NEXGEN, which were
charged
to operating expense. As of December 31, 2005 and 2006, the
related payables resulting from the aforementioned transactions
were $19
thousand and $4 thousand, respectively.
In
2004, 2005 and 2006, Chi Lin Tech provided IC bonding service on
prototype
panels for the Company’s research activities for a fee of $12 thousand,
$43 thousand and $128 thousand, respectively, which was charged
to
research and development expense. As of December 31, 2006, the
related process fee payable resulting from the aforementioned transactions
was $38 thousand.
|
Note
21.
|
Commitments
and Contingencies
|
|
(a)
|
As
of December 31, 2005 and 2006, amounts of outstanding letters
of credit
for the purchase machinery and equipment were $25 thousand and
$146
thousand, respectively.
|
|
(b)
|
As
of December 31, 2005, and 2006 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 $8,861 thousand and $7,806 thousand,
respectively. As of December 31, 2005 and 2006, the remaining
commitments were $8,150 thousand and $2,816 thousand,
respectively.
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
(c)
|
The
Company leases its office and buildings pursuant to operating
lease
arrangements with unrelated third parties. The lease
arrangement will expire gradually from 2005 to 2009. As of
December 31, 2005 and 2006, deposits paid amounted to
$371 thousand and
$477 thousand, respectively, and were recorded as refundable
deposit in
the accompanying consolidated balance
sheets.
|
|
|
As
of December 31, 2006, future minimum lease payments under
noncancelable
operating leases are as
follows:
|
Duration
|
|
Amount
|
|
|
(in
thousands)
|
January 1, 2007~December 31, 2007
|
|
$ |
864
|
January 1, 2008~December 31, 2008
|
|
|
509
|
January 1, 2009~December 31, 2009
|
|
|
103
|
|
|
$ |
1,476
|
|
|
Rental
expense for operating leases amounted to $981 thousand, $1,305
thousand
and $1,763 thousand in 2004, 2005 and 2006,
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 0.5% 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 $2,604
thousand, $4,478 thousand and $3,788 thousand, respectively,
in 2004, 2005
and 2006, respectively. The sales commission expenses were
recorded as a deduction from revenue in the accompanying consolidated
statements of
income.
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
(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 progress of the
project development and a royalty based on shipments. The
license fee paid and charged to research and development expense
in 2004
and 2006 was $100 thousand and $200 thousand, respectively. No
license fee or royalty occurred in 2005.
|
|
|
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 or royalty occurred in
2005. The license fee paid and charged to research
and development expense in 2006 was $10
thousand. |
|
(f)
|
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.
|
|
(g)
|
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.
|
|
(h)
|
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.
|
|
(i) |
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 |
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
|
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 15 (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.
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. As of December 31, 2005 and
2006, the Company had satisfied the 2005 and 2006 undertakings
the Company
made with the ROC Investment Commission. Himax Taiwan had 549
employees and 664 employees as of December 31, 2005 and 2006,
respectively, and had spent NT$1,012 million ($30.9 million)
and NT$1,394
million ($42.8 million) in research and development expenditures
in 2005
and 2006, respectively.
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
|
|
With
regard to 2007 conditions, the Company expects that it
will spend at or
above the research and development expenditures requirements
in 2007, even
if its business suffers a slowdown (unaudited). Based on
the nature of the
fabless semiconductor design industry, even if the Company
experience no
or negative revenue growth as a result of company-specific
or
industry-wide events, the Company believes it still must
commit to the
necessary resources in both headcount and research and
development
expenditures in order to support its plans for further
growth and
competitiveness (unaudited). The Company’s business plan contemplates an
increase in headcount (mostly research and development
personnel) and
research and development expenditures to improve and enhance
its core
technologies and know-how (unaudited). Based on the historical
trend of
increasing headcount and research and development expenditures
and the
Company’s projected headcount and research and development expenditures,
the Company believes that the above-mentioned headcount
and research and
development expenditures requirements with respect to 2007
could be
satisfied with a very high level of certainty (unaudited).
In the event
that the Company’s operating performance is below its current
expectations, the Company believes it could still access
unused letters of
credit from several financial institutions to finance its
working capital
requirements in order to meet the increased headcount and/or
research and
development expenditures undertakings (unaudited). Moreover,
the Company
believes that Himax Taiwan could access the capital markets
through the
issuance of equity or debt securities or through the incurrence
of debt
(unaudited).
Therefore,
the Company believes that the uncertainty that may arise
from the
restrictions that could potentially be imposed by the ROC
Investment
Commission mentioned above is not so severe that would
cast significant
doubt on the Company’s ability to control Himax Taiwan. The
Company has determined that the likelihood of the Company
failing to
satisfy the undertakings given to the ROC Investment Commission
is remote
and there is no significant impact to the Company’s financial position or
results of operations
(unaudited).
|
Note
22.
|
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.
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Revenues
from the Company’s major product lines are summarized as follow:
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Display
driver ICs for large-size applications
|
|
$ |
258,006
|
|
|
|
470,631
|
|
|
|
645,513
|
|
Display
driver ICs for mobile handset applications
|
|
|
12,607
|
|
|
|
31,123
|
|
|
|
52,160
|
|
Display
drivers for consumer electronics applications
|
|
|
21,754
|
|
|
|
18,571
|
|
|
|
28,616
|
|
Others
|
|
|
7,906
|
|
|
|
19,879
|
|
|
|
18,229
|
|
|
|
$ |
300,273
|
|
|
|
540,204
|
|
|
|
744,518
|
|
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Taiwan
|
|
$ |
284,569
|
|
|
|
482,991
|
|
|
|
605,924
|
|
Other
Asia Pacific (China, Korea and Japan)
|
|
|
15,704
|
|
|
|
57,213
|
|
|
|
138,287
|
|
Europe
(Netherlands and France)
|
|
|
-
|
|
|
|
-
|
|
|
|
307
|
|
|
|
$ |
300,273
|
|
|
|
540,204
|
|
|
|
744,518
|
|
The
tangible long-lived assets relating to above geographic areas were as
follows:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Taiwan
|
|
$ |
24,344
|
|
|
|
40,132
|
|
China
|
|
|
82
|
|
|
|
203
|
|
Korea
|
|
|
-
|
|
|
|
6
|
|
|
|
$ |
24,426
|
|
|
|
40,341
|
|
Revenues
from significant customers, those representing approximately 10% or more of
total revenue for the respective periods, are summarized as
follows:
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
CMO
and its affiliates, a related party
|
|
$ |
189,870
|
|
|
|
318,008
|
|
|
|
409,697
|
|
Chunghwa
Picture Tubes and its affiliates
|
|
|
58,430
|
|
|
|
87,534
|
|
|
|
92,561
|
|
|
|
$ |
248,300
|
|
|
|
405,542
|
|
|
|
502,258
|
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Accounts
receivable from significant customers, those representing approximately 10%
or
more of total accounts receivable for the respective periods, is summarized
as
follows:
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
CMO
and its affiliates, a related party
|
|
$ |
68,113
|
|
|
|
115,535
|
|
Chunghwa
Picture Tubes and its affiliates
|
|
|
41,369
|
|
|
|
33,846
|
|
|
|
$ |
109,482
|
|
|
|
149,381
|
|
(a)
Acquisition
On
February 1, 2007, the Company acquired 100 percent of the outstanding common
stock of Wisepal Technologies, Inc. (“Wisepal”). The results of
Wisepal’s operations will be included in the Company’s consolidated financial
statements beginning as of 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. The acquisition will further strengthen the Company’s
competitiveness in the display driver market with the addition of technology
resources.
The
aggregate purchase cost was $45,249 thousand, primarily consisting of 6,090,114
shares of the Company’s ordinary shares plus 418,440 units of the Company’s
unvested RSUs. The value of the Company’s ordinary shares issued and the
unvested RSUs granted was $43,020 thousand and $2,011 thousand, respectively,
and 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 purchase agreement requires the Company
to grant an option to the former parent company of Wisepal to purchase 626,285
additional shares of the Company’s ordinary shares at US$0.001 per share upon
the achievement of specific milestones in 2007. When it is deemed
beyond a reasonable doubt that such conditions will be satisfied, the Company
will record the additional consideration as additional goodwill related to
the
acquisition. Based on the market price of the Company ordinary shares
as of December 31, 2006, which is US$4.78 per share, the maximum possible price
of such contingent consideration is $2,994 thousand.
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
The
following table summarizes the preliminary allocation of the purchase price
to
the estimated fair values of the assets acquired and liabilities assumed at
the
date of acquisition. The Company is in the process of obtaining
third-party valuations of certain intangible assets; thus, the allocation of
the
purchase price is subject to refinement.
|
|
At
February 1,
2007
|
|
|
|
(Unaudited) (in
thousands)
|
|
Current
assets
|
|
$ |
8,937
|
|
Property
and equipment
|
|
|
1,247
|
|
Acquired
in-process R&D
|
|
|
700
|
|
Intangible
assets
|
|
|
7,148
|
|
Goodwill
|
|
|
28,566
|
|
Total
assets acquired
|
|
|
46,598
|
|
Current
liabilities
|
|
|
(1,349 |
) |
Total
liabilities assumed
|
|
|
(1,349 |
) |
Net
assets acquired
|
|
|
45,249
|
|
Approximately
$700 thousand of the purchase price represents the estimated fair value of
acquired in-process R&D
projects that had not yet reached technological feasibility and had no
alternative future use. Accordingly, this amount will be expensed in
the Consolidated Statement of Income at the acquisition date. The
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 $3,000
thousand (7-year weighted-average useful life), customer relationship of $4,100
thousand (7-year weighted-average useful life), and licence of $48 thousand
(3-year weighted-average useful life). Goodwill is not expected to be
deductible for tax purpose.
(b)
Treasury share buybacks
In
January
2007, the Company repurchased 2,161,636 ADSs from open market amounting to
$10,841 thousand. On February 1, 2007, the Company announced the completion
of
its share buyback program, which had been authorized by the Company’s Board of
Directors on November 2, 2006. 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. The repurchased ADSs and their underling ordinary shares were then
cancelled, thereby reducing approximately 10 million shares or 5% of the
Company’s issued and outstanding ordinary shares in 2007.
Note
24.
|
Himax
Technologies, Inc. (the 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
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
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 21
(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, 2006, 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 $238,173 thousand.
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
Company, as if the Company had been in existence for all periods, are presented
as follows:
Condensed
Balance Sheets
|
|
December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$ |
-
|
|
|
|
95,591
|
|
Other
current assets
|
|
|
-
|
|
|
|
31,013
|
|
Investment
in subsidiaries
|
|
|
179,564
|
|
|
|
238,648
|
|
Total
assets
|
|
$ |
179,564
|
|
|
|
365,252
|
|
Liabilities
|
|
$ |
13,733
|
|
|
|
1,325
|
|
Total
stockholders’ equity
|
|
|
165,831
|
|
|
|
363,927
|
|
Total
liabilities and stockholder’s equity
|
|
$ |
179,564
|
|
|
|
365,252
|
|
The
Company had no long-term obligations or guarantees as of December 31, 2005
and
2006.
Condensed
Statements of Income
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
-
|
|
|
|
-
|
|
|
|
-
|
|
Costs
and expenses
|
|
|
-
|
|
|
|
(77 |
) |
|
|
-
|
|
Operating
income (loss)
|
|
|
-
|
|
|
|
(77 |
) |
|
|
-
|
|
Equity
in earnings from subsidiaries
|
|
|
36,000
|
|
|
|
61,733
|
|
|
|
69,435
|
|
Other
non operating income (loss)
|
|
|
-
|
|
|
|
(98 |
) |
|
|
5,755
|
|
Income
before income taxes
|
|
|
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
Income
tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
Income
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
HIMAX
TECHNOLOGIES, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements – (Continued)
December
31, 2004, 2005 and 2006
Condensed
Statements of Cash Flows
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
36,000
|
|
|
|
61,558
|
|
|
|
75,190
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earning from subsidiaries
|
|
|
(36,000 |
) |
|
|
(61,733 |
) |
|
|
(69,435 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in other current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,789 |
) |
Increase
in other accrued expenses and other current liabilities
|
|
|
-
|
|
|
|
133
|
|
|
|
1,192
|
|
Net
cash provided by (used in) operating activities
|
|
|
-
|
|
|
|
(42 |
) |
|
|
1,158
|
|
Net
cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(540 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
of special cash dividends
|
|
|
-
|
|
|
|
(13,558 |
) |
|
|
-
|
|
Proceeds
from borrowing (repayment) of short-term debt
|
|
|
-
|
|
|
|
13,600
|
|
|
|
(13,600 |
) |
Proceeds
from initial public
offering, net of issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
147,408
|
|
Acquisition
of ordinary shares for retirement
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,835 |
) |
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
42
|
|
|
|
94,973
|
|
Net
increase in cash and cash equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
95,591
|
|
Cash
and cash equivalents at beginning of year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
and cash equivalent at end of year
|
|
$ |
-
|
|
|
|
-
|
|
|
|
95,591
|
|